Stop Illicit Capital Flows to Tackle the Climate Crisis

December 11th, 2009

The European Union has today pledged US$ 10.6 billion (€7.2 billion to be exact), spread over three years to help mitigate climate change in developing countries, in a deal that Gordon Brown hailed as ‘helping generations to come.’ But do the numbers really add up? The pledges for climate change are around US$ 35 billion (in total committed funds).

The UN Framework Convention on Climate Change (UNFCCC) estimates that adaptation alone in developing countries will cost between US$ 27.75 – 58.25 billion, while the World Bank estimates that adaptation will cost some US$ 75-100 billion. So even on adaptation, i.e. keeping the current level of livelihoods, the funding that is currently pledged falls far short.

What about mitigation, i.e. reversing the trend of increasing CO2 and other greehouse gas (GHG) emissions in the atmosphere? Estimates vary even more here: the UNFCCC estimates US$ 52.4 billion, while the World Bank says US$ 140-175 billion — with cost of financing even higher if that money has to be borrowed and then repaid (financing cost is estimated anywhere between US$ 265-565 billion), hence the figure of US$ 400 billion to bring the level of CO2 in the climate down to a safer level of 450 parts per million (ppm) of CO2 in the climate.

Meanwhile there is a petition on the ‘safe’ level actually being 350 ppm, requiring a lot more climate financing.

Whatever the ‘magic figure’, the demand for climate change finance is huge.

One solution is this: tackle illicit financial flows from developing countries, estimated by Global Financial Integrity (GFI), our colleagues in Washington D.C. annually between US$ 858.6-1060 billion annually for the years 2002-2006.

This point was completely lost in the United Nations Climate Change Conference 2009 in Copenhagen (COP15) — the 15th climate conference since the first one in Rio de Janeiro in 1992. If we want to adapt to climate change, and further mitigate it, we need to look at the capacity of especially the developing countries in raising domestic climate change financing.

Alongside tax evasion, illicit flows, and avoidance, there are questions such as low royalties and imbalanced mineral contracts, sources of large losses. Ghana, for instance, in a report titled ‘Breaking the Curse‘ says the state could have raised further US$ 54.46-163.39 million due in mining royalties if a range of 6-12 per cent were applied instead of the current minimum rate of 3 per cent, that all mining companies pay due to low reported profits from gold, diamonds, manganese and bauxite mining. Meanwhile, in Sierra Leone, it is estimated in another report titled ‘Sierra Leone at Cross-Roads‘ that US$ 110 million more could be raised annually by 2020 in the future from the mining sector. This potential for mobilising further domestic resources is there.

Indeed, just as we argued at the Doha Financing for Development (UNFfD) conference in Doha in November-December 2008, involving pledges to reinforce international tax co-operation, to tackle illicit financial flows and to work towards a multilateral framework of automatic information exchange. These will be productive ways of tackling the financial costs of the climate crisis.

So here are the proposals:

– Reinforce in principle the role of domestic resource mobilisation in climate change financing, by means of:

  1. Support for country-by-country accounting of all companies, listing their turnover, profits, liabilities, other financial information, including the beneficial ownership of all affiliates, subsidiaries, or any incorporated entities including trusts in all jurisdictions.
  2. We must also account for carbon and other green house gas (GHG) emissions in all company accounts on a country-by-country basis, which can then serve as a basis for environmental taxation, and the distribution of future revenue streams.
  3. Support multilateral and automatic tax information exchange, helping curb illicit financial flows from developing countries and regions, and letting them to use the resources for their own developmental and environmental priorities.
  4. Give developing country governments and civil societies support for reinforcing their tax authorities, and better tax dialogue to enhance developmental and sustainability goals.

We must campaign, as we did at the Doha FfD, to have domestic resource mobilisation included in the final text of the COP15.

Written by Tax Justice Network

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