| United Nations |
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E/CN.17/1995/29 |
Economic and Social Council
Distr. GENERAL
20 March 1995
ORIGINAL: ENGLISH
COMMISSION ON SUSTAINABLE DEVELOPMENT
Third session
11-28 April 1995
Item 4 of the provisional agenda*
* E/CN.17/1995/1.
FINANCIAL RESOURCES AND MECHANISMS
Letter dated 24 February 1995 from the Permanent
Representative of Malaysia to the United Nations
addressed to the Secretary-General
On behalf of the Permanent Missions of Japan and Malaysia to the United
Nations, I have the honour to transmit to you the report of the Second Expert
Group Meeting on Financial Issues of Agenda 21 (see annex), which was held in
Glen Cove, New York from 15 to 17 February 1995. The meeting was jointly
organized and sponsored by the Governments of Japan and Malaysia in
collaboration with the United Nations Department for Policy Coordination and
Sustainable Development and the United Nations Development Programme.
The objective of the initiative undertaken by the sponsors is to
facilitate discussions on finance at the Inter-sessional Ad Hoc Open-ended
Working Group on Finance of the Commission on Sustainable Development as well
as the third session of the Commission.
I would be grateful if you could make arrangements to circulate the
attached report as an official document of the Commission on Sustainable
Development under item 4 of the agenda for its third session.
(Signed) RAZALI Ismail
Ambassador
Permanent Representative
Annex
REPORT OF THE SECOND EXPERT GROUP MEETING ON FINANCIAL
ISSUES OF AGENDA 21
(Harrison Conference Center, Glen Cove, New York,
15-17 February 1995)
OVERVIEW
1. The Second Expert Group Meeting on Financial Issues of Agenda 21,
sponsored by the Governments of Japan and Malaysia in collaboration with the
United Nations Department for Policy Coordination and Sustainable Development
and the United Nations Development Programme took place in the Harrison
Conference Center, Glen Cove, New York from 15 to 17 February 1995. The goal
of the meeting was to continue discussions on financial issues of Agenda 21
and sustainable development started during the first such meeting (Kuala
Lumpur, Malaysia, 2-4 February 1994), and to provide an input to the upcoming
deliberations of the Inter-sessional Ad Hoc Open-ended Working Group on
Finance of the United Nations Commission on Sustainable Development (6-
9 March 1995).
2. The meeting, attended by 50 experts from Governments, international
organizations, research institutions and the private sector, was chaired by
Dr. Lin See-Yan of Malaysia.
3. The experts' discussion focused on the urgent need to close the resource
gap that is preventing full implementation of Agenda 21. Unless prompt and
effective action is taken, this gap will continue to widen as the world
economy diverges further and further from the sustainable path.
4. This report does not attempt to reflect all the views and suggestions
made and does not represent a negotiated text. It reflects, nevertheless, the
general thrust of the discussion. Participants agree that it provides a
substantive contribution to future discussions in the Commission on
Sustainable Development (CSD) and its Inter-sessional Ad Hoc Open-ended
Working Group on Finance.
I. INTERNATIONAL FINANCIAL FLOWS
5. The participants discussed the current and prospective situations
related to international financial flows and the role of the Bretton Woods and
other international development institutions (collectively, the international
financial institutions) in the financing of Agenda 21, with particular
attention paid to opportunities to link official development assistance (ODA)
and financing by international financial institutions (IFIs) with private
capital flows.
6. Considering that issues of financial flows are closely interrelated with
issues of debt, trade, and macroeconomic policies, the experts suggested that
the CSD should promote an integrated discussion of these issues at an
appropriate forum.
7. The experts emphasized that national sustainable development strategies,
recommended by Agenda 21, provide an important vehicle for bringing about
practical collaboration among various organizations and institutions engaged
in financing sustainable development at the country level.
A. Private capital
8. Private capital is the largest component of total international
financial flows, and its share is likely to continue to rise. It accounts for
virtually all of the expansion in resource flows to the developing countries
in recent years, though it has been concentrated in middle-income countries.
9. The experts noted that private flows are becoming an increasingly
important source of financing for many environment-related infrastructure
projects in middle-income countries (e.g., waste-water treatment plants).
They suggested that such experiences offer valuable case studies for nations
wanting to attract such flows.
10. The experts emphasized that regulatory and other mechanisms must be
found to ensure that environmental and social impacts need to be taken into
account in investment decisions if private flows are to promote sustainable
development.
B. Official development assistance
11. ODA is essential for promoting economic growth and sustainable
development in developing countries. In particular, it plays a vital role in
financing social and environmental costs, as well as satisfying needs in some
areas of the world that have a scarcity of domestic resources and inadequate
access to foreign capital. The recent decline in ODA flows is of grave
concern.
12. To maximize the beneficial effects of scarce ODA resources, the experts
suggested that there is a need to increase its role in leveraging additional
external and domestic financial resources, through mechanisms such as joint
ventures, co-financing, underwriting of country risks and other approaches.
They also stressed the importance of continuing efforts to coordinate and
harmonize activities across the bilateral and multilateral system to increase
the cost-effectiveness of ODA delivery and use.
13. Donor countries need to take steps to build domestic support for higher
levels of ODA, for example by communicating more effectively its role in
promoting growth, expanding international markets and addressing global
environmental problems.
14. The CSD, in performing its mandate to monitor the implementation of
financial commitments contained in Agenda 21, should continue to support
efforts aimed at reaching the 0.7 per cent target. The experts emphasized
that it is now timely for both donor and recipient countries to explore new
approaches to ODA, in the CSD context, that increase its effectiveness and
thus make more rapid progress towards meeting the accepted United Nations
target of 0.7 per cent of GNP.
C. International financial institutions
15. Despite the growing importance of private capital flows, IFIs continue
to have a crucial role in financing sustainable development.
16. To ensure coordination of sustainable development efforts at the country
level, the experts emphasized that IFIs should seek closer cooperation with
national sustainable development councils, which bring together
representatives of relevant government agencies and non-governmental
constituencies.
17. Furthermore, they stressed that the CSD and the governing bodies of IFIs
should strengthen communication and partnership to further international
dialogue and action on sustainable development.
18. The experts emphasized that there is now an urgent need for the CSD to
invite the governing bodies of IFIs, in particular the Interim and Development
Committees, to consider increasing their current activities and financing and
ensure that all of them are in support of sustainable development.
Specifically, the CSD should encourage IFIs to extend further their efforts
beyond incorporating environmental and social components into their projects
and activities, by integrating the economic, social and environmental goals of
sustainability in their overall financial policies, strategy formulation and
priority-setting. A similar approach should apply to the Global Environment
Facility (GEF). Furthermore, IDA is a crucial mechanism to support
sustainable development of the low-income countries and should be adequately
replenished.
II. INNOVATIVE INTERNATIONAL MECHANISMS
19. The discussions focused on the feasibility of applying a global
environmental user charge (such as an air transport) and market-based
mechanisms (such as tradeable CO2 permits and joint implementation), bearing
in mind that detailed discussion on them had already taken place at the recent
Prague Workshop (12-14 January 1995) on the use of economic instruments as
effective mechanisms and tools for sustainable development.
A. Environmental user charge on air transport
20. Air transport of passengers and cargo is a key source of environmentally
damaging pollution emissions. The experts recognized that a properly designed
environmental user charge on this activity, as just one of several possible
international environmental user charges, would discourage global
environmental damage and would raise funds for environmental protection and
remediation activities.
21. The design of such a charge would need to be carefully considered.
Ideally, it should be assessed on the quantity of pollution emissions. A
second-best but more easily administered option would be to assess fuel
consumption. In any event, the charge should not be assessed on either
passenger miles or airline revenue.
22. It is important to specify how the charge would be collected and how the
renevue it would generate would be distributed and used. One possibility
would be to collect it in the countries where air travel originates and to
share the revenue between the collecting country and a multilateral fund
dedicated to international environmental problems.
23. The experts suggested that the CSD should encourage further study of
environmental, economic, legal, administrative and political aspects of this
mechanism, with a view to determining its practical feasibility.
B. Internationally tradeable CO2 permits
24. Internationally tradeable CO2 permits are a promising mechanism for
bringing about cost-effective reductions in emissions of this greenhouse gas
and transferring new and additional financial resources to developing
countries and countries in transition. The experts noted that experience with
existing SO2 markets in the United States of America is encouraging and should
be examined for lessons that could be applied to CO2 in an international
context.
25. The experts suggested that the CSD should encourage further study of
such a proposal with a view to the development of a pilot scheme at an
appropriate time, to gain experience and provide a framework for further
research and development. Such a scheme should involve both industrial and
developing countries on a voluntary basis in order to create opportunities for
gains from trade and to ensure that developing countries can benefit from
these opportunities from the outset.
26. The experts stressed that it would be helpful if Governments could
encourage and facilitate the participation in such a scheme by emitters of
CO2, in particular utilities and heavy industries. The experts suggested that
schemes could be designed to assist Governments participating in the United
Nations Framework Convention on Climate Change to develop and implement
effective mechanisms for dealing with climate change.
27. Experience with other traded goods suggests that commodity exchanges and
other forms of market infrastructure would play an important role in
developing markets for CO2 permits. The experts suggested that the CSD should
encourage the active involvement of such parties in a pilot scheme for CO2
permits.
C. Joint implementation
28. The expert group considered that joint implementation could provide a
bilateral mechanism for developed countries to compensate developing countries
and economies in transition for carbon sequestration services or other net
reductions in carbon emissions, through transfers of financial resources
and/or technology.
29. To ensure that developing countries and economies in transition receive
their fair share of the cost savings that utilities and other partners derive
from joint implementation activities, the experts suggested that the CSD
should encourage Governments to explore such possibilities as: (i) the
establishment of a clearing-house for collecting and disseminating financial
and other information on existing and proposed joint implementation
activities; (ii) the development of auction systems to increase competition
for access to developing countries' carbon services; and (iii) a levy (in
effect, a windfall profits tax) on the estimated cost savings by the partner
paying the compensation.
III. MOBILIZATION OF DOMESTIC RESOURCES
30. The discussions focused on environmental user charges, environmentally
damaging input subsidies and a multilateral consultative process for
encouraging domestic policy changes to mobilize domestic financial resources.
A. Environmental user charges and environmentally
damaging input subsidies
31. Although external resources are essential, the bulk of resources for the
implementation of Agenda 21 must ultimately come from domestic sources.
Effluent and emissions charges and other environmental user charges based on
the "polluter pays" principle not only mobilize resources, but they also
induce consumers and producers to change their behaviour towards more
sustainable norms.
32. The experts stressed that for environmental user charges to provide
effective incentives to reduce pollution, they should be assessed, in so far
as possible, on the amount of pollution discharged, not on industrial output
or revenue.
33. The introduction of environmental user charges and related means of
"greening" the tax system could provide macroeconomic benefits (a "double
dividend") by shifting the tax base away from economically valued activities,
such as employment and income, and towards economically damaging activities
like pollution.
34. The expert group emphasized that the reduction of environmentally
damaging input subsidies (including indirect subsidies represented by unduly
low user fees for natural resources) is also an attractive means of mobilizing
domestic financial resources, for reasons identical to those for environmental
user charges. Global estimates of such subsidies indicate that they are
comparable in magnitude on an annual basis to the total domestic resource
needs for Agenda 21.
35. The experts suggested that the CSD should promote studies on the
environmental, social and economic impacts of these policy measures at current
levels and at alternative levels consistent with sustainable development. It
should also promote interministerial consultations in national and
international forums to discuss the findings and policy implications of these
studies.
36. Even in advance of the studies, the CSD should encourage Governments to
consider reducing environmentally damaging subsides and to utilize the
potential savings to meet financing requirements for sustainable development.
B. Multilateral consultations on domestic policy changes
37. The experts noted that the concerns about international competitiveness,
distributional impacts and other factors frequently hinder unilateral action
to reduce environmentally damaging input subsidies and to implement
environmental user charges. Multilateral consultations offer a possible means
of helping overcome these barriers.
38. They emphasized that such consultations should be flexible and proceed
in stages, and they should address selectively sectors and policies that offer
particularly promising opportunities for environmental, social and economic
gains. Moreover, they should be demand-driven and voluntary, with country
involvement being determined by interest in the specific matters under
discussion. They could be organized on a subregional, regional or global
level, as appropriate.
39. The experts stressed that these consultations should respect the right
of countries to set the level of environmental standards. They should also
allow countries at differing stages of development to proceed at different
speeds in implementing agreed-upon policy changes.
40. The expert group suggested that the CSD, supported by other
organizations and financial institutions, should provide leadership in
advancing such a process by developing a concrete proposal for further
consideration. In this context, the CSD's growing efforts to encourage the
voluntary presentation and examination of national experiences in developing
and applying national sustainable development strategies can contribute
importantly to the identification of, and agreement on, shared national goals
that could form the basis for eventually implementing such a process.
IV. A MATRIX APPROACH TO SECTORAL AND CROSS-SECTORAL FINANCE
41. The expert group reiterated that the use of economic instruments and
market-based policy reforms on a wide-ranging scale offer the possibility of
substantially reducing the financing gap of meeting the goals of Agenda 21 and
of complementing the additional financial resources required to achieve
sustainable development. Initial estimates indicate that national measures
alone could reduce the total funding needs significantly, and national and
international measures combined could do so by an even greater amount.
Further research is needed to determine this potential in more detail.
42. The discussions focused on the specific economic and financial
instruments described in the previous section. There is, however, a wide
range of instruments available for meeting the financing needs of the
individual sectors and cross-sectoral provisions identified in Agenda 21.
There is also a wide range of policy reforms that could make these instruments
more effective. Reforms remove the root causes of unsustainable development,
thus ensuring that additional financial resources flow into investments that
move national economies towards more sustainable paths.
43. Given the broad scope of Agenda 21 and the wide range of economic and
financial instruments and policy reforms relevant to it, the experts
emphasized that there is need for a transparent conceptual framework for
structuring discussions on financial aspects of the Agenda. The table (see
annex) attempts to present such a framework in matrix form. 1/
44. In the context of the formulation and development of national
sustainable development strategies, the group suggested that the CSD should,
including through inter-sessional activities, support efforts to quantify the
effectiveness and promote the use of these instruments in mobilizing resources
and creating incentives for more sustainable consumption and production.
These can build on case-studies of existing applications to facilitate
exchanges of experience among countries.
45. The experts indicated that the focus of inter-sessional activities
should be to highlight the most promising options for particular countries or
regions. These options are generally ones that offer both environment and
social benefits and tangible economic returns ("win-win" options). The group
suggested that the CSD may wish to encourage countries or groups of countries
to launch pilot programmes to experiment with these options.
46. Finally, the experts recommended that the CSD should support efforts to
consider additional policy-relevant dimensions of the matrix, including:
(i) the public and private parties involved in decisions on and implementation
of the options; and (ii) the impacts of each option on particular social
groups. This process should involve consultations with all the stakeholders
concerned.
Notes
1/ The matrix presents, in compact and interrelated form, all Agenda 21
issues (each row represents an individual sector or cross-sectoral issue) and
the principal financial instruments and policy reforms potentially applicable
to each (each column represents a particular instrument or reform). By
looking across any row, one can see that there are several financing options
for individual sectors and cross-sectoral activities. These options are often
complementary. By looking down any column, one can see that individual
financing options are typically applicable to more than one sector. The
matrix is filled in detail only for those issues which are on the CSD's agenda
in 1995. Often, an option that is implemented in one sector has positive
spill-over effects in other sectors.
Annex
MATRIX OF FINANCIAL INSTRUMENTS AND POLICY OPTIONS
==============================================================================
External
Resources International Policy Environment
---------------- --------------------------------
Sector ODA GEF Debt relief
==============================================================================
Sustainable development X Rescheduling
Debt-for-sustainable
development swaps
---------------------------------------------------
Biodiversity X Debt-for-nature swaps
---------------------------------------------------
Forest resources X X Debt-for-nature swaps
---------------------------------------------------
Fragile ecosystems X X Debt swaps
---------------------------------------------------
Fresh water resources X X
---------------------------------------------------
Land resources X Debt-for-equity swaps
---------------------------------------------------
Sustainable agriculture X Debt-for-sustainable-
agriculture swaps
---------------------------------------------------
Atmosphere X Debt relief for energy
efficiency improvements
---------------------------------------------------
Oceans X
---------------------------------------------------
Hazardous waste
---------------------------------------------------
Toxic chemicals
---------------------------------------------------
Solid waste
---------------------------------------------------
Radioactive effects
---------------------------------------------------
Health X
---------------------------------------------------
Urban environment X
---------------------------------------------------
Biotechnology
---------------------------------------------------
==============================================================================
International Policy Environment (cont'd)
---------------------------------------------------
Sectors Trade flows Private financial flows
==============================================================================
Sustainable development X BOT
--------------------------------------------------
Biodiversity Biodiversity Green funds
Patent rights Venture capital
--------------------------------------------------
Forest resources Terms of trade Green funds
--------------------------------------------------
Fragile ecosystems Non-resource based Green funds
employment
--------------------------------------------------
Fresh water resources More efficienct Foreign direct
water use investment
--------------------------------------------------
Land resources
--------------------------------------------------
Sustainable agriculture Market access Foreign direct
Terms of trade investment
--------------------------------------------------
Atmosphere More efficient Foreign direct
energy use investment in
the energy sector
--------------------------------------------------
Oceans
--------------------------------------------------
Hazardous waste
--------------------------------------------------
Toxic chemicals
--------------------------------------------------
Solid waste
--------------------------------------------------
Radioactive effects
--------------------------------------------------
Health
--------------------------------------------------
Urban environment
--------------------------------------------------
Biotechnology Market access Venture capital
Profit sharing
Technology transfers
---------------------------------------------------
X: Important and self-explanatory contribution.
==============================================================================
National Policy Reforms
---------------------------------------------------
Sectors Economic and Property Resource
financial rights pricing
reforms
==============================================================================
Sustainable development Competitive Secure property Full-cost
capital rights pricing
markets
---------------------------------------------------
Biodiversity Environment Biodiversity Prospecting
funds patents fees
---------------------------------------------------
Forest resources Environment Long term Forest product
funds concessions pricing
Bidding
---------------------------------------------------
Fragile ecosystems Environment Communal
funds property rights
---------------------------------------------------
Fresh water resources Municipal bonds Water rights User charges
---------------------------------------------------
Resources X No titles for
land clearing
Secure land
ownership
---------------------------------------------------
Sustainable agriculture Removal of Secure land Water pricing
interest rate ownership
ceilings
---------------------------------------------------
Atmosphere Energy
pricing
---------------------------------------------------
Oceans 200 mile EEZ
---------------------------------------------------
Hazardous waste
---------------------------------------------------
Toxic chemicals X
---------------------------------------------------
Solid waste X
---------------------------------------------------
Radioactive effects
---------------------------------------------------
Health X
---------------------------------------------------
Urban environment X
---------------------------------------------------
Biotechnology X
---------------------------------------------------
==============================================================================
National Policy Reforms (cont'd)
---------------------------------------------------
Sectors Subsidy Taxation Environmental
reduction charges
==============================================================================
Sustainable development Reduce energy Green taxes Depletion and
and capital pollution
subsidies charges
---------------------------------------------------
Biodiversity Reduce land Deforestation
conversion charge
subsidies
---------------------------------------------------
Forest resources Below cost Habitat Deforestation
timber sales protection charge
Conversion subsidy
subsidies
---------------------------------------------------
Fragile ecosystems X Differential Deforential
land use charges
charges
---------------------------------------------------
Fresh water resources Subsidies to Sewage and
water conservation effluent
and irrigation charges
---------------------------------------------------
Resources Agricultural Property Impact fees
subsidies Land use taxes Waste disposal
Below-cost Transfer taxes charges
public land
sale/lease
---------------------------------------------------
Sustainable agriculture Water Agrochemical
subsidies taxes
Agro-chemical IPM subsidies
subsidies
---------------------------------------------------
Atmosphere Energy subsidies Energy taxes Emission
charges
---------------------------------------------------
Oceans Effluent
charges
---------------------------------------------------
Hazardous waste Presumptive
charges
---------------------------------------------------
Toxic chemicals X Taxes on Feedstock
chemicals charges
---------------------------------------------------
Solid waste X Collection
and disposal
charges
---------------------------------------------------
Radioactive effects
---------------------------------------------------
Health
---------------------------------------------------
Urban environment Property taxes Pollution
Relocation
Incentives for
industry
---------------------------------------------------
Biotechnology
______________________________________________________________________________
Table 2. MATRIX OF POLICY OPTIONS AND FINANCIAL INSTRUMENTS
==============================================================================
Innovative Instruments
---------------------------------------------------
Sectors Domestic innovative Global innovative
mechanisms mechanisms
==============================================================================
Sustainable development Ecolabelling Joint implementation
Ecofunds
---------------------------------------------------
Biodiversity Bioprospecting fees Patents
Ecotourism fees Intellectual property
Scientific tourism fees rights
TCCs
---------------------------------------------------
Forest resources Watershed charges Tradeable forest
Tradeable reforest credit Carbon offsets
---------------------------------------------------
Fragile ecosystems Relocation incentives TCCs
---------------------------------------------------
Fresh water resources Tradeable water shares Water trading
across borders
---------------------------------------------------
Land resources Betterment charges
Differential land use
charges
---------------------------------------------------
Sustainable agriculture Differential land use International
charge sustainability
Ecolabelling Standards/price
premia
Carbon offsets
---------------------------------------------------
Atmosphere Tradeable SO2 emission Tradeable CO2 permits
permits Carbon offsets
Carbon taxes
Air travel tax
---------------------------------------------------
Oceans ITQs Oil spill bonds
---------------------------------------------------
Hazardous waste
---------------------------------------------------
Toxic chemicals
---------------------------------------------------
Solid waste
---------------------------------------------------
Radioactive effects
---------------------------------------------------
Health
---------------------------------------------------
Urban environment Betterment charges
TDRs
Tradeable emission permits,
TDQs
---------------------------------------------------
Biotechnology Bio-prospecting
Profit sharing
______________________________________________________________________________
TDR: transferable development right; TCC: tradeable conservation
credit; ITQ: individual tradeable (fishing) quotas.
-----
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Date last posted: 2 December 1999 13:24:30
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