ABOUT

TEN DEEP FINANCIAL SYSTEM RECOMMENDATIONS

Reinventing Finance for a more just, less hot, regenerative future.

Recommendation 1:

Implement an uninterrupted and instantaneous global carbon price.

(Inspired by ICE Carbon Futures Contract.)

  1. Justification: A carbon price forces private actors to internalize the social cost of carbon. Without it, high emissions occur.

  2. Mechanism: Emissions Trading Systems, like cap-and-trade schemes, can create a 24/7 carbon price.

  3. Call to Action: COP must expand ETS mechanisms across the globe to create a unified carbon price.

    Global central banks must support the schemes with price floors pegged to the remaining carbon budget.

Introduce unique and ubiquitous carbon price 24/7/365

  • Inspired by ICE Carbon Futures Contract.

  • Weighted average of 4 Emissions Trading Systems (ETS - Carbon Compliance Markets or Cap-and-Trade schemes.)

  • COP process to expand ETS mechanism across the globe to build out the coverage and adoption of the Carbon Futures Contract’s price discovery potential.

  • Global central banks to start enforcing minimum prices and manage carbon price bands as a function of the remaining carbon budget.

  • Ensure full equity through re-distribution of $7 Trillion oil and gas subsidies.

Recommendation 2:

Incorporate Climate into Monetary Policy.

  1. Monetary policy is a critical tool in catalyzing the sustainable transition and investment in green assets.

  2. Shift monetary policy from climate-agnostic to climate sensitive.

  3. Central Banks should have two interest rates: one for carbon-intensive entities, another for carbon-light.

  4. Central Banks should track the inflationary effects from climate change, fossil fuel use, and non-antitrust.

  5. Central Banks should impose ban on financing fossil fuel exploration; bank lending should have 1:1 capital weighting.

  6. Stratified eligibility criteria for monetary operations and repo trading; discount window facility for emergency lending operations.

    Central Banks to incorporate Carbon Reserve management, next to Monetary Aggregates, as a key decision objective of monetary policy.

    Presumption of Central Bank capture (Non-independence) if nefarious impact of Co2 ppm trend is not tackled through modified financial transition mechanisms:

    • Foster green assets through “stratified” monetary policy:

    • Bifurcation of interest rate monetary policy:

    • lower for carbon nimble exposure

    • Higher for carbon heavy exposure

    • Identify “Climateflation,” Fossilflation” and Non-Antitrust impact as part of inflation targeting strategy.

    • “Stratified” eligibility criteria for monetary operations and repo trading.

    • Discount window facility for emergency lending operations

    • Consider and correct Inequality externality outcomes as a result of 10 years+ QE monetary policies (housing market and equity markets)

    • IPCC and Central Banks to impose the end of new oil and gas exploration and the financing thereof.

    • During the phase-out, continued (regulated) bank financing of new coal, gas and oil exploration should be matched with a full capital weighting, i.e., every $ of a bank loan will trigger a $ of equity. A similar regime should apply to prime brokerage lending by the regulated banking sector, through which shadow banking provides funds and credit to the fossil fuel industry.

    • Establish Prudential Supervisory Mechanisms in respect of solvency and liquidity to facilitate transition pathway from current 80 (fossil fuel)/20 (non fossil fuel) to 20/80 by 2040.

Recommendation 3:

Production of fossil fuels far overshoots the social optimum, so subsidies must end immediately.

  • Production of fossil fuels far overshoots the social optimum, so subsidies must end immediately.

  • Erase the $7tn global subsidies for fossil fuels, of which 18% were explicit and 82% were implicit.

  • The IMF should establish a working group specializing in repurposing subsidies toward a just transition.

  • Nations should implement country-level recommendations from the IMF, reducing their internal budget deficits.

  • Repurpose Oil and Gas Subsidies.

  • Per recent IMF research, total global fossil fuel subsidies amounted to $7 trillion in 2022, equivalent to nearly 7.1 percent of global GDP.

  • The number can be broken down by:

    + Explicit subsidies (undercharging for supply costs) which account for 18 % of the total while

    + Implicit subsidies (undercharging for environmental costs and forgone consumption taxes) account for 82%.

  • A working group within the IMF should identify how those oil and gas subsidies, by country, could be repurposed towards a just transition and bolster accelerated de-carbonization initiatives.

  • The repurposing of oil and gas subsidies will stall the widening of the internal budget deficit, whilst ensuring the pursuit of a just decarbonization initiative.

Recommendation 4:

Make the Nature-Centric Approach a standard.

  • Excessive focus on GDP growth diverts attention from metrics of environmental and social wellbeing.

  • Adopt new frameworks like Wealth Accounting and the Valuation of Ecosystem Services (WAVES).

  • CCFM and COP should entreat the World Bank to review and popularize the Human Development Index, Genuine Progress Indicators, and Thriving Places Index. 

  • COP Food Systems and Agriculture Agenda should declare regenerative agriculture a key natural carbon sink asset.

  • Make Nature Centric Approach a Standard.

  • Coalition of Climate Finance Ministers (CCFM)  to take the lead on this effort.

  • Using “Wealth Accounting and the Valuation of Ecosystem Services (WAVES)” in support.

  • World Bank-led global partnership that aims to promote sustainable development by ensuring that natural resources are mainstreamed in development planning and national economic accounts.

  • The CCFM and COP Agenda should invite the World Bank to complete the review of sustainable growth and comprehensive development indicators, such as the Human Development Index (HDI), Genuine Progress Indicators (GPI) and Thriving Places Index (TPI), away from the current Gross Development Product (GDP) income-based metric. These metrics should guide and influence the multi-lateral development lending processes.

  • Make Nature Centric Approach a Standard.

  • The COP Food Systems and Agriculture Agenda should declare regenerative agriculture as a pinnacle natural carbon sink asset to be deployed to reach more ambitious NDCs.

  • Natural carbon sink-centered mitigation strategies should be prioritized by offering bountiful incentives to boost nations’ NDC and the Global Stock take ambitions.

  • Multilateral development banks should exclude any further fossil fuel-based financing.

  • Firm valuation and exec compensation is broadly agnostic to systemic environmental and social risk and value.

  • Use bifurcated interest rates to gauge modified firm values of carbon nimble and carbon heavy industries.

  • Use bifurcated interest rates to re-priced fixed income price offerings of carbon nimble and carbon heavy industries.

  • Private Finance to execute Macro Stewardship in engagement with Sovereign Debt issuers and their NDC efforts (Paris 2015 efforts)-

Recommendation 5:

Regulate the Shadow Banking sector.

  • Banks are regulated to minimize moral hazard. Hegde funds, private equity, and similar institutions are not.

  • Create a new regulatory framework that controls the Shadow Banking regime.

  • [ENTITY] to conduct a review of the risk factors and impact associated with the global leverage landscape.

  • [ENTITY] to draft and implement policy pursuant to the identified risk factors.

    Capture Shadow Banking (Private Equity, Hedge Funds,…) regime in a regulatory framework

    • Assess aggregate picture of global leverage impact.

    • Remove moral hazard.

    • Shut off easy exit route for regulated banking industry.

Recommendation 6:

Rebalance representation in international financial institutions.

  • Power structures of multinational institutions are dominated by the Global North.

  • Redevelop governance structures such that decision-making power is commensurate with climate exposure.

  • IMF to implement more democratic processes, such as a double majority rule.

  • IMF to update quota formulas and delink access to resources from quotas, focusing instead on vulnerability.

  • IMF to boost all types of representation, including geographic, racial, and gender.

Governance Reform of International Financial Institutions.

  • The Global North has outsized institutional power relative to the Global South. Yet the Global South is disproportionately affected by climate change.

  • Update IMF quota formulas to reflect the changing global landscape.

  • Reform voting rights and decision-making rules to make them more democratic, for example through a double majority rule.

  • Delink access to resources from quotas, with access instead determined by both income and vulnerabilities (through a multi-vulnerability index or “beyond gross domestic product (GDP)” indicators).

  • Boost the voice and representation of developing countries on boards and improve institutional transparency.

  • Strive for gender-balanced representation in all the governance structures of these institutions, in particular at the leadership level.

Recommendation 7:

Develop novel institutions for overseeing climate finance.

  • Existing institutions and markets are broadly insufficient to address the climate crisis.

  • Readjust, improve upon, and go beyond existing institutions to address modern landscape.

  • New independent agency to assess climate calamity triggered event clauses (leading to DSSI implementation)

  • New V20 Debt Restructuring Agency (see Rec. 4)

  • New institution to levy carbon fees and partition as adaptation finance alongside MDBs (see Rec. 8)

  • New pricing incentives such as contract for difference: counterparty pays for delta between carbon price and removal price.

New institutions and markets needed.

  • Independent Agency (Combination of IPCC and IMF) to assess climate calamity triggered event clauses (leading to Debt Service Suspension Initiative (DSSI) implementation)

  • New V20 Debt Restructuring Agency – see Recommendation 4.

  • New markets/pricing incentives like “contract for difference” mechanism - the counterparty would not pay for the whole removal, but for the difference between the price of the removal and the carbon price.

  • New institution to levy carbon fees and re-distribute as adaptation finance, in collaboration with MDBs – see Recommendation 8.

  • Design Climate Central Bank at G20 level to issue funds swiftly to climate calamity struck V20 member and Developed Countries.

  • Funds are released by Climate QE from major Central Bank against identifiable natural assets (see Recommendation.

Recommendation 8:

Reimagine and redistribute mitigation, adaptation, and L&D financing.

  • There is an estimated $4-6tn financing gap across mitigation, adaptation, and L&D.

  • Employ new structures and approaches to unlock recalcitrant capital.

  • [ENTITY] to implement incentives for nations to adhere to Paris Treaty, e.g. rewards linked to carbon price.

  • [ENTITY] to implement levy-based financing across airline, shipping, and fashion industries.

  • [ENTITY] to redistribute frozen war assets and captured fossil fuel wealth to afflicted nations.

Mitigation, Adaptation and Loss and Damage Finance to be re-imagined.

  • Challenge of unlocking the $4 -$6 Trillion Annual Funding Requirement

  • Mitigation – Provide incentives (rewards, linked to 24/7/365 carbon price, part of debt restructuring efforts) to foster the Nationally Determined Contributions within the 2015 Paris Treaty to abate Green House Gasses at the national level.

  • Adaptation – Financing to be levy based (Airline, Shipping, Fashion industry)

  • Loss and Damage – Rechannel portion of war frozen assets ($200bn with Euroclear) and fossil fuel super wealth created as a result of the warinflation (OPEC, Norway, Qatar,…)

  • Private Finance incentivized by externality adjusted price allocation mechanisms (global carbon price, stratified monetary policy and modified prudential supervision policy)

Recommendation 9:

Establish a new Debt Restructuring Mechanism.

  • Impoverished nations have unsustainably high debt burdens – Paris Club and Common Framework inadequate.

  • Tailor restructuring terms to needs and constraints of affected nations.

  • Debtor Nations should agree on common sovereign debt terms and conditions disclosure platform.

  • [ENTITY] should extent preferred creditor status with pari passu clauses.

  • [ENTITY] should use Brady Bond mechanism to reimagine and reinvigorate debt restructuring talks.

Establish a new V20-oriented Debt Restructuring Mechanism.

  • Paris Club and Common Framework no longer adequate.

  • Debtor Nations to agree on common Sovereign Debt Terms and Conditions disclosure platform.

  • Consider New Debt Restructuring Agency with more adequate representation.

  • Extend preferred creditor status with pari passu clauses.

  • Use Brady Bond mechanism to re-imagine and reinvigorate debt restructuring talks (see also debt relief efforts for green and inclusive recovery) – [Caution – due care for natural carbon sink assets given as collateral]

Recommendation 10:

Design novel nature-based currencies.

  • Compensation mechanisms for climate actions, such as decarbonizations, are insufficient.

  • Take advantage of emerging technologies (e.g. blockchain) to create climate-sensitive currencies.

  • IMF should issue a climate stablecoin whose value is pegged to the ICE Carbon Futures Contract – used to reward abatement efforts undertaken by countries.

  • Other approaches: Land and Forestry; Top 1000 ESG Compliant Companies; VC Climate Technology.

Design nature-based currencies (with link to CBDC developments)

  • Nature Based Currency design by Open Earth

  • IMF Climate Coin by undersigned

  • IMF issues Climate Stablecoin whereby the supply is tied to a limited carbon reserve.

  • IMF Climate Stablecoin value set at $ X per ton of CO2 abated. The price will be function of ICE carbon Futures Contract (see Recommendation 1).

  • IMF Stablecoin offered for NDC efforts by individual nations within the Paris Treaty context

  • Stablecoin is steered by establishing the following collateral components, purchased/invested by the contributed SDRs:

  • Land and Forestry. (main beneficiaries will be V20 countries)

  • Top 1000 ESG Compliant Companies.  (main beneficiaries will be IMF Quota countries)

  • VC Climate Technology. (main beneficiaries will be IMF Quota countries)

  • Cash reserve in SDRs.