DG ECFIN Innovative financing at a global level Informal meeting of EU Directors General for Development Brussels, 9 th February 2010 Peter Bekx Director for International Economic and Financial Affairs European Commission

DG ECFIN 2 The importance of fiscal consolidation Change in debt as a share of GDP – Commission Autumn 2009 forecasts

DG ECFIN 3 Global challenges with budgetary impacts Financial stability: the costs of bail-outs should be paid by the financial sector Climate change/Copenhagen Accord: fast-start of USD 30 billion 2010 to 2012 and the goal of USD 100 billion dollars a year by 2020 by developed countries to developing countries Development: MDGs, G8 Gleneagles and EU commitments on scaling up ODA

DG ECFIN 4 The role of innovative financing in addressing these budgetary challenges Expenditure: reduction in non- productive spending tends to have more long-lasting effects if linked to structural reforms Traditional tax revenues: increases in rates, in tax bases and in efforts to fight tax fraud Innovative sources of financing: potential to be further explored

DG ECFIN 5 Instruments of innovative financing Definition: public finance that is raised in non- traditional ways; does not include mechanisms that are exclusively private finance Earmarking: can improve political acceptability, but leads to budgetary inflexibility Importance of implementation at global level: fair burden-sharing and global political commitment needed; risks of tax evasion by relocation of economic activities or tax bases → Coordination among all relevant key players (notably G-20) essential, but EU taking on a role of global leadership could also be an option

DG ECFIN 6 Innovative financing related to the financial sector Pricing of leverage and risk-taking: a fee on certain balance sheets positions of financial institutions, with the revenues being channelled either into a crisis resolution fund (Sweden) or into the budget (US) Financial transaction tax: expected to help stabilise financial markets by reducing "speculative" trading Taxation of bonus payments: expected to reduce managers' or traders' incentives to take excessive risks (UK, France) Increase in profit taxation: higher rate or surcharge on corporate income tax in the financial sector

DG ECFIN 7 Innovative financing related to climate change Putting a price on greenhouse gases emissions to use least- cost abatement opportunities: Cap-and-trade schemes: Revenues from the auctioning of allowances (e.g. in EU ETS as of 2013) Carbon taxes: in the EU as a complement to cap-and-trade where this is difficult to directly apply to small and diffuse emission sources; scope for further EU coordination in the Single Market Emissions from international aviation and maritime transport: Proposals in climate change negotiations; inclusion of aviation in ETS as of 2012; airline ticket tax by several countries Flexible mechanisms of the Kyoto Protocol: selling/auctioning Assigned Amount Units (AAUs); levy on CDM projects

DG ECFIN 8 Innovative financing for development Frontloading of public finance and action by tapping the capital markets: International Finance Facility (IFF), IFF for Immunisation, Global Climate Financing Mechanism Targeted bonds: green bonds, diaspora bonds IMF Special Drawing Rights (SDRs) Debt-for-development swaps (Debt2Health) Leveraging private finance through public incentives: Advance Market Commitments (AMC) Tax discounts Public-Private Partnerships Market-based insurance schemes Lotteries

DG ECFIN 9 Assessment criteria 1. Potential to raise revenues: serious budgetary challenges to be addressed 2. Effects on market efficiency: internalisation of external costs and benefits (“double dividend”) 3. Effects on equity and income distribution: affects political acceptability and need for accompanying social expenditure 4. Administrative and legal aspects: may complicate feasibility

DG ECFIN 10 Potential to raise revenues Financial sector: applying Sweden's Stability Fee in the EU-27 could raise more than €10 billion; FTT revenue estimates of more than €50 billion worldwide and of about €20 billion for Europe Climate change: auctioning revenues from the EU ETS could provide nearly €26 billion per year by 2020 (half of this should be used for energy and climate change purposes); carbon taxes already raising important revenues of 0.3% to 0.8% of GDP in several Member States Development: existing instruments already deliver important contributions, but the potential for significant scaling up might be limited

DG ECFIN 11 Effects on market efficiency Financial sector: taxing leverage and risk-taking by financial institutions can foster financial stability by slowing the build up of excessive risk positions in balance sheets; FTT may actually increase price volatility in specific markets by reducing the number of transactions and liquidity; transactions easier to relocate Climate change: a price on carbon emissions allows limiting global warming by using the least-cost opportunities of emission abatement Development: frontloading can prevent substantially higher costs or risks in the future by acting at an early stage

DG ECFIN 12 Effects on equity and income distribution Financial sector: companies are likely to roll over part of the tax burden to clients Climate change: low-income groups tend to spend more of their income on transport and energy, possibly implying a need for compensating social measures Development: additional and hidden burdens on future budgets from frontloading may create issues of inter- temporal distribution if future aid flows fall

DG ECFIN 13 Administrative and legal aspects Financial sector: tax on leverage and risk- taking as well as a surcharge on the corporate income tax easy to administer; compatibility of FTT with the EU Treaty provisions of free movement of capital to be further assessed Climate change: concerns about legal compatibility with WTO rules and administrative costs of carbon border taxes Development: institutional complexity of some of the mechanisms

DG ECFIN 14 Conclusions Significant budgetary challenges in the years ahead give innovative sources of financing an important role to play Global coordination will be essential as isolated action is likely to be less effective Taxing leverage and risk-taking in the financial sector and the pricing of carbon emissions are of particular interest because of a possible “double dividend” Relevant experiences of innovative financing for development have some potential of being scaled up, but the revenues are likely to be more moderate Commission will examine the most promising instruments in further detail and present proposals in due time, taking into account the importance of both EU and global coordination