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Dr. Theodore Panayotou (Harvard Institute for International Development) presented his matrix of financial instruments and policy options — a new approach to financing sustainable development. Dr. Panayotou noted that to put the world economy on a sustainable development track, a combination of instruments and approaches is necessary. The world economy is at a crossroads between sustainable and unsustainable development and may have already taken the wrong track. We need to change tracks and the longer we wait, the more resources we will need. If we assume a business as usual scenario, the available resources leave an apparent funding gap that was estimated by the UNCED Secretariat to be US$600 billion. However, if we remove barriers to sustainable development (energy, agricultural, chemical and other subsidies in both developed and developing countries) and redeploy existing resources, the funding gap will shrink.

He listed a number of different sources of additional resources to bridge the funding gap. These include: redeployment of resources and a move from unproductive to productive projects; phasing out subsidies; privatization; greening of taxes; marginal cost pricing of services like water and electricity; assigning property rights to natural resources to communities or the State; channeling private capital flows correctly to promote sustainable development; encouraging joint implementation and the use of tradeable CO2 emissions permits; using ecotourism, bioprospecting and tradeable conservation credits; and using other environmental user charges, private voluntary contributions, the GEF and additional external assistance, such as ODA.

The matrix of financial instruments and policy options includes: external resources; the international policy environment; national policy reforms; and innovative instruments. Sources of external resources include ODA and the GEF. Options in the international policy environment include debt relief, trade flows and private financial flows. The matrix of national policy reforms includes: economic and financial reforms, property rights, resource pricing, subsidy reduction, taxation and environmental charges. Innovative instruments at the domestic level could include: ecolabelling, ecofunds, bioprospecting fees, ecotourism fees, scientific tourism fees, watershed charges, tradeable reforestation credits, relocation incentives, tradeable water shares, betterment charges, differential land use charges, tradeable emissions permits, waste delivery incentives, bonds, deposit refund systems, competitive bidding and property taxes. Global innovative mechanisms include: joint implementation, patents, intellectual property rights, water trading across borders, tradeable permits, carbon offsets, carbon taxes, air travel tax, oil spill bonds, and transport bonds. In closing, he noted that the implementation of these options has to take place slowly but must begin somewhere, whether on an experimental or voluntary basis or through joint implementation.

In the discussion that followed, MALAYSIA said that IARCs and CGIAR gene banks are another possible source of finance for developing countries. BRAZIL sought clarification on why the innovative measures, which are so widespread, are not being implemented and added that the paper should have provided a financial assessment of the effects of the instruments in the short-term. He suspects that the instruments could penalize the poor in the short-term, in spite of their potential success in the medium- to long-term periods. Panayotou responded that several factors, including suspicions, lack of capacity, vested interests, time constraints and competitiveness, have delayed the start-up of these processes. However, his concern was not that the process will not eventually start, but the fact that the response to urgent problems is always too slow and the eventual cost too high. Often, the effects of equity and distribution depend on how the process is handled, and mostly relate to how the revenue earned is distributed. The approach requires undertaking neutral revenue taxation. Short-term distribution of revenue also requires further study. He stressed that poverty alleviation, economic growth and environmental conservation must be addressed concurrently.

CHINA clarified that one cannot refer to bilateral initiatives between counties as joint implementation, an approach that has not yet been approved by the Parties to the Convention on Climate Change. There should be a way to integrate environment and development concerns. Resolving environmental problems requires joining hands in a global partnership. Panayotou concurred, adding that over-consumption can be easily resolved by eliminating subsidies. Capacity-building is important in developing innovative domestic instruments, since even if they are successful elsewhere, they still need to be adapted to local situations.

The PHILIPPINES noted that in this matrix there are many options. Now that we know the "what," we need to discover the "how." Panayotou concurred on the need to develop mechanisms to enforce property rights on biodiversity. The paradox is that currently patented products can be reproduced, while those unpatented, such as biodiversity, cannot be recycled.

INDIA stated that the new and innovative ideas were very useful, but how does one deal with the administrative and implementation problems ensuing from new taxation processes and how does one integrate the new taxation concepts with the attempts to simplify taxation, since these can generate a new bureaucracy. Panayotou recommended that the CSD should use case studies from developing countries to find out how these methods have been implemented, the problems encountered and their replicability. To address environmental problems, one could start with other measures, such as removing tax shelters, exceptions and subsidies that harm or do not benefit the poor, the environment and the economy. Alternatively, one could introduce marginal cost pricing or differentiated taxation of products, for instance between leaded and unleaded gasoline.

The UNITED STATES said the new approaches to resource flows have merit, especially in increasing financial flows. Given the inability of existing institutions to undertake new work, who would undertake the proposed studies? Second, why is there a difference between Panayotou's and UNCED's estimates of the finances needed for sustainable development? Panayotou suggested that governments voluntarily undertake the experiments, with coordination by the CSD. With regard to the difference in estimates, UNCED undertook the studies in a rush and was, therefore, not able to take into account certain distortions.

Poland asked three questions. (1) On what basis were Panayotou's funding estimates done and how is it possible to evaluate those instruments that have not been applied? (2) How can an increase in ODA at this stage allow its lowering in the future? (3) Which is better for implementation in the near future — joint implementation or tradeable emissions permits. Panayotou responded that the shrinking of ODA reflects the fact that if the levels were met now, less would be required in the future in relative terms, since most problems will have been resolved, although this may be too much to expect. He said that preference should be international tradeable permits to joint implementation (JI), since the former provides an opening into the international market. However, JI is still useful in the short term, especially if CO2 permits are auctioned.

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