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On Tuesday 5 March, the Working Group began its consideration of financial resources and mechanisms. The CHAIR introduced Agenda Item 3, Financial resources and mechanisms (Agenda 21, Chapter 33). He noted the importance of linking the issue of implementing economic instruments with the discussion on changing consumption and production patterns. He encouraged the Working Group to keep the discussion of official development assistance (ODA) alive, and to facilitate the dialogue to bring forth new approaches.

The Task Manager, Juergen Holst (DPCSD), introduced the Secretary-General's report, Financial resources and mechanisms for sustainable development: overview of current issues and developments (E/CN.17/1996/4 and Add.1). The report focuses on three main issues: mobilization of external financial resources; mobilization of domestic resources; and innovative mechanisms. The report also addresses the transfer of environmentally sound technology (EST) and the matrix of policy options appropriate for financing sustainable development activities (the matrix). He noted that the Tobin tax (a tax on foreign exchange transactions) is on the Working Group's agenda for the first time.

JAPAN introduced the Chair's Summary from the Third Expert Group Meeting on Financial Issues of Agenda 21, which was held in February 1996 in Manila, the Philippines. Major findings include: removing impediments to investment is important; economic instruments may generate more stable demand for environmental technologies than command-and-control regulations; and the carbon tax is a highly desirable tool.

The CHAIR then opened the floor for general discussion. COSTA RICA, on behalf of the Group of 77 and China, identified a number of concerns, including: the decline in the level of financial resources for implementation of Agenda 21; the importance of access to new and emerging technologies on favorable terms; foreign direct investment (FDI) should not be an avenue for dumping unsound technologies; measures to provide debt relief and, where appropriate, cancellation should be implemented; and further study is required for certain economic instruments, including pollution taxes, natural resource taxes, emission trading schemes and the reduction of certain subsidies.

The EU stated that the mobilization of domestic resources is important, as is ODA, and reaffirmed its commitment to the 0.7% of GNP for ODA target. ODA cannot fully implement Agenda 21, but it can arrange private capital flows. He stated that national policies must promote private investment, and that technical assistance can develop policies to encourage this. He welcomed including innovative financing on the agenda of the 1996 ECOSOC meeting. A number of developing countries welcomed the EU reaffirmation of the ODA target.

COLOMBIA commented on the "new approach" to private capital mentioned in the report, noting that FDI is not directed to environmental priorities, and called for a study on the shift to the private sector. He stated that the Working Group should focus on the mobilization of international resources and called for easing external debt, now at US $1.7 trillion.

SWEDEN noted that ODA is insufficient for sustainable development, and stressed the need for private capital. He offered to share experience on innovative economic instruments. IRAN stated that only a few developing countries have attracted private capital flows. He cautioned against setting emissions targets without considering developing-country economies.

NORWAY expressed concern at falling levels of ODA, and called attention to subsidies, especially with regard to energy, and economic instruments, especially within the Climate Change Convention.

The PHILIPPINES noted that sustainable development is characterized by, among other things, increased globalization and heightened ecological interdependence, while increases in private flows of capital should be accompanied by increases in ODA. He advocated economic incentives but cautioned that marginal benefits should exceed marginal costs of implementation. He also highlighted mobilizing local resources.

The NETHERLANDS stated that an absence of good governance can block private sector flows. ODA functions optimally, he added, if it is aimed at economic self-reliance. He highlighted the utility of debt swaps and the problem of environmentally-damaging subsidies.

GUYANA supported the pursuit of viable, new funding mechanisms, but stated that they should not be considered as a substitute for existing commitments under Agenda 21.

CHINA reminded delegates of the vision set out in Agenda 21, including: establishment of a new and equal global partnership; elimination of poverty; and the principle of common but differentiated responsibility. He also noted principles in Chapter 33, including new and additional financial flows to developing countries and projects conducted in accordance with the development goals of developing countries.

GERMANY stressed the importance of examining the particular situation of each country and taking action accordingly. He noted that the matrix is helpful in this examination, and stated that domestic and external resources must be seen as complements. He called attention to the importance of the development of local financial markets. He also noted that Costa Rica has made sustainable development its guiding policy and has applied many of the matrix tools in doing so.

INDONESIA stated that the message from Rio is not fully reflected in the Secretary-General's report.

DENMARK stated that ODA should not be seen as an alternative to other forms of financing, but as a stimulus to the speed at which development is achieved. He called for attention to subsidies and tax incentives that damage the environment.

CANADA noted that a combination of policies and measures that may be appropriate for one country may not be appropriate for another. He stated that ODA remains an important source of funding, especially in the least developed countries. He suggested priority for the development of private funding, and stated that the multilateral development banks (MDBs), especially the World Bank, have made progress but that more can be done.

UGANDA stated that the report's treatment of international tax issues required further elaboration, including the relationship to global environmental benefits and the international distributional impacts. The OECD called for collaboration between rich and poor countries toward sustainability. She described total ODA as "stable" since 1986. She stated that available evidence shows economic instruments to be both environmentally- and cost-effective.

MEXICO cautioned against "sidestepping" Agenda 21 in mobilizing global resources. Regarding the report, he asked that private capital flows and free trade be evaluated vis-a-vis debt relief and sustainable development. He called for: increased ODA; State involvement in the marketplace; a clarification of the classification of countries; and an evaluation of subsidies.

POLAND highlighted the interaction between domestic effort and international support. While generally supporting the recommendations of the report, he called the proposal for a world-wide environmental tax too "idealistic" and proposed regional policies instead.

BRAZIL differed with the report over: ODA, calling for a study of funding obligations; private capital flows, stating that they cannot fill the gap created by the decline of ODA; national resources, including economic instruments and subsidies, which may have negative effects on income distribution; categorizing countries; and innovative mechanisms, which should not replace other sources of funding.

UNEP stated that adequate environmental protection requires investment in social issues. She described an initiative to inject social and environmental factors into investment decisions, and another to promote ESTs with databases.

The US stated that the CSD's role is to discuss "realistic" opportunities for financing. He noted that FDI may have deleterious economic and social effects, and suggested that governmental policies can address this. He encouraged the CSD to involve the private sector. He also mentioned 13 specific points, including: support for the OECD study on ODA fatigue and sustainability of private capital flows; opposition to the Tobin and air transport taxes; and a proposal for consideration of domestic funding for financing sectoral and cross-sectoral issues, as well as information sharing on economic instruments.

FINLAND suggested expanding the matrix to include case studies on innovative mechanisms for financing policies. In reference to the Manila meeting, the UK: stressed the importance of a credible and stable environment to promote financing of sustainable development; noted that the bulk of financial resources will come from the private sector; and stated the importance of internalizing external costs by imposing appropriate taxes and removing environmentally damaging subsidies.

INDIA stated that, without attention to financing for technology transfers, sustainable development might be seen as a marketing strategy, especially if certain technologies are only available from developed countries. He stated that the matrix provides a useful framework, but noted that it is moving into the area of policy options and suggested that it be used as an information clearinghouse. He called for more work on concepts such as eco-space, environmental justice and international environmental debt. Finally, he noted that the GEF was replenished at the minimum acceptable level and is working in the area of global benefits, which are a small aspect of sustainable development.

The IMF stated that since economic ministers do not discuss environmental objectives with the IMF such objectives either: are not a priority; have not been conveyed to the economic ministers; or have not generated concern regarding their macroeconomic implications. He asked delegates to encourage their economic ministers to discuss environmental objectives with the IMF. He also offered IMF expertise on the distributional and analytical aspects of environmental tax reform. IRELAND noted that his country has increased ODA, although it has not yet reached the target level.

The REPUBLIC of KOREA suggested that: innovative financial mechanisms be applied on a step-by-step basis; a carbon tax be encouraged for domestic production on a voluntary basis; and regional technology centres be supported. The CHAIR then opened the floor for specific comments on the text.

I. MOBILIZING EXTERNAL FINANCIAL RESOURCES FOR SUSTAINABLE DEVELOPMENT: A number of countries, including MEXICO, BENIN and CHINA, questioned the reference to a "new approach" for financing sustainable development. The Secretariat stated that the reference was not meant to indicate that the old approach (as contained in Chapter 33) was discarded, but to recognize changes since Rio and a widened perspective of financing. COLOMBIA noted that no in-depth analysis has been conducted on the impact of increased private capital flows on sustainable development, and stated that the increase in private capital flows should not change the approach.

BRAZIL questioned the impact on sustainable development in reference to the paragraph comparing ODA with private investment. He suggested a balance between domestic resources and ODA in the paragraph on new approaches to financing. With regard to the same paragraph, JAPAN stated that economic development is driven by private sector development, and called sustainable development "market-based." CHINA questioned the reference to "domestic resource mobilization." The IMF suggested changes implying that non-ODA financing is a "continuing" activity.

AUSTRALIA suggested improving the "quality" of resource flows. She emphasized pre-existing aid sources in paragraphs on subsidies and international taxation. ITALY, speaking on behalf of his own government, stated that industrializing countries in Latin America and Asia may not need ODA, and suggested a focus on countries "really in need of help." He advocated export promotion and technology transfer.

GERMANY supported Japan, noting that German ODA leverages private and domestic resources. FRANCE stated that ODA is "absolutely essential" to support sustainable development in the poorest nations. BENIN highlighted "the effects of slavery and colonization on Africa," noting that the world should not lose sight of political commitments.

MALAYSIA stated that FDI is concentrated in only a few countries, while others may be most in need of ODA, and that much FDI is directed to countries without stringent regulations. CANADA highlighted: encouraging private investment in all countries; difficulties with stability of investment; linking profit motives to humanitarian goals; and the recommendations from the Manila meeting on capital flows.

II. MOBILIZATION OF NATIONAL RESOURCES FOR SUSTAINABLE DEVELOPMENT: COLOMBIA noted that funding should be at the international level. On subsidies, he cautioned against altering the balance agreed to at the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). BENIN stated that subsidy reduction by OECD countries did not apply to developing countries. CANADA stated that environmental liability and the role of government procurement were relevant to this section.

AUSTRALIA supported the recommendation that subsidies be reviewed. BRAZIL suggested that a review of subsidy schemes should keep in mind all aspects of sustainable development.

III. FEASIBILITY OF INNOVATIVE MECHANISMS FOR FINANCING GLOBAL ENVIRONMENT: The WOMENS ENVIRONMENT AND DEVELOPMENT ORGANIZATION, speaking on behalf of several NGOs, endorsed an international tax on air transportation, noting that it would: generate new and additional funds; support the polluter pays principle; and reduce greenhouse gas emissions. The FOSSIL FUELS POLICY RESEARCH INSTITUTE and the ENERGY CAUCUS proposed an international tax on the transport of petroleum and fuel by tankers and barges to reduce the severity of oil spills, and the creation of an independent thinktank on sustainable development for the CSD.

SWEDEN requested specific mention of the GEF in the Chair's text. BENIN stated this section should address sustainable development, not just the global environment. He also called for a "team" to develop politically-acceptable global taxes on environmentally-damaging consumption.

In reference to the paragraph on pilot schemes for emissions trading programmes, such as one proposed by the Earth Council, CANADA, supported by AUSTRALIA, COLOMBIA and the US, requested more information on the Earth Council proposal. The SECRETARIAT stated that this proposal is not yet publicly-available. AUSTRALIA stated that more appropriate fora than the CSD exist for continuing discussion of international air transport taxes, carbon taxes and the Tobin tax.

MEXICO stated that innovative finance is complementary to Chapter 33 of Agenda 21, and requested further analysis of "alternative banks" that fund environmentally-sensitive investments. He questioned the linkage between the Tobin tax and mitigating environmental degradation, and remarked that taxes do not address the high volatility of capital flows. COLOMBIA questioned: the viability of global taxes; the effect of airline taxes on reducing fleets; and the environmental effects of the Tobin tax.

The US supported tradeable permit schemes at the national level and supported joint implementation programmes, which may be more feasible in the short-term. He supported a study of the air transportation tax idea. The NETHERLANDS suggested attention to other innovative measures, such as Colombia's call for debt swaps.

PERU noted that the GEF does not cover all sustainable development issues. He also called for flexible and efficient GEF procedures. GUYANA stated that the reference to a pilot scheme for emissions trading programmes did not provide sufficient information to warrant support.

BRAZIL called for studies on a variety of sectors that could be the object of taxation, and suggested studies of a petroleum transport tax and of taxation fatigue.

MALAYSIA stated that the Working Group should not embroil itself in technical details, but should agree to search for practical, innovative financial mechanisms. He supported the air transport tax, and noted that it is in line with the polluter-pays principle.

IV. FINANCING THE TRANSFER OF ENVIRONMENTALLY SOUND TECHNOLOGIES and V. MATRIX OF POLICY OPTIONS AND FINANCIAL INSTRUMENTS: DEVELOPING ITS FORMAT AND CONTENT: With regard to the policy matrix, CANADA requested more information on the magnitude of incentive and financing effects. AUSTRALIA stated that the matrix was useful for developing countries in decision-making on finance. She suggested further refinements on the magnitude of incentives and financing effects. The CHAIR noted that a lot of "original work" has yet to be done on this subject, and mentioned related studies done by the OECD.

BENIN stated that the matrix section should refer to financing the flow of "eco-technologies" from developing to developed countries. On the issue of subsidies, he requested clarification on whether national or international subsidies will be considered and which body would develop subsidy indicators. COLOMBIA called for EST transfer on favorable terms, and suggested examination of "rights banks" in this regard as well as trust funds for the transfer of biotechnology.

The US noted that the section in the addendum that highlights US experience with venture capital and equity finance for environmental firms draws clear lessons, such as the importance of a transparent, predictable and reliable regulatory framework, but suggested that the text should not focus only on ESTs. He also suggested moving towards input-output quantifications for the matrix. MEXICO suggested that the section on ESTs should go beyond the North-South framework of transfer, and suggested that the problem of access for technology transfer should be addressed.

INDONESIA suggested that, in reference to a paragraph regarding the difficulties in financing transfer of ESTs, entrepreneurial interests could take root if incentives were available to overcome risk. PAKISTAN suggested identifying constraints to technology transfer other than financing.

The UK noted that the majority of technology transfer flows are privately financed, and stated that the best way to promote flows of ESTs is to ensure that policy frameworks are environmentally and investment friendly. JAPAN stressed the Manila meeting's finding regarding the importance of creating more predictable and investor friendly markets to facilitate technology transfer. He also stressed the need to take into account the differing situations of countries when promoting technology transfer.

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