Currency Transactions Tax Implementation - A Proposed Model (September 2001)

The UN Multilateral Environmental Agreement /Financial Mechanism
as a Model for Currency Transactions Tax Governance and Revenue Redistribution

Robin Round
Policy Analyst
Halifax Initiative
Vancouver, CANADA
September 2001

The UN multilateral environmental agreement/financial mechanism model is a viable one that can provide useful lessons to governments developing the terms of reference for currency transactions tax governance and redistribution systems.

The field of international environmental law for sustainable development has developed and refined models for multilateral cooperation to redistribute revenue that may serve as models for both the governance and the redistribution of receipts of currency transactions taxes.

In this model, a democratic and representative political body defines legal, administrative and operational responsibilities as well as overarching policy priorities through the treaty mechanism and a second body, also democratic and representational, yet smaller and more efficient, oversees the day to day management of resources. This structure provides for a streamlined "financial operations" department accountable to a larger political body.

The structure of both will be examined generally below and will be followed by analysis of two existing mechanisms, the Global Environment Facility and the Multilateral Fund for the Montreal Protocol.

An agreed legal framework is essential to multilateral cooperation and the UN MEA model provides both useful principles and successful examples. Multilateral environmental agreements (MEAs) are legally-binding instruments through which national governments commit to the achievement of specific environmental goals. While MEAs have existed for the last one hundred years, most arose from the Stockholm Declaration on the Human Environment in 1972 and/or the United Nations Conference on Environment and Development (UNCED) in 1992.[i]

While all MEAs exhibit unique characteristics based on negotiated terms, all have several critical characteristics. All are developed under the auspices of United Nations and derive from specific decisions of the General Assembly. MEAs are governed by the UN principle of “one-country-one-vote”. In addition to its equitable governance structure, the UN is considered the appropriate institution for the task of both facilitating decision-making and assisting in implementation due to its multi-sectoral capacity and the extensive experience and expertise of a number of its agencies specialized in environment and development issues. Administrative services to MEAs are provided through the United Nations Environment Programme (UNEP).

The effectiveness of MEAs depends primarily on the existence and effectiveness of the corresponding national legislation, institutions and policies, including those that ensure access to judicial and administrative fora, national capacity and political will. All MEAs are subject to domestic ratification and codification through the development of appropriate national institutions and policies, national capacity and political will. While an agreement could be developed outside the UN, such as was done successfully with the Land Mines Treaty, the utilization of UN governance principles would be essential.

As Schmidt has shown[ii], the only technically feasible currency transactions tax is one that can be adopted unilaterally. Thus, a currency transactions tax would be subject to the legislative, legal and administrative requirements of any new tax in the implementing country. Each country would necessarily establish the appropriate infrastructure to collect the revenue and administer the tax and invoke the appropriate legislative authority to do so.

A legally binding multilateral agreement provides a broad based framework that defines agreed principles and procedures and provides direction for the creation of an appropriate financial mechanism.

Treaty implementation, in developing countries, is often contingent on the provision of adequate external resources. Recognizing that all countries, but particularly developing countries, would be faced with financial burdens in meeting specific convention objectives, signatory parties to several MEAs have created financial mechanisms to collect, allocate and distribute resources, technology and expertise to achieve convention objectives. Revenue collected at the national level by participating donor parties is channeled through the financial mechanism to recipient parties for use in achieving jointly agreed convention priorities[iii].

Multilateral environmental agreements, depending upon number of signatories and nature of agreement, tend to be highly politicized arenas wherein participating governments are able to agree on only the broadest of agendas and guidelines. These multilateral agreements provide necessary legal, administrative, and operational frameworks only. Historically, it is through the work of the financial mechanism that convention priorities are realized in recipient countries.

A financial mechanism is created by the legal agreement as a permanent or interim measure to redistribute resources to achieve convention goals. The necessary day to day business of funding measures to implement the convention occurs through the financial mechanism.

A financial mechanism is composed of a democratic and representative decision-making body drawn in whole or in part from participating parties to the convention. The representation of the MEA within the mechanism's governance structure provides an additional level of accountability to convention signatories without compromising functional efficiency. The governing body of the mechanism, whether representative of all participants of not, is always much smaller than the conference of the parties. In the case of the Global Environment Facility profiled below, the structure is viewed as a hybrid between the UN, with its equitable governance structure, and the Bretton Woods, which participants view as more capable of efficient financial decision-making[iv].

This governing body is responsible for administration and operations including the development and monitoring of detailed operational polices and programmes, budgets, eligibility criteria and guidelines as well as the approval of detailed project and work programme according to convention provisions. Traditionally, the governing body of the financial mechanism meets at greater frequency than the conference of the parties, particularly in the early years as the mechanism is being established.

A financial mechanism is supported by an administrative secretariat that oversees resource collection and administration including policy paper development, surveillance and reporting. The secretariat engages with specific implementing agents responsible for spending the resources in agreed ways. A fiduciary agent holds resources in a trust fund and has no role in decision-making regarding resource allocation. Select UN agencies (including UNEP, United Nations Development Programme (UNDP), United Nations Industrial Development Organization (UNIDO), as well as the World Bank, bilateral agencies and in some cases non-governmental organizations serve as implementing agencies. They develop programmes and projects in consultation with the secretariat and participating governments and implement those approved by the mechanism's governing body.

The two mechanisms are described in greater detail below.

Global Environment Facility (GEF)
The Global Environment Facility (GEF) is the largest multilateral financial mechanism and unlike all others, serves multiple multilateral environmental agreements. The GEF provides “new and additional grant and concessional funding”[v] to qualifying countries for projects aimed at protecting the global environment in four “focal areas”: climate change, ozone layer depletion, biodiversity and international waters. Multilateral environmental agreements in all but the international waters focal areas guide the GEF’s work[vi].

The GEF was established in 1991 and its decision-making body and secretariat are based at World Bank headquarters in Washington, DC. The GEF underwent restructuring in 1994 to incorporate the principles of universal membership, greater transparency and increased accountability having been strongly criticised in an independent evaluation for its lack of equitable governance, its dependence on the World Bank, the poor performance of its projects, and the undermined efficiency resulting from inter-agency competition and manipulation of the project cycle.

Funding from the GEF is limited to “recipient countries” which are parties to specific environmental agreements or which qualify for technical assistance grants from the United Nations Development Programme or loans from the World Bank. The GEF is financed by contributions from developed countries based on the World Bank’s International Development Assistance formula. The GEF is replenished roughly every three years at a level set by the GEF Participants. Replenishment levels are as follows: US$ 1.2 billion for the Pilot Phase (1991-1993), US$ 2.0 billion for GEF I (1995-1997) and $ 2.0 billion[vii] for GEF II (1998-2002).

The GEF is governed by two bodies, a Participants’ Assembly, composed of 165 member governments[viii], which meets every three years to initiative replenishment negotiations, and a Council, composed of 32 constituencies, representing all Participants, which meets twice a year to set policy and approve major funding allocations to meet treaty obligations.

The GEF Council’s governance system gives both developed and developing countries equal voice in protecting the global commons. Sixteen seats are for recipient countries[ix], 14 are for the donors and two are for countries with “economies in transition”. This unique constituency structure, in which some seats are shared by both donor and recipient countries, blurs political distinctions and encourages consensus decision-making thereby increasing operational efficiency.

Decisions at the Council are taken by consensus, but where there is disagreement, a “double majority” system is in place. The system is designed to balance the interests of the donors and recipients, though, to date, all decisions have been taken by consensus. Should a vote be required, a decision must have the support of 60% of the Participants (one country-one vote) as well as 60% of donor support (one dollar-one vote). G7 donors control over 60% of funding and developing countries make up the majority of the Participants.

The GEF has an independent secretariat that supports and coordinates all major functions of the GEF. Its duties include the implementation of decisions of the Assembly and the Council; the formulation, coordination, implementation and oversight of the work program; facilitation of inter-agency coordination and oversight of operational policies. The secretariat is functionally independent of the World Bank, but is still supported administratively by the Bank. The World Bank serves as trustee for the Global Environmental Trust fund.

Projects and activities supported by the GEF are implemented by three agencies: World Bank, UNDP, and UNEP. The World Bank focuses on investment projects, UNDP implements technical assistance and training projects, and UNEP emphasizes research and enabling activities, although in practice, there is some overlap of activities between all agencies. Other organizations or institutions, including NGOs, UN agencies or bilateral development agencies can serve as executing agencies for GEF projects. The principle underlying this approach is to “cast the net widely” thereby utilizing the comparative advantage of a diversity of organizations in efficient and cost-effective project execution.

GEF projects must be endorsed by recipient country governments, to help ensure that projects are country driven and based on national priorities. Project types vary widely, but include “enabling activities” which help countries meet reporting requirements under the Climate Change and Biodiversity conventions, provide basic information, and to undertake national planning to identify priority activities.

As of June 1999, the GEF had approved over 635 projects in the amount of US$ 2.44 billion since its inception[x].

Multilateral Fund for the Montreal Protocol
The Multilateral Fund for the Montreal Protocol (MFMP) is the financial mechanism for the Montreal Protocol on Substances the Deplete the Ozone Layer. The interim Multilateral Fund became operational in January, 1991 and was made a permanent mechanism of the Protocol in January, 1993. It provides financial and technical co-operation and technology transfer on a grant or concessional basis to designated parties to meet Protocol commitments.

The MFMP is governed by an Executive Committee that is composed of 14 representatives drawn from participating parties, seven from recipient countries and seven from donor countries, with assistance from the Fund Secretariat. Executive Committee seats are rotated annually as is the Chair, which is selected from the ExCom membership. This committee meets quarterly and is responsible for administration and operations including the development and monitoring of operational polices, budgets, eligibility criteria and guidelines as well as large project and all programme approval, resource allocation and disbursement oversight.

The MFMP Secretariat, based in Montreal, Canada, is tasked with communication and liaison functions, expenditure monitoring, monitoring activities of the implementing agencies, and producing a range of reports for the Executive Committee including project analysis of every project. The Secretariat office and administration costs are borne by the Government of Canada in addition to its assessed contribution, as part of a hosting agreement.

Projects and activities supported by the MFMP are implemented by four agencies: UNEP, UNDP, UNIDO, and the World Bank. UNEP is responsible for research, data gathering and the information clearinghouse function and serves as trustee for the funds. UNDP does feasibility and pre-investment studies and technical assistance as does UNIDO. The World Bank is responsible for investment projects.

The Multilateral Fund is financed by assessed contributions from developed countries based on the United Nations Scale of Assessments. The MFMP is replenished every three years at a level set by the Parties to the Montreal Protocol. It has been replenished four times: US $240 million (1991-1993), US $455 million (1994-1996), US $466 million (1997-1999), and US$ 440 million (2000-2004)[xi].

Between 1991-2000, the MFMP disbursed US$ 813.1 million[xii]

If success can be defined as the measure of how efficiently the GEF and the MFMP has used the funds available to them to meet their objectives, both have mixed records and for different reasons. Each has a unique mandate and objectives, governance and administrative structures, operational strategies and project cycles, timelines and financial arrangements. Several critical lessons from the experiences of each are worth noting in the context of the replicability of the financial mechanism model for CTT implementation.

A significant strength of both the restructured GEF and the Multilateral Fund is the equity built-in to each mechanism’s governance structure. Both mechanisms have developed governance systems that give both developed and developing countries equal voice in protecting the global commons. Both mechanisms have double weighted voting systems to balance the interests of donors and recipients. To date, all decisions at both the Executive Committee of the MFMP and GEF Council have been taken by consensus.

Another strength is the relative efficiency in decision-making at each mechanism. The GEF 32 seat Council constituency structure and the 7N+7S MFMP Executive Committee structure streamline and to a certain extent de-politicize decision-making. Government bureaucrats are under pressure to move resources through the pipeline and spend little time speechmaking in plenary. Most comment that the decision-making process is far more business-like than any UN forum they have ever participated in.

A significant weakness of both mechanisms is that although contributions are assessed on agreed scales and after protracted negotiation and are therefore considered obligations, they remain subject to political will. The US refusal to ratify the Kyoto Protocol is currently seriously undermining functioning of GEF. The US is the GEF's largest donor. This political manipulation is likely to remain a feature of any arrangement to redistribute the receipts of currency transactions taxes, particularly if the receipts are large, and points to the need for complete ownership of any political agreement by all participating countries.

The GEF and to a much lesser extent the MFMF, have been criticized for their complexity, excessive bureaucracy and their failure to move swiftly to meet the needs of the conventions they serve. This is in part due to the way both mechanisms were created. The primary organizing principle of both the GEF and the MFMP was that no new organization would be created to administer funds. This arose from donor cost concerns and the belief that financial mechanism operations would be informal and cooperative and based on only modest modifications to implementing agencies’ structures and procedures.

Unfortunately, however, more than minimal adjustments to structures and procedures were required. By failing to establish procedures that first met the needs of the intended recipients and the convention, the inherent complexities of the World Bank and the UNDP approvals processes coupled with their large and largely inflexible bureaucracies, were built into both financial mechanisms. Both mechanisms, which were to benefit from the comparative strengths of the implementing agencies, inherited their comparative weaknesses.

Both mechanisms and the implementing agencies themselves have made substantial efforts to streamline procedures to expedite the project cycle. Unfortunately, while elements of the structures have changed, the underlying issue of how efficiency could be achieved by the coupling of several entrenched bureaucracies remains.

The argument that it is too costly to create any new organization for the management of CTT receipts is unsupportable. Given the magnitude of the funds and the anticipated desire for all governments to have an influence over the redistribution of the multilaterally-targeted portion of receipts, there will most certainly be a new institution established to manage the potentially enormous receipts of CTTs. The lesson from the GEF and the MFMP in this regard is that the coupling of many institutions as recipients and managers of those resources is fraught with danger.

If the experiences of other environmental treaties are any indication, the failure of the political body to provide explicit and consistent guidance to the bureaucracy on funding priorities results in confusion, delay and frustration. Any financial mechanism acts under the guidance of and is accountable to the conference of the parties, on policies and programme priorities. With inadequate, unclear or conflicting directives from its political masters, no operations department can be expected to perform well. The clear articulation of priorities and programmes is essential to the effective function of any financial mechanism or mechanisms.

This will be of particular concern as regards CTT money management. Whatever political body is formed to direct the bureaucracy that will manage the money, it is imperative that the extent of its role in decision-making on resource allocation be made explicit. There is a huge risk that the political battles that will inevitably result from discussions to redistribute the equivalent of tens to hundreds of billions of US$ will result in unclear guidance to whatever bureaucratic body such as a financial mechanism is charged with day to day financial management. Only clearly articulated roles and responsibilities will ensure that the financial mechanism's bureaucracy is not manipulated by a host of powerful un-elected and unaccountable agencies and institutions hungry for CTT cash.

The spectacle of the World Bank and various UN agencies continually battling with one another for access to both GEF and MFMP resources has been nothing less than shameful. The result of the struggles has been duplication, overlap, delay and the waste of tens of millions of dollars of scarce resources. Terms of any CTT financial agreement much ensure that inter and intra-institutional competition is minimized and that the comparative advantages of each are utilized optimally. If past experience is any indicator, this will be one of the most difficult tasks in the evolution of a CTT fund.

Current financial mechanisms manage small sums narrowly targeted to achieve specific purposes. Anticipated receipts from currency transactions taxes vary widely; they depend on the number of participants and are subject to a range of distribution formulae that make fund size estimates impossible at this time. All anticipated receipts of CTTs, however, are expected to easily eclipse those currently under management at the existing MEA financial mechanisms. Thus, the sheer volume of potential resources associated with the CTT, and the likelihood that resources will be broadly targeted to a host of agencies or institutions will necessitate substantial adjustments to the MEA/financial mechanism model.

A CTT financial mechanism would likely serve more of a financial "gatekeeper" function channeling and overseeing general resource allocations rather than the supervisor of agencies whose task it is to implement specific projects. Resources under management by any new CTT mechanism may or may not be allocated to specific programmes or projects as is the case with current models, but to specific funds, agencies or institutions to achieve broader goals of poverty reduction and environmental protection. Thus for example, the mechanism may allocate several billion dollars to fund the UN rather than fund specific UN agencies for specific tasks, although both options are possible.

However the CTT fund and its management structure evolves, the functional relationships between multilateral environmental treaties and their financial mechanisms could help guide the development of whatever new institution, agency, organization or mechanism is created by participating governments. These new structures, particularly informed by the lessons learned from the GEF and the MFMP, could incorporate best practises and avoid serious errors of their predecessors resulting in efficient and effective resource allocation.

In the case of a currency transactions taxation agreement based on this model, the convention body, for example, could negotiate among its signatories a CTT tax rate, a percentage allocation per country and the general formulae, guidelines, or priorities for revenue disbursement, and the financial mechanism could set the terms of reallocation based on incoming receipts and ongoing negotiations between participating governments.

More specifically, the multilateral agreement would define the terms of cooperation and compliance between nations and codify responsibilities. It would be governed by a conference of all participating parties based on the principles of one country one vote.

In terms of duties, this body would:

  1. define the tax base;
  2. establish the tax rate or rates and the terms for rate adjustments;
  3. determine the contribution formula(e) for participating countries and thus the volume of resources likely to be handled by the financial mechanism;
  4. establish broad principles, terms and guidelines for fund disbursement;
  5. provide the legal framework for the establishment of a financial mechanism to oversee policy development and disbursements;
  6. provide regular and explicit guidance to the financial mechanism on funding priorities;
  7. establish a secretariat or equivalent administrative body to oversee specific procedural or administrative requirements;
  8. establish the conditions for the treaty to enter into force;
  9. establish provisions for treaty review after a pre-determined time;
  10. establish the procedures for treaty amendments;
  11. determine appropriate sanctions against treaty violators;
  12. set the terms for entry into force after the appropriate number (usually fifteen) number of ratifications; and
  13. articulate procedures for withdrawal[xiii].

The financial mechanism based on this model operates under the authority of the parties to the convention who decide on its overall policies. The mechanism would be governed by a small Council or commission composed of equal representation participants representing donor and recipients, utilizing a two-thirds double majority voting system with shared seats to encourage cooperative engagement.

In terms of duties, the financial mechanism would:

  1. establish a trust fund to house contributions;
  2. establish an administrative secretariat to oversee administrative operations and assist in policy development;
  3. collect and oversee contributions based on formula(e) agreed by the convention;
  4. develop and monitor operational policies and procedures for revenue disbursement based on guidance provided by the convention;
  5. oversee budget development and implementation;
  6. establish criteria for funding eligibility;
  7. develop allocation and programme approval procedures;
  8. disburse resources;
  9. review performance reports of implementing agencies and the secretariat;
  10. establish independent and effective monitoring and evaluation procedures to ensure continual improvement.

A convention on taxing currency transactions could be modeled on the UN model multilateral environmental agreement model as regards decision-making, ratification procedures, compliance principles etc, yet adapted to suit the specific needs of a revenue collection and redistributive mechanism. Critical principles that are essential in multilateral treaty and its financial mechanism include: democratic representation and equitable decision-making, full transparency and disclosure, full public accountability, public participation and engagement and continual improvement through monitoring and evaluation.

The existing MEA/financial mechanism model is a viable one and can provide useful lessons to governments developing the terms of reference for currency transactions tax governance and redistribution systems. 

[i] Major agreements include: Ramsar Convention (of Wetlands of International Importance)(1971), UN Convention on the Law of the Sea (1982), Convention on the Conservation of Migratory Species (1979), Montreal Protocol on Substances that Deplete the Ozone Layer (1987), Basel Convention on the Transboundary Movement of Hazardous Wastes (1989), Convention on Biological Diversity (1992), Framework Convention on Climate Change(1992), Convention on International Trade in Endangered Species (1993), UN Convention to Combat Desertification (1994) and the Persistent Organic Pollutants Convention (2000).
[ii] Schmidt, Rodney. “A Feasible Foreign Exchange Transactions Tax”. North-South Institute March, 1999. and “Efficient Capital Controls”. International Development Research Centre, Government of Canada. April 2000.

[iii] These include capacity building, data collection, technical training, and the implementation of projects.

[iv] Based on the author's repeated conversations with participant governments - 1994 - 1999.
[v] “Instrument for the Establishment of the Restructured Global Environment Facility” Basic Provisions. Para. 2.p.6.
[vi] These include: Montreal Protocol on Substances that Deplete the Ozone Layer (1987), Convention on Biological Diversity (1992), Framework Convention on Climate Change (1992) and the Persistent Organic Pollutants Convention (2000). Projects that meet the goals of the UN Convention to Combat Desertification (1994) are also encouraged insofar as they also meet the objectives of the above noted agreements.
[vii] This figure reflects new resources only. Often cited figures for the GEF II replenishment include an additional .75 billion carried over from the previous replenishment for a total of US$ 2.75 billion.
[viii] Of which 120 are recipient countries.
[ix] Six seats for Africa, 6 for Asia, and 4 for Latin America and the Caribbean.
[x] EF/C.14/Inf.5. Program Status Reviews FY 1999.
[xii] ibid.. Of that total, the World Bank disbursed US$ 353.3 million, UNDP - US$ 232 million., UNIDO - US$ 191.2 million and UNEP - US$ 37.6 million.
[xiii] Many of these elements were drawn from Ruben Mendez "Financing the United Nations and the International Public Sector" [Global Governance, 3 (1997), 283-310]