Every country around the world is affected by the climate crisis. The sustainable transformation necessary to combat climate change is an all-encompassing process requiring deep economic, political, social, cultural, and ecological changes in the way our society is organized. One of the required dimensions of the transformation process involves finding ways to ensure the availability of financial flows needed for sustainable investments.

The financial means to pursue a sustainable transformation, however, are very unjustly distributed: while high-income countries have the capacity to create the money needed, middle- and low-income countries do not. This state of affairs is particularly problematic considering that in general Global South countries have been contributing the least to worldwide carbon emissions while being the most affected by adverse ecological and climate impacts including floods, droughts, and hurricanes, among others.

Lacking the capacity to create necessary financing, Global South countries require access to foreign currency to import essential goods and services for the green transformation. Estimates show that emerging and developing countries will need to spend an annual amount of around 1 trillion US dollars by 2025 and 2.4 trillion US dollars by 2030 to pursue investments crucial to limit global warming to the target of 1.5 degrees. However, to date, excluding China, total climate finance to emerging and developing economies stands at 244 billion US dollars. Additionally, Global South countries are already highly indebted and the cost of capital (the rate of return required by investors) is two to three times as large in the Global South as it is in the Global North. Recent research shows that under these circumstances foreign financial investors are unlikely to finance the green investments lacking in the Global South. This is the case, above all, because particularly in areas such as environmental conservation, restoration, and protection, many sustainable projects are inherently high risk with little or no profit potential.

In other words, the level of global finance has fallen far too short to effectively finance the required transformation. Not surprisingly, calls to reform the international monetary system have been growing in recent years. In June 2023, at the Paris Summit for a New Global Financing Pact, UN Secretary-General António Guterres characterized the global financial architecture as “outdated, dysfunctional, and unjust”. He called for “a new Bretton Woods moment—a moment for Governments to come together, re-examine and re-configure the global financial architecture for the twenty-first century”. This is also the goal of the Bridgetown Initiative for the Reform of the Global Financial Architecture launched in 2022 by the Prime Minister of Barbados, Mia Mottley.

With this goal in mind, and inspired by Keynes’ bancor proposal, we make the case for the introduction of a global special purpose money to overcome the constraints of financing green projects in the Global South.

Money creation, power, and global currency hierarchies

Considering how to create global financing opportunities for sustainable transformation requires examining power relations inscribed in the global financial architecture. In principle, there is no natural limit to the amount of money that can be created. In theory, any green project is fundable as long as necessary resources are available, and the actors involved are willing to accept the money in question. However, not all monies are created equal. The US dollar holds a central place in the current international monetary system. Located at the very top of the global currency pyramid, it is the unit of account in which most global trade and finance are denominated, and the currency used for reserve accumulation. Most importantly in the context of this article, the U.S. dollar is the medium of payment in which international balances are settled. Accordingly, one of the largest hurdles to financing sustainable and just transformation is the need on the part of Global South countries to acquire US dollars to import and pay for the goods, services, and technologies they require but do not (yet) produce for the sustainable transformation. Although the ultimate aim of transformation processes is certainly to strengthen local production and markets, the import of certain goods and services is unavoidable, and will likely remain so, at least for some time to come. To move towards renewable energy sources, for example, countries need to import solar panels, wind turbines, and other commodities that they may not yet have the capacity to produce themselves.

Most Global South countries, however, either lack dollar reserves or cannot obtain the amount they need because they do not have sufficient trade surpluses. Access to foreign currency credit is either not an option or very expensive, and many of these countries are already highly indebted. As a result, proposals to provide finance to the Global South will continue to fall short in ambition unless a new, non-hierarchical international monetary system is created in accordance with the principles of global justice.

Keynes' international clearing union and bancor proposal

In the early 1940s, John Maynard Keynes developed a proposal for shaping the post-war international monetary system in a way that would avoid financial crises in the long run and balance global trade. His idea involved the creation of an International Clearing Union (ICU) that would allow countries running a commercial deficit to temporarily hold debit balances with surplus countries. According to his plan, both deficit and surplus countries would be members of the ICU, which would have its own unit of account: the bancor. Bancors were designed to exist only for the purpose of settling international balances between monetary authorities (central banks, for example) and not for private use between individuals, companies, or banks. All countries participating in the union were to have ICU accounts through which they could transfer bancors to one another so as to settle external balances. Membership in the union would likewise require countries to commit to accepting bancors as a means of payment. Accordingly, whenever one country incurred a deficit with another, the former would be debited with bancors from its account at the ICU and the latter would receive a corresponding bancor credit. This would automatically expand the system's bancor reserves. Implied in this arrangement is the assumption that the amount of money in the system would adjust endogenously to the real demands of trade and would not be exogenously determined by a pre-existing amount of money. Viewed from a different angle, the arrangement was designed to give countries a certain amount of flexibility in financing their trade deficits while allowing them sufficient time to sort out their external accounts.

Keynes’ plan also dealt with the question of how countries would restore equilibrium in their balance of payments. It opposed a contractionary adjustment that would burden deficit countries by reducing their balance of payments deficit through the reduction of imports, the devaluation of their currency, and the adjustment of their fiscal and monetary policy. Instead, it required both debtor and creditor countries to make adjustments to establish equilibrium. The key reason for proposing symmetric adjustment stems from the fact that the sum of all surpluses equals the sum of all deficits. As a result, if the latter is considered a problem, then the former should be as well. According to Keynes, contractionary adjustment is detrimental not only for deficit countries but also for surplus countries since the reduction of imports by a deficit country leads to a reduction in world trade. In such a situation, surplus countries face a reduction in exports with negative consequences for their output and employment. To remedy this detriment, Keynes advocated for the expansion of international trade to ensure that all economies produce at full employment. To achieve this, Keynes’ proposal aimed to restore equilibrium by incentivizing surplus countries to boost their spending in deficit countries. Adjustment in this sense is expansionary. When spending is increased, credit balances do not lie idle in the coffers of the surplus countries, but are used to expand world trade for mutual benefit.

Towards a Green Bretton Woods system with the ecor at the centre

Times of crises, like the situation that prompted the founding of the Bretton Woods system after the Second World War, often lead to “critical conjunctures” that mark the politicization of structures that would otherwise seem almost impossible to change. Such a scenario may once again develop in the foreseeable future if the climate crisis continues to escalate.

To overcome one of the largest problems in terms of financing sustainable transformation, we build on Keynes’ plan with the overarching aim to develop a supranational arrangement that would provide countries especially, but not only, from the Global South with the financial leeway they need to import green goods, services, and technologies essential to achieve the objectives of sustainable transformation. Towards this aim, we propose the creation of a Green World Central Bank (GWCB) embedded within a Green international monetary system that could issue its own unit of account, which we call the ecor, fixed to the dollar or other assets. National currencies would be fixed to the ecor but at adjustable exchange rates. Because ecors would not be convertible into US dollars or any other currency, they would only be valid within the system. This would eliminate any risk of a run on the GWBC.

Under our proposal, all participating countries would have an account at the GWCB. When a country needs to import green goods or services (for example, solar panels or wind turbines), it would ask the GWCB for a loan in ecors. If accepted, the GWCB would create ecors through the act of lending by digitally crediting a country’s GWCB account at a zero or very low interest rate. The importing country would then transfer the ecors to the GWCB account of the exporting country to pay for the imports that it needs. In this way, the system allows for financing a necessary trade for the green transformation that would have otherwise not happened. This would alleviate financial constraints and provide the elasticity necessary to finance sustainable projects.

In the system we propose, projects would need to be approved by both the national government and the GWCB. Therefore, only those meeting the internationally agreed sustainable standards would have access to funding. This would ensure a built-in limit to the quantitative expansion of ecors. More importantly, the Green Bretton Woods System would give deficit countries more autonomy to actively advance their national endeavours towards sustainable transformation without relying on the benevolence of international donors, conditional loans from international financial institutions, or private, profit-motivated financial institutions. This would contribute to the development of Southern sovereignty, allowing Global South countries to shape their own transformation.

Assuming that the sustainable transformation will be a gradual and time-consuming process, the design of the system should take into account the fact that in some countries transformation is likely to be a lengthy process involving significant deficits, while in others there will be sustained periods of surplus. This should not be a problem since ultimately all countries will benefit from climate change mitigation and adaptation, not least because of its money-saving potential. For the system to work in the long run, however, countries in need of funds in the short term would eventually have to reverse their foreign trade position to repay their debts. This, in turn, implies that the productive structure of deficit countries would have to become competitive enough so as to be able to export and earn the ecors needed for repayment. In our proposal, this would be achieved by an international increase in demand, leading to an expansionary adjustment of imbalances. In order to avoid replication through the system of existing patterns of ecologically unequal exchange, mechanisms would be required to encourage surplus country spending on sustainable activities. As ecors can only be spent in the system (not convertible into dollars or other outside currencies), surplus countries have an incentive to spend their accumulated balances in other countries, creating further demand and positive loopback effects. Surplus countries might be reluctant to join the Green Bretton Woods System if they were unable to find an attractive way to spend their credits. The larger the system were to become, however, the more possibilities there would be for surplus countries to use their ecor credits. Thus, as more and more countries come to accept and use the system, trust in the ecor would grow.

As our proposal specifically focuses on special purpose money, it is meant to supplement rather than supersede the current international monetary system. It could, however, be a first step in setting up the infrastructure required to completely overcome the current hierarchy, and to ultimately replace the current international monetary system with a more globally just system. During the transformation to a sustainable economy, the area of circulation of ecors would gradually expand and eventually displace the US dollar and other currently dominant currencies. Our proposal aligns with and extends proposals to reform the international monetary system that are currently being considered, above all, by the UN and the Bridgetown Initiative.

In summary, the Green Bretton Woods System with a Green World Central Bank and a supranational currency, the ecor, at its core would constitute a strong force with the potential of promoting sustainable and just transformation on a global scale. It would make it possible for countries of the Global South to move towards sustainable investments and create green jobs, thus rendering their economies more sustainable. It introduces an enabling structure capable of overcoming current constraints on financing climate change adaptation and mitigation, while reducing loss and damage and driving the global transition towards zero greenhouse gas emissions. Without such a system, shortages of hard currencies such as the US dollar make necessary investments impossible. Furthermore, the proposal would allow producers of green goods and services to secure additional sources of demand which would also benefit their domestic economies. Accordingly, the ecor system would benefit not only deficit, but also surplus countries.