Reviving the International Financial Transactions Tax Agenda for the G20

As the need for substantive climate action and poverty alleviation becomes more urgent amid global crises, both developing and developed countries cannot fulfill the mechanisms designed to ease these issues. Meeting the United Nations 2030 Sustainable Development Goals (SDGs) and climate action are necessary to ensure green transitions and lift communities out of poverty, but achieving them requires staggering amounts of external finance that the global community is finding it challenging to pay. Given tight budgets and insufficiencies in Official Development Assistance (ODA), a new and innovative source of financing is needed for climate action and the SDGs.

In a new Think20 (T20) policy brief, Nagesh Kumar and Kevin P. Gallagher propose that the Group of 20 (G20) implement an International Financial Transaction Tax (IFTT), consisting of a small tax on foreign exchange transactions, as the new source of revenue for climate action. 

The authors estimate that even at a very marginal rate, an IFTT could yield annual revenues equivalent to three and a half times the annual flows of ODA. An IFTT can serve as the new perpetual source of revenue that could support the SDGs and climate action targets in developing countries while constraining foreign exchange speculators. As a result, an IFTT would generate an ability to check volatility in financial markets, moderating harmful speculation and the ensuing boom-bust cycles.

The combined effects of the COVID-19 pandemic, the inflationary spiral stoked by Russia’s war in Ukraine and the debt crisis have stretched budgets in both developed and developing countries. Additionally, unrestricted foreign exchange transactions foment market volatility and threaten the international financial system. Kumar and Gallagher argue an IFTT has the unique ability to curb volatility while generating resources for meeting climate action and the SDGs, priming it to be a landmark multilateral initiative coming out of the G20.