International Climate Change Lottery: a financing mechanism that could actually be agreed in Cancún.

Miquel Muñoz, Guest Blogger

It is increasingly evident that a comprehensive climate change agreement is unlikely at the next climate change meeting (COP 16) in Cancún, Mexico, on December 2010. Finance – that is how much money will be provided, where will it come from, how will it be used, and who will hold the strings of the purse – is one of the main obstacles to agreement, compounded by deep distrust between developing and developed countries. While a comprehensive deal is unlikely, there are financing instruments that could conceivably be agreed upon in Cancún; for example, an International Climate Change Lottery.

The idea of an international goal-driven lottery has been regularly raised since the 1970’s. A good starting point is work by Addison and Chowdhury in 2003 analyzing the prospects of harnessing the world lottery market (worth US$126 billion and generating US$62bn in gross profits) for the purposes of development.

The idea, in principle, is simple:

(1) establish an international climate change lottery;

(2) generate revenue; and

(3) channel this revenue towards one or more of the many climate funds.

In practice there are a few hurdles. For instance:

(a) the lottery should respect principle of common but differentiated responsibilities (which in plain language means the money should come from developed countries);

(b) there may be principled opposition, for example on religious grounds, ethical issues, or the “regressiveness” of lotteries in general; and

(c) the lottery will compete with and face opposition from existing lotteries and their beneficiaries (including many governments)

On closer look, however, none of those hurdles is fundamental and they could all be overcome with the political decision-maiking level expected in Cancún. Let’s examine them one by one.

The principle of common but differentiated responsibilities would be mainly met by the fact that most lottery revenue comes from developed countries. A few provisions would be necessary to ensure that revenue generated in a developing country is recycled to fund climate change policies within that country. This would be particularly necessary for countries with high lottery participation rates, such as India, to ensure inter-country equity amongst developing countries.

Religious concerns may preclude some countries from participation, but they would not conceivably be the grounds for blocking the mechanism within the UNFCCC. Ethical opposition on the grounds that lottery incites gambling could be reduced with proper design. More importantly, since all developed countries, whose participation is the key for a climate lottery mechanism, have lotteries, the arguments on principled opposition, while legitimate, remain mainly of academic interest.

Opposition from existing lotteries (normally in the hands of government or heavily taxed) could pose a more serious problem. Addison and Chowdry estimate that a global lottery could capture 10% of the market profits, to the tune of US$6.2 bn/year. That amount would certainly stir sufficient political opposition to kill any deal. Opposition could be overcome by limiting market capture of the climate change lottery (0.5-1% seems reasonable) and giving existing lotteries a stake in its success. This could be accomplished with an approach similar to the one used by EuroMillions, where a joint lottery is organized by existing national lotteries, pooling the stakes of participants from 9 European countries into a larger prize. Under the EuroMillions approach the revenue is shared among member lotteries according to relative weight. Under a “ClimateMillions” Lottery, revenue (from developed country lotteries) would be shared between a climate fund, domestic climate measures, and the organizing lotteries. Revenue in developing countries would be shared by domestic climate measures and the existing lotteries. Such an approach has the added benefit that no new organizations are needed, thus reducing transaction costs and speeding up the process.

Lottery could have ancillary benefits, notably education on climate change. This information could be conveyed through the lottery advertising, the local selling stores and the tickets themselves.

In conclusion, a climate change lottery is politically and technically feasible, with no fundamental problems preventing its agreement in Cancún. If the climate lottery captures 0.5-1% of the market, it would provide climate finance in the order of US$300-600 million/year. This is only a tiny fraction of the climate funding needed, but still more, in a single year, than what the Adaptation Fund has raised in almost a decade (including Spain’s groundbreaking contribution of €45 million on Wednesday 28 April).

Agreeing to an International Climate Change Lottery seems like a step in the right direction. And if nothing else, it would provide negotiators with something concrete to show back home for their trip to Riviera Maya.

Miquel Muñoz is a fellow at Boston University’s Pardee Center