Climate Aid Progress May End Kyoto Rancor

By | September 30, 2011

U.N. climate talks resume in Panama next week, but expect more action in Cape Town 10 days later, where an informal panel will quietly agree the outlines of a climate fund which could surpass lending by the World Bank.

Climate investors are taking an interest in the fund, which has no money, reflecting the fate of a shrinking market in carbon offsets which is now a rump of its size four years ago.

Thorny issues will still be addressed in Panama: the first round of the existing Kyoto Protocol expires at the end of 2012 with no chance left for a full successor.

Negotiations are on life support, and a deal at the next ministerial conference in Durban in November-December will be a weak compromise at best.

The European Union may step up, with new emissions targets from 2013 allowing the $1.5 billion carbon offset market to survive until the world’s top two emitters China and the United States agree their own binding targets under a new deal, around 2015.

Such a long-term deal would shore up global action, but fall short compared with scientists’ warnings of climate peril if global greenhouse gas emissions keep rising through 2015, as they almost certainly will and for many years beyond.

Enter the Transitional Committee (TC) for the Design of the Green Climate Fund (GCF), established at the end of last year.

The TC is poised next month to agree the rules for a fund which world governments agree will be at the centre of global, long-term climate financing for developing countries.

Such financing should reach $100 billion annually by 2020, compared with the World Bank’ lending budget of $43 billion last year. Not all of the $100 billion would go through the GCF.

The GCF doesn’t yet exist and so has no money, in fact. And the panel’s proposals must be signed off by the Durban conference.

But, in important steps, the TC will agree next month to make the fund fully independent, giving birth to a new institution separate from the U.N. and multilateral development banks.

It will also hand direct funding power to the GCF board. The World Bank, as trustee, would act as banker, reviewing decisions from a fiduciary perspective and drawing up contracts.

Operating gaps remain: when would large emerging economies like China contribute; which nations would benefit; how will funds split between public and private sector, and loans and grants?

There’s a funding gap, too: developed countries are already raising “fast-start” climate aid of about $10 billion annually through 2012: a tenth of the $100 billion 2020 total.

U.N. climate talks have long focused on process and the TC mandate upholds that approach focusing on operating rules and ignoring finance.

But the World Bank has recently drafted climate fund-raising options for G20 finance ministers which fit directly into the GCF project.

A U.N. note describes gaps in the G20 paper: it doesn’t detail how funds would ramp up from 2013-2020; nor review whether $100 billion is adequate; or critically compare options; and barely mentions a financial transactions tax.

But the G20 paper does list concrete options by 2020 for raising climate finance, from diverting fossil fuel subsidies ($10 billion annually); selling emissions rights to industry ($25 billion); and a global tax on jet and shipping fuel ($10 billion), among others.

Investors are tentatively exploring the new, potentially highly capitalized world of the GCF.

By comparison, carbon offset markets are in limbo: the European Union is by far the biggest market for credits generated from emissions cuts in developing countries in a scheme under the Kyoto Protocol.

Fed up with being the world’s leading source of climate finance – the United States hasn’t even ratified Kyoto – the EU has closed its borders to new offset projects from 2013 except where these originate in least developed countries.

Climate Change Capital, one of the world’s leading offset investors, has suggested an “emissions reduction under-writing mechanism” where the GCF could pay private investors to implement carbon cuts in developing countries.

More private sector engagement will hinge on political commitment to deliver funds and a framework for investment.

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