Climate aid progress may end Kyoto rancour -Gerard Wynn

(Gerard Wynn is a Reuters market analyst. The views expressed  are his own. The column is repeated to reach additional  subscribers)

 By Gerard Wynn

LONDON, (Reuters) – 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 in 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. (See draft proposals below)

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.

FUNDS

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. (See links  below)  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.

INTEREST

Investors are tentatively exploring the new, potentially  highly capitalised 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 orginate 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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