The world's richest countries have agreed for some time that they must cover the costs of climate mitigation and adaptation for the poorest nations. But as the latest round of UN climate talks ends this week in Bonn, Germany, it is still unclear how industrialized nations will finance these strategies.
Yvo de Boer, head of the UN Climate Change Secretariat, has called the financing issue one of the hardest nuts to crack, and for good reason.
According to an EU report last March, global investment to fight and deal with climate change in the developing world will need to reach about $90 billion per year by 2020.
To date, however, wealthy countries have failed to make good on promises made at the UNFCCC's 2001 Morocco summit to provide the 49 least developed countries (LDCs) $2 billion for immediate adaptation. So far, only $200 million has been contributed and few projects have been implemented as a result.
"The LDCs are demanding that the rich countries pledge up to $2 billion over the next five years in order to fulfill the promise they made eight years ago," said Saleemul Huq, senior fellow in the Climate Change Group at the International Institute for Environment and Development.
There is also the disparity between what developed countries are willing to do and what the LDCs, with the support of the UN, consider to be the level of need. A U.S. budget of $400 million to help poor countries adapt to climate change was dismissed as inadequate by the LDCs.
Despite these issues, a number of financing ideas were floated in Bonn. (Earth Negotiations Bulletin has some of the highlights of the financing discussion.) These included a levy on air travel and shipping fuel, and a proposal that rich countries set aside up to 2% of their gross national product to assist poor countries.
Airline and Shipping Taxes
The levy on air travel drew attention, in part because the proposal came from the 49 poorest countries attending the talks.
The proposed levy would raise average long-haul fares by less that 1% for coach passengers and could bring in up to $10 billion a year to help the LDCs, many of which are on the front lines of climate change.
A proposal for an additional compulsory surcharge on all international shipping fuel could raise another $10 billion.
The EU is particularly interested in these two industries because shipping emissions have increased by over 60% in the last 15 years and airline emissions have doubled. Both are international industries, and shipping emissions have been particularly hard to regulate as a result.
International Green Fund
Mexico proposed a "green fund" plan which would obligate all nations to pay into the fund according to a formula reflecting the size of their economy, greenhouse gas emissions and population.
Since 75% of global emissions come from the wealthiest countries, this plan would take into account historic and current emissions in setting financial obligations.
The biggest issues with the green fund are that it is estimated to collect under $10 billion a year, less than what is needed, and would be subject to approval by each participating country's legislature.
Carbon Allowance Sales
Norway has proposed that a set percentage of emissions allowances be set aside for sale, with the proceeds used to support developing nations. Like the Mexican proposal, this was reported to have received some traction at the talks.
Determining sources of financing is not the only issue. There are also questions about how the money would be distributed.
The current agreement draft states:
The allocation of support should move towards a performance-based system, strongly incentivizing the promotion of actions which maximise climate value for climate money.
It is unclear how such a performance-based system would be evaluated, though. Poor nations might have to provide proof of emissions cuts in order to receive funding. They also might end up competing with one another for money based on their carbon-cutting proposals.
Climate activist groups are also putting forward financing plans. Greenpeace and six other NGOs released their own draft climate agreement on Tuesday. In it, they propose a plan for funding adaptation in poor countries with a minimum of $160 billion per year from 2013–2017 coming from industrialized nations:
The main source of revenue should be through the auctioning of roughly 10% of industrialized countries emissions allocation with additional financing from international levies on aviation and marine sectors, with some portion also possible from national auctioning in line with a set of agreed UNFCCC criteria. A limited share could come from other means if they fulfill criteria.
Oxfam also released a plan (pdf) that includes at least $150 billion a year from the sale of carbon permits to go toward poor countries for adaptation, poverty reduction and low-carbon development.
Even if the sources, levels and distribution of funding can be determined, there remain concerns over whether poorer nations will be able to absorb the funds and efficiently use them.
Philip Mikos, head of the European Commission's development department spoke to a Development Policy Forum roundtable on this issue at the end of last month:
"It is not obvious that developing countries, some of which are already having difficulty absorbing development aid, will be able to make efficient use of the additional funds they could receive under a new global climate treaty, the forum heard."
Experts warn that poorer countries will also need access to appropriate technologies and help with capacity building, not just financing. That raises questions about intellectual property rights, creating another sticky issue that has yet to be resolved.
"The negotiations must ensure a coherent and coordinated approach to technology and adaptation under the new agreement, and dedicate the financing and institutional capacity necessary to support them," said Sol Oyuela, a policy expert from the CIDSE and Caritas networks.
The EU is meeting next week in Brussels to discuss the funding issue, but few expect progress. To start, the EU claims to be waiting on the United States to commit to mid-term reduction targets and a cap-and-trade system.
In the meantime, the EU countries have been considering two possible funding sources, both of which were proposed in Bonn: money raised through the auction of pollution permits in global carbon markets or a levy directly on countries according to their economic strength, population growth and emissions.
There is some internal fighting within the EU over how the burden will be divided among its member states, with Poland in particular insisting the issue be clarified prior to any global agreement.
In an update from the Bonn talks last week, Saleemul Huq wrote that resolving the financing issue is the key to reaching a climate deal in Copenhagen.
Money, he wrote "is the glue that will hold the final agreement together but so far it is the weakest part."