Q+A: Climate change finance -- how does it work?

Sun Nov 8, 2009 2:13pm EST

By David Milliken

ST ANDREWS, Scotland (Reuters) - Discussing how to pay for efforts to combat climate change was a major theme at Saturday's meeting of finance ministers and central bankers from the Group of 20 leading economies.

Ministers made little visible progress in sorting out the thorny issue of how rich countries should help poorer ones fight global warming, but did agree that a big increase in funds was needed.

Following is a guide to the financing issue ahead of a United Nations summit on climate change in Copenhagen next month:

WHAT IS CLIMATE CHANGE FINANCE?

It covers a broad range of proposals to fund schemes in the developing world which reduce emissions of carbon dioxide and other gases that cause climate change.

The schemes are usually based on funding from governments and investors in richer countries -- in part because a dollar of spending can achieve a greater reduction in emissions in the developing world. Possibilities for cheap reduction of emissions in developed countries have largely been exhausted. Moreover, spending money on fighting climate change is not a priority for many developing countries, which blame industrialized nations for the problem. They argue spending on health, education and other poverty-reduction measures bring more immediate improvements to the quality of life.

Some schemes aim to mitigate the effects of climate change -- for example by boosting flood defenses -- where this is cheaper or more urgent than trying to reverse global warming.

WHO WOULD PAY?

Primarily governments and investors in rich countries. The European Union estimates effective action would cost 100 billion euros ($149 billion) a year, around a quarter to a fifth of which would be funded by taxes.

How the taxes would be levied is unclear. Options include charging firms for permits to emit carbon dioxide, taxes on financial transactions, and a tax on actual carbon dioxide emissions.

Private sector investment can be attracted since many schemes help save money by reducing energy costs. Some governments are also keen to have private sector involvement because they believe profit-driven investors are better at picking successful energy-saving technologies than civil servants or non-profit groups.

WHO WOULD RECEIVE THE MONEY?

Some funds would go directly to governments -- either administered by the World Bank, as some rich countries prefer, or via the United Nations, preferred by some poorer countries.

Other funds could pay for carbon emission credits which would go to firms that proved their investments had helped reduce carbon dioxide emissions. The UN has recently expanded such a scheme.

WHY ARE GOVERNMENTS SO IMPORTANT?

Public sector funding to combat climate change is crucial because the benefits of avoiding climate change will be felt too far in the future for the private sector to spend optimal amounts of money.

Also, the benefits of solving the climate problem will be felt by the entire population, not merely by investors.

WHO SUPPORTS/OPPOSES?

The EU supports greater rich-world financing of measures to tackle climate change, and has its own internal market for permits to emit carbon dioxide. It has promised to pay its "fair share" of the 100 billion euro annual costs.

The United States and Japan have both agreed in principle to help poorer countries fight climate change, but have been even vaguer about the details.

(Editing by Andrew Torchia)