As climate discussions under the United Nations move forward next week with the first substantive negotiations since Copenhagen, an important parallel process on climate finance continues to consider “innovative” approaches to achieving the global pledge of mobilizing $100 billion per year by 2020 for mitigation (clean energy and reducing deforestation) and adaptation. While it may not produce a definitive outcome, the report the Secretary General’s Advisory Group on Climate Change Financing delivers in Cancun in December 2010 will provide an important barometer for where key nations and the world as a whole stand on one of the most important issues for catalyzing international climate cooperation.

The most immediate task of the group may be finding a replacement for outgoing UK Prime Minister Gordon Brown to serve alongside fellow Co-Chair Meles Zenawi of Ethiopia. The rest of the group is composed of a mix of experts (such as Nicholas Stern of the London School of Economics), heads of state or government (such as Jens Stoltenberg of Norway), and national representatives (such as Larry Summers from the United States). Each of the options currently under consideration has its pros and cons, and there are several other options not as clearly on the table that attention may turn towards as the debate progresses.

Under primary consideration by the Advisory Group:

1) Allowance auction revenues. Countries could devote a certain percentage of allowances sold in domestic cap-and-trade or carbon tax regimes to international purposes, or a limited number of allowances could be auctioned by an international body. If major developed nations devoted 3-5% of auction revenues in 2020 to international purposes, $5-8 billion per year would be raised at a carbon price of $20 per ton. Getting carbon pricing schemes in place domestically seems to be the largest obstacle to securing this revenue, and the additional benefit of this revenue would be lower in the likely event that it crowds out existing climate-related foreign assistance. However, this is a straightforward, easy to understand mechanism that does not seem to be a huge political lift in the context of a comprehensive climate bill.

2) International offsets. Also under domestic carbon pricing schemes, countries could allow regulated entities to achieve a certain percentage of their compliance obligation by investing in emissions reductions in developing nations. If 25% of a company’s compliance obligation could be achieved in this way in all major developed nations, it could generate up to $32 billion in 2020 at a carbon price of $20 per ton. Again, the major obstacle appears to be implementing the broader domestic policies that would mobilize this financing. The primary benefit of this mechanism is that under a carbon pricing scheme it actually reduces domestic costs for developed nations. In addition, since funding comes directly from the private sector, it may be less likely to crowd out existing foreign aid and cannot get cut in an annual appropriations process.

3) Redirecting fossil fuel subsidies. Countries could redirect some of the revenue raised from removing preferential tax treatment of fossil fuel industries towards international climate financing. In the United States, making the subsidy removals proposed by the Obama Administration in its FY2011 budget would generate an additional $4.5 billion per year over the next decade. While removing certain subsidies received support during the 2007 energy debate – a bill eliminating the domestic manufacturing tax credit and certain foreign tax preferences for large, integrated oil companies was reported out of the Senate Finance Committee on a bipartisan basis – it failed by one vote to achieve cloture on the floor. Removing some of these tax preferences has also been floated as a way to help pay for various jobs bills in Congress that have some domestic energy provisions. Overall, while this mechanism could be used in absence of a carbon pricing policy, these revenues will face stiff competition in a world of large fiscal deficits and competing spending priorities. The main benefit of removing these subsidies could be if it persuades large developing countries to remove their own subsidies – as they agreed to at last year’s G20 summit – and thus begin to shift their domestic energy consumption patterns.

4) Levy on fuels used in international shipping and aviation. Countries could apply a domestic or international fee on fuels burned during international shipping and aviation, which are currently not covered by Kyoto Protocol inventories. Based on business-as-usual emissions trends in these sectors, a carbon price of $20 per ton could raise about $30 billion per year by 2020. One of the primary challenges of this mechanism is that in order to be effective on globally competitive industries, it would have to apply to both developing and developed countries. In addition, industry groups argue that they are a small part of the climate problem and should not be expected to provide such a large percentage of the climate financing solution. Instead, they would like to see most funding raised be invested in technologies to help reduce their emissions. Countries may also insist on some control over funds raised from within their borders, once again introducing the possibility of crowding out existing foreign aid or falling victim to the annual appropriations process. Despite these challenges, however, the clear need to address this source of emissions and the benefits of international coordination indicate that this mechanism is likely to be implemented at some point in the future.

5) International Monetary Fund (IMF) Special Drawing Rights (SDRs). Countries could exchange their Special Drawing Rights – a reserve asset created by the International Monetary Fund – or other reserve assets for an equity stake in an international fund that would make below-market loans and some grants to developing countries, or SDRs could be lent or sold directly or indirectly to raise capital for an international fund or developing country budgets. Various iterations of this proposal could mobilize from less than $10 billion per year by 2020 to over $100 billion, depending on how loans are counted and what mechanism is used. Analyzing U.S. and international authorities governing SDRs reveals that this proposal could face substantial legal obstacles, albeit ones that could be overcome with an infusion of high-level political will. If this political will exists, it may be easier to create a similar international fund using an appropriated capital and callable capital model similar to the World Bank that avoids reserve assets altogether. However, in light of this proposal it is at least worth re-examining the future role of the IMF in the climate crisis, which could cause macroeconomic stabilization issues in developing countries that need to devote substantial fiscal resources to domestic adaptation or other climate purposes.

6) Financial industry taxes. Countries could redirect revenue from fees on international currency transactions or other aspects of the financial industry towards international climate purposes. While specific amounts vary based on different proposals, most fall in the range of tens of billions annually by 2020. Overall, the proposal could face similar issues to a bunker fuel levy in terms of applying to all developed and developing countries, industry opposition and domestic implementation leading to crowding out or a yearly budgetary fight. In addition, there is also a less clear link between the financial industry and climate change that will make selling financial fees to the general public a greater challenge.

In addition, there are two other mechanisms that are receiving serious attention from some governments and the broader environmental community:

1) Increasing funding for and “greening” existing institutions. Countries could increase capital for existing institutions, especially the World Bank Group and other development banks, with the expectation that their lending for fossil fuels phases out and funding for alternative energy and efficiency projects increases. Combined, these institutions provide billions in energy and transportation funding each year in the form of grants, concessional loans and below-market rate loans to developing nations. This appears to be a clear victory as it would require limited additional capital outlays from developed country budgets and force key international financial institutions to develop expertise in climate financing. However, developing countries will no doubt have concerns about access, governance, and the ability to meet their development objectives if enough additional financing is not provided to meet the higher capital costs of clean energy projects. If these concerns can be managed, which appears likely, this mechanism should move forward successfully.

2) Friendly accounting practices. Emboldened by the word “mobilizing” in the Copenhagen pledge, countries will take credit for loans, programs that produce climate “co-benefits” (such as those for water or agriculture), and the full value of investment in projects where public financing is only a small component. While these efforts are all helpful in a world of limited resources, the international community and national governments would benefit from clearer guidelines about what “counts” as climate financing. For example, while offsets and some multilateral funds both “mobilize” private sector resources, countries generally do not count the full value of entire offset projects as the amount of funding mobilized (they focus on the value of carbon credits generated). It is important to consider these issues to ensure resources are being directed in the most effective manner, and are adequate to address the scale of the problem.

Overall, reaching the $100 billion commitment is highly unlikely without deploying a range of these mechanisms over a period of several decades, and indeed engaging new ones that have not yet been considered by the international community. In the end, success is not likely to hinge on a lack of ideas but rather the political will to see them through.

Andrew Stevenson is a research assistant at Resources for the Future.