EU officials are considering diverting tens of billions of euros from the bloc’s carbon market to use as foreign climate aid in a bid to secure allies for negotiating a global climate pact.

This would involve ringfencing a small portion of EU carbon allowance auction revenues as part of the European Commission’s EU ETS reform proposal, according to two sources with knowledge of the matter.

The Commission’s plan is expected to be released on July 15, but a draft of the text leaked last week had no mention of the aid provision.

However, the two sources said some officials are pushing hard for it to be included in the final proposal.

The entire reform process is expected to take at least two years and require most member states and MEPS to agree.

The move to ringfence cash for foreign aid comes amid pressure from developing countries for the bloc to give firmer guarantees on how they will meet an international pledge to help the world’s poorest nations tackle climate change.

“Some kind of ‘window’ could be set up that helps raise climate finance and hence also would support the negotiations in Paris,” said one source, referring to the December UN climate talks tasked with striking a new global climate deal.

The leaked EU draft proposes to allow member states to sell 57% of the carbon allowances under the EU ETS over the next decade, with 2% of that already ringfenced to help poorer EU states decarbonise and at least 400 million allowances to be sold under an innovation fund for big-emitting factories.

The sources emphasised that the foreign aid fund would be financed exclusively by the auction pool and not from other permit pots, including the one to help big emitting companies deemed vulnerable to carbon leakage.

CASH SECURITY

All industrialised nations have agreed mobilise cash to help poorer nations tackle climate change, and for that aid to reach at least $100 billion a year by 2020.

Yet despite EU nations providing billions of euros a year in public funding, the bloc has found it difficult to convince the developing world it will make good on that goal, as most member states decide funding subject to annual budgetary cycles.

Deciding to use of portion of the ETS’ auction revenue would go a long way to providing that assurance, especially as the recently-agreed Market Stability Reserve is likely to underpin carbon prices, according to Lies Craeynest of development charity Oxfam.

“Establishing this reserve would greatly enhance the long-term visibility and predictability of a sizeable proportion of overall climate finance from the EU and its member states,” she said.

Ringfencing 10% of all the ETS allowances due over 2021-2030 would raise €35 billion, or over €3 billion a year, which could be channelled into the UN’s Green Climate Fund for poorer nations, according to the Institute for European Studies in a report commissioned for Oxfam.

One possible supporter of the idea could be Germany, which already diverts 100% of its ETS revenue to climate finance – either at home or abroad – and in May announced plans to double the amount of climate finance it channels to developing countries over the next five years.

“Developing countries won’t accept a (Paris) agreement if they don’t get financial support,” Germany’s chancellor Angela Merkel said at the time.

However, the issue remains a thorny one amid cash-strapped governments, as reflected last month when Merkel failed to get fellow G7 leaders to agree wording for setting interim goals towards the $100 billion target.

Additionally, according to EU data only five member states have reported to have used or plan to use ETS revenues before 2020 for foreign climate and energy investments: Austria, Denmark, Finland, Germany and the UK.

BUILDING ALLIANCES

The European Commission is attempting to build support amongst developing countries for a global pact ahead of December, but trust is fragile as many poor nations have accused industrialised ones of not making good on their finance promises

To help quell these concerns, Europe’s climate commissioner Miguel Arias Canete is this summer visiting counterparts across Latin America and the South Pacific.

Arias Canete this week told the Guardian newspaper the bloc would reject a Paris deal lacking in ambition, something it failed to do at last year’s Lima talks despite losing key demands to ensure national pledges were comprehensive and could be scrutinised ahead of Paris.

By Ben Garside- ben@carbon-pulse.com

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