By Nina Chestney

LONDON (Reuters) - Public finance could help stimulate private investment in climate change solutions in developing countries, a report commissioned by the United Nations' Environment Program showed on Monday.

World leaders are grappling with how much funding should be provided for poor countries as part of a deal to tackle climate change which they hope to clinch in Copenhagen in December.

"Today's report underlines a range of public policy options that reflect the varying circumstances currently prevailing in developing economies and show how existing barriers to a green economy can be leap-frogged," said UNEP's Executive Director Achim Steiner.

Investments of around $530 billion a year are needed to help avert the dangerous effects of climate change and drive forward low-carbon economies, according to the International Energy Agency.

The World Bank estimates that around $475 billion of that investment must happen in developing countries.

Although the drain on public finance is severe following the financial crisis, the private sector is not able to shoulder the financing burden because returns from low-carbon investments do not outweigh the risks.

Public finance mechanisms could help manage the risks the private sector can't control and improve returns for investors, the report said.

SOLUTIONS

The mechanisms can help shape private capital, with previous research suggesting that $1 of public money spent through well-designed mechanisms can encourage between $3 and $15 of private sector investment.

The report suggests several ways to stimulate that investment:

* Provide and expand insurance cover against country risk, such as breach of contract or war, to support low-carbon funds.

* The same bodies providing country risk cover could also provide low-carbon policy risk cover where countries go back on policy frameworks that underpin low-carbon investments, such as emissions trading or renewable energy incentives.

* Public finance could provide currency funds which offer cost-effective hedges for local currencies which would otherwise not be available in the commercial foreign exchange markets.

* Improve deal flow to provide a series of commercially attractive projects and vehicles specializing in early-stage low carbon projects.

* The public sector could invest directly in low-carbon funds through 'first loss equity', which would reduce risks for private investors.

The report was commissioned by UNEP, along with several investor and climate groups. Research was carried out by Vivid Economics.

The full report is available at http://www.unepfi.org.

(Reporting by Nina Chestney; Editing by William Hardy)

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