Aid donors meet in Germany on Wednesday to discuss two new World Bank climate change funds amid a row over whether money should be given as loans or grants to help developing countries introduce low carbon technologies and adapt to climate change.

Britain's Department for International Development (DfID), one of the main contributors, has been criticised in the British media for offering much of the £800m ($1.56bn) it has promised to the climate investment funds as cheap loans rather than grants.

Aid agencies argue that rich polluting countries owe the money to poor nations expected to suffer the worst effects of climate change, and shouldn't ask them to pay it back.

"Adaptation is a necessity that has arisen out of the impacts of man-made climate change," said Saleemul Huq, head of climate change for the London-based International Institute for Environment and Development (IIED). "For the countries that are most responsible to go to the victims and say we've broken your house, here is a loan to fix it, is unacceptable."

This week's meeting in Potsdam will focus on the design of the funds, which could start with $5bn. Britain hopes they will be launched at July's G8 meeting in Japan, although the World Bank says they are unlikely to start operating until the autumn.

Besides Britain, only the United States has committed money so far - $2bn for clean technology - but this has yet to be approved by Congress.

Warren Evans, director of the World Bank environment department, which is coordinating work on the funds, told AlertNet his team would propose at the meeting that the amount of grants should be maximised, but it would ultimately depend on the mix of donor contributions.

He said this was particularly important for one of the first programmes to be supported by the World Bank funds, which will explore practical ways to help developing countries incorporate resilience to climate change into their development plans and budgets.

"The more that we can offer as grant support ... if we are talking about sub-Saharan African countries, the more effective we will be and the quicker we will be able to actually generate some very desperately needed lessons," Evans said.

In a letter to the Guardian newspaper this week, Britain's environment minister Phil Woolas and minister for trade and development Gareth Thomas argued that a mix of finance types was needed to help poor countries tackle climate change quickly. They said the loans - which will be interest free - would allow larger investments, which could be used again by other countries, creating more impact.

Back in February, DfID told a British network of development NGOs called BOND that the nature of the financing on offer from the British government meant it would be best channelled mostly as capital loans through the World Bank, with a grant element of only around 10 percent.

Lies Craeynest, co-chair of the BOND development and environment group, said its members had stressed repeatedly that the money should be provided as grants, but were told this wouldn't be possible because of accounting rules.

In a letter to BOND, dated April 22, Woolas and Thomas said the British government would talk to other donors about the possibility of grants from the funds - an approach preferred by the U.S. government.

AID LOANS NEEDED?

BOND believes the inclusion of loans in the World Bank funding packages should not set a precedent for the future. "What we're really keen to see now is a commitment that future financing will uphold the principles of fairness and justice, and that it will not be in the form of loans and will be additional to development aid," Craeynest said.

Evans argued that this approach was unrealistic. "This concept that all adaptation money should be grants is difficult to substantiate, and much adaptation investment is simply going to be development investment but after having looked at the investment decisions with a climate lens," he said.

On other issues, activists say the British government and the World Bank have listened to their concerns that rich countries would have too much control over the new funds. As a result, poor nations are now likely to get an equal say in decision making.

Still, IIED's Huq said more effort should have been made to involve them from the start. "My criticism is that the UK government had closed-door meetings with the United States and Japan, and it was only later in the process that they had some consultation with others and they are getting the blow-back from this now," he said.

Aid agencies are also worried the funds could be spent on big infrastructure projects that harm the environment and do not reduce poverty. Some would prefer the money to be managed by the United Nations rather than the World Bank.

"The simplest and best arrangement would be to channel funds through the U.N. system, which is working to help poor countries adapt to the effects of climate change," an Oxfam spokesperson told AlertNet.

The World Bank proposal prepared for the Potsdam meeting states that the funds are intended as an interim measure to help poor countries start work on climate change while the United Nations discusses future financing strategies for climate change as part of negotiations on a successor pact to the Kyoto Protocol, the main international agreement to reduce greenhouse gases emitted by developed countries, which runs until 2012.

This World Bank web page explains the background to the climate investment funds.

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