*Draft report outlines substantial aid to developing world

*Broad participation in aid fund beneficial

*Separate report warns against trade restrictions (Adds comment from U.S. official)

By Richard Cowan

WASHINGTON, Sept 1 (Reuters) - A paper drafted by the United States and Mexico urges Group of 20 nations meeting this month to support giving developing countries more money for cutting carbon emissions to fight climate change.

"We recommend that financial flows increase significantly in the near term beyond existing levels, with an expectation of continued and substantial growth in the future," said the draft report obtained by Reuters on Tuesday.

The draft, which could be revised before the G20 meeting of large economies in Pittsburgh, also discusses the advantages of having all but the least developed countries contribute aid. The paper does not recommend how much financial aid should be given.

Several teams of countries are putting forward proposals in hopes of building consensus in the runup to the Sept. 24-25 meeting.

"We are working with countries in the G20 as part of a new voluntary experts group that is examining an array of options for how to facilitate a successful transition to a lower carbon, climate resilient global economy," a U.S. official said. The official declined to comment on how much aid the United States would like to see pledged.

Andrew Light, a senior fellow at the Center for American Progress, said it was significant that Mexico, a major polluting developing country, was one of the authors of the report. It is "further proof that Mexico is ... most interested in finding a way forward to bridge the gap" between industrialized countries and poorer ones, he said.

The transition from the use of dirty fuels such as coal and oil for powering utilities and factories to cleaner energy sources like biofuels, solar and wind power, is an expensive proposition.

But the environmental woes arising from global warming have spurred international efforts to reduce emissions of carbon dioxide and other greenhouse gases related to coal and oil.

Aid to developing countries could be a major provision of any international climate change deal that could be negotiated at a United Nations summit set for December in Copenhagen.

CHINA AND INDIA

In suggesting broad participation in an international "green fund," the draft paper appeared to be including China and India, a move that could help Democrats in the U.S. Congress win support for domestic climate control legislation and eventually a broader global pact -- if one is negotiated.

"By engaging all but the least developed countries, this creates global ownership in the process and further incentives for mitigation," the report stated.

But the draft noted the difficulty of estimating how much aid and financing would be needed to help developing countries offset the costs of alternative energy. It did, however, cite separate estimates of hundreds of billions of dollars needed annually by 2030.

In the United States, there has been discussion of using government-backed loans to help finance developing countries' climate-change efforts, as well as giving free pollution permits that could be later sold on an international carbon market. The draft report said countries needed flexibility in providing aid.

Besides helping developing countries with the technology to switch to cleaner energy sources, poor nations also want help with other costs associated with climate change, such as rising seas overwhelming dykes and levees.

The draft report stated that "while there will be a role for the private sector, the bulk of international finance is likely to come from the public sector" in this area.

BLUNT FEARS

A separate draft report that sources said was written by Australia and Indonesia tried to blunt economic fears cited by opponents of climate change control, including many Republicans in the U.S. Congress.

"The current (global) financial crisis should not be allowed to undermine our determination to achieve the goal of a greener economy," this report stated.

It also warned against using climate legislation to impose trade limits. "An effective internationally integrated, credible global carbon market requires broad coverage, low transaction costs, minimal distortions and no trade restrictions."

A climate bill passed in June by the U.S. House of Representatives would let the president set some tariffs on imported energy-intensive goods including steel, glass, cement and paper. (Additional reporting by Alister Doyle in Geneva and Glenn Somerville in Washington; Editing by Cynthia Osterman)

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