G-8 Summit and Climate Change

The G8 summit will discuss a comprehensive set of energy options to mitigate climate change and create incentives for expanded use of clean energy. An important way to achieve both objectives is by expanding carbon markets.

Two years ago, the G8 Summit in Gleneagles, Scotland promised to advance a clean development agenda and mobilize financial support for greener growth in the key emerging market economies. This year’s meeting, in Heiligendamm, Germany, must deliver on that promise.

Since Gleneagles, a critical mass of public support to act decisively on climate change has developed. Some say a tipping point has occurred. The science and the economics of climate change has come closer as a result of the overwhelming scientific evidence in the studies of the Intergovernmental Panel on Climate Change (IPCC) and Sir Nicholas Stern’s Report for the UK government on the costs of action and inaction. Around the world expert officials, the business community, concerned citizens, and responsive governments are coming together to find common solutions to a global problem that may be the single most important issue we face as a global community.

In Heiligendamm, the G-8 leaders, together with representatives of major emerging economies (Brazil, Mexico, China, India, and South Africa, who have a critical stake in energy consumption to continue to generate economic growth), will discuss a comprehensive approach encompassing a set of energy options, from energy efficiency and renewable energy, to clean coal, carbon capture and storage, and carbon sequestration. They also have a chance to advance the use of market mechanisms to do two things: mitigate climate change, and, at the same time, create incentives for expanded use of clean energy.

An important way to achieve both objectives is by expanding carbon markets. Carbon finance is an effective vehicle for channeling funds for climate-friendly investments, including to the developing world. Last year alone the size of the world carbon market tripled to over $30 billion, of which about 20 percent went to projects in the developing world. By one estimate, with a long term, predictable, and equitable post-2012 global regulatory framework for curbing greenhouse gas emissions (when the Kyoto protocol expires), carbon markets could develop exponentially and deliver financial flows to developing countries of anywhere between $20 and $120 billion dollars/year.

The funds are sorely needed. The World Bank calculations show that developing countries need an annual investment of about $165 billion through 2030 just to supply electricity to their people. Of this sum, only about half is readily identifiable. On top of this $80 billion gap, developing countries will need another $30 billion per year to reduce their greenhouse gas emissions from the power sector alone and get on a low-carbon development path, and $10-40 billion dollars more per year to adapt to the already inevitable impact of climate change .

A G8 commitment to the global carbon market will foster long-term financing beyond 2012. Such carbon finance can also tackle deforestation, which represents about 20% of the global CO2 emissions causing climate change. A forest carbon facility can reward forest conservation as a means of protecting the climate while also preserving ecosystems and generating income for poor communities in developing countries. The World Bank is keen to work with partners to experiment with such a facility for avoided deforestation.

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An expanded carbon market can help pay for a transformation to a low carbon economy, but it won’t be enough. Like other new markets, it will take time to mature and reach out to places with weaker market institutions.

German Chancellor Angela Merkel has said that rich countries need to take the lead because only then will the less developed economies follow, and she is right. The United Kingdom recently announced a new £800 million Environmental Transformation Fund International Window. Japan’s Prime Minister Shinzo Abe said his country is ready to look into the possibility of creating a new financial mechanism, with substantial funds for the relatively long- term, to help developing countries halt global warming. These are the types of climate change leadership that the world needs.

Mobilizing large scale financing for clean investments today and over the next 5-10 years is critical because this is when developing countries will essentially “lock-in” carbon emissions for the next 50 years. If we can help them get on a low carbon path, we will have taken a giant step forward in preserving and protecting our planet while enabling them to reduce poverty and offer their citizens a better future. The meeting in Heiligendamm can advance the commitments made at Gleneagles two years ago and bring the world closer to a more sustainable future.