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Can Money save the climate?

Speech | 20-01-2009 | Brussel, Minister

Speech held at the network meeting of the Ministry of Finance in Brussels.

'Can money save the climate?'

A few weeks ago I attended a conference in Paris, organised by the outgoing EU president Nicolas Sarkozy, attended by Chancellor Merkel, former Prime Minister Blair and lots of other interesting people, including Nobel Prize Winners like Amartya Sen and Joe Stiglitz.

The conference carried the intriguing title 'Nouveau monde, nouveau capitalisme', which suggested that some truly fundamental challenges to our common economic thinking were going to be put forward.
The list of contributors was just as interesting as the subject.
Perhaps that is why I was a bit disappointed with the outcome.
It was best summarised by Tony Blair: 'This crisis is a financial crisis.' And I thought to myself: 'We have here an opportunity to discuss the real flaws of capitalism, sparked by what today's crisis has been showing us for more than a year now.
So why is everything so quickly reduced to a financial crisis and a discussion about financial markets, regulation and supervision?'

There are a number of reasons why I felt that was a shame.

First of all because the financial crisis is in itself not unique.
It has happened before: the Dutch tulip crisis in the 1630s for instance. The scale is different now of course because of our economic interdependence, but we have seen it before.

A second reason I was disappointed is because steering the discussion quickly towards the topics of regulation and supervision is the easy way out.
Regulation and supervision are overestimated problem-solvers in the financial market.
They will not be sufficient unless supplemented by values guiding individual bankers, consumers, traders and credit raters in their individual decisions.
The financial crisis, viewed from that perspective, is above all a moral crisis.

This brings me to the third reason I was disappointed.
Some of the moral values at stake in this financial crisis have to do with rebalancing modesty versus greed, long term versus short term, stakeholders versus shareholders, public interests versus private interests and fair shares versus excessive accumulations.
These values also underlie the other two great crises of capitalism that we are experiencing today: the energy and climate crisis on the one hand and the food and trade crisis on the other.

And maybe the climate and food crises are more fundamental and much harder to solve than the financial crisis; and, from that perspective, even worse than the financial crisis.
Just look at the nature of these three crises.
We know that the financial crisis will be over one day; after things hit rock bottom they will go up again.
However, the climate crisis is not cyclical but is getting progressively worse.
And the food crisis just won't go away.

The difference is also clear if you look at how governments go about fighting these crises.
The policy packages and international summits aimed at fighting the financial crisis seem to blossom and multiply a lot more easily and quickly than those on the climate crisis or the food crisis.

But there are opportunities as well.
Although I never hope to experience it again, the fact that the world is suffering from these three crises at the same time potentially creates huge momentum for international leadership and international action. And true leadership here would mean that the solution to each of these crises is not developed in an isolated manner but by connecting the three negotiating tables.
If only because countries that have something to offer at one table, have something to ask at another.
Just think of how we are asking countries like India and China to become greener whereas they are asking us for better access to world trade.

Which brings me to today's topic: 'Can money save the climate?'
No, it can't. But it can make it a whole lot easier to do so.
We need a Copenhagen agreement.
It will not only be a convention of nations and notions, but will hopefully be about measures and money as well.
Because money plays a crucial role: without minimising the global costs of climate action and without agreeing on equitable burden sharing, there will be no ambitious climate deal in Copenhagen.
First of all, equitable burden sharing is necessary to ensure the broad participation needed to contain global climate change.
Of course, what an equitable distribution actually means is debatable. But whatever definition you prefer, it is clear that an equitable distribution implies a transfer of resources - money and technology - from the developed to the developing world.
From the perspective of both historical responsibility and our respective capabilities, the industrialised countries should bear the brunt of the costs.
So, only if the developing countries receive appropriate compensation for the costs of fighting climate change can Copenhagen be a success, and can the climate be saved.

However, agreeing on equitable burden sharing is not enough.
There is, I believe, a second and equally important condition for an ambitious Copenhagen agreement: using cost-effective solutions.
This may sound all too familiar from a Minister of Finance.
But that does not make it less true.
Cost-effectiveness is of the essence: if we do not minimise the costs of fighting climate change, meeting the enormous challenge will simply become too costly, and that will undermine support for ambitious global action!

Containing climate change requires a true green revolution over the next forty to fifty years, a revolution that will make the world economy turn a green corner.
Not a silent takeover Ms Hertz, but an extreme makeover!
That is an immense challenge!
We have to reduce both the energy intensity of GDP and the carbon intensity of the energy we use.

Apart from the challenge of mitigation - reducing greenhouse gas emissions -, there is the challenge of adaptation - coping with the consequences of irrevocable climate change.
Estimates of the global costs of adapting to climate change are highly uncertain, but range from 60 to 100 billion per year in 2030.
Adaptation will be especially costly in developing countries, which are most vulnerable to the adverse effects of climate change.

So what we need is money, lots of it.
It is therefore not surprising that in the discussions and negotiations on international climate policy, financing plays a key role.
The discussions focus on generating additional public funds for mitigation and adaptation.

We will need public money, for example to stimulate R&D in low-carbon technologies or to support capacity-building in developing countries to enable them to access international carbon markets.
But by far the most important source of investment will have to be the private sector.
Unleashing these amounts of investments in a cost-effective manner requires a carbon price: to give firms and households the right monetary incentives.
Or in more familiar language: we have to make the polluter pay.

This requires the creation of a truly global market for carbon credits. Moreover, a global carbon market is the only mechanism that can credibly generate adequate financing for mitigation and adaptation.
It thereby offers an attractive alternative to the flurry of proposals for public funds that are currently being discussed.

A global carbon market will result in cost savings of roughly 50%. Moreover, if burden sharing were to be based on equal emissions per capita, the least developed countries would actually benefit.
Scenario analyses show that ambitious reduction targets adopted by the industrialised world result in huge monetary flows from rich to poor countries - through emissions trading and the Clean Development Mechanism.
These could easily amount to 90 billion USD in 2020. This is far more than public funds will ever be able to generate.

I strongly believe that the creation of a global carbon market is a necessary condition for an ambitious global climate deal.
I think Ministers of Finance have an important role to play in making the global carbon market the central building block of a future climate regime, instead of a remote possibility for a distant future.
This solution is not ad hoc and ineffective, narrow and nationalistic, but a truly global solution for a global problem.
An important step we have to take to secure our world for future generations.
I can assure you I will work hard to make the building of a global carbon market a central part of the Copenhagen agreement!

Whether that is enough for Noreena Hertz, one of the world's leading authors on globalisation and capitalism, probably not.
We have invited her here to tell you what all those other Finance Ministers have done wrong in the past and how I and my colleagues will have to do better.
And with all the humility that requires, I would like to ask you to welcome Noreena Hertz and pass the floor to her!