Speech to be given at the High Level Event of Ministers of Finance on Climate Change, session 5:”From Kyoto to Copenhagen”, Warsaw, 9. November 2008
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Thank you Mr Chairman. And thank you for the opportunity to
speak on the challenges we face on the further road to Copenhagen and COP15.
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The engagement of Finance Ministers is important in this process. The challenge of global warming is huge by itself. Access
to energy, energy security and coping with large macroeconomic burdens of energy costs are also at stake. These concerns interact and call for practical policies at national and international levels.
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The current economic and financial crisis should not further delay our resolve to take action in addressing climate change. Addressing climate change is part of the solution, not part of the
problem.
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I will address three issues: What is at stake in terms of financing and cost? How to develop an architecture of international financing mechanisms? And what will be the approach of the upcoming Danish COP15 presidency – not least the role of Finance Ministers in facilitating good solutions and mutual consensus?
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No matter what, climate change will affect public finances and
the economy as a whole. The less we act to reverse current
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emission trends, the higher the costs of adapting to climate
change. When we act, the impact and costs of our actions will
depend heavily on the efficiency of our approach. I will here
make two main points:
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First, I doubt that cost estimates are sufficiently taking into account the inefficiencies in today’s energy policies. Addressing
such inefficiencies are first best solutions. They can at the same
time improve economic growth, living standards and reduce
CO2 emissions.
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One example is when consumers and business are not exposed to the marginal costs of energy, due to the absence of
metering systems – or when underdeveloped technologies do
not allow them to adjust consumption.
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Another example is subsidies that encourage the use of fossil
fuels. I have seen figures for such subsidies that sum up to 600
Bill US $ - more than 1 per cent of global GDP.
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These subsidies are so large that they probably exceed the
global taxation of energy. Some of them are intended as social
measures, but I doubt that they reward the poorest. As a result,
the implicit global price of carbon is likely to be zero or negative.
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Poor or no access to energy grids in developing countries is
spurring deforestation and very inefficient local facilities.
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A number of trade barriers imposed by rich countries are hampering the exchange of the most efficient technologies.
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I do not underestimate the political and practical challenges of
correcting these inefficiencies. We all know that reform is difficult. Special interest groups will always complain. But such resistance can be overcome to the benefit of the economy and
the climate. International organisations play a strong role in assisting with ideas and exchange of information.
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Second, addressing inefficiencies is clearly not enough. We
need further action in order to reduce green house gas emissions. Action, however, will depend heavily on our approach to
pricing and regulation. And on our ability to cooperate internationally.
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If we allow the market to find the cheapest reductions among
several to address the same problem, costs will be smaller. If
we price carbon instead of subsidising alternatives, costs will be
lower. And harmonising prices is more efficient than exemptions
and loopholes.
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I know of course, also from my own country, that there is a lot of
pressure for exemptions and subsidies which appear more easy
and friendly, but which are more inefficient and costly. I do not
disagree that in some cases we collectively appear to choose
the most expensive option. Of course inefficient policies will reduce the growth in living standards.
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By the way, the financial crisis may be one obstacle to action
against climate change. We should avoid that. But I think the
rapid fall since summer in fossil fuel market prices is a bigger
problem.
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There is a clear risk that coming back to very low prices will
again boost large demand for energy consumption and discourage new efficient technologies. Therefore, now is the right time
to stop subsidising fossil fuels, reform tax systems and introduce green taxes where needed to consolidate public finances
in the medium term. This would not only help the climate but
also avoid triggering the next spiral of market driven price increases in energy and increasing global imbalances.
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Now, I will turn to the architecture of international financing
mechanisms. Any global deal must be supported by strong and
effective financial frameworks. They should support:
− effective reductions in global emissions.
− a sustainable energy-efficient economic development in low
income countries.
− the adaptation in poor and vulnerable countries to the unavoidable share of global warming.
− diffusion of technologies and the endeavours of large emerging economies to make energy use much more efficient and
diverse.
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They might even help international cooperation in climate related research and development.
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I have no readymade solutions, strong feelings or even predictions about how this difficult issue can be resolved. But I do
have some remarks on which important principles I expect us
all to support:
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First, we should make better use of carbon markets. A true
global market requires a consistent set of emission targets and
trading mechanisms across regions and countries. We are very
far from that today, but should act now.
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Connecting carbon markets does not in itself reduce emissions
significantly. However, it facilitates cost-efficiency and contributes to diffusing technology. In the mean-time we should develop the CDM-mechanism to be more effective. We should listen to the critics and ensure a major boost in its use in lowincome countries. But carbon markets are not enough.
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Second, when looking for additional, predictable, sustainable
and adequate financing, we should be practical and open
minded to a variety of possible contributions related to funding,
pledging and innovative mechanisms. We should accept the
fact that developed countries have special obligations in financing and that broad cooperation is the key.
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Third, the governance structure of financing should also be acceptable and legitimate. Mechanisms should also ensure efficient operational structures. That will maximise the reduction of
emissions. Most likely, a combination of lending and grants is
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necessary to facilitate already profitable investments as well as
help cover additional costs, where concerns for the climate require extra efforts.
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Fourth, financing and operational structures in international contributions to adaptation efforts should also be distinct and effective. As a result, they need to be operationally aligned with existing structures. They should be particularly aimed at the most
vulnerable and poorest countries.
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Finally, let me comment on the role of the COP15 presidency
and potential contributions from Finance Ministers.
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The role of the presidency is to listen and facilitate negotiations.
We have no hidden agenda, but will to the best of our ability
look for consensus in finding mechanisms that can convert the
ambitious goals set by global leaders into practical results.
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To that end, Finance Ministers have a special stake and interest
in meeting in order to help each other find the best possible approaches to national implementation. With regard to the international agenda and financing, Finance Ministers cannot, nor
should we, negotiate in parallel. We may feed in ideas and help
where we can. That includes ensuring consistency with broader
issues of national policies and international economic cooperation. But let me venture two considerations:
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On substance: Political leaders may at one point wish to delegate the formulation of a coherent input to the addressing of
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specific issues. I expect that that will most importantly concern
architecture for financing mechanisms of a new, global climate
agreement.
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On procedure: In order to feed in such input, Finance Ministers
may need to meet and prepare over the course of 2009, rather
than waiting until December 2009 in Copenhagen. Meetings at
deputy level may also be required and a close coordination of
logistics. That may allow us to take advantage of events, where
Finance Ministers meet in already existing forums. We are considering several options, and ideas are most welcome.
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In closing, let me express my warm thanks to our Polish hosts
for organising this important event. And allow me to express my
sincere hope and belief, that over the course of 2009, we will be
heading towards an agreement. An agreement with a level of
ambition tuned according to the challenges we face - in a spirit
of open minds and fruitful international cooperation - and an
agreement that take advantage of the momentum this issue is
now finally enjoying after several decades of discussions.