A Global Contract

The Ministers of Finance High Level Event on Climate Change, December 11, 2007.
Session 3: Common Objectives on Climate Change Financial Issues.

Introduction
I am very pleased that this year’s Nobel Peace Prize has been awarded to the UN Intergovernmental Panel on Climate Change (IPCC) and former US Vice President Al Gore. This is truly well deserved.

Climate change is now! The question is no longer whether human behavior is contributing to climate change, but rather how vast and irreversible the damages will be. We know beyond doubt that if we are to prevent the most devastating consequences we must stabilize global warming within two degrees Celsius of pre-industrial levels.  This means that by 2050 we must return to a level of emissions equal to two thirds of the level we had in 1990. 

This is a great challenge. And it is a challenge that not only involves the Ministries of Environment. It involves other ministries as well, and especially the Ministries of Finance. Limiting climate change will be costly. It will require extensive use of economic instruments. Mitigation, including its costs and consequences for the economy, needs to color all political decisions. The Ministries of Finance therefore have a vital role to play. We at the Norwegian Ministry of Finance seek cooperation with other Finance Ministries to help facilitate the international processes dealing with climate change. I am therefore very happy to speak here today.

Action is required
The industrialized countries bear a special responsibility for the current state of our atmosphere.  Therefore, we must also take a special responsibility for reducing the global emissions of greenhouse gases to a sustainable level. Every country needs to make a huge effort to reduce emissions both at home and abroad. If the current trend continues, global emissions of CO2 will increase by about 50 percent by 2030. Three quarters of the increase will come from developing countries. This will lead to a high concentration of CO2 in the atmosphere and to substantial global warming. It will also generate extensive damages and according to the Stern review, which was commissioned by the UK Treasury, it will reduce global consumption by 5 to 20 percent on a permanent basis.

The world does not need to choose between averting climate change and promoting growth and development. But the price of not acting on climate change will, in the longer term, be a lot more costly to the global economy than acting on it now. Early, targeted, and strong action is the most beneficial investment we, the world, can undertake.

The latest IPCC report states that climate change is happening faster than estimated by previous research. The Norwegian government therefore believes that our long-term goal should be to avoid a temperature increase above 2 degrees Celsius compared to the pre-industrial level. This will be no easy target. 3 degrees might be more realistic, but it could push climate change into a self-reinforcing, accelerating process. Already, we have reached a stage where significant impacts on our planet cannot be avoided. 

Financing
Meeting the challenge of climate change is still possible. However, it requires that our response is strong, coherent, and sustainable. Our job is to agree on a broad and ambitious post-Kyoto climate agreement. And we have to agree on it sooner rather than later.

The countries which have undertaken quantitative commitments under the Kyoto Protocol are responsible for less than 30 percent of global emissions, and this percentage is decreasing. Therefore, the new agreement, which should be firmly anchored in the UN, must include all major emitters. There can be no free riders. The climate convention is based on the principle of “common but differentiated responsibilities.” This must mean that the industrialized countries should take the greatest responsibility. Our most important challenge is therefore to develop an equitable solution that includes all developed countries, but also emerging economies and developing countries.

Mitigation and adaptation is costly. We therefore need to agree on a framework that ensures that global emissions are reduced cost effectively, and at the same time provide emerging economies and developing countries with new and stronger incentives for participating in the new agreement. A well functioning permit trading system with equitably distributed national quotas will solve this to a large degree.

The essence of a system with tradable quotas is to ensure that all countries are given the same incentive to reduce emissions. Each country should then pass on the costs to domestic emitters. Through this, both producers and the consumers of their products will be encouraged to contribute to reduced emissions.

Another important effect of a system of equitably distributed national quotas is that it will generate a demand for permits from developed countries, and in this way become a means of transfer of resources from richer countries to emerging economies and developing countries. Developing economies have a right to develop, and they should be given strong incentives and high rewards for growing in a climate friendly manner. This type of regime will generate more mitigation per dollar as well as substantial transfers to developing countries to be used for adaptation, reforestation, and investments in sustainable technology.

When negotiating this treaty it is important to keep in mind that the sum of the undertaken commitments decides the global level of emissions, as well the total amount of distributed quotas, and indirectly the market price on emissions permits. With tight caps we get lower generated emissions and less permit supply. And the smaller the permit supply, the higher the price. Thus, tight caps will generate more revenue to countries that are net sellers of permits under the new treaty.

A well functioning permit trading system will provide the private sector world-wide with strong and most needed incentives for cutting emissions. The business world knows that a tighter cap on greenhouse gas emissions will lead to increased permit prices. Expectations of higher costs linked to emissions will immediately influence business decisions. It is therefore important that an effective global agreement is perceived by everyone as the credible long term solution as soon as possible.

Research and development
Emissions of greenhouse gasses represent the world’s most severe market imperfection and it is essential to establish a global market price on emissions of CO2 and other greenhouse gasses. However, carbon pricing alone will not be sufficient to reduce emissions on the scale and pace required.

Large scale research and development is necessary in order to find new solutions and to reduce the costs of existing solutions to a level that is affordable to everyone. Successful development and diffusion of climate friendly technologies, like technology for capturing and storing carbon (CCS), will reduce costs in the future. Governments must help speed up the processes through increased support for research and development and by minimizing institutional and other non-market barriers to the deployment of new technologies.

Even if we put great emphasis on switching to renewable energy, most likely more than half of the energy use in 2050 will be fossil fuel based. Developing technology for capturing and storing carbon is therefore very important. The Norwegian government has put aside substantial amounts to have CCS technology in place at the gas fired power plant at Mongstad by 2014. Hopefully this technology will contribute to emissions reductions in large parts of the world.

The private sector will continue to play the major role in research and development. But closer collaboration between government and industry will further stimulate the development of a broad portfolio of low-carbon technologies and reduce costs.

Adaptation
Even with strong action to reduce greenhouse gas emissions, the need for adaptation will increase. The impacts from climate change are and will be unevenly divided. They will be most harshly felt by poor countries through heat waves, flooding, drought, reduced crops, sea level rise, and more. The need to finance adaptation is therefore an important global issue and should be part of the new treaty.

Considering that the industrialized countries to a large degree are responsible for the historic emissions, we should contribute financially to adaptation. Adaptation is costly, and the needs are independent of local emissions, and thus require a different approach than mitigation.

In our national emissions trading scheme the Norwegian government has decided to follow the polluter pays principle. The auctioning of permits then becomes a source of revenue at the national level. Something similar could also be considered at the international level. A small portion could be withheld from the national quotas and auctioned by the appropriate international institution. The resulting revenue could then be placed in a fund to be used towards adaptation and other specified purposes. Even a small percentage of auctioning will be a large source of finance. We, the Ministers of Finance, should therefore commission a study where auctioning on the international level is examined.

The number one priority
At present, the number one priority is to start a process here in Bali that will lead to a broad, ambitious, and equitable agreement - a global contract - which will help the world to effectively reduce emissions of greenhouse gases. Rich countries will have to reduce emissions substantially and contribute financially to more climate friendly growth in developing countries. There is no easy quick fix. It is the sum of many, many small contributions, year after year that is needed. To achieve this we need to agree on a cost effective long term contract. A contract perceived by everyone as an equitable and credible lasting solution.

Carbon pricing must be part of an equitable and effective global emissions reduction scheme. Establishing a global market price on carbon emissions will induce countries, businesses and individuals to invest in low-carbon assets and push the world towards a more sustainable path. We have a limited window of opportunity: Large energy investments in the next few years will lock in technology for decades. We need these and all other investments to shift onto a low-carbon path.

All scientific knowledge points to the benefits of early action against climate change. This is why Norway has already signaled ambitious national climate goals. In addition, we will contribute substantially to the development of new and climate friendly technologies, such as technologies for capturing and storing carbon.
 
At present, deforestation in developing countries is releasing carbon dioxide corresponding to about 20% of total global greenhouse gas emissions. Reducing deforestation is of crucial importance not only in relation to climate change, but also in order to maintain biodiversity and safeguard people’s livelihoods.

Curbing deforestation is a highly cost effective way of reducing greenhouse gas emissions, and has the potential to offer significant reductions fairly quickly. Norway attaches great importance to efforts aimed at reducing emissions from deforestation in developing countries. The Government two days ago announced that Norway is prepared to increase its support to NOK 3 billion (corresponding to USD 500-600 million) a year on conditions that satisfactory mechanisms, for example under the UN or the World Bank, are established for certification and for handling large transfers of funding for forest-related measures. In the start-up phase, some resources will therefore need to be used to develop a framework, including monitoring and control arrangements, for example through demonstration and pilot projects. Norway advocates the inclusion of commitments to achieve reduced emissions from deforestation in developing countries in a global climate change regime for the period after 2012.

A rich country like Norway should live up to its responsibilities. We hope that the measures we are taking will make a positive contribution in this new process toward agreement on an effective framework for large scale international reductions of greenhouse gas emissions.

Thank you.