GreenFleet

The world's emissions need to be cut to 50 per cent of 1990 levels by 2050. The longer it takes for emissions to start reducing, the harder it will be. It's a challenge unlike any other that we've faced. It's a technological and scientific challenge, to find more ways of reducing emissions. It's a financial challenge because the UN estimates that over $200 billion of additional investment and financial flows will be needed by 2030 to return greenhouse gas emissions to their current levels. Although that's a lot less than the costs of inaction it is still a great deal of money.

UN framework
The United Nations Framework Convention on Climate Change (UNFCCC) will need to reach agreement on a future framework for dealing with climate change, to replace the current Kyoto agreements.
 
I know how difficult Kyoto was to negotiate - I was working as a Minister at the Environment Department at the time. The new framework will, if anything, be even more difficult because clearly it has to include, if at all possible, all countries.
    
We have made enormous progress over the last 20 years in tackling the production of CFCs and other substances that deplete the ozone layer. So on a smaller scale we already have a successful example of combined global action that eliminated a particular threat to the ozone.
    
So how should we go about achieving these difficult aims? Of course, what we have to do is reduce carbon emissions - and dramatically. I'm proud that in the UK we've made clear our determination to do that by committing to a Climate Change Bill.
    
This means we'll be the first country in the world to put long-term targets into legislation, and we'll set out binding carbon budgets that we'll need to meet to achieve these targets.
    
The question now is how to reduce carbon emissions in the most efficient way, and how to do it without damaging either development or economic growth.

Growing green
We can both be green and grow. While the costs of inaction could be between 5-20 per cent of global GDP, action could cost just one per cent. That depends, however, on emissions being reduced where the costs are lowest. And the key to that will be giving carbon a price, so that individuals and businesses factor the real cost of the damage their carbon emissions cause into their decisions. This is the market mechanism that needs to go alongside the goodwill, the political agreements and the social determination.

Trading scheme
There are a number of ways we can do it. Tax has a part to play by influencing behaviour and incentivising low carbon technologies, and as the main way of tackling emissions from surface transport. But we can't do this without carbon emissions trading.
    
That's why the UK strongly supports the EU Emissions Trading Scheme, the main method of pricing carbon in our economy. It covers around 50 per cent of our emissions, mainly from electricity generation and industry.
    
It's true that there have been difficulties with the scheme, which remind us just how challenging it is to set up new markets such as this. But we have learnt a lot from the first phase and the signs are positive for Phase Two of the scheme. In the future, we'll want to see the scheme strengthened, with limits that tighten over time to create scarcity; we'll want to see it expanded, to cover more sectors and gases; and we'll want to see it linked up with schemes in other countries.

Working globally
The challenge of climate change is international - and the responses therefore must be international too. So carbon emissions need a global price, not just a price in the UK, or indeed Europe.
    
That means we'll need a global carbon market that is deeper, more liquid, and open - and to achieve that we would eventually need a global trading scheme.
    
Clearly, the longer separate systems develop in isolation from each other, and in a fragmented way, the more the cost of moving to that global scheme will rise. So we need to think about how we're going to create that global scheme now.
    
Linking the European trading scheme with others would be an important step, and here in the UK we are working with California and other American states to try to ensure that trading systems are compatible as they develop.
    
The Clean Development Mechanism also has an important part to play in linking the EU ETS to developing countries, and helping to reduce emissions there. That's crucial, because we can't reduce carbon emissions without the developing world playing their part - but they won't be able to bear the full costs of that action alone, and they shouldn't have to given that we are already industrialised and caused the problem.
    
Creating a global carbon market will, of course, be a real challenge - and we have to recognise the scale of that ambition. The experience of Phase One of the Emissions Trading Scheme here in Europe has shown us that it isn't easy. If we're to do it, then there's a huge role for the private sector to play.

Carbon markets group
To help us to use the knowledge and the skills of the private sector, we are setting up a carbon markets experts group that will act as a sounding board for the Treasury, and that will discuss ways of enhancing and developing the global carbon market.
    
The group will also be advising us on the opportunities that the global carbon trading market, which is already worth $30 billion, can create, and on ensuring clearly that London can maintain its position as the world's leading financial centre for emissions trading.
    
The most important opportunity, however, isn't to make money out of emissions trading. It's to reduce carbon emissions in the most efficient way in all our economies, and to avoid the damage that climate change therefore could do.
    
Carbon trading and a global carbon market is something we have to think about urgently. The Kyoto framework expires in 2012, and if we are to have a new system in place in time we will need it to be finalised by the end of 2009.
    
I know there is a long way to go in those negotiations and we are not going to achieve an agreement it unless there is real international effort, and co-operation. The scale of the challenge is huge. It's an environmental, technological, political and social and unlike anything that we have ever faced - but one that our economies, and people's lives, depend on us meeting.
    
We're taking climate change seriously in the UK Treasury. Climate change could be an economic disaster - but it also presents opportunities, and we must focus on ways in which we can respond without damaging growth. All of that makes it hugely important to finance ministries - and economics ministries that also have huge expertise in the market-based solutions that we need to find.