Kyoto Can Be Made to Work

Climate change has become a "threshold issue." Deny the evidence, ignore the problem, and you look like a Luddite. The new report of the International Panel on Climate Change confirms the scientific consensus: global warming is happening and its consequences will be severe, unless action is taken.

The European Commission proposes unilateral cuts of 20 percent in European emissions from 1990 levels. The U.S. Senate is considering four similar bills. The British government will soon present a landmark Climate Change Bill mandating CO2 emission reductions of 60 percent from 1990 levels by 2050. All this is welcome. But the biggest issue has yet to be confronted: how to forge an equitable global compact that sustains the development aspirations of poorer countries and contributes to the battle against climate change.

Consider the facts framing this debate. At the moment, the United States accounts for 25 percent of global emissions and the European Union 14 percent. Per capita, emissions from developing countries (accounting for 5 billion of the world's 6 billion people) are a fraction of that. But by 2020, total emissions from developing countries, led by India and China, will be greater than emissions from the industrialized world. How world leaders deal with this evolution will determine how well we cope with global warming.

In discussing these issues, developing countries have traditionally cleaved to a simple view: developed countries caused the problem, and it's theirs to solve. By the same token, developing nations have a right to develop, climate change or not. Any global agreement dealing with our shared problems, then, must acknowledge two principles. First, not only have developed countries indeed caused the problem, but it's they that possess the greatest capacity to reduce emissions. Second, by a cruel irony, developing countries will suffer the most from climate change. They therefore have a strong incentive to seek development that protects the natural environment. I call this "leapfrog economics."

For the poorer countries in the world, development is, rightly, nonnegotiable. But there's a critical choice. Will that development be high-carbon or low-carbon? A leapfrog economy will embrace the latter without passing through decades of traditional, high-carbon industrialization. That choice will, in turn, essentially be about heat, electricity and transport. In all three areas there are examples from developing countries that show what is possible. China has well over 50 percent of the world's installed solar thermal water heating; India leads the developing world in wind power; in Brazil ethanol car fuel has displaced $120 billion worth of oil.

Today we have a great new advantage in promoting such green technologies. That's because, when it comes to the trade-off between environment and development, finance may not be the problem it traditionally has been. Here is why.

When developed countries take on emissions-reduction commitments, they can either reduce their own emissions, or pay for low-carbon energy investments in the developing world. Under the Kyoto Protocol, for instance, the European Emissions Trading Scheme allocates emissions allowances to companies operating in the EU. They are allowed to trade those allowances and, subject to an overall limit, purchase credits from emission- reduction projects around the world.

This has created a lively international market in carbon finance. Already there are some $3 billion in established global carbon-trading funds. By the end of the decade this market is projected to be $40 billion annually. Obviously, the larger the carbon-reduction commitments that industrial nations take on, the greater this figure will be. If all industrialized countries took on emissions-reduction commitments of 60 to 80 percent, according to the U.N., and if they purchased half of their reductions in the developing world, and if the carbon price were at least $10 per ton, then the global financial flows would be of the order of $100 billion per year.

This sort of money could help bridge the gap between high- and low-carbon development. It could help fund the extra cost from carbon capture and storage technology that reduce emissions from coal-fired power stations by 85 percent. It could make the difference for governments choosing between "cheaper" fossil-fuel power plants and more expensive hydroelectric projects. It could help make solar power a reality.

Of course, carbon finance alone will not be sufficient. Technology cooperation, higher product-efficiency standards and adaptation to climate changes are vital. But it is a big headstart. The stakes are high. Unless developed countries take a lead, there will be no progress. But without developing countries as part of the solution, the problem will get worse. We are all in this together.