Climate change is the greatest market failure the world has seen. It requires large-scale and international action. By providing a strong policy framework to overcome this failure, governments can harness the tremendous power of markets to find effective, efficient, equitable and international responses to the challenge. For markets and entrepreneurship to work, that framework must be credible and predictable, but allow flexibility too.

The Climate Change Bill, currently in debate in the House of Lords, provides a huge opportunity to demonstrate the UK's commitment. Targets must be consistent with the scale of the problem - that means at least 80 per cent reductions by 2050 for the UK (relative to 1990); and they must promote efficiency and internationalism - that means openness to buying emissions reductions from poor countries.

Reversing the trend to higher global temperatures, more extreme and variable local weather patterns, increasing costs of natural disasters and potentially enormous population movements requires an urgent worldwide shift towards a low-carbon economy. Sound policy and international collaboration can deliver strong and clean growth for all at reasonable cost. Weak or delayed action will eventually choke off growth and is a far more costly option.

A global policy must satisfy three principles if it is to find international support: it must lead to cuts in CO2 emissions on the scale required; it must be implemented in the most cost-effective way; and it must be equitable, to take account of the double inequity - it is poor countries that are hit earliest and hardest and rich countries that have greater responsibility for past emissions. At the same time, with the welcome rapid growth of some parts of the developing world it is crucial that they participate if the “deep cuts” in emissions agreed in Bali last December are to be achieved.


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