June 14th 2008
G8 Action Plan for Climate Change to Enhance the Engagement of Private and Public Financial Institutions
1. Climate Change is one of the most urgent issues for the world to tackle. We, G8 Finance Ministers, recognize that the international community has been making considerable efforts, but that there is still much to do. Many reports, like the one released by the Intergovernmental Panel on Climate Change (IPCC), have warned us of the huge economic risks and adverse impacts from climate change and underscored the need for all countries to take concerted action to reduce greenhouse gas emissions significantly below current levels.
2. We are convinced that urgent and concerted action is needed and accept our responsibility to show leadership in tackling climate change. We are strengthening our efforts assisting developing countries in addressing climate change. We welcome and support the launch of the new multilateral funds to be established in collaboration with the multilateral development banks (MDBs).
3. Private sector engagement is essential in effectively addressing climate change including, most importantly, industries' investment in clean technology and R&D as well as improved energy efficiency. Focusing here on the role of private financial institutions, they are creating many innovative financial products and increasing numbers of financial institutions are employing environmental guidelines to mitigate environmental risks. The public sector has to encourage private sector engagement by ensuring stable and consistent legal and regulatory frameworks.
4. The MDBs, along with other international financial institutions, also have a major role in supporting developing countries to combat climate change, as mitigation and adaptation are indispensable parts of sustainable development. Their key activities include increasing needed investments and helping developing countries to integrate climate change into their overall development strategies.
5. Market mechanisms have the potential to deliver economic incentives to the private sector to take investment decisions that internalize environmental costs. We agree to continue active participation in discussions of market mechanisms.
Promoting Investment for Climate Change
6. Recognizing the UN climate process as the appropriate forum for the negotiations to reach an agreed outcome for the post-2012 period, we reaffirm our commitment to contribute to its successful conclusion, in which all major economies are effectively engaged, based on the Bali Action Plan. At the same time, we recognize the need for urgent actions to tackle climate change in the immediate short term. In order to ensure an effective and efficient response, we affirm our intention to coordinate and harmonize various financial facilities and initiatives, ensuring they are complementary to the key role of the Global Environment Facility (GEF).
7. We, G8 finance ministers, have been strengthening our activities addressing climate change. We are determined to further reinforce our bilateral efforts assisting developing countries.
8. We welcome and support the launch, to be made in collaboration with the MDBs, of new Climate Investment Funds, which will complement existing bilateral and multilateral efforts until a post-2012 financial framework under the UNFCCC is implemented. These funds include the Clean Technology Fund and the Strategic Climate Fund. Together these funds will scale up public and private finance for the deployment of clean technologies, the prevention of deforestation and development of climate resilient economies in developing countries.
9. Because of the overriding need to spur private investment in clean energy technologies, the public sector has to establish and maintain stable and transparent legal and regulatory frameworks. The post-2012 international framework and domestic regulations will be of critical importance, to this end.
10. We agree to promote deployment of clean technologies through WTO negotiations on the reduction or elimination of trade barriers for key environmental goods and services.
11. At Gleneagles, we asked the World Bank and other MDBs to strengthen their activities for climate change, through the Clean Energy Investment Framework. We welcome the joint MDBs' report on climate change, which describes their achievements so far and outlines their future plans to significantly increase investments for mitigation, adaptation, and clean energy access, setting stretching and measurable targets to track progress. We urge the MDBs to build their capacity for climate change, to strengthen their partnerships and also to integrate climate change into their development activities, while maintaining their focus on sustainable development and poverty reduction.
Climate-friendly Development Strategies in Developing Countries
12. Developing countries will both influence the scale of climate change and be affected by it. By 2030 global energy demand will be 55 percent higher than it is now, and nearly three-quarters of this rise will take place in developing countries, according to the International Energy Agency's (IEA) estimates. At the same time, the poorest countries tend to have the least resilience to climatic variability and change.
13. It is crucial for developing countries to integrate climate change in their overall development strategies. They should incorporate climate considerations into energy sector reform and undertake other climate-related policy actions, transforming them into low-carbon economies. We encourage the MDBs, in coordination with other actors in this area, via knowledge sharing and policy dialogues, to help developing countries with this task, including by assisting capacity building, especially in the poorest countries. We, as bilateral donors, commit to follow the same strategies and to actively engage in coordination with the MDBs and other bilateral donors.
14. The international community should step up its efforts, in a coordinated manner, to develop analytical tools needed to shape better climate change policies. The IEA, as requested by the Gleneagles Plan of Action, is developing indicators and best practices for energy efficiency. We call on the MDBs, in cooperation with other institutions, to develop common methodologies for measuring carbon emissions and other environmental impacts from projects they finance and to establish a joint benchmarking, monitoring and reporting system. We will consider using these common methodologies for our bilateral assistance and export credits, and ask the private sector to follow our example. We also encourage the relevant international institutions and bilateral agencies to collaborate on and exchange experience related to developing climate change risk assessment systems.
Public-Private Partnership in Addressing Climate Change
15. Private financial institutions play a key role in mobilizing the private capital necessary to achieve the transformation to a low-carbon economy and manage the risks of climate change. In particular, they are creating many innovative financial products. These financial products include "eco-lending", which finances climate-related projects by favorable investment terms"eco-bonds", which are issued to finance renewable energy and energy efficiency projects, the securitization of carbon credits, which divide carbon credits into smaller assets that are more easily available to small purchasers, and weather derivatives, which have a pay-off in accordance with certain weather parameters. We welcome and encourage the further development of new financial tools. We also encourage the appropriate wider use of insurance and hedging mechanisms to address the risks of adverse weather conditions and natural disasters.
16. Increasing numbers of financial institutions are employing environmental guidelines such as the "Equator Principles" and strengthening those guidelines. We welcome and support those private financial institutions in taking enhanced actions to align their activities with low-carbon growth strategies.
17. The MDBs should play a leadership role in setting environmental guidelines for financial projects and introducing innovative financial tools and facilities, which catalyze private sector engagement. Recognizing the crucial importance of sustainable forest management, we welcome the successful launch of the Forest Carbon Partnership Facility (FCPF) at the World Bank.
18. We ask the World Bank to hold a joint symposium with other MDBs, the UN, the GEF, bilateral agencies, and private financial institutions, with a view to continuing to share their experiences and promoting further development of those financial products. We ask them to report on progress at the next G8 Summit Finance Ministers' meeting.
19. Market mechanisms, including emission trading, tax incentives, performance-based regulation, fees or taxes, and consumer labeling are key to addressing climate change as well as enhancing energy security and efficiency. Market mechanisms play a key role in minimizing the costs of action and providing incentives for all stakeholders to use existing low-carbon technologies and invest in the development of innovative technologies. Recently, we have seen evidence of growing maturity in emission trading markets. Through the Clean Development Mechanism under the Kyoto Protocol, the private sector already provides substantial finance for climate change mitigation projects in developing countries. But challenges and barriers to further development remain. Enhanced domestic enabling environments as well as the agreed outcome for the post-2012 period should address these barriers.
20. Market mechanisms have the potential to deliver economic incentives to the private sector. These mechanisms can provide pricing signals but different market mechanisms operate in distinct manners and have different advantages. Any instrument adopted by a country needs to be designed for long-term implementation in order to provide incentives to reduce emissions for all stakeholders. Predictability and consistency are needed to stimulate substantial private investment in energy efficiency and new technologies with long paybacks. The issues of leakage and international competitiveness need to be addressed in designing the system.
21. - Emission trading - A cap and trade system would set a limit on total emissions over a certain period and would require regulated agents to hold credits for emissions. This system has the benefit of providing certainty over total emissions volumes but because the price of credits can fluctuate there is less certainty for those attempting to plan investments. Any cap and trade scheme would also raise questions over the initial allocation of credits, whether by grandfathering or auctioning.
22. - Tax incentives - Under a carbon tax system, a fee would be levied for each unit of CO2 emitted. This would incentivize agents to cut back on their emissions if the cost of doing so was less than the cost of paying the tax. This system would provide certainty for businesses on the costs of emissions and have benefits of simplicity but would not provide certainty on overall emissions volumes, in contrast to an emission trading system. In addition, any carbon tax system would involve issues about consistency with overall tax structures and usage of its revenue. Preferential tax treatments such as accelerated depreciation allowances and tax credits can also encourage clean technology investments.
23. In comparing potential alternative mechanisms, we should be mindful of; firstly, the efficiency of outcomes that would result; secondly, the ease and practicality of implementation; and thirdly, international implications. We reiterate that frameworks should be effectively designed to meet specific conditions in each country, while recognizing the possibility of integrated markets. In addition, any scheme should: contribute to environmental effectiveness and economic sustainability; reflect the need for all major economies to mitigate greenhouse gas emissions; and take into account the "principle of common but differentiated responsibilities and respective capabilities" among countries as agreed in the UNFCCC's Bali Action Plan.