Expert View: We're on a different planet in fighting global warming

Environmental policy used to be the province of the beard and sandal brigade. Today the suits have to pay attention.

Climate change has become a big issue, and the UK is using its presidency of the G8 to move it even further up the political and business agenda. The long-term aim is the strict implementation of the "polluter pays" principle, as applied to carbon dioxide (CO ₂) emissions. There is now a price attached to these: in future, energy users will have to pay for every ton of CO ₂ they release into the atmosphere.

The reason is that burning fossil fuels has increased the atmospheric concentration of CO ₂ , leading to a rapid increase in the average global temperature. Variations here are nothing new: Britain was warmer (and a significant wine producer) in Roman times; it was colder in the 17th century (the Thames regularly froze over). But it is hard to find a serious scientist now who thinks the recent rise in global temperatures can be explained by this kind of natural variation. The chief cause is energy consumption.

The most dramatic (though distant) result of global warming, highlighted in a report published last week, is the melting of the polar ice caps, a rise in the sea level and the inundation of major population centres. Riverside cities such as London and Paris, and low-lying counties such as the Netherlands and Bangladesh, would be devastated. A more immediate, but less dramatic, consequence of changing weather patterns is the likely disruption of food supplies, particularly in the developing world.

If the scientists are right, the reduction of carbon emissions is arguably the most important political and economic issue of the 21st century. Emissions must be limited to below the level at which the Earth naturally absorbs them, so that carbon concentrations in the atmosphere fall rather than rise and global warming is halted.

The issue has been taken sufficiently seriously by the world's economic and political leaders to inspire action. The UN Convention on Climate Change (Rio, 1992) secured agreement among the industrial nations to reduce carbon emissions. A later convention (Kyoto, 1997) set more explicit targets.

Emissions can be reduced by taxing carbon use. After signing the Rio agreement, the Major government put in place a policy of steady real rises in duty on petrol. The policy was continued, post-Kyoto, by the Blair government. The next step is to move from taxing carbon use to imposing quotas on emissions and making energy users pay for anything above their limit.

The big idea behind quotas is that the capacity of the Earth as a carbon "sink" is finite. As with any scarce resource, we want to make sure it is used by those who derive most value from its use. This is achieved by creating a market in emissions permits, so that those who do not use their quota can sell it to those who need more than their quota. Making firms pay for the right to emit CO ₂ brings an economic idea into the realms of practical business.

An EU Emissions Trading Scheme for CO ₂ came into effect in January, but what is needed is a global plan. If the EU goes it alone, European producers will suffer an increase in costs relative to the US, the world's biggest energy consumer, and to China, which accounted for 43 per cent of the growth in global primary energy consumption last year. Those affected by the scheme will argue it is both damaging to EU competitiveness and ineffectual in reducing global emissions.

But the Americans are always reluctant to restrain energy use. They have not signed up to Kyoto and their petrol taxes are famously low. The Atlantic divide on this issue is deep; let's hope the G8 summit can bridge it.

Bill Robinson is director of economics at PricewaterhouseCoopers