There should be no underestimating the importance of Nicholas Stern’s review of the economics of climate change. Let me restate here what I see as his core finding: ‘Mitigation – taking strong action to reduce emissions – must be viewed as an investment, a cost incurred now and in the coming few decades to avoid the risks of very severe consequences in the future. If these investments are made wisely, the costs will be manageable, and there will be a wide range of opportunities for growth and development along the way … Costs of mitigation of around one per cent of GDP are small, relative to the costs and risks of climate change that will be avoided.’

In a few short sentences, Stern demolishes the arguments of quasi-economists such as Bjorn Lomborg, with their elaborately fraudulent arguments for inaction. And his message is one that governments cannot ignore – neither the British government, nor indeed other governments for which his economic calculus applies with equal force. In a nutshell, action to deal with the causes of climate change is affordable, far cheaper than the cost of inaction, and will bring many benefits along the way.

There are weaknesses in Stern’s report. His choice of 550 parts per million as a target for maximum CO2 concentrations goes against scientific advice that such a concentration would be dangerously high. And while Stern calls for a worldwide carbon trading system, he never defines the nature of the carbon marketplace, or the rules that would apply.

These are key questions. The existing Kyoto Protocol (Kyoto 1) expires in 2012. What is to take its place? If any new Protocol is to have any significant effect, it must go much further, and its framework must encompass all nations, not to mention areas excluded from Kyoto 1, such as aviation. Indeed, the core theory of Kyoto 1 – that ‘industrial’ and ‘non-industrial’ nations must be treated differently, and that trading in carbon and its derivatives can produce meaningful results in the absence of a global cap – must be abandoned.

The main alternative approach – one that has gained much ground in the South, and especially in Africa – is ‘Contraction and Convergence’ (C&C), developed and promoted by Aubrey Meyer of the Global Commons Institute. The key elements of C&C are that greenhouse gas (GHG) emissions should be subject to an annual gobal cap; that the cap should contract (‘contraction’); that GHG emission rights be allocated to countries on the basis of their populations (‘convergence’); and that these ‘rights’ should be tradeable.

There is much to recommend C&C. It is global in scope. The principle of a declining cap in global GHG emissions is unarguable. However, the allocation of rights to governments based on population size represents a missed opportunity. The sale of surplus rights would provide governments of poor countries with a new source of income,certainly not a bad thing in itself. However, this money would then not be used where it is most desperately needed – to attack the causes and consequences of climate change.

C&C also adheres to the ‘country-based’ system embodied in Kyoto 1, in which GHG emissions are controlled at point of emission. This is an error: in today’s globalised economy, in which energy and energy embodied in products are freely traded across national boundaries, the country-based approach does not fit and requires the support of a huge, expensive and unreliable carbon accounting exercise. And the points of GHG emission are so numerous and diverse as to challenge the very notion of controllability.

The Kyoto 2 approach therefore adopts in its entirety the ‘contraction’ element of C&C. However, it proposes that GHGs should be controlled not at the point of emission but of production – and in the case of fossil fuel emissions, at the point of production of the fossil fuels themselves. Emission rights would consequently need to be secured by the likes of oil companies, coal mining companies and companies producing industrial GHGs. Most fossil fuels and industrial greenhouse gases come from a small number of large producers, so this would greatly reduce monitoring and compliance overheads.

Kyoto 2 also proposes that GHG emission rights should not be given away, but sold to the highest bidders at a global auction, using the ‘ascending clock’ system (in which the price is gradually raised until there is no excess demand) to secure the highest commonly-agreed price; and that the funds so raised – of the order of $500-$1,000 billion per year – be applied to solving the problems of climate change. Funds of this order are desperately needed to transform the global economy, dramatically raising the efficiency with which we use energy and developing new low-carbon energy sources; and to help countries adapt to climate change that is already unavoidable.

This would help to meet some of Stern’s main objectives: ‘Creating a broadly similar carbon price signal around the world, and using carbon finance to accelerate action in developing countries, are urgent priorities for international cooperation … Scaling up flows of carbon finance to developing countries to support effective policies and programmes for reducing emissions would accelerate the transition to a low-carbon economy.’

It is hard to see how else such funds could be raised. The Climate Adaptation Fund created by Kyoto 1 contains only some $3 million, raised from a small levy on investments in its Clean Development Mechanism. At the recent Nairobi meeting of the United Nations Framework Convention on Climate Change (UNFCCC), the fund was relaunched and member states promised an additional $1 billion over the next few years.Compare this to the World Bank’s estimates that protecting development projects alone from climate change impacts will cost around $100 billion a year.

By contrast, Kyoto 2 could raise hundreds of billions of dollars per year, to spend, for example, on relocating cities and essential infrastructure at risk from sea level rise, or on creating alternative livelihoods for farmers and pastoralists whose survival is threatened by drought. And there would still be funds remaining to spend on other essential climate-related projects such as low-carbon energy research and installing renewable heating and electricity generation capacity.

A further use to which the funds raised might be put is to buy out fossil fuel deposits in the ground, and leave them there. Countries with big fossil fuel resources, especially those with high carbon fuels such as coal, might oppose Kyoto 2 because it would reduce their incomes. One way to overcome such objections would be to buy out their fossil fuels – so providing an alternative source of revenue, and saving the trouble, expense and other environmental impacts of opening new mines or oil wells.

With forest and swamp destruction contributing some 18 per cent of the world’s GHG emissions, there is also a huge need to reward countries endowed with substantial forests for preserving them and the carbon they embody, and this would be another excellent way to use the funds raised by the rights auction. For example, the UNFCCC could enter into ‘rental’ agremeents whereby forest-rich countries agreed to protect and enhance their forest estate.

Such financial inducements would help to reverse the existing situation whereby we implore poor forest-rich countries to look after their forests, while at the same time demanding debt repayments and exports of timber, beef, soya beans and palm oil. Again, this would deliver one of Stern’s aspirations: ‘Emissions from deforestation are very significant … greater than [those] produced by the global transport sector. Action to preserve the remaining areas of natural forest is needed urgently. Large-scale pilot schemes are required to explore effective approaches to combining national action and international support ... those countries should receive strong help from the international community, which benefits from their actions to reduce deforestation.’

The Kyoto 2 framework would also address the extra GHG emissions, beyond those of fossil fuel use, from cement manufacture, aluminium smelting and aviation. At present, aviation pays for none of its contribution to global warming, being specifically excluded from Kyoto 1. However, due to the additional radiative forcing of stratospheric aircraft exhaust due to oxides of nitrogen, steam and particulates, aviation contributes about three times as much warming as the carbon dioxide it emits. Airlines should pay their fair share, and the easiest way to do this would be to make them buy sufficient rights to cover these additional emissions.

Cement kilns also produce additional carbon dioxide beyond that of the fossil fuels they burn, as a result of converting calcium carbonate to calcium oxide, doubling their global warming impact. And aluminium smelting produces perfluorocarbon (PFC) gases as a by-product of electrolysis. Their very high global warming potential (6,500 to 9,200 times more powerful than CO2) means they are responsible for just under half of the industry’s GHG emissions. Other such industrial gases include sulphur hexafluoride (22,200 times more powerful than CO2, it is used as an electrical insulator and to protect magnesium from oxidation) and the HFCs widely used in refrigeration and mobile air-conditioning (even though perfectly adequate substitutes exist, such as the Greenfreeze technology supported by Greenpeace).

To conclude, I believe that Kyoto 2 offers the kind of flexible, encompassing framework for global action and cooperation on climate change that Sir Nicholas Stern was reaching for, delivering the key objectives set out in his report in a way that is fair, equitable, practical and economically efficient.

Oliver Tickell is freelance journalist and environmental campaigner and author of the Kyoto 2 concept.