The economics and finance of climate change show that climate change and economic and financial matters are causally linked in both directions. Chapters 6 and 7 vividly bring out this interplay. Economic and financial changes, backed by a carefully designed international legal framework, can have a significant impact on climate change mitigation and adaptation. Moreover, climate change concerns induce changes in the global economic and financial architecture.
CO2 markets have been and are being created unilaterally and regionally in both developed and developing countries. While this is a step in the right direction, and demonstrates again how unilateral action can serve as a stepping stone, CO2 markets would be more effective if they were integrated and expanded. Although a global CO2 market would be ideal, even a large CO2 market, made up of several major players, could serve as an effective catalyst for change. There are precedents at the WTO for the negotiation of sectoral agreements, in which Members accounting for over 90 percent of trade in a particular product or service reach a trade liberalization agreement that other Members can join later. This type of negotiation model has proved effective in the liberalization of trade in financial services and information technology goods, for example. A similar approach might work well to integrate and expand CO2 markets.
The insurance industry has a valuable role to play in mitigation and adaptation and is perhaps the best example ofhow the private sector can play a critical role with respect to climate change. The liberalization of trade in insurance services is thus a critical component of addressing climate change. In this regard, the WTO again has a key role to play, through the liberalization of trade in financial services under the GATS. We discuss the role of GATS further in Chapter 8.