Tony Blair has called on the world to grasp the "real opportunity" that would exist next year for tackling climate change.
The Prime Minister said there would be a chance to make progress when Germany took over the presidency of the powerful G8 group of nations and the European Union in January.
Speaking at a joint press conference in Downing Street, German Chancellor Angela Merkel also stressed that the Stern Report published by the UK Government this week should act as a "wake-up call".
She said the two countries were "closely linked" on the issue: "The EU needs a strategy for the time once the Kyoto Protocol is elapsed (in 2012).
"Climate change is one of the great challenges of the 21st century."
Mr Blair said there were signs that the US appreciated the scale of the problem, although he accepted President George Bush put more emphasis on the need for energy security rather than a drive to cut carbon emissions.
"Under the leadership of the German Chancellor, there's a real opportunity to make progress next year. I'm hopeful that will be something that all countries can participate in."
The Prime Minister also suggested environmental taxes were not the only way he believed climate change could be tackled.
"You can do as much sometimes by incentives as you can through taxation," he added.
Chancellor Merkel said that on the issue of climate change she hoped Germany could carry on work done by Britain when it held the EU and G8 presidencies simultaneously recently.
