Overcoming climate change and unleashing a dynamic, zero-carbon economy

Secretary-General of the OECD

The UN Conference on Climate Change (COP21) in Paris 30 November-11 December is a once-in-a-generation opportunity to reach a new international agreement to combat climate change and accelerate our transition to a low-carbon economy. World leaders attending the summit are aware of the urgency we face. However, to judge by their national contributions pledged so far, more ambition will be needed to keep global temperatures from rising above the agreed limit of 2ºC. The “carbon entanglement” of our economies is keeping us on a collision course with nature.

We must and can change course. Simply committing to reduction targets for greenhouse gas (GHGs) emissions by 2030 is not enough; leaders must take action, with zero net emissions by the end of the century as our common goal.

The OECD has been involved in the fight against climate change for several decades, with cross-cutting analysis and in-depth discussion among experts and stakeholders both at the organisation and beyond. We know a low-carbon transition will not be easy, but it is feasible. And besides, we have no choice.

For COP21, the OECD’s message is clear: world leaders are three steps away from overcoming climate change and unleashing a dynamic, zero-carbon economy. They must: first, end harmful subsidies and wasteful support for fossil fuels; second, spur innovation, and promote the conditions needed for climate-friendly investment and development; and third, work together to monitor progress and help one another to move forward, through co-operation, investment, trade and sharing ideas.

Let’s start with unhealthy fossil fuels. Coal, oil and gas can be replaced by cleaner energy sources, which open up new opportunities for wealth creation, work and well-being. Policy makers must do more to make that happen.

Removing fossil fuel subsidies would be a quick win. Our latest inventory of some 800 measures on government books to support fossil fuels found that in OECD and emerging economies, subsidies amounted to about US$160-200 billion a year between 2010 and 2014, mostly for refined fuel through the likes of tax credits and exemptions. Remarkably, two-thirds of these measures were introduced before 2000, and some during the oil crisis of the 1970s. A broader estimate from the International Energy Agency (IEA) puts global consumer price subsidies even higher, at about $500 billion. Both estimates greatly exceed the $100 billion per year that developed countries have pledged to help poor countries prepare for climate change. Fossil fuel subsidies benefit the wealthy, and skew resources away from priorities such as health, education and cleaner energy development. They no longer make sense.

Removing them may not be easy in the face of resistance from deep-seated interests in “carbon-entangled” sectors. Yet many countries are taking action, such as the Netherlands, Mexico, India and Indonesia, in some cases with surprisingly good results in terms of improved public finances, economic incentives and equity. More governments should follow suit.

Apart from subsidies, policy makers must put a robust and steadily rising price on carbon through green taxes and/or sound carbon trading schemes that operate globally. These will help curb emissions by tilting the policy balance away from, say, coal which is relatively lightly taxed, and in favour of cleaner alternatives.

This leads to our second step, which is that of unleashing a low-carbon future. This entails two initial challenges: devising and aligning policies to build the innovative, dynamic environment in which low-carbon technologies and systems can flourish; and funding the infrastructure and transition.

Public spending on clean energy R, D&D (research, development and demonstration) averages about 0.05% in OECD countries. The IEA warns that we need to triple public energy investment in RD&D and scale up collaboration between public and private entities.

Meanwhile, OECD research shows that although new firms are driving innovation in low-carbon technology and systems, conventional policy settings like tax credits and regulatory standards restrict them, putting polluting incumbents at an advantage instead. Policy makers must reverse this.

Our analysis suggests that they should do a better job of aligning other parameters too. The low-carbon transition cuts across society, and policies on the likes of value-added trade, investment rules, local-content requirements, building standards, electricity grids, transport procurement, skills and taxes should all be pointing in one single direction: low-carbon.

Finance is particularly critical. Over the next 20 years, some $53 trillion–roughly the GDP of the OECD area–in cumulative capital expenditure on energy supply and energy efficiency will be needed to stay within the 2°C limit. This sounds huge but it is really just 10% or so above the $48 trillion to be spent on energy investment under business-as-usual projections. It is a small premium that in any case would be more than compensated for by the massive fuel and health savings brought about by shifting to low-carbon infrastructures compared with locking us further into harmful fossil fuels.

How can we pay for it? New sources of funding should be tapped, such as the surging green bond markets, as should institutional investors, like insurers and pension and investment funds. These hold over $90 trillion in assets in OECD countries, but invest just a tiny fraction of that in energy infrastructure. This can be improved with the right policies and partnerships.

The third step for COP21 is working together to monitor progress. Developed countries should honour the aforementioned $100 billion commitment to poorer countries for a start. This is crucial for the UN Sustainable Development Goals and for garnering trust. Robust monitoring of all climate measures will help ensure everyone makes progress together and no one is left behind.

Businesses and households from Chile to Japan and from Gabon to New Zealand are showing what is possible, in technology, carbon markets and green regulations, as policy makers and OECD experts writing in this edition show. Cities too are taking a lead as laboratories of change, including Paris; as Mayor Anne Hidalgo remarks in our spotlight, another world is within reach.

The carbon clock is ticking and will continue ticking after COP21. In three steps, leaders can seize the momentum and help make the world a cleaner, healthier and fairer place to live.



©OECD Observer No 304 November 2015

Economic data

GDP growth: +0.6% Q1 2019 year-on-year
Consumer price inflation: 2.3% May 2019 annual
Trade: +0.4% exp, -1.2% imp, Q1 2019
Unemployment: 5.2% July 2019
Last update: 8 July 2019

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