Economic instruments in the fight against climate change

©Charles Platiau/Reuters

2008 will be a decisive year in the battle against climate change. Hopefully, it will see us forge an international consensus so an agreement can be reached in Copenhagen in 2009 that will allow us to build on the Kyoto Protocol.
In July, climate change will be high on the agenda for the G8 summit. In December, the 14th Conference of the Parties to the United Nations Framework Convention on Climate Change in Poznan should lay the groundwork for a global agreement.Within the EU, negotiations over the energy-climate package will be ongoing throughout the year, with the result that European member states will have better instruments at their disposal for meeting their commitments to reduce greenhouse gas emissions.Against this background, the 2008 OECD Ministerial Council Meeting is in my view an opportunity to exchange views on the economic tools that we, OECD countries, can promote in order to achieve a sustainable reduction in worldwide greenhouse gas emissions.Global warming is an economic issue
We are meeting to discuss a new topic for OECD member countries: the economics of climate change and the tools that governments might bring to bear to meet the challenge. Climate change is also an economic issue. As the Stern Review demonstrated, if we fail to take action, then climate change could at the very least lead to a sharp drop in GDP in all our economies. The economic damage caused by climate change would be 5 to 20 times greater than the sacrifices which our economic systems would have to make to combat greenhouse gas emissions efficiently.We now know that the cost of doing nothing is higher than the cost of taking action. We also know that our time is running out if we are to avoid a global temperature increase of more than 2°C by 2050 whose consequences would be irreversible.Promoting an economic approach
For acceptability and viability, it is vitally important to minimise the costs of combating climate change that our economic systems will have to bear, and we should do this by prioritising the most economically efficient approaches for reducing emissions.Faced with this challenge, OECD countries can, and to my mind must, mobilise different types of economic instruments. The scale of the costs we must accept to fight climate change efficiently will naturally depend on the effectiveness of the policies we put in place. We must hammer out the various options that will allow us to deploy the most efficient strategies towards combating global warming.Involving the emerging economies
Climate change is a global issue that goes beyond the concerns of OECD countries alone. Furthermore, we now know that the costs of reducing greenhouse gas emissions will not be spread equally or evenly among different economies. In the fight against climate change, emerging economies have more to lose in terms of GDP than developed economies. It would therefore seem legitimate to differentiate between the efforts asked of emerging and industrialised economies.In this respect, I am delighted that the ministers of major non-OECD countries and developing countries are taking part in our discussions. Their contributions will enable us to consider how to achieve a balanced share of our global efforts. In any event, it is essential that the major developed countries and the emerging economies work together in a global approach.Choosing the most efficient levers
Against this background, the OECD Ministerial Council Meeting will, hopefully, allow us to get ahead on a number of issues that I feel are crucial. Firstly, our policies must help to establish price signals that are capable of influencing economic behaviour. It is by setting the right price for carbon that we will be able to encourage consumers and firms to behave in a manner compatible with the international goals we have set ourselves for reducing greenhouse gas emissions.A clear long-term price signal will also play a determining role in promoting efforts to innovate and disseminate the least expensive technologies. In my view, each government is responsible for implementing the economic instruments which, by sending out a price signal on the real cost of greenhouse gases to society, will encourage everyone to make the choices that will allow us to move towards a less carbon-intensive economy.There are many economic instruments that can be deployed for this to happen: the meeting we will be holding in June seems to me to be an appropriate forum in which to examine the advantages and disadvantages of the various solutions possible. But let me underline that if our various government policies do not deliver strong economic signals, people’s behaviour may not change.Secondly, we must also think about the mechanisms to prevent any uneven share-out of the effort to reduce greenhouse gas emissions from causing investments and emissions to relocate to countries with less proactive policies. It would be neither acceptable nor economically justifiable if a country reaped a competitive advantage by refusing to participate in the global effort to reduce greenhouse gas emissions.Thirdly, we must reflect on ways in which to involve the private sector in the fight against global warming. For example, the International Energy Agency estimates that over the next 20 years some US$20 billion will be invested in the energy sector, the bulk of which will be provided by the private sector. Introducing incentives to encourage low-carbon investment by the private sector would be crucial for the future.Lastly, I think that the economic responses to the question of how our international efforts should be shared out demand our full attention. For example, emerging countries could be offered incentives to make additional “sacrifices” to stabilise climate change. But let me emphasise how useful it would be to link the financial resources delivered by developed countries to the introduction of national incentive programmes and upgraded and measurable initiatives to combat climate change in and by the countries that benefit. Unless we adopt such a common position we will run the risk of subsidising activities that add no real value to the fight against climate change.The fight against global warming is one of the major challenges currently facing mankind. We cannot be satisfied by our current level of effort, limited as it is to a few governments. We have a broad array of economic instruments at our disposal to meet this challenge. The OECD Ministerial Council Meeting offers an excellent opportunity to discuss, and subsequently choose, the most effective instruments.Visit©OECD Observer No 267 May-June 2008

Economic data

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