Green and growth go together - How can policies shape economic incentives to promote green growth?

 

Remarks by Angel Gurría, OECD Secretary-General

Copenhagen, Denmark, 8 November 2010


Your Royal Highness, Crown Prince Frederik, Prime Minister Rasmussen, Ladies and Gentlemen,

Let me start by thanking the Climate Consortium and its Executive Director Finn Mortensen for the initiative for this “ Global Green Growth Conference 2010”. Green Growth has the potential to shape the 21st century and this conference could not be more timely, just 21 days before the start of COP 16 in Cancun.

People around the world are demanding better lives. This is legitimate and we should work together to fight poverty, promote development and improve living standards for all. In doing so however, we cannot forget the growing environmental pressures on our planet, which, if left unchecked, could undermine our ability to deliver the prosperity that we hope for.

This double task is made more difficult today, as we recover tentatively from the worst financial, economic and employment crisis of our lifetime.  But the crisis, or the fragile recovery, should not be used as an excuse for inaction. In fact, we should see it is an opportunity to re-think our economic model and to better equip our societies to tap into more sustainable, greener sources of growth. 

Implementing green growth policies can promote economic growth and development on more environmentally and socially sustainable grounds.  They can underwrite growth in a world trying to recover from a deep recession.  They can also lay the foundation for ways of powering and feeding the world that make a much lighter claim on the planet’s life support systems.

Achieving greener growth will involve seizing opportunities to develop new green industries, jobs, and technologies, as well as managing the transition for greening the more traditional sectors and the associated employment and social effects. It requires policies to ensure that new technologies are developed and commercialized and to encourage more sustainable demand patterns from households, companies and governments.


Innovation is central to Green Growth

In fact, innovation is the key of our success. This is where business comes in. You are at the heart of this desired green transition.

Basic research and larger scientific breakthroughs may need public support: for instance, it is difficult to envision private entrepreneurs investing sufficient resources in large-scale advanced energy storage technologies to allow for a greatly expanded use of renewables. Government policies for R&D and innovation are therefore important, notably in the early stages of technological development.

But the closer we get to market-ready green technologies, the more important the role of business becomes. We need to tune our economies and markets so that they provide the right incentives to mobilise the talent and insights of business for green innovation. We need clear demand signals that can guide innovation efforts in directions where they are most likely to produce tangible environmental gains.
Innovation is not only about developing new technologies and know-how, but also about doing business differently.  We have recently completed a study on corporate practices contributing to a low carbon economy. It clearly shows that leading companies are increasingly shifting to a “low carbon business model”, starting with measuring their greenhouse gas emissions and then taking action to reduce their emissions.

They do so partly compelled by regulation, but also, because they see the business case in assessing and addressing the climate change-related risks they face, in using energy more efficiently, shifting to renewable energies, and producing low carbon goods and services for increasingly demanding consumers.

They are also aware that “business as usual” will not be acceptable much longer if they wish to keep a good corporate image and be able to pass increasing investor and shareholder scrutiny. 


Shifting towards Green Taxes can spur Innovation

But for business to accomplish all these tasks, incentives have to be right. One of the most powerful and efficient approaches to encourage green innovation is to reform our tax systems. I am not speaking about higher taxes; I am speaking about shifting the composition of taxes: using environmental taxes more to create green incentives, perhaps while cutting taxes on corporate and personal income where it matters most for investment, entrepreneurship, employment and growth.

At the OECD Ministerial meeting in June 2009, Ministers of Finance, Economy and Trade from 34 countries endorsed a mandate for the Organisation to develop a Green Growth Strategy; and in one of the first major studies under the Strategy, we have looked into how environmental taxation results in innovation.

Let me give you an example: Sweden was among the first countries to seriously address pollution from Nitrous Oxides that cause smog. Back in 1992 they introduced a charge and after just a couple of years, emissions fell by a third. Power plants used a variety of different technologies depending on what the best fit was – and the least costly – for their particular context.

New technical solutions also emerged, and a large number of patents were taken out by Swedish companies. If, instead, Sweden had mandated the use of specific technologies, it would not have given room for innovation – the scope for green growth would have been limited. In this sense shifting part of the tax burden onto pollution aligns with the logic of business: it creates market demand for entrepreneurs to develop and sell new smarter and cleaner technologies and promotes green growth.

 

You would be surprised by how much can be achieved by innovation coming from the shop-floor rather than from laboratories. Ten years ago, Switzerland introduced a tax on Volatile Organic Compounds because these chemicals used in cleaning and precision machinery were found to have adverse health effects. One result was innovation in how to clean machinery used for paint making, printing and metal cutting. Such practical innovations can hardly be targeted via R&D support; rather they are promoted by putting a price on pollution – while cutting other taxes.

Another key lesson for governments is that predictability is vital: if we want businesses to invest in developing new clean technologies they must have some certainty that the environmental tax underpinning the market demand is still in place when they are ready to sell their innovations. Denmark’s Climate Commission which has laid out a plan for a transition to an energy system independent of fossil fuels by 2050 is an interesting example of how to establish such predictability: a key component of the plan is the introduction of a tax on fossil fuels.

It also essential that more and more countries work together. EU countries are discussing whether they should agree to higher minimum tax rates on energy and CO2 emissions. This would help fight climate change and promote innovation by creating a larger market for green entrepreneurs. Of course, ideally we would have the whole world adopting similar policies, but this may not be immediately possible. This has led some people in Europe to warn of leakages and the loss of competitiveness of European industry. Our research says that these threats are overstated. Carbon leakage rates would be almost negligible if the EU acted alone to reduce GHG emissions. If the EU aimed at a reduction of 50% by 2050, only about 12% of these emission reductions would be offset by emission increases in other countries. If all advanced economies acted together, this leakage rate would be even smaller, at below 2%.
 

OECD’s support for countries to identify Green Growth policies

With this in mind, Ministers asked us to develop the appropriate policy framework to ensure that, in the short-term, a durable recovery takes hold while, in the longer-term, more balanced growth – consistent with resilient ecosystems – is restored. The Green Growth Strategy which we will present next year will be our answer to this request. It will draw on work from across 25 OECD Committees working on different policy areas, including innovation, taxation, labour, education and governance. The Strategy will provide practical messages and a green growth policy toolkit that is flexible enough to be tailored to countries in very different circumstances and at different stages of development.

There are four main aspects to this work:

First, we will look at the potential of green growth policies to achieve economic, social and environmental goals.

Second, we will identify a policy package to facilitate the transition to green growth and to enable transformational changes across the economy. This will include policies to remove barriers to greener growth and to change both demand-side as well as supply-side patterns.

Third, we will advise governments on how to make this change possible. We will focus on the implementation of green growth policies, and examine the economic, social, political, and institutional issues that may arise in any reform agenda.

Last but not least, we will develop the necessary progress measurement tools to help policymakers evaluate the extent to which they are shifting economic activity onto a greener path.

 

Excellencies, ladies and gentlemen,

Let me finish with a plea. International climate negotiators need clear and positive messages on the way to Cancun. We need to be able to show that with the right policy strategies, our growth model can be adjusted in an efficient, environmentally friendly, low-carbon way, without hampering development perspectives for emerging and developing countries. 

Green growth is part of the solution: Green is compatible with growth; it is a source of growth. Like two “LEGO” bricks, if you turn them the right way, they can fit together perfectly. And with this fit, we can start building a sturdy pillar for a stronger, cleaner and fairer world economy. This is the message I would like to leave with you today, another strong signal from Copenhagen to Cancun!

Thank you.

 

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