by Angel Gurría, OECD Secretary-General
delivered at the Club de Madrid Annual Conference
21 October 2006
Good afternoon, ladies and gentlemen, distinguished guests and participants,
I am honoured to be invited to make a few comments in closing this conference and to share this panel with such distinguished persons and good friends.
I will focus my remarks on the political economy of climate policies. We already have at our disposal a range of policies that can be used to help address climate change, but to implement them appears to be a considerable challenge.
Climate change is one of the greatest challenges we face
Climate change is one of the greatest challenges we face – both in terms of its potential impacts on our societies and the earth, and in terms of the scale of the international co-ordination and co-operation needed to address it.
The scientific evidence is overwhelming. Global atmospheric temperatures are increasing at the rate of approximately 0.2 degrees Celsius per decade. Antarctica’s ice core reveals that carbon dioxide and methane concentrations are higher than at any time in the last 650,000 years. Hurricanes and heat waves are becoming more intense and damaging – as we witnessed in Hurricane Katrina and the 2003 heat wave in France. Glaciers are melting in Antarctica, Chile, Peru, the Alps and the Himalayas. The Arctic ice cap is thinning and shrinking in the summer. 87% of glaciers in the West Antarctic peninsula have retreated.
What is driving climate change?
Simply put, human induced climate change is caused by the expanded use of fossil fuels that is driven by global economic and population growth. Since the 1970s, emissions of CO2 (the main greenhouse gas) have grown by 60%. As we heard yesterday from the International Energy Agency, a sister organisation of the OECD, emissions of CO2 will grow by another 60% by 2030.(1) About three-forth of this increase will occur in developing countries.
This is a very ominous picture. But there is some good news too. It is technically feasible for us to stabilise greenhouse gas concentrations at levels just slightly above today’s levels (450 ppm). We have already, or will soon have, the technologies to do the job.(2)
Moreover, we also have substantial experience with the policies needed to encourage these technologies and energy efficiency improvements.
Barriers and responses
Overcoming this challenge will require a more environmentally friendly behaviour by everybody. But it will also require overcoming the political inertia to take difficult decisions. I can see some answers that I want to share with you.
First in the list of barriers, the perceived conflict with more immediate political priorities. We live in a world pre-occupied with other problems. Terrorism, poverty, economic growth, unemployment, world trade, pensions and health care… all of these are priorities, and often seem more urgent than actions we take now which will affect the climate way into the future. Often people seem to take an “either-or” approach – we can’t tackle climate change now because we’re trying to strengthen the economy, or connect the poor to reliable water supply. But this is very short-sighted strategy. Whatever progress we make on these other priorities, including the internationally agreed Millennium Development Goals, may be literally “washed away” if we do not also address climate change.
What is more, actions to address climate change can go hand in hand with actions to provide adequate water, food and shelter. Recently the World Bank estimated that basic electricity services could be provided to the poor at almost no net increase in greenhouse gas emissions.
The development assistance community can also contribute by integrating into development projects considerations about adaptation to climate change to avoid costly climate damage later. OECD analysis has shown that a significant portion of Official Development Assistance is directed at activities potentially affected by climate risks, such as water supply and sanitation, or energy and transport infrastructure. For example, a drainage infrastructure built in a coastal zone in Bangladesh may be damaged even with a slight change in the sea level. This was underscored by OECD Development Co-operation and Environment Ministers when they met in April this year, and endorsed a Declaration on Integrating Climate Change Adaptation into Development Co-operation.
Second, there are concerns that the cost of mitigating climate change is too high, while the benefits are more difficult to quantify. The distribution of these costs is also of concern to many. As developed countries are the ones that have agreed on binding commitments to reduce or stabilize emissions under the Kyoto protocol, they will be likely to bear the highest cost in the initial period of reductions. Currently, OECD countries account for one sixth of the population, and yet they are responsible for just over half of the worlds energy related CO2 emissions. These countries have historically been the main contributors to the problem, and have the greatest capacity to take action.
But many of them are concerned about the cost to their economies. How do we overcome these concerns? First, we need to ensure that we design policies which are economically efficient and do not result in uneven burdens or windfall profits. OECD work has found that, with the use of more economically efficient environmental policy instruments – such as taxes and tradable pollution rights – the same environmental targets could be reached at 25% less cost. On climate policies, the European Union is gaining a great deal of experience with its greenhouse gas emission trading system, and in particular the need to address windfall profits.(3)
However, the concern about “high cost of actions” is probably misplaced. According to the best estimates, we could stabilise climate change at a level most scientists think is acceptable by 2050 at a cost of slowing down GDP growth by just 0.03-0.1% per year, or delaying economic growth by just one year.(4) Note that these estimates only reflect the expected costs of climate change policies, not the economic benefits that we would see from avoiding the damages of climate change.(5)
On the competitiveness argument and their effect on certain industries, OECD work has shown that carbon or energy taxes may impact on the competitiveness of energy-intensive sectors (such as aluminium, steel, cement), but they are unlikely to negatively impact on the economy as a whole. In some cases, they may lead to improved efficiency of the economy, easing it away from ailing and inefficient industries. And, if governments wish to limit the impacts on affected industries, there are ways to do so without reducing the environmental incentives. Options include phasing in the taxes slowly or recycling tax revenues to help the adjustment process of affected sectors.
The third barrier to overcome is the powerful vested interests in maintaining the status quo in energy production and use. Those that have the most to lose from ambitious policies to tackle climate change often have powerful voices to lobby decision-makers, while those that are likely to suffer the greatest impacts have less political and economic power. We see this imbalance of power both between and within countries. For example, while the coal industry represents only a small percentage of GNP, it often has significant – if not disproportionately large – political influence.
One way to address this is to make winners out of losers. For example, carbon capture and storage – a promising technology for coal-fired power plants – is still costly and yet to be commercialised. If the cost can be lowered significantly through government-industry research and development programmes, it could turn the coal industry from being ‘part of the problem’ to being ‘part of the solution’. At this stage, many businesses are also drawing market power from a “green” image. In a number of cases, they are doing this by signing up to voluntary agreements with governments.(6)
The scale of the climate change problem is like no other we have faced. Every country, sector and business, no matter how small, contributes to the problem and will be impacted by the changing climate.
At the international level, the more countries involved in reducing greenhouse gas emissions, the lower the competitiveness problems will be – thus overcoming one of the main barriers to political action.
As I mentioned, there are some good news related to the tools and consciousness we have gained about this problem. Scientific research is providing clear evidence about the phenomenon while technological advances could help us to design solutions to deal with it. Political and social awareness is playing its role at designing different initiatives to contribute with innovative solutions.
However, we need to do more. Collectively, we need to translate this increased understanding of the science of climate change into actions nationally and in the international arena. Countries took a long time to negotiate the Kyoto Protocol to limit greenhouse gas emissions, and even longer for its entry into force. And the countries that committed to emission reduction targets by 2012 must do more to meet those goals.
And the Kyoto Protocol is but one small step towards the stabilisation of greenhouse gas concentrations in the atmosphere at an acceptable level. We need to move far more quickly, and be far more ambitious, in establishing the actions needed to tackle climate change post-2012.
Democratic institutions must take on the political challenge of implementing climate policies that we already identified. It is not always easy, because this is about short-term costs against long-term gains; it is about changing they way we produce, the way we consume and ultimately, our life-style. OECD stands ready to continue to study best practices and provide evidence-based objective advice on the policies that can be used to efficiently and effectively achieve this overriding objective. Reform minded politicians can count on the OECD to support the implementation beyond the electoral cycles – climate change.
2. For example, electricity used for lighting is a major source of CO2 emissions worldwide – roughly equivalent to 70% of the CO2 emissions from cars. If end-users were to install already existing technologies – such as energy-saving light bulbs – we could save over 16,000 Mt of CO2 emissions between now and 2030.
3. The EU Emission Trading Scheme is currently in a first pilot phase (2005-2007), and will continue at least through the Kyoto Protocol first commitment period (2008-2012). In this pilot phase, all 25 EU member states plus Czech Republic, Hungary, Slovakia, Estonia and Lithuania are participating, and the sectors covered are responsible for about 52% of overall EU CO2 emissions. Under the ETS, each country allocated permits to their participating sectors for carbon emissions based on historical emissions as reported by the industries themselves. In the first year, there were a significant amount of trades – estimated value of US$2.7 billion in total – and by April 2006 the price of a permit had risen to over €30. Then, when the data on emissions levels by country were released, it became clear that many countries had over-allocated permits to industry in the first year, and the actual emissions were lower than expected. As a result, the market for the permits dropped. Since then there have been questions about how to allocate the permits in the next round (in this first round they relied heavily on industry to provide information on historical emissions data, but now governments have their own data from this year), and how many permits should be allocated.
4. This estimate is taken from the draft Summary for Policy Makers of the IPCCC 4th Assessment Report, due out in 2007. This cites studies that estimate that the costs of achieving 550ppmv of CO2 equivalent in the atmosphere, will be about 1-5% loss of GDP (which is equivalent to a reduction in the average annual GDP growth rate of around 0.03-0.1 percentage points). A few studies give higher or negative numbers. The studies find that a multi-gas approach and inclusion of carbon sinks generally reduces costs substantially compared with CO2 abatement only.
5. For example, if we avoid climate change, we will also have the direct economic benefits from avoiding the impacts of increased extreme weather events and the potential flooding of low-lying coastal cities – but these economic benefits of avoided climate change are often much more difficult to calculate than the costs of climate policy action, and so are seldom fully considered in the analyses.
6. For example: The Netherlands Voluntary Agreement on Energy Efficiency, which includes improvement targets and benchmarking for 30 industrial sectors; the Canadian agreement between government and the automobile industry to reduce emissions from vehicles by 5.3 metric tons of CO2 equivalent by 2010; and the U.S. Climate Leaders agreement between companies and the government to develop greenhouse gas inventories, set corporate emission reduction targets, and report emissions annually to the U.S. Environmental Protection Agency.