Towards a Green Economy: Policies to Tackle Climate Change

Remarks by Angel Gurría, OECD Secretary-General, delivered at the National Forum on Energy, Environment and Climate Change Policy

Mexico City, 24 August, 2009


Dear Minister, Ladies and Gentlemen:

It is a great pleasure for me to be in Mexico City to participate in this National Forum on Energy, Environment and Climate Change Policy. It is also very encouraging to notice that environmental protection and climate change are challenges that Mexico and the United States are increasingly addressing together. In a highly interdependent world, progress is a shared venture.

Tackling climate change is a top priority for the OECD. We have been working to provide a solid economic footing for its possible solutions for more than 20 years. And we are now helping countries restart their economies based on “green-growth”.

Today, I would like to share with you some of our perspectives on climate change, the policies to tackle this global challenge, their implications for competitiveness and the importance of inter-agency coordination for effective and coherent policy action.

1. Climate change: a road to disaster?

Climate change is the defining issue of our era. I cannot think of a greater threat to the well being and security of our societies than the global peril of climate change. Scientists have been raising the tone of their voice throughout the last years to warn us about its possible consequences, passing from “serious concerns” to a “strong warning” to an “alarming scenario”, in a very short time.

No wonder; global greenhouse gas emissions have roughly doubled since the early 1970s (i).  Consequently, the rate of global warming has also accelerated. Without new policy action, the OECD projects that world greenhouse gas emissions would increase by about 70% by 2050 (ii), and continue to rise thereafter. This would lead to a rise in world temperatures of 4 to 6 degrees centigrade by 2100.

Just to have an idea of what this can mean for humanity, let me recall some of the evidence presented in a recent book by Tim Flannery (iii), an Australian scientist and Chairman of the Copenhagen Climate Council, which reminds us that a rise in global temperatures of only 1 degree centigrade throughout the past Century has meant changes in rainfall in large areas of the world, severe drying out of river systems and an increase of incidents of extreme weather, like heat waves, hurricanes and bush fires. That’s only a 1 degree difference; imagine the possible consequences if we are talking of 4 or 5 degrees.

What can this imply for Mexico?

As many of you have personally experienced, the country has suffered increasingly strong hurricanes, severe floods and droughts in recent years. This is likely to continue. Rising temperatures and changes in rain patterns will worsen water shortages, leading to declining agricultural yields and to severe water pressures in the big cities. Rising of sea levels and storm surge will also threaten the lives of millions of Mexicans that live in its nearly 10,000 kilometres of coasts.

Are we heading straight to disaster at an accelerating speed? Most scientists think we are. So we must act now. We need to start producing, transporting, consuming, regulating, governing, even thinking, differently; starting today. Climate change means cultural change. And, as a matter of fact, the current financial and economic crisis is giving us a unique opportunity to make that change.

2. A green growth: the only way

The economic crisis is no excuse to delay action on climate change. On the contrary, it is a great opportunity to “reset” our economies on the base of a new “green growth”. Ambitious policies to move toward a low-carbon economy should be an essential element in the strategy to recover from the crisis.

During our recent Meeting of the OECD Council at Ministerial Level in June 2009, Ministers from thirty-four countries asked the OECD to develop a Green Growth Strategy. The idea is to help countries to put in place the right incentives and set the right frameworks to encourage investments for green recovery to set us on a low-carbon growth pathway.

Government policies have a key role to play.

In the short-term, there is a need to look for win-win opportunities for both economic recovery and the environment. Many countries are directly investing through their stimulus packages in cleaner, low-carbon transport and energy systems, “smart’ electricity grids, energy efficiency in buildings, as well as in green research and development (R&D). At the same time, it is important to ensure that economic stimulus packages do not lock in polluting energy technologies and dirty modes of production and consumption.

In the long-term, countries need structural reforms to achieve “green growth”. Green tax reforms and price-based approaches ─ such as carbon taxes and auctioned permits in cap-and-trade schemes ─ are one element of necessary policy reforms. Taxes and auctioned permits can also help to bring in revenues to invest in energy efficiency, to offset reductions in other taxes (such as on employment), or to contribute to fiscal consolidation. A number of OECD countries (e.g. Czech Republic, Denmark, Finland, Sweden and the UK) are already moving towards “green” taxation in the context of their economic recovery plans.

Green structural reforms may threaten powerful economic interests, and they are often difficult to implement. But these reforms are possible when supported by objective scientific and economic analysis and strong political will. The State of California, in the US, is a clear example of this. The implementation of the Global Warming Solutions Act of 2006 has been path-breaking and it is estimated that this initiative could lead to around 123,000 jobs by 2020 and turn the state into a hub of clean energy technology development (iv). 

Another key element in policy reforms for green growth is to remove environmentally harmful subsidies, especially for fossil fuel production and consumption. This will save money for governments and taxpayers, shift the economy away from carbon-intensive activities and increase overall economic efficiency.

In this context, the policy in Mexico of keeping gasoline prices constant in real terms, and subsidies on liquefied natural gas and electricity for household use should be reviewed. These are inefficient and also unfair policies, as there is evidence that the subsidy mainly benefits well-off social groups.

In the particular case of Mexico, policies that favour low-carbon options and penalise fossil fuels could be an especially attractive opportunity. Declining oil production will reduce the contributions made by PEMEX to the budget over the next two decades, putting pressure on social spending and infrastructure development. Shifting policies today to favour clean energy investment offers an opportunity to reduce the high budget dependency on oil revenues and increase the competitiveness of clean energy alternatives.

This takes me to the next issue I want to address: the implications of climate change solutions on the competitiveness of economies.

3. The issue of competitiveness

Given the economic crisis, countries will be even more aware of the costs of any policy action, providing a strong argument for a least-cost approach to tackling climate change. Achieving this will require participation by as many countries and sectors as possible in the mitigation effort. Reconciling competitiveness and the environment has always been an important concern, and will be essential going forward to ensure broad-based participation.

Some countries fear that green taxes and cap-and-trade schemes would put industry at a disadvantage with foreign competitors who may not be subject to similar costs. This is one of the key obstacles to the introduction of climate change policies in many countries. However, OECD analysis has found that the effects of climate policies on competitiveness are often quite small, particularly if a sufficiently large group of countries take action.

Negative impacts on specific firms, sectors or regions, in fact, often tend to be compensated by positive effects elsewhere in the economy. Our analysis shows that, if only the EU takes action, 12% of the emission reductions in the EU would be offset by emission increases in other countries. However, once all industrialised countries take action, this leakage rate would be reduced to below 2%.

It is important to underline here that border-tax adjustments (BTAs), which may be politically appealing, can provide benefits in terms of reducing output losses in energy-intensive sectors of importing countries, only if a very small group of countries participates in mitigation action. OECD analysis suggests that BTAs are also economically costly both for countries applying the BTA, and for trading partner countries (due to reduced trade). Thus they are very much near the bottom of the list of second-best approaches. On the other hand, if carefully designed, international sector-wide agreements could be a better 2nd-best option for levelling the playing field and helping to build up broader participation in action. However the first best option is still action by all large emitting nations and in all major emitting sectors.

We must also look at this issue of competitiveness through a positive lens.

Tackling climate change brings new opportunities that can enhance competitiveness of some firms or sectors. Ambitious environmental policies can act as a catalyst for eco-innovation, for example, by creating new markets for low-carbon technologies.

Some countries have acquired a competitive advantage in the renewable energy sector by strategically incentivising development of “green” sectors and developing a “first-mover advantage”, to become leaders in the new cleaner technologies and processes. Denmark, for example, is a leader and major exporter of wind power turbines.

Cleaning up our economies can be a good business. According to a new report by the United Nations Environment Programme (UNEP), global investments on sustainable energy generation reached $155 billion in 2008 (v). These annual energy investments should be reaching $500 billion by 2020, if we want to stop the growing trend in carbon emissions by then, and subsequently reverse the trend (vi). This investment can translate into new opportunities for our companies, for our research centres, for our workers.

4. A policy framework: the right incentives

But these new opportunities will only be realised if governments provide a clear and consistent long-term policy framework with the right incentives. What should these incentives look like?

A first priority is to put a price on greenhouse gas emissions, through carbon taxes or emissions trading, to discourage the behaviour that generates emissions and encourage investment in low-carbon options. This also provides powerful incentives for eco-innovation: it makes low-carbon technologies more cost-competitive and lets the market determine which technologies work better.

However, carbon pricing alone will not be enough. We need a mix of policies to support sufficient investment in green R&D and to help new technologies compete on a level playing field, as well as targeted standards (e.g. building codes, electric appliance standards) and communication policies.

Governments should stop trying to pick winners by subsidising specific technologies. It is not economically efficient. Recent OECD analysis puts the cost of current support policies to first generation biofuels in the EU, the US and Canada up to $1000 per ton of CO2 saved; a very expensive policy to reduce greenhouse gas emissions, especially if we consider that the recent prices of CO2 in the EU Emissions Trading Scheme are in the range of below 30 dollars per ton. Subsidies to specific technologies also risk locking in technologies that may be less appropriate tomorrow.

Major new technology breakthroughs will still be needed to bring down the costs of climate action over the long-term. While businesses are the engine of innovation, governments will also have to share the risk of developing new technologies by investing in technology research, development and demonstration projects; especially in this difficult time for entrepreneurs.

5. Conclusion

So, in conclusion, we need to shift our economies towards a low-carbon future, but the transition will need to be managed carefully to address social and competitiveness impacts, and to take advantage of the new business opportunities. This is an economy-wide challenge that requires all-of-government responses, and this means: policy coordination and coherence.

Apart from the Ministry of the Environment, the Ministry of Finance can play a key role in designing and reforming taxes and price instruments, key tools to promote green growth. Sectoral policies such as energy, transport, agriculture, technology, infrastructure and urban planning are crucial for both mitigating greenhouse gas emissions and for adaptation to climate change. And to implement policy changes in all these areas, it is important to address social and employment effects to smooth the transition to a low-carbon society.

The capacity of Mexico to fight climate change and become a greener economy will highly depend on its government’s capacity to build a national collective response that involves all its government bodies; but also its corporations and schools. But it will also depend on its capacity to address this crucial challenge in partnership with the American, Canadian, and other governments, firms and academic institutions.

At OECD we know that “greening” Mexico is one of the key priorities for the Government of President Calderon. I’d like to congratulate Mexico for being the first non-Annex-I country to announce a 2050 target of a 50% emission reduction from 2000 levels, and for working on near-term commitments to implement this goal. We are convinced that the conversion of our economies into low carbon economies can be an engine of growth, innovation and employment in itself. So we are looking forward to intensifying our work, to help you design a strategy to tackle climate change and to build the strong and long-term green growth that all Mexicans deserve.

Thank you very much.

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(i) OECD “Climate Change Mitigation: What Do We Do?”,OECD 2008, p.6

(ii) Idem. p.6

(iii) Tim Flannery, “The Weather Makers: The History and Future Impact of Climate Change”, Grove Atlantic, 2006.

(iv) Natural Resources Defense Council, “Climate Facts: AB32 and You”, April 2009.

(v) UNEP, “Global Trends in Sustainable Energy Investment 2009”, p.10. See:
(vi) Idem. p.5