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Keynote speech by Angel Gurría, OECD Secretary-General at the CIGI'07 conference, organised by the Centre for International Governance Innovation
Waterloo, Ontario (Canada)
27 October 2007
I am very pleased to be here today to address one of the greatest challenges facing mankind – moving energy use onto a sustainable path, as a contribution to global efforts to address climate change. Energy consumption, and in particular the burning of fossil fuels, is the main source of human-induced greenhouse gas emissions. But energy is also a fuel for economic growth, particularly in the fast developing economies of the world. The challenge is to maintain economic growth, while reducing the carbon-content of energy and increasing the efficiency of its use.
The science of climate change is clear
Climate change is already happening, and concerted action is needed now to prevent its worst impacts. The Intergovernmental Panel on Climate Change warns that failure to act to reduce greenhouse gas emissions now will lead to costly risks to society, the economy and the earth. These risks include shortages of water and extensive drought, more extreme weather events, rising sea levels and storm surges, lower yields from agriculture in already vulnerable areas, the loss of many animal and plant species, and increased health risks in many regions.
Poorer countries are more vulnerable to the effects of climate change, and are likely to suffer disproportionately. But all countries will be affected. This summer, the coverage of the Arctic sea ice reached a new record low, opening the Northwest Passage for the first time. This last year saw yet more droughts, heat waves and forest fires in North America and in Europe. Parts of Australia are suffering their sixth year of drought. The European Alps suffered from record low snow fall in the prime holiday week last Christmas, with a resulting impact on local economies.
Collective action is needed
The consequences of failure to take action are evident. It is no exaggeration to say that climate change poses serious challenges, not just for the environment, but for peace and security in the 21st century. This was clearly recognised recently when the IPCC and Al Gore were awarded the Nobel Peace Prize for their work on climate change. The global community must work together to address this threat to our planet. The post-Kyoto architecture will need to include ambitious emissions reductions by all the major emitters.
At the OECD and the IEA, we are working with our member countries and with the key emerging players in the world economy – in particular China, India, Brazil and Russia – to identify specific policies and mechanisms that can help us in our response t o climate change. Cutting emissions and beginning to stabilise the concentration of greenhouse gases in the atmosphere will require major adjustments not only in the mix of energy and the technologies we use to produce this energy, but in buildings and transportation systems, product design, land use, and the way we price basic commodities such as water and energy. This is a lifestyle issue for some parts of the world, while a development one for others.
The necessary policies are available and well known
The policies to move towards low-greenhouse gas emitting economies are known. Taxes, including carbon taxes, tradable emissions permits, incentives for climate-friendly innovation, standards and regulations – all of these instruments can help to address climate change. But an effective economic strategy to deal with climate change will not only identify the best tools. It will also link the various instruments in a coherent framework. This will help identify trade-offs between the different instruments and enable the design of country-specific policy packages with sufficient flexibility to meet individual needs while still achieving the overall objective of ambitious emission reductions. Our studies show that environmentally-related taxes or cap and trade systems are efficient policy instruments when markets work well. Following the entry into force of the Kyoto Protocol in 2005, cap and trade systems for greenhouse gas emissions are on the increase in many regions. The European Emissions Trading System (or ETS) is the largest; other initiatives include proposed schemes in New Zealand and Australia, and the Regional Greenhouse Gas Initiative (RGGI) of the North-Eastern States of the US.
Increased international co-operation is clearly necessary. Expansion and linking existing market-based incentives – such as the Clean Development Mechanism – can help provide the financing to encourage low-carbon growth in the developing world.
Concerns about competitiveness impacts of climate policies can be addressed
Overall, the global carbon price must be set at a level that is high enough to help shift investment and economic activity away from carbon-intensive production and consumption and create incentives for the development and use of new, clean energy technologies and new forms of energy efficiency. Such a price will also provide an incentive for the rapid development and use of carbon capture and storage technologies.
Inevitably, this raises issues of competitiveness for energy-intensive industries. So far, most countries that have implemented taxes or tradable permits schemes to reduce greenhouse gas emissions have generally provided large reductions or exemptions to the most energy-intensive sectors, undermining the effectiveness and economic efficiency of the policy instruments.
Clearly, the more widely such carbon pricing is applied across countries, the more level the playing field for business. Even with a more limited number of countries participating, diminished competitiveness is not inevitable. The best response is to provide incentives for companies to move to cleaner technologies, while simultaneously taking transitional measures to help affected individuals or sectors.
Tax the bad, don’t subsidise the good
Because of concerns about industrial competitiveness, a number of countries have focussed their climate change policies on subsidising the “good” solutions, rather than on taxing the “bad”. This is the wrong choice. There is a role for government support for basic R&D and to overcome market barriers. But the costs of achieving a given level of GHG emissions are likely to increase significantly if policy focuses primarily on subsidising the “good”, rather than taxing the “bad”. Subsidising good behaviour also risks locking in technologies that may later be considered inefficient, as what is considered “good” changes regularly. Taxing bad behaviour, on the other hand, provides a consistent incentive for increased efficiency and innovation.
In a number of OECD countries, however, we have recently seen new policies aimed at increasing the use of biofuels. Tax subsidies alone to support biofuels production amount to USD 15 billion, according to research presented to the OECD. Our analysis suggests, however, that current biofuels production is generally not economically viable in OECD countries without significant subsidies, and the environmental benefits are uncertain and may be much smaller than anticipated.
Climate change policies are affordable
Ambitious policies to tackle climate change should lead to a structural shift in the economy – away from carbon-intensive activities. So the question that remains is: how can this transition be managed in an economically efficient and socially responsible manner?
We should not exaggerate the cost of change. Action is affordable. At the OECD, we estimate that ambitious moves to address climate change – for example, to move towards a pathway to stabilise greenhouse gas emissions in the atmosphere at about 450 ppm -- would reduce GDP globally by only about one-tenth of a percentage point per annum from now to 2030, providing that efficient policies are adopted. The cost of not acting would be much higher. The Stern Review, for example, estimates that the costs of climate change could amount to a loss of 5-20% of GDP to the world economy if we fail to act in a timely and ambitious way now. So the benefits of early action far outweigh the costs.
Innovation is the key to improving the prospects
As part of its detailed action plan for a low-carbon world, to be concluded in time for the G8 leaders’ summit in Japan next year, the IEA published an important study, “Energy Technology Perspectives: Scenarios and Strategies to 2050”. It showed how advances in energy technologies and improved energy efficiency can achieve major reductions in greenhouse gas emissions by 2050. The report focused on key technologies in electric power generation, transport, buildings, appliances, and industry. It concluded that innovation, combined with the right incentives, will be crucial in improving the prospects of success.
With some relatively optimistic development across a range of existing low-carbon energy technologies, the report found that emissions in 2050 could be just 6% higher than today. Under an even more optimistic scenario (what the IEA called its “TECH Plus scenario”), which assumes greater cost reductions and technological improvements for renewables, nuclear, hydrogen and fuel cells, emissions in 2050 could be 16% lower than today. But even this is not enough. A number of countries – including Canada, Japan, and the European Community – support reductions in global emissions of at least 50% by 2050 to curb climate change and avoid its worst impacts.
How do we achieve these emission reductions? A price on greenhouse gas emissions is one of the key incentives for further development towards low cost and carbon-neutral energy sources, and for increasing efficiency of energy production and use. In the IEA technology scenarios I have just described, the marginal cost of reducing emissions in 2050 would be about USD 25/tCO2 (for illustration, this would be equivalent to adding about USD 0.07/ litre or 0.28/gallon to the cost of gasoline). A higher price signal would be needed to achieve more ambitious climate stabilisation goals. But new work by the OECD for our 2008 Environmental Outlook shows that the costs of even a much more ambitious climate goal could still be affordable , provided the right policies and an optimised emissions reduction path are adopted.--.
So a global carbon price is essential to achieve the necessary emission reductions and provide incentives for innovation. But other policies are also needed to help overcome market and information failures, to ensure a rapid move to a low-carbon economy. These include regulations and information-based policies. For example, tighter fuel efficiency standards for vehicles; tighter energy efficiency standards for a wide range of electrical appliances; stricter building codes and the adoption of mandatory efficient lighting systems, to name just a few.
Let me mention two other issues that need to be considered in bringing new energy technologies to the market. The first concerns market development. As the current energy system, based on fossil fuels, is heavily entrenched and new technologies are still risky and costly, governments may need to engage in partnerships with the private sector to demonstrate the feasibility of new technologies. Public-private partnerships help share costs and risks, and encourage knowledge sharing and joint research. This will help ensure that companies can benefit from the business opportunities offered by green technologies. The second issue is basic research. It is crucial to realise that only 4% of public R&D budgets are currently devoted to energy R&D. While the private sector obviously plays an important role in energy innovation, a question can be raised as to whether sufficient basic research is undertaken to address the major energy challenges of the future. Both of these issues also raise the question of how to address the transfer of clean technologies and the protection of intellectual property rights.
We expect to address these two questions further in the context of the OECD Innovation Strategy. We are building this Strategy as a set of mutually reinforcing policy analyses and recommendations to help governments develop more coherent and effective policies towards innovation. It will include ways in which innovation can help address climate issues
Conclusion
A consensus is now clear regarding the urgency to take action to tackle climate change. The science is no longer in doubt. This year’s Nobel Prize Awards were just another, albeit very strong, signal.
The “how” and “who” of international action is, however, not yet established. Indeed, widely differing strategies are being promoted! A wide range of policy options is available but political commitment is needed to implement them. Most importantly, the question of who pays for what will need to be addressed.
At the OECD, we have been working on the economics of climate change for about two decades now. We have accumulated a wealth of expertise and best practices based on our member countries’ experiences. I believe that we have much to contribute to moving the debate forward and bringing the post-Kyoto architecture onto a solid economic and financial footing to keep the costs of action low and therefore acceptable. We are working closely together with both Finance and Environment Ministries to identify least-cost and equitable approaches to addressing global climate change. I look forward to working together with Canada, and with you, on this important challenge.
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