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What are the priority areas where environmental action is needed today to tackle climate change? How can the costs be shared fairly between the developed and developing world? What part can green taxes, emissions trading and eliminating harmful environmental subsidies play?
Read below the questions and answers from this online debate that took place on Thursday 27 March 2008. Lorents Lorentsen, Helen Mountford and Jan Corfee-Morlot from the OECD’s Environment division, answered questions.
Q. What are the highest priority areas where environmental action is needed today to tackle climate change?
K. Manhas, University of British Columbia, Canada
A. Priority areas are: i) starting early with mitigation policies to stabilize atmospheric concentrations of GHGs at low levels, ii) broad participation by all the big emitting countries in the coming decades, iii) emphasis on market-based instruments internationally and nationally to keep mitigation costs low, and iv) coming up with mechanisms to equitably share the cost of mitigation internationally.
Q. In addition to the market solutions discussed, what non-market actions are most effective in helping reduce carbon emissions?
K. Manhas, University of British Columbia, Canada
A. While the OECD Environmental Outlook shows that a strong emphasis on market instruments is important to keep the cost of policy actions low, these do need to be complemented with non-market measures. Regulations and standards are needed to achieve better energy efficiency in buildings, for example. Even with energy/carbon taxes, if energy bills are borne by tenants, higher energy prices may not be a sufficient incentive for landlords to invest in retrofitting rental properties for energy efficiency or in green buildings. Building codes would be needed. Information tools such as energy efficiency labeling of appliances is also an important tool so that consumers can make informed decisions.
Q. The Province of British Columbia, Canada has recently implemented a carbon tax. How does that compare with the EU's current carbon trading model? Can you compare the pros and cons of green/carbon taxes vs. emission cap & trade systems, and are there any other effective systems or means for limiting carbon emissions?
K. Manhas, University of British Columbia, Canada
A. Green/carbon taxes put a price on emissions and as a result discourages behavior that produces emissions, while also encouraging investment in clean production technologies and consumption patterns. They send a direct market signal to producers and consumers. Absent market failures (i.e. insufficient information about the cost of alternatives, or buildings maintained by landlords while tenants pay the electricity & heating bill) green taxes will encourage changes in behavior that limit emissions at lowest cost. A down-side of taxes as an instrument is that they do not deliver any certainty about the quantity of emission reductions to be achieved (because we do not know how responsive society will be to a given change in price & we do not know the costs of mitigation options with any certainty at any point in time). Therefore if the aim to achieve a given emission target, taxes will require regular adjustments and trial and error assessment.
Emission trading is another type of market instrument that delivers emission reductions at least cost. It is a more complex type of instrument, in that it requires up front target setting and decisions about how to allocate emission permits to participants. But once the system is in place the costs of achieving a given target should be equivalent to those of a tax. An emission trading policy has the advantage over taxes of delivering certainty about the quantity of emission reductions to be achieved (however there is uncertainty about the price of emission reduction). A trading system is more institutionally complex but does provide a means to re-distribute the costs of mitigation, for example, through allocation of more or less stringent mitigation obligations across participants.
Both policy instruments require solid emissions monitoring & reporting systems to identify and follow emission performance across all polluters covered in policy. Both will require design features & institutions designed to enforce the rules and punish bad behavior, i.e. if a polluter does not pay the tax or exceeds its allocated emission cap.
Q. Is the Kyoto Protocol still achievable or relevant today?
K. Manhas, University of British Columbia, Canada
A. The Kyoto Protocol is an important first step in an international collaborative framework to address climate change. Most of the OECD countries are actively pursuing its implementation. In the event of non-compliance, there are international agreed rules to “penalize” non-compliant parties. These rules have not yet been tested as the Kyoto Protocol commitment period runs through 2012.
Q. What do you think governments can do in terms of
(a) reforming corporate legal frameworks (ie. to include environmental externalities to corporate accounting and/or reporting), or
(b) increasing/changing regulatory frameworks
to ensure negative environmental activities/externalities are properly balanced against corporate profit maximization?
K. Manhas, University of British Columbia, Canada
A. The Outlook analysis leads to a strong endorsement of the use of market instruments (e.g. pollution or carbon taxes or green tax reforms, emission trading) as a means of internalizing the environmental harms that are otherwise external to market activities. In this way environmental harm is made to carry a cost for firms and other decision-makers, pollution is no longer invisible but it carries a cost. Market instruments create the conditions where it is in the best interest of companies to take action to limit their costs thus to limit polluting activities as part of their normal profit-making, day to day business. Policies that implement market instruments such as these are typically the most cost-effective way for governments to deliver strong environmental outcomes along with economic growth and development.
Overall, governments will need to rely upon a mix of policies, with market instruments taking an important role, complemented by other policies including targeted regulations as well as public support for research and development in key areas. For example, we know that pricing pollution will not be enough in some areas, such as transport, lighting or buildings. Here we think that regulations will also be part of the policy mix to address market failures.
Q. Are you working on alternative research models, as a Plan B in case the current Plan A proves problematic in the short term? Would the recent request from President Sarkozy to two renowned economists to put together a report on wealth indicators other than the existing GDP ones fall into this category?
France
A : At OECD we collect not only data and indicators on more traditional measures of economic growth, for example GDP, but also to measure progress on environmental and social developments in our member countries. These are essential to a broader understanding of human welfare and to assess the effectiveness of government policies. Together with other organizations, such as the UN, we also work on developing methodologies for environmental accounts to complement economic ones.
OECD is carrying out a global project on measuring the progress of societies, recognising that effectively measuring progress, wealth and well-being requires indices that are as clear and appealing as GDP but more inclusive than GDP--ones that incorporate social and environmental issues. More information available on the OECD World Forum and http://www.beyond-gdp.eu/index.html.
Q. Isn’t global population increase the main cause of environmental stress and are there policies for this?
Roland Clerc, Oise, France
A. It is not population growth per se, but consumption pattern is also an important factor behind pressures on the environment. Today, rich countries with lower population growths consume far more per capita than an average citizen in developing countries with higher population growths. Environmental pressure from households is projected to significantly increase to 2030. Consumption of food and energy is expected to increase with income levels.
Understanding population growth and how populations consume is important to projecting how economies and environmental pressures will develop. In the Environmental Outlook we dedicate an entire chapter to questions about population growth and demographics, and another to examining consumption and production patterns, in order to provide insights in these drivers of economic and environmental projections. However we do not look at population related policies as a means to address environmental problems, as that would go far beyond the remit of environmental policymaking.
Q. What impact do you think rising energy and food prices will have on efforts by developing countries (particularly in Africa) to balance action on the environment with economic growth?
Robert Bisset, UNEP
A. Environmental protection needs to go hand in hand with continued economic growth. The costs and consequences of inaction on environmental problems to human welfare and the economy would be significant – for example in terms of the availability of clean water for drinking, or the impacts of more severe climate events on human settlements.
But OECD countries recognize that they have a responsibility to work together internationally with other countries, in particular less developed countries, to ensure environmental improvements without jeopardizing the important and legitimate efforts of these countries to improve their economies. While rising energy prices, for example, can help to provide the right incentives to use energy efficiently and move towards less carbon-intensive fuel options, international financing and partnerships will be needed to ensure the connection of the estimated 1.6 billion people worldwide without access to electricity in their homes.
Q. Since biofuel production is set to increase - do you think the production should be regulated to ensure that it does not compromise food security and is easily accessible at cheap prices, given that oil prices are also going to continue to rise?
Jaspreet Kindra, UN
A. The impacts of a rapidly increasing use of first generation biofuels on food prices has been of concern in a number of countries in the last year. At the same time, some recent work – including at the OECD – has raised questions about the benefits of biofuels, for example with respect to reducing greenhouse gas emissions, and in terms of the impacts of biofuels production on the environment. Rather than using regulations to ensure that the current biofuels are accessible at cheap prices, we would advise governments instead to focus their support on second generation biofuels, for example produced from agricultural waste, which won’t compete with crops for food and which is expected to have lower negative environmental impacts.
Countries might also consider phasing out or reforming current subsidies to support the production of first generation biofuels.
A very recent OECD “policy brief” on biofuels might be of interest – see: http://www.oecd.org/dataoecd/18/8/39718027.pdf
Q. How do you get the developed world to share technologies such as the second generation biofuel technology based on biomass waste cited in the Outlook with poor countries in Africa and Asia who face the brunt of fuel and food price increases?
Jaspreet Kindra, UN
A. A number of technology partnerships are already underway, either bilaterally or multilaterally, to develop and share technologies that can help to more effectively reduce emissions. More is certainly needed.
At the OECD we are now looking at the crucial question of how to ensure the necessary transfer of clean technologies to developing countries, while also protecting intellectual property rights (thus ensuring the incentives for private companies to continue to innovate). We are also looking at the trade barriers which may hamper transfer of climate-firendly technologies, and how these barriers can be removed. Also this conventionals view about the need for North-South technology transfer is a transitional issue. As rapidly industrializing countries, such as China, India Brazil and S.Africa, work with OECD countries to constrain carbon and deliver clean energy through national policies, these countries are increasingly drivers of innovation and new technologies themselves, opening up new South-South and South-North technology transfer possibilities.
Q. How do you ensure countries implement the right mix of policies to keep emissions down ? Do you think they should be penalised?
Jaspreet Kindra, UN
A. In the Outlook we describe the range of policies and approaches that might be used in a cost-effective policy mix to address greenhouse gas emissions. To keep the costs of action low, we suggest that the policy mix should have a strong ermphasis on the use of market-based approaches – such as carbon taxes or cap and trade systems. We are already seeing these in use in many OECD countries, but they need to be scaled-up, in particular to cover more countries and more sectors. But market based approaches will not be sufficient. Regulations, such as building codes, and government support to research and development are also needed to ensure effective and least cost emissions reductions. For each country, the exact mix of instruments used might vary, depending on national circumstances.
There is already in place today a system for “penalizing” countries that have committed to specific emission targets under the UNFCCC Kyoto Protocol and that do not meet these targets – this is the Kyoto Protocol’s compliance mechanism. Countries are discussing the next phase of international commitments and actions to address climate change post-2012 – in this process establishing rigorous and enforceable compliance mechanisms are essential, as the targets and commitments tighten, and as we expand carbon markets for example, to achieve GHG mitigation goals at least cost.
Q. What does the panel think of the balance of action between countries and hemispheres?
Mike Smith, New Zealand
A. One of the clear messages emerging from this Outlook is that the major environmental problems we face in the coming decades cannot be solved by industrialized countries alone. Co-operation between countries, in particular between OECD countries and the fast emerging economies (e.g. China, India, Brazil, Russia, Indonesia, Sth Africa*) will be essential. In part this is because of the increasing economic weight of these emerging economies, and in part because of their increasing pressures on the global environment. Both climate change and biodiversity loss are global challenges, and require global solutions.
However, following the principle of “common but differentiated responsibilities”, OECD countries recognize that they have a responsibility to take a lead role in tackling these challenges, and provide support to help developing countries to take action – for example through technology partnerships or transfer, and through financial mechanisms. While what needs to be done to tackle these challenges is fairly clear, finding ways to share the burden of the costs of action will be necessary.
* Note: other countries of relevance include South Korea & Mexico, both of whom are OECD Member countries, thus not mentioned here.
Q. Despite many efforts to promote sustainable development, the global results haven’t achieved what is needed. Do you think that a society founded on the principle of endless economic growth is possible and desirable in a world with finite resources, given a context of a growing global population?
France
A. Continued economic growth is essential, in particular to reduce poverty in developing countries, and with the right policies in place can be compatible with and even supportive of increased environmental quality. The two can go hand in hand.
However, unless new and ambitious policies are introduced, we do expect that the pressures on the environment to 2030 will be significant with significant repercussions for the health of the economy. According to the new OECD Environmental Outlook, the economy will double, population will increase by almost one-third, and as a result greenhouse gas emissions can be expected to increase by 37% compared to 2005 levels,with global temperatures rising to roughly 2 C above pre-industrial levels already by 2050. And there will be an additional one billion people living in areas subject to severe water stress, i.e. with a potential to face water shortages. The implications for natural ecosystems, which support economic development and life, and for human health of increasing pollution and toxic chemicals in the environment will be significant.
So the challenge is great. But the consequences and the costs of inaction are even greater. The Outlook shows that if we work together internationally to put in place ambitious and efficient policies now, tackling the key environmental challenges can be affordable and achievable. Can this be achieved in reality? Considerable political will, as well as the support and engagement of business and other stakeholders, will be absolutely essential. There are indications of this emerging, but whether it will be sufficient and in a timely way is still to be determined. Thanks to policy action in the past, we have already seen significant improvements in some areas -- for example, in energy and water efficiency improvements, in recycling, in significantly reducing some local air pollutants. So there are positive examples on which we can build. But the challenges that remain are some of the most difficult ones, in particular tackling climate change and biodiversity loss, because of the global nature of the problems and the need for global co-operation in the response to these problems.
Background reading
OECD Environmental Outlook to 2030
Cost of tackling climate change should be shared more fairly
Climate change could triple population at risk from coastal flooding
Cities and climate change
OECD work on climate change
See previous Ask the economists
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