A transition to a low-carbon economy is achievable, but will require a concerted, more consistent effort across a range of policy areas, from tradeable permits to stringent norms.
The climate is changing–not for the better, but for good. Governments want to limit the global temperature increase to less than 2⁰C, which implies that greenhouse gases (GHG) pumped into the atmosphere by human activity need to decline to around zero or below on a net basis towards the end of this century. GHG emissions in 2050 consistent with this target would be around 40% to 70% lower globally than in 2010.
The world’s largest emitters have signalled their willingness to undertake strong collective action. The joint declaration between the US and China signed in Beijing in November 2014 has injected political momentum into the longer range effort to transform to low-emission-resilient economies. The US will cut its emissions from 2005 levels by up to 28% by 2025, while China said its emissions would peak around 2030. The EU climate and energy package–a 40% cut in emissions below 1990 levels by 2030–is a further demonstration of climate leadership. The climate summit in Paris in November/December of this year aims to build on this momentum to deliver a new agreement on climate action beyond 2020.
But will that action be enough to turn the carbon tide? Globally, we will soon exhaust the cumulative CO2 emissions budget consistent with a 2⁰C target. Investment in fossil fuel exploration, production and consumption beyond this will increase climate risks, unless carbon capture and storage can be scaled up rapidly or governments and companies are prepared to risk prematurely writing off large amounts of invested capital. So far, there is not much sign of this happening, as the fracking fashion shows, though looking on the bright side, the Bank of England’s recent move to examine financial risks linked to fossil fuels underscores the importance of addressing the climate risks built into our economies.
Effective climate action means that government policies should move in the same direction. Yet around US$55-90 billion per year is devoted to supporting fossil fuel consumption and production in OECD countries, which blatantly contradicts climate action. In developing and emerging economies, an estimated US$548 billion is spent to support fossil fuel consumers. At the same time, our research shows how costly some emissions reduction policies have become, but without making a real dent in emissions. Exemptions and special deals have sapped even the most economically sensible measures like emission trading schemes and carbon taxes of their usefulness, while adding complexity and burdensome compliance costs instead. This mesh of carbon prices needs to be straightened out to be more effective. But it needs more than prices: clear, strong and adaptable policies are needed too.
By taking effective policy action now, governments collectively could avoid annual GDP losses of between 1% and 3.3% by 2060. If they don’t, these damages could mount more rapidly beyond 2060, all the while increasing the risk of passing tipping points. Over the next 20 years, more than USD 50 trillion in cumulative capital expenditure on energy supply and energy efficiency will be needed to meet the 2⁰C goal, according to the International Energy Agency (IEA). Public finance, however, faces significant constraints, so mobilising private finance will be critical. Institutional investors held some US$93 trillion in assets in OECD countries in 2013, of which only a tiny fraction is invested in low-carbon infrastructure. This is not enough. Increasing institutional investment will require investment-grade policies with clear price signals and policy coherence.
Building an effective and coherent policy response to climate change will require leaders to look beyond traditional climate policy. The interaction of policy and regulatory signals across a much broader range of areas will determine how fast we can make the low-carbon transition and how much it will cost. The OECD is working with sister bodies–the IEA, the International Transport Forum and the OECD Nuclear Energy Agency–to identify the main policy misalignments and provide guidance for governments to help them untangle the regulatory wiring that has grown up around the fossil economy. This requires looking at the relationship between sectors like water, energy and food production, which is a nexus spanning several sustainable development goals (SDGs). In its own reports, the OECD has also started mainstreaming climate issues into its renowned economic surveys, and expects to release an overall assessment of national climate policies in OECD and other countries before the UN climate change summit (COP 21) summit in Paris in November-December.
Commitments by central governments on emissions reductions and financing must be translated into cost-effective policies and actions. Given the role of cities as crucibles of wealth creation, population growth and resource use, regional and municipal governments need to be fully involved, as does the dynamism of private sector technological, project management and investment expertise. Public and private investment in research and development will not only open the way for the new technologies needed for low-carbon activities, but will also generate new economic opportunities.
The required transformation in our economies is achievable, but it won’t happen without a deliberate and concerted effort. Nor will it happen if we see climate action as an economic constraint. OECD work on productivity and environmental regulation shows that environmentally stringent policies, which have mushroomed in recent years, are an incentive for greater innovation and efficiency, from which leading-edge companies benefit.
Policies rather than technologies are now holding back progress. The OECD’s message is simple: pricing carbon is essential, but it is not enough. Governments need to go further and address the institutional, contractual and regulatory lock-in that favours old established players and their polluting technologies, for it is those policies that are destroying our planet. If they can do that, the low-carbon transition will be achievable.
For more on the UN climate summit–21st Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC, COP21)–see www.cop21.gouv.fr/en
OECD-IEA-ITF-NEA (2015, forthcoming) Aligning Policies for the Transition to a Low-Carbon Economy