Keynote Speech by Angel Gurría, OECD Secretary-General
Oslo, Norway, 6 March 2008
Ministers, distinguished guests, ladies and gentlemen;
I am honoured to be with you today. It is a timely occasion as we have just released our 2008 OECD Environmental Outlook and can therefore share some of the findings with you. Although our analysis addressed all environmental challenges, such as water, biodiversity and health impacts, I will focus on climate change.
Climate change involves all three dimensions of sustainable development: the economic, the environmental and the social dimension. Addressing this challenge demands a long term perspective on how our actions today will affect the lives of our children, and it also demands a dialogue with all stakeholders involved in order to reach viable solutions.
Climate change has been rising on the political agenda. Knowledge and awareness about some of the most alarming trends have been enhanced by several assessments released recently, including those of the OECD. The 2008 OECD Environmental Outlook says, for example, that if we continue to do business as usual, global greenhouse gas emissions are expected to grow by over 50% by 2050 which will cause world temperatures to rise between 1.7º and 2.4º Celsius above pre-industrial levels in 2050, and more than 4-6 degrees Celsius over the very long-term. We will see more heat waves, droughts, storms and floods, severely damaging key infrastructure and crops, and threatening the lives of millions.
But having the information is not enough. We need to act now and the OECD Outlook points out how to do it. There are three main messages that emerge from our analysis.
Don’t get me wrong: This does not mean that action will be cheap or that it will be easy. It will require significant changes in how we consume and how we produce. We will need structural change to move our economies towards a low-carbon environment. This will require real political courage and perseverance.
In its most ambitious scenario, the 2008 OECD Environmental Outlook showed that stabilising greenhouse gases in the atmosphere at about 450 ppm of CO2-equivalent could cost about 0.5% of GDP in 2030 and rise to 2.5% in 2050. This is not cheap, but it is affordable in light of the expected economic growth over this period and it is certainly less expensive than the cost of inaction. Adopting this option would require putting a global price on greenhouse gas emissions which would, for example, translate into an additional one-half a cent of a US dollar per litre of gasoline in 2010, increasing gradually to 12 cents in 2030 and to about 37 cents in 2050.
This scenario is based on the assumption that all countries participate and that they apply the least-cost policies available today. It involves a reduction of 39% of GHG in 2050 compared to 2000.
The most difficult task now is to translate these findings into policy action. The real issue is not how much it costs to fight climate change but rather who is going to pay for it. The distributional aspects are key to finding a workable solution.
Developing countries will suffer most from the effects of climate change. Their economies are more dependent on natural resources, such as agriculture, forestry and fisheries, and they often lack the infrastructure, the financing and capacity to adapt to a changing climate.
Any successful policy has to include a substantial reduction not only of existing GHG emissions but also of future emissions. Given that the reduction of emissions in faster-growing emerging economies is an indispensable element of such a policy and given that the challenges of climate change affect developing countries more, we need to focus on how to distribute the cost and find ways of developing a fair burden-sharing. The simulations show that the use of certain instruments, such as a global tax would generate almost five times bigger GDP losses in many developing countries than in the advanced economies. Thus, if the burden is not shared, developing countries will not be in a position to participate and the scheme will fail.
One option would be to use a global cap-and-trade approach. Under another 450 ppm scenario with cap-and-trade, we found that the total costs of such a global scheme would be roughly the same as under the global tax scenario, but rules for allocation of emission permits could be designed to better share the costs. Under this simulation, the direct investment costs for emerging economies would be less than half compared to the globally harmonised tax case, as industrialised OECD countries would buy emission permits from the BRIC countries. This constitutes a good example how to share the burden.
Moving to the national perspective, our analysis highlights the important role for economic instruments in the broader mix of policies to reduce greenhouse gas emissions. Instruments such as emission taxes and charges, tradeable permits, and the removal of environmentally-harmful subsidies keep the cost of action low and help to put an appropriate, high enough price on emissions. But we will also need regulations and standards (e.g. energy efficiency standards for vehicles and buildings), sectoral approaches and voluntary agreements, support to basic research and development, and information-based instruments, such as energy efficiency labels. Technological breakthroughs have also a key role to play.
A major obstacle to the use of market based approaches – in particular carbon taxes and emissions trading systems -- is a fear of the potential impact on industrial competitiveness. Many countries worry that their companies would not be able to compete internationally if they face additional taxes that are not implemented across the world.
Our work suggests that the impacts of these taxes on the competitiveness of affected industries may often be quite small. The real challenge, however, is to agree on a globally harmonised policy so that there can be a level playing field. Thus, the problems, the concerns, and the excuses disappear.
These concerns have resulted in countries focusing on policies to subsidise the “good” solutions, rather than on putting a price on “bad” behaviour. This is an inefficient choice. It increases the costs of reducing greenhouse gas emissions. And it risks locking in technologies that may soon become outdated. Pricing bad behaviour, on the other hand, provides a consistent incentive for efficiency and innovation. Tax the bad, don’t subsidise the good!
There are ways to address some of the concerns about competitiveness without reducing the environmental benefits of the policy. For example, the revenues from carbon taxes could be used to reduce other taxes, limiting the overall tax burden on the economy. Or revenues could be recycled back to affected industries temporally, but not linked to their emissions. Policy measures to ease the transition for workers and industries towards a low-carbon economy may also be necessary in some cases.
Another benefit of pricing emissions is the impact on innovation. Fuel taxes and motor vehicle taxes, for example, encourage innovation and lead companies to develop cleaner and more energy-efficient cars. New technological solutions are already developing. Hybrid vehicles or Carbon Capture and Storage could lead to significant reductions in greenhouse gases, and they are likely to become increasingly cost-competitive over time. A high enough price on greenhouse gas emissions would provide an incentive to speed up development and deployment of these technologies.
At the OECD we stand ready to continue our support to policy makers in identifying, developing, and implementing effective and least-cost policies to tackle climate change. We will be holding two Ministerial level meetings this year which will address climate change – the first will be a Meeting of Environment Ministers on 28-29 April, the second the OECD’s Ministerial Council Meeting on 4-5 June. At both events, Ministers from the major emerging economies will sit at the same table with their OECD counterparts.
Only through such dialogue will we be able to move the global agenda on climate change forward, towards an economically, environmentally and socially sustainable development.