Environment Directorate

Why should Finance Ministers worry about climate change?


Remarks by Angel Gurría, OECD Secretary-General, at a high-level meeting of Ministers of Finance in Poland

Warsaw, 8 December 2008

Good morning.

The central question before us is: Why should Finance Ministers worry about climate change? The question seems all the more relevant as we are facing an unprecedented global financial and economic crisis that is requiring a lot of attention and resources.

Let me give you four good reasons to worry:

One - Even a deep and prolonged recession will not help in facing the GHG emission problem – it is likely to slow world emissions growth temporarily, yet we need large and lasting emission cuts, reducing them to around one-fourth of current levels over the longer-term to achieve climate stabilisation.

Two – Should some of the climate risks materialize, the economic costs of climate change would be much higher than those from the current financial crisis.

Three - Least-cost action would be expected to start small, thereby entailing low initial costs.

And four - Government efforts to address the financial crisis can also present opportunities to encourage a lower-carbon recovery, eventually leading to more climate-friendly growth paths.

The consequences of not acting would be serious. In the absence of new policy, the OECD projects world greenhouse gas (GHG) emissions to roughly double by 2050 and continue to rise thereafter. This would result in an increase in world temperatures by 4°C, and possibly by 6°C, by 2100. The consequences of such a scenario include destructive sea level rise and storm surges, more frequent and intense heat waves, and agricultural yields declining in many parts of the world. Also we cannot rule out major and irreversible damages associated with catastrophic climate events .

OECD analysis provides convincing evidence that to stabilise GHG concentrations at acceptable levels, so as to avoid the potentially enormous damages of climate change on our economies, we need to act decisively, broadly and quickly. This is not to say that such ambitious climate change mitigation will be cheap. Even if least-cost policies were implemented, which would imply pricing carbon in a uniform and comprehensive way across all countries, sectors and greenhouse gases, world annual growth could be reduced by up to a couple of decimal points over the next half century. Given the costs and risks of inaction on climate change, such action makes economic sense. But, of course, the cost could be much higher if governments were to choose inappropriate policy mixes. And it is in all our interests to keep the cost as low as possible.

This is why we need the full engagement of finance ministers to deliver cost-effective policies. A mix of policy instruments will be needed to successfully tackle climate change, but price-based instruments will be essential in this mix to keep the costs of action low. Finance ministers are central for:

  • Designing and implementing CO2 emission trading schemes or taxes: by putting a price on carbon emissions today these market instruments will stimulate the appropriate investment decisions and provide incentives for investment in the next generation of low-carbon technologies.
  • Implementing reforms aimed at eliminating fossil fuel subsidies that currently put a premium rather than a penalty on CO2 emissions, as well as measures to introduce targeted subsidies to climate-friendly R&D.
  • Reforming potentially harmful “green” subsidies, for example biofuels subsidies that have been found to cut GHG emissions only at prohibitive costs [wave “Biofuel Support Policies” book]. This is an example of how costs of action to address climate change can increase if governments choose unnecessarily expensive policy mixes.
  • Overseeing the use of fiscal instruments to address the potential “competitiveness” effects of mitigation policies and opposing such measures if they are likely to be counterproductive, such as border tax adjustments on the carbon content of imports: OECD analysis [wave “Climate Change Mitigation” booklet] finds that the overall economic effects of such measures would be negative, both for the country imposing such tariffs and for the world as a whole.

Many policy instruments to reduce GHG emissions have also significant implications for government revenues and expenditures. OECD analysis provides examples of ambitious emission reductions that can be achieved through carbon taxes or fully auctioned tradable emission permits, with estimates of fiscal revenues worldwide reaching over 5% of world GDP by 2050. It may be possible to use such large revenues to cut distortive taxes, such as corporate and labour taxes, in order to offset some of the cost of emission reduction.

But tackling climate change at least cost goes much beyond aligning the domestic policy mix; it also requires strong collective action worldwide. Broad coalitions of developed and developing countries are essential to achieve ambitious climate goals. At the same time, countries have different incentives to join in world action to limit climate change. Securing action by all major emitters is likely to require some degree of de-coupling between where emission cuts take place – primarily where it is cheapest – and who pays for it.

This implies the need for sizeable international financial transfers across countries to incentivise mitigation through a wide range of devices, such as the allocation of tradable emission reduction commitments across countries, the Clean Development Mechanism, technology transfers, adaptation financing support, and incentives to reduce emissions from deforestation and forest degradation – including assistance through international aid policies.

Finally, considerable time lags in the climate system mean that many impacts of climate change are already “locked in” over the coming decades. Investing in adaptation to these impacts is therefore an immediate priority. Adaptation will entail significant costs suggesting the need to apply economic instruments to better align private incentives for adapting to climate change. Globally the costs of adaptation could exceed the ability of the private sector to respond -- ranging from tens of billions to several hundreds of billions of dollars, much of it in developing countries. This raises a common challenge for Ministers of Finance: How to raise additional resources from public budgets for adaptation?

The resource challenge underlines that we cannot afford to delay action – we must begin today to limit climate change. Indeed OECD analysis suggests that if we act now, we have 10 to 15 years’ “breathing space” during which time action is possible at a relatively modest cost.

In summary, Ministers of Finance share a common responsibility to help shape cost-effective policies to respond to climate change through both mitigation and adaptation policies. I have confidence that we have the ingenuity and the political will to transform the world economy to deliver a climate-resilient, low-carbon future. I look forward to working with you to move the policy agenda forward.