Remarks by Angel Gurría,
Berlin, 4 July 2016
(As prepared for delivery)
Ministers, Distinguished Panellists, Ladies and Gentleman,
The Paris Agreement presents us with many excellent opportunities to manage the transition towards low carbon economies and greener societies, if properly implemented with the right strategy.
You have asked me to lead a discussion on how we can ensure that finance flows are consistent with a low carbon, climate-resilient pathway. Let me suggest to you to look at the finance flows where the returns are most promising. So the first lesson to draw is that if there are policies in place that make fossil fuels attractive at the expense of clean alternatives, we are tying one if not both hands behind our backs.
That means we need the swift withdrawal of policies that prop up fossil fuels and carbon-intensive activities and the strengthening of policies that put a positive price on greenhouse gas emissions. This means a new, low carbon growth narrative. Therefore, governments need to align their policies across all domains, looking beyond implementing core climate policy instruments.
You have in front of you our report on Aligning Policies for a Low-Carbon Economy. It is designed to help governments identify the misalignments that stand in the way of a low-carbon future. Its message is quite simple: every country has to carefully review all its policies to ensure that there are no frictions, unintended consequences or even objectives and signals that are in conflict with climate action.
First, some of the most glaring misalignments are evident in the realm of public finance. Frankly, many governments openly continue to support fossil fuels. Our OECD Fossil Fuels Inventory puts the spotlight on almost 800 spending programmes and tax breaks. For 34 OECD members and Key Partners, the total support is estimated at USD 160-200 billion a year over the period 2010-14. One of the low-hanging fruits is to get rid of these subsidies which are not only bad for the climate; they are also bad for equality as they benefit the rich in a disproportionate manner! That’s the reason why the OECD is chairing the G20 Peer Reviews for the Reduction of Fossil Fuels Subsidies for the US, China, Germany and Mexico.
Second, coal is still the least heavily taxed of all fossil fuels. Yet, it is the most carbon-intensive fossil fuel and results in significant local pollution. Meanwhile, a 10 to 20% import tariff is levied on renewable energy technology crossing borders. This creates an unequal playing field biased against innovation in low-carbon alternatives. No wonder that fossil fuels account for roughly 80% of the global energy supply. Policymakers can create an enabling environment conducive to the flourishing of green technology and renewable energy sources.
Third, we know that there are large pools of capital in the private sector waiting to be mobilised if the right conditions are created. Tackling climate change requires a major shift in investment patterns towards low-carbon, climate resilient options. To trigger increased capital flows from private sources, policy instruments need to be underpinned by a strong, long-term commitment by governments that will provide investors with the confidence they need to take long-term decisions. It requires policy makers to look across the regulatory landscape to ensure that clear, consistent and coherent signals are being sent to investors, producers and consumers alike. In the clean energy sector for instance, our analysis suggests that the increasing use of local-content requirements in solar and wind energy are hampering investment in solar and wind energy in a context of global value chains.
Fourth, we must ensure that financial markets are steadily ‘greened’. The existing investment landscape was not designed to support the structural change needed to overcome the carbon-dependence of our systems. We must ensure that governance standards in this sector take full account of climate change risks and opportunities. Instruments such as the G20/OECD High Level Principles on Long-term Investment Financing already require institutional investors to identify and act upon the long-term environmental risks in their portfolios. Following a request by the French COP21 Presidency, the OECD is now conducting work on fiduciary duties and how institutional investors can be encouraged to invest responsibly.
One mechanism that has been successfully trialled as a way to speed up the rate of change in the market place is the creation of “green banks”. A dozen green banks have been launched globally in recent years and are creating and supporting investment vehicles that address institutional investors’ concerns about liquidity and risk-return issues. Relatively new financial instruments such as green bondshave the potential to provide low-cost and long-term sources of financing needed for infrastructure projects. Green bonds are on track to increase further from the USD 42 billion issued last year, but still represent a tiny fraction of the USD 19 trillion of debt securities issued globally last year.
This “green” bond market will only continue to grow as long as the pipeline of green projects they are financing grows; and that in turn is dependent on governments becoming more ambitious in reconciling investment and emission reduction targets. I can’t let you get away with thinking that finance and investment is a separate topic. Finance will be mobilised on the scale we need only if governments have the right policies to generate the pipeline of low carbon infrastructure that we need. It is great to see that in 2016 the Chinese G20 Presidency has taken the lead on some of these issues and we were glad to lend our support on the analysis of institutional investors, fiduciary duty and green bonds.
Fifth, key to underpinning these efforts is data and evidence. Our “Climate Finance in 2013-14 and the USD 100 billion goal” report is an example of a rigorous and transparent analysis that supported progress on one of the most sensitive issues in the COP21 negotiations. Investment in the green economy will play a central role in achieving the ambition of the Paris Agreement and globally will need to be at the scale of trillions not billions. At the OECD we are about to launch an OECD Centre on Green Finance & Investment to help countries mobilise green investment flows on a scale that is commensurate with the challenge.
Last but not least, climate finance action measures must go hand in hand with development objectives. The idea that development comes before decarbonisation is flawed, and there is no iron law that requires development in the 21st century to be as fossil-fuel-intensive as it was previously. There are different approaches to catalyse and mobilise private sector engagement and investment, not only in low-carbon technology but also in order to help build resilience in the developing world. For example, the could help countries navigate the evolving architecture of, and the opportunities for, accessing finance for adaptation.
Choices made today about the types, features and location of long-lived infrastructure will define the emissions profile and impact for a whole generation. Thus, starting today, as we move to adapt policies towards lower greenhouse gas emissions and climate resilient development, we must ensure that our approach is cohesive and takes a whole-of-government perspective.
We will continue to help governments remove the barriers to climate action that are built into existing policies from the fossil fuel age, in everything from investment, taxation, energy, land use and transport. We remain steadfast in our conviction that sustainable growth should increasingly be low-carbon and climate-resilient growth for countries across the spectrum of development. We stand ready to assist them in this meaningful transition to better climate policies for better lives. Thank you.