Green growth and sustainable development

Roundtable: Climate is Everyone’s Business

 

Opening Remarks by Angel Gurría, OECD Secretary-General, 14 May 2014, Berlin, Germany

(As prepared for delivery)

Ladies and Gentlemen,

It is a pleasure to share some ideas with you about climate change and what it means for countries to respond to that challenge.


Twenty years ago climate change was viewed as just an environmental issue. Today it is squarely an economic issue. Climate change poses significant risks to our economic systems that could result in very large damages. To mitigate these risks we need to radically transform our economies and societies to stop global warming.

Today I would like to talk about this transformation and what is needed to make it happen. The urgent nature of the current situation demands that solutions be implemented not only at a German but at a pan-European level. The challenges posed by climate change are everyone’s business and can only be overcome through concerted action.

I will highlight how German businesses are leading a cutting edge transformation and paving the way for other European countries to follow suit. And I will talk about how the OECD can help countries to achieve this transformation in the most cost-effective way.

We know that achieving our goals will not be easy. But as we fast approach the UNFCCC Conference of the Parties in 2015 we must get to grips with the risks of climate change. In doing so, we need to not only abandon our comfort zones but at the same time create a sense of urgency which is very often overlooked.

 

The climate challenge: Reflections from my LSE climate change lecture

Let me start with a brief reflection on the global community’s agreed objective of keeping the increase in global average temperature to below 2 degrees Celsius.

Back in October last year, I was invited by Lord Stern and the London School of Economics to give a lecture on climate change. I emphasised that we have to move to zero net emissions from fossil fuel combustion in the second half of this century if we were to retain a chance of staying below the 2-degree limit. While this is ambitious, it is achievable.

Twenty years ago one might have been more cautious about saying that. But the technical progress that has been made – despite some truly muddled public policies – is pretty remarkable.

  • We have managed to reduce the cost of photovoltaic modules by 80% since 2008 and by 99% since 1977. 
  • We now have the first solar thermal plants that can deliver electricity 24 hours a day;
  • Tesla is selling high performance 100% electric vehicles with a range of 350 km and recently achieved the best safety rating of any car ever tested by the US government. 
  • Over the coming decade, advancing energy-storage technology could make electric vehicles cost competitive, bring electricity to remote areas of developing countries, and improve the efficiency of the utility grid.

 

On the other hand, this is not yet enough to turn the tide. Incumbent high-carbon industries and technologies are maintaining their market share globally. In Europe, we see much gas-based capacity being mothballed due to low electricity demand, the unabated penetration of renewable energy, cheap coal, and tumbling CO2 allowance prices.

As a result, there is rising uncertainty about how the transition should proceed from here. At the global level we are certainly nowhere near a trajectory that would get us to zero emissions from fossil fuels in the second half of the century. But we can now see many of the pieces of the jigsaw that need to be assembled.

Putting together the jigsaw puzzle will require policies that involve unprecedented economic, social and technological transformation. Most significantly, it implies a radically different energy sector and, as a result, an economy and a society that will look and feel very different to what we have now.


Towards a radically different energy system

The energy sector emits more CO2 than any other sector. Electricity-related emissions account for more than 40% of emissions from the energy sector. Decarbonising the electricity sector will therefore be key to staying within the 2-degree limit.

To make this happen, electricity production will have to rely on a much larger share of renewable technologies, going far beyond the hydro-electricity and biomass energy that dominate renewables today. By 2050, solar and wind technologies alone may have to supply 30% of global electricity demand. That is more than the total electricity production of OECD countries today and 15 times their share in total supply in 2010.

The future electricity system will also have to embrace other potentially zero emission options such as Carbon Capture and Storage and nuclear energy – for those countries that choose to use such technology.

And working on the supply side won’t be enough. We also need to lower demand, including through smarter energy storage and higher energy efficiency. Indeed, improving energy efficiency is one of the major components of the energy transformation.

Decarbonising the transport sector will also be needed. The challenge is greater here, but mass reliance on the internal combustion engine has no future in a low-carbon world. Electrification or fuel cells are among the most promising replacements.

But what can policymakers do to make this happen? Most importantly, they need to facilitate the development and uptake of systemic innovations that will fundamentally change the energy system. This will include new business models for both energy producers and consumers. The potential is there to achieve climate objectives in a cost-effective manner, if governments can address the institutional, contractual and regulatory lock in that favours incumbent players and technologies.

Carbon pricing and fossil fuel subsidy reform are necessary ingredients to help shift investment and encourage innovation, and the OECD has been at the forefront of policy analysis in these areas. However, governments also need to ensure that other policies are well-aligned and to focus attention on regulatory and other barriers that could prevent new technologies and systems from developing scale and market penetration.

 

What would this mean for Germany?

Let me try and answer this question. When one of the OECD’s largest energy-intensive manufacturing economies decides to take a low-carbon path that excludes nuclear energy, policymakers and observers take a close look. It says something when the “Energiewende” is known by that name not just here in Germany but internationally.

What is noteworthy about Germany’s approach is that it has been more sustained and consistent than that of many other countries, which have been forced into complete U-turns in their energy transformation by pursuing needlessly costly policies.

By deciding to cut greenhouse gas emissions by 40% by 2020 and by at least 80% by 2050, with renewables as a cornerstone of energy supply over the long term, Germany has charted a way forward that, if realised, will change the energy sector forever.

In the first quarter of this year, 28% of German electricity came from renewables. Similarly impressive results can be demonstrated for energy efficiency. Germany is making good progress toward its target of a 20% reduction of primary energy consumption by 2020 and 50% by 2050, although more can obviously be done.

But while Germany’s energy transformation will bring long term benefits, it has not been easy, or cheap. An OECD report – “Effective Carbon Prices“ – found that Germany’s carbon-related policies applied in the electricity sector incurred the highest total abatement costs as share of GDP (in the order on 0.3%) in the OECD, primarily due to feed-in tariffs on solar panels (PVs).

 

German industry has repeatedly expressed concern that the rapid and costly expansion of renewables could undermine the strength of the country’s industrial base. The reality of the policy, however, has largely been to shield energy-hungry companies from electricity surcharges to support renewable energy deployment. Much of the burden has been passed on to households and small consumers. Indeed, the government was so successful in shielding large consumers that it triggered competition concerns in the European Commission.

You know the outcome: legislation to slow the rapid expansion of solar and wind parks in an effort to hold down spiraling prices and more emphasis on containing the costs of the energy transition by enhancing market integration and broadening the base of consumers paying for the process.

It is not surprising that Germany has moved to reform its feed-in tariff regime. But before being too critical about its cost, we must acknowledge the huge amount that has been learnt and the structural changes that have been set in force. Moreover, thanks to the technological advancements that have been triggered by the support scheme, the feed-in tariffs have already come down quite significantly.

There is no simple way to make a transition on the scale that is required. There will be winners and losers but as long as the process is a creative one – in a Schumpeterian sense – we will be better off for it. The world is now eagerly watching to see how Germany manages the forces it has set in motion.

 


A pan-European response is needed

But Germany cannot make this transition alone. This transformation has to spread to other countries because the changes are systemic – and systems don’t stop at borders. To realise the full potential of the technological – and human – progress that has been made in Germany to date, the transformation therefore has to take place at a pan-European level.

Seeking purely national solutions in Europe would be ruinously expensive. The physical reality of Europe’s renewable energy sources – literally the entire surface of the continent and its surrounding seas – and their variability require integration on a scale not previously imagined.

The European energy system cannot remain as fragmented as it is. Higher levels of renewable penetration will require broader inter-regional and international grid connections, demand response (including through smart grids) and electricity storage capacity to create much more flexible electricity systems at the EU level. There is no shortage of renewable energy. The challenge is to capture it cost-effectively, to move it around and to store it when necessary.

In principle, pan-European policy coordination holds the key to cost-effective renewable energy deployment in Europe. The proposed EU Climate and Energy Package for 2030 sets an EU-wide binding target to increase the share of renewable energy to at least 27% by 2030. The absence of country-level targets may mean that the EU will seek to achieve emission reductions (or in this case, deploy renewable energies) wherever they are least costly.


However, making this a reality will mean resolving many challenges at the European level:

  • How can countries make faster progress in expanding transmission networks, cross-border grid interconnections and electricity trade? 
  • How do we finance the cost of national and cross-border transmission investments? 
  • How can countries reform their regulatory regimes to provide stronger incentives for demand-side management and smart grids?

 

In addition to broader inter-regional and international grid connections, more cost-effective national support policies for renewable energy will be needed to facilitate the energy system transformation. One of the objectives of the European Commission’s new Energy and Environmental State Aid Guidelines is to progressively replace feed-in-tariffs by competitive bidding processes that will limit distortions to competition and will help reveal the price of energy in a more cost-effective way. The example of Brazil shows that this is indeed possible. The country used reverse auctions for wind energy and managed to reduce tariff rates by 42%.

In addition to enabling more cost-effective provision of renewable energy, the European guidelines encourage the building of new generation capacity by allowing for the use of “capacity mechanisms” to assist in financing the expansion of the electricity system.

As these important steps are implemented, further questions can be anticipated. For example, how will bidding processes for renewables work alongside the EU Emissions Trading System (ETS) and a carbon price that is supposed to play a growing role? Are capacity mechanisms not going to artificially support fossil-based generation? Striking the right balance will be difficult.


Lining up the right policies in the right way

The policies that need to be put in place at the national level to make the energy transformation will depend on a country’s endowment of natural resources and human skills as well as its industrial structure. The transformation is potentially going to be easier for those economies that have never had easy access to oil and gas but have had to rely on the ingenuity of well-trained populations and the efficient use of resources.

Those economies that have invested heavily in easily available fossil fuel and whose governments have relied on a steady stream of oil and gas rents to balance the books might find the transition much harder. What adds to the difficulty is that the economic transformation required to cut emissions is not fully understood as no economy has yet accomplished it.

But a common key barrier is a fragmented, silo approach to climate-related policies, when a multi-sector and multi-ministerial engagement is often necessary. That is why Ministers, just last week meeting at the OECD, charged us, together with the IEA and other sister organisations, to provide governments with advice on how to deliver effective packages of policy instruments that will facilitate the transition to a low-carbon economy. This will be drawn from a careful examination of the complex linkages between different policy domains, some of which I have alluded to already:

  • The interaction of electricity market designs with investment choices in favour of the decarbonisation of electricity generation;
  • The role of energy and environmental taxes in budget consolidation;
  • The trade aspects of clean energy investments and innovation policies;
  • The impact of financial regulation on investment in clean energy infrastructure ; and
  • The intersection of agricultural and energy policy choices (e.g. biomass energy use).


Watch this space a year from now!


Competitiveness and Opportunity

As representatives of industry, competitiveness will be uppermost in your minds. Clearly, government policies designed to make fossil fuels less attractive will upset the competitive status quo. It must be stated that there is no climate policy scenario that is consistent with low fossil energy prices. The prospect of a steadily rising carbon price has to be at the foundation of any coherent EU-wide policy. Industry has (with no small success) expended a huge amount of energy lobbying to shield itself from the effects of climate policies over the years.

But forget fossil fuel’s implications for the climate for a moment. While they may have been a friend to Europe’s industrialisation, they are not a friend when applied on the scale we are seeing in fast emerging economic powers like China or India. The local health effects are simply overwhelming. And the scramble to secure fossil fuel supplies – and their potential for disruption – is a major source of geopolitical tension. The capacity for clean technologies to overcome the challenge is potent.

So in lobbying for a managed transition, don’t under-estimate the market potential for the array of products and services that will be associated with the transformation of the energy system. You know what these are better than I do. One example is the plan to convert disused coal mines into vast underground pump storage facilities to help manage the variable output of renewables. The information-intensity of many of the solutions means they play directly to the strengths of Germany’s brains and engineering-based economy.



Ladies and Gentlemen,

Governments and the private sector together have a crucial role to play to deliver this energy transition. We have a window of opportunity for establishing a policy framework to enable transformational change in the energy sector. The energy transition will require products and services that simply don’t exist today. The fact that they will be provided by companies that barely exist, or are yet to be born, doesn’t make it any easier to argue the case for change when there are large incumbent companies that are much more comfortable with the status quo.

Understandably, the cost of exiting from the status quo can appear daunting. And the transition to a zero emissions economy will certainly not be a costless one for all stakeholders involved. Governments must be clear about this. On the other hand, they are presiding over a battery of regulatory instruments that, if left untouched, could make the transition more costly than it need be. We need to stand back and look across the entire range of signals that are being sent to consumers, to producers and investors alike. If ever there was a case for joined-up policy, this is it.

I would now like to welcome your views and experiences in addressing these challenges.

Thank you.

 

Related Documents

 

Mr. Angel Gurría, the Secretary-General of the OECD, in Berlin on 13-14 May 2014

 

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