Lecture by Angel Gurría,
3 July 2015
London, United Kingdom
(As prepared for delivery)
Ladies and Gentlemen,
It is a great pleasure to be with you to deliver my second climate change lecture. I want to thank AVIVA Investors for hosting this event in association with ClimateWise, a group driving action on climate change risk insurance. Second, our co-organisers, the Grantham Research Institute at the London School of Economics and its Chair, Lord Stern, who has provided invaluable support, guidance and inspiration.
In my first climate change lecture, nearly two years ago, my key message was that meeting the challenge of climate change required us to achieve zero net greenhouse emissions globally by the end of this century. That’s because carbon dioxide emissions accumulate and are long-lived. Without zero net CO2 emissions, temperatures will just keep rising. When I said that two years ago, it was deemed controversial. Today, I’m pleased to see that it has become conventional wisdom and a commonly shared goal – including just last month by the G7 Leaders.
Not much has changed since then…except prices
So let me start by reflecting on what has and what hasn’t changed since that day (9 October 2013). First of all, the science has not changed. The IPCC’s recent Fifth Assessment Report has confirmed the seriousness and urgency of the issue. The second key element that has NOT changed is the predominance of fossil fuels. Two years ago, we were awash in fossil fuels. Unfortunately, they still dominate global energy supply, accounting for an aggregate share of 81%. In fact, the carbon intensity of the fuel mix has hardly changed since 1990.
What has changed significantly is the price of fossil fuels. On the day I delivered my first LSE lecture, Brent crude stood at USD 109 per barrel. By mid-January 2015, the price had plunged to less than USD 50 per barrel. It has since followed an upward and volatile trend, but remains well below last year’s peak, fluctuating at around USD 60 per barrel. Of course, coal prices have fallen too, though less dramatically.
Paradoxically and sadly, the impact of this price roller coaster on the outlook for climate action has been “less than you might think”. When prices were high, it made obvious sense to pursue low-carbon energy supplies and enhanced energy efficiency. However, the times of high oil and gas prices also triggered some massive, higher-carbon investments: for example coal-fired generation in ASEAN, coal conversion in China, and oil sands in Canada. To make things worse, high prices made removing consumer subsidies difficult. Missed opportunities!
Today’s lower prices make it easier to reduce subsidies – we have already seen some enlightened measures in countries like Indonesia, India, Malaysia and Thailand. Unfortunately, however, most governments have failed to take advantage of falling oil prices to introduce or increase carbon taxes, which would still have left prices “at the pump” unchanged. The revenue from carbon taxes could have been recycled through changes to other taxes and transfer programmes. Instead, we have the equivalent of a “big rebate” on the cost of each tonne of CO2 emitted. The benefits of falling oil prices have flowed to oil consumers, at the expense of the environment. Not surprisingly, demand is increasing. In the USA, for example, the SUVs and the Hummer are making a comeback. And we have done this at a time when we are fighting deflation, not inflation. Missed opportunities!
On the other hand, investments in expensive new fields that were dependent on prices staying north of USD 80 per barrel are being halted or deferred. Rather than investing in clean energy, we now see oil companies returning cash to shareholders through dividends and buybacks. Coal companies have seen their market valuations tumble, sometimes dramatically. And governments are facing demands from oil and gas producers for softer tax regimes to prop up production and exploration. Here in the UK, the Government has already granted North Sea oil and gas producers reduced tax rates and more generous investment allowances. Missed opportunities.
So lower oil prices create competing market forces that can cut both ways for climate. But one thing is clear - without concerted climate policies, fossil fuels will remain the energy fuel of choice. In the absence of deliberate climate policies, we will see a predictable pattern of responses - consumers will use more of the cheaper resources, demand will increase; and producers will use their formidable technical skills to find new and cheaper ways of bringing to the markets the fossil fuel resources they’ve discovered.
Another change I can identify is a growing awareness that not all fossil fuels are created equal. There will be winners and losers if governments decide to embark on the transition that the 2 degree goal implies. The recent call by six major European oil and gas companies for “widespread and effective pricing of carbon emissions” is something of a tectonic shift.
This is clearly not driven by idealism, but (in their words) “in order to realise the full and positive impact natural gas can have”. In the face of growing pressure to limit emissions, they see their business model threatened by the continued growth of cheap and emissions-intensive coal that will easily eat up most of the remaining carbon budget for a 2 degree world. Their view is not universally shared; Chevron immediately cast doubt on the “effectiveness” of carbon pricing as a strategy, “because customers want affordable energy”.
While this call for a carbon price is an intriguing tactical move, Chevron’s scepticism isn’t without foundation. It all depends on whether you think governments will, this time, really make a step change on the road to a low carbon economy. If the tortuous pace of negotiations within the UNFCCC is anything to go by, that cannot be guaranteed. The mitigation contributions (“INDCs”) currently tabled by countries do not get us to where we need to be by 2030. We’re told that we shouldn’t worry; that this is an iterative process, that ambitions will be revisited. They had better be. Calling something a process doesn’t guarantee an outcome. We have been in a process for over 20 years. And so far, the commitments simply don’t add up. 151 countries have still not even tabled their contributions. They need to do so as a matter of urgency. The carbon clock is ticking.
So what is holding governments back? Let me run quickly through a few of the reasons.
1. The growth dilemma
Clearly, there is extreme reticence to do anything that might jeopardise the economic recovery. But we’re talking about charting a long term transformation involving structural adjustments that will lead to better lives. The New Climate Economy Commission, of which I am a member, has convincingly argued that sustainable growth and the transition to a low carbon economy are not incompatible. And in any case, there are plenty of short term low or no-cost actions consistent with a 2 degree pathway, such as energy efficiency and subsidy reform.
Then there is the enduring concern that climate policies could significantly alter the competitiveness of particular emission-intensive industries. While such worries cannot be ignored, the scale of most proposed carbon pricing policies pales alongside the “normal” price volatility to which resource users are exposed.
In fact, the OECD has not found evidence of significant competitiveness impacts as a result of climate policies to date. We need policies that progressively ramp-up to redirect investment and catalyse innovations. And the geographical spread of these policies needs to broaden if we want to remove carbon “leakage” as an excuse that is currently inhibiting climate policy ambition.
3. The tragedy of horizons
Mark Carney talked about the “tragedy of horizons” – a failure by governments and businesses to internalise long-term considerations in decision making. Climate change is a victim of this “tragedy of horizons.” It will unfold over many decades, while political and business cycles at best extend over a few years. Thus, even known catastrophic losses in 100 years’ time do not influence policy and investment decisions today. Jeremy Grantham has referred to this as the “tyranny” of the corporate discount rate lens, through which our grandchildren end up having no value. Yet there is a real risk that between now and the end of the century, we may face severe, pervasive and irreversible climate impacts. And then we will regret our myopia.
4. Development space
There is a flawed but deeply rooted idea that development comes before decarbonisation. While developing economies will inevitably increase their emissions, there is no iron law that requires development in the twenty first century to be as fossil-intensive as it was. Viable alternatives are already commercially available. Today, nobody would propose laying out telephone lines as OECD countries did in the mid-twentieth century. But some leaders and development specialists still imagine tomorrow’s societies engineered around yesterday’s solutions.
5. Carbon entanglement
Two years ago I used the phrase “carbon entanglement” to describe the extent to which many governments and asset owners have deeply vested and sometimes conflicting interests in the status quo. This is not just a question of lobbying power. For example, most government budgets and pension funds rely heavily on the returns of fossil fuel exploitation. We face some truly bizarre contradictions: summer arctic ice is a huge reflector of sunlight. Once it has gone, there will be a strongly positive temperature feedback. We worry about what that means for tomorrow but busily prepare today for the moment when fresh oil and gas from the Arctic become available!
So how do we untangle ourselves?
Core climate policies
In the first place we need strong, credible and predictable climate policies, in particular a price on carbon and the elimination of both consumer and producer subsidies that support incumbent fossil fuels. These are, in climate terms, “sins of commission” for which there is no excuse. I don’t need to say more under this heading. The OECD has been on the record for more than 20 years on this issue.
Second, we need to ensure that climate policies aren’t undermined by other public policies. Consciously and unconsciously we have wired our economies around fossil fuels for well over a century. Leaving that wiring untouched will mean that climate policies will under-deliver. That, if you like, would be a “sin of omission”. Too many existing policy settings are misaligned with the transition to a low-carbon economy.
The OECD, IEA, Nuclear Energy Agency and International Transport Forum have joined forces to produce the first economy-wide global diagnosis of such potential misalignments. Published today, Aligning Policies for a Low-carbon Economy identifies possible misalignments with climate goals across just about every area of government policy, from electricity market regulation to land use. Governments need to study its 200 pages and consider, in each national context, how to resolve these misalignments, and ensure that all Ministers report regularly on how they are bringing their policies into alignment. This is essential for a more effective and less costly transition to a low-carbon economy.
Finance and investment
A particular priority will be encouraging long-term investment financing for the transition and lowering the cost of capital. Developed countries have committed to mobilise climate finance – from public and private sources - worth USD 100 billion a year from 2020 onwards to support developing countries. But globally, we need to invest trillions in infrastructure. The low carbon transition actually requires little more money than is already being invested today. But it requires a massive shift towards low-carbon, energy efficient systems.
Institutional investors manage USD 93 trillion in OECD countries. Government policies can play a central role in influencing how this private capital is mobilised and shifted. It will only be green if the investment landscape is supportive. Coherent climate policies and good framework conditions for investment are essential, as are measures to reduce financial risk and facilitate transactions. We need to move from a world where green bonds are a novelty to one in which the entire USD 100 trillion bond market reflects a transition towards a low-carbon transformation. It’s all about policies.
What about coal?
Governments are constantly urged to be “realistic”. Both Glencore’s chairman and its CEO have recently urged governments to accept the “reality” that a lot of fossil fuel is going to be burnt. What, and how much, depends on your view of “reality”. Our major new report Taxing Energy Use shows that the “reality” for coal producers is that coal is usually the least heavily taxed of all fossil fuels. Coal is also generally subject to very low or no import tariffs all over the world - unlike renewables, which are often subject to import tariffs of 10-20% or higher. The “reality” for policy makers is that without a concerted change in these facts, the 2 degree target will slip from our reach. Again, it is policies that will determine the outcome.
Coal is the most carbon-intensive fuel available for electricity generation. The most urgent threat to climate policy is the scale of new investments in unabated coal-fired electricity generation still being planned. Between now and 2050, if no further mitigation measures are undertaken, coal generation is projected to emit more than 500 GtCO2. That is around half the remaining carbon budget consistent with staying under 2°C. Even the most advanced (and costly) coal-fired power plants are not going to be consistent with a 2 degree goal unless they can capture and store the CO2 they produce.
Yet the IEA expects global demand for coal to continue to grow in the near term, which would result in a disastrous 4°C plus trajectory. They have called for a ban on the construction of the least efficient coal-fired power plants in their latest report on Energy and Climate Change. In North America and most of Europe, regulations, carbon pricing and future emissions targets have made investing in new coal power too risky. But that is more than offset by growth in Asia. Particularly in China, where despite signals that the government is moving towards capping coal use nation-wide as part of its war on local pollution, new coal plants are still coming on line, even if less rapidly than a few years back. The cost of the health impact of air pollution from energy use in China was about USD 1.4 trillion in 2010.
Governments need to be seriously sceptical about whether new coal provides a good deal for their citizens. If we muster the political will to set ourselves on a 2°C trajectory today, not all coal assets will be able to run for their full economic lifetime. Unsurprisingly, if we delay action, we will have to strand much more capacity overall, as steeper reductions will be required.
So, is unabated coal for power a rational choice today, against low-carbon alternatives (including, transitionally, gas)? The first point to make is that coal is not cheap. Or at least, it is only cheaper if you ignore all the costs it imposes. It causes a number of environmental problems including significant land disturbance, contamination of water sources, air pollution, damage to ecosystems, and dust and noise pollution. We know that it is dangerous, and that mining accidents and respiratory illnesses impact on the health and life expectancy of miners.
We also know that it is socially difficult to dismantle, as we are witnessing in Poland, Germany and other coal-rich countries. The coal industry employs around 7 million people worldwide. For these people, the social consequences of decarbonisation will be serious and they will need assistance. This is not just a question of stranded assets; it's about stranded communities too.
The second point is that we already have commercial alternatives to coal-fired power generation, in contrast to heavy industries like cement and steel which don’t and which pose a major technical challenge. The fact that 60% of total power plant investments since 2000 have been in low-carbon technologies illustrates the point.
Depending on the region, cost-competitive renewables include onshore wind, biomass and hydro-based generation, solar and geothermal power. Some challenges remain, but the bottom line is that low-carbon options can and should play a much greater role in energy supply. Their costs are still decreasing, some much faster than others, and the challenges of integrating new renewable energy are being overcome.
Knowing these risks, will new coal investments be decided any differently from here on? Some investors are looking at coal in a new light. The Portfolio Decarbonization Coalition launched at Ban Ki-moon’s Climate Summit last year, for example, is gathering a coalition of investors to decarbonise USD 100bn of institutional equity investment by COP21. Norway’s sovereign wealth fund has just announced it won’t invest in high CO2 emitting businesses.
But it is the drive for development that raises the most difficult questions. One of the proposed Sustainable Development Goals is “access to affordable, reliable, sustainable and modern energy for all.” To implement that in the context of a world that has to decarbonise its energy system in the coming decades, governments - particularly in developing and emerging economies - will need very good information to filter out proposals that may be affordable but are neither modern nor sustainable. The New Climate Economy Commission recommended that governments should reverse the burden of proof, building new unabated coal-fired plants only if other options are not competitive after accounting for the full environmental, health and financial costs of coal.
This is particularly important for developing countries, some of which have never before generated power from coal, and which are in the process of building new infrastructure from scratch. They need to weigh the full social benefits and the full costs, even if they don’t want to formally put a price on carbon. Pre-eminent among these should be health costs and claims on water and other scarce resources, as well as the benefits and costs of clean energy generation technologies.
If the combined costs and benefits of any clean alternatives win out, there should be no debate, nor delay. If, however, coal still has an edge, then governments need a reliable way of judging how long that advantage is likely to last because the cost of clean technologies will continue to fall. While access to energy and alleviating poverty rightly come first in developing countries, they need a trustworthy appraisal tool to help them ensure that the benefits of coal are not being over-estimated or short-lived.
We have to move to the point where claiming that coal is cheaper or that it is the “only” solution is no longer good enough. Political and business leaders who make this claim have to be able to substantiate it against the alternatives. I would appeal to leaders to subject such claims to close scrutiny. If the only thing separating coal from cleaner alternatives is a purely financial gap then we need to mobilise climate finance to bridge it.
Some aid donors and multilateral development banks are now providing support for coal-fired power only when there are no feasible alternatives. These cases must really be exceptional. Without a rigorous means of testing these propositions there is a real risk that inertia and conventional wisdom will underwrite assets that should never be built.
Of course, all of this applies in spades to developed countries as they face the retirement of old generating capacity. We cannot continue building coal-fired plants simply because we have been doing so for the last 150 years. And we should not strand or give up on clean energy sources like existing or future nuclear capacity. Nuclear will be a part of the solution in many countries and we must guarantee that safety concerns are fully addressed to ensure that this option remains available.
Finally, we need to support research, development and applications of the next generation of low-carbon technologies. Yet the share of public R&D spent on energy in the OECD today is less than half what it was at the end of the 1970s. We therefore warmly welcome the ambition and focus of the “Apollo” initiative launched here in the UK, to secure USD 150 billion for R&D into energy storage and smart grid technologies to unlock the full potential of renewable power generation.
And although the Apollo project specifically excludes technologies such as carbon capture and storage, governments need to continue to support these endeavours too, since there will be fossil fuel emissions that cannot be easily eliminated.
What path do we need to be on?
Zero net emissions by the century’s end will require the systemic transformation of power generation, industry, transport, buildings and land-use. Infrastructure is long-lived – changing it takes time. Climate change, too, is a process that unfolds over decades. So the real challenge is not to meet an emissions reductions target in a given year but to create credible pathways for each country that will bring us collectively to such net zero carbon world needed by the end of the century. Remember, it’s all about policies.
Policies need to link long-term and short-term objectives. The UK’s path-breaking Climate Change Act, with its long term goal and rolling five-yearly targets, is the right approach. Other governments should follow the UK’s lead as they develop their national policy responses.
Different time scales, same end point
The timescale and sequencing of actions will vary across countries, reflecting their different circumstances.
Many emerging economies are still on steeply rising emissions pathways. They too need to peak soon and start falling. I welcome the Chinese government’s INDC announced this week that it will achieve a peak in CO2 emissions around 2030 and make best efforts to peak early, and that they will drastically reduce their dependence on coal.
For the least developed countries, peaking may be further away but even here there is huge scope for mitigation actions that bring other benefits in terms of air pollution, health and the quality of life in cities.
The size of the carbon budget that we can emit consistent with 2 degrees depends on how big a risk you are prepared to take to meet that goal or to wind up on a higher temperature pathway. But one fact is clear - we are currently emitting some 38 billion tonnes of CO2 p.a. and this will exhaust that budget at an alarming rate.
Furthermore, the 2 degrees goal relies on a carbon budget which only provides for a 66% chance of meeting the target. If we want a lower level of risk, we should be even more ambitious. After all, we’re betting the planet. This is the “cheerful recklessness” towards our common home lamented by the Pope in his recent climate change encyclical. Two degrees already implies costly change. But we’re currently on course for around 3-5 degrees. We continue to be on a collision course with nature. As we continue to emit, the risks are becoming increasingly unpredictable and uninsurable.
How can COP21 help?
The OECD has been actively supporting the 21st Conference of the Parties next December. The fundamental issue is how we develop pathways to transition from the carbon-intensive present to a zero net carbon future.
Three things are critical: engagement, evaluation and evolution.
COP21 should send clear directional signals that countries as well as non-state actors must, can and will create their own pathways to a zero net carbon future. This requires the full engagement of all the major economies of the world, both developed and developing.
Countries will be interested in comparing the ambition of others relative to their own, and will want assurances that others’ actions match their promises. One of the critical roles of the UNFCCC will therefore be to monitor and evaluate country commitments. These are challenging issues. What does a 30% reduction in emissions from a hypothetical baseline mean? And how can we tell if a country is on track to meet its commitments?
The same issues surround commitments to provide financial and other resources. Meeting the commitment made by developed countries at Cancun in 2010 to jointly mobilise USD 100 billion per year by 2020, from public and private sources, is important to build trust in the UNFCCC process. One of the OECD’s tasks is to keep countries accountable for their commitments by monitoring and reporting on donor countries’ contributions. This strengthens accountability and transparency and helps build trust. This year’s calendar hasn’t made it any easier. While UN members will meet in Addis next week to renew their commitments to financing for development, it won’t be until next September that 169 targets for 17 sustainable development goals will be decided, and until next December when climate commitments are sealed. Governments will need to ensure coherence in their various commitments as they navigate the various 2015 forums.
Monitoring and evaluation will be crucial to the credibility of any commitments made. Through our country-tailored economic, environmental and investment reviews,the OECD can help assess whether country policies are likely to deliver the emissions cuts promised.
What about evolution? With current commitments well short of what is needed, the Paris COP21 needs to reaffirm governments’ long-term ambition to get onto a pathway that leads to zero-net carbon globally by the end of the century. In addition to a high level of initial ambition, we need a regular reporting, review and updating process to check whether national targets and pathways are consistent with that ambition; and if they’re not, to spark a dialogue about how we get on track. We need ambitious long-term targets now and we need to stick to them. A robust review process has to be built as a means of ensuring commitments are met, to track where we are, to act as our climate GPS!
There is little time left. Governments cannot afford to treat this year’s COP like just another round of an endless trade negotiations – The carbon clock is ticking! The international community has other priorities to address. Attention spans are limited. Since the failure of Copenhagen, it has taken six years to get back to the same level of focus. It’s a bit like landing the Rosetta probe on a comet, which took ten years to align. Windows for alignment are temporary – we haven’t time to wait for another one.
If we fail to make sufficient progress, we will be plunged later into an even more costly and disruptive round of national adaptation responses, where the costs will fall most heavily on the least resilient societies. In other words, if we fail on climate, we will fail on the sustainable development goals too.
If on the other hand we succeed, there is so much positive upside. There is a growing momentum behind solutions to energy, industry, urban organisation and food production that are simply better than what we have today. It is hard to believe governments would cling to technologies whose climatic and health side-effects are so insidious. Why instead wouldn’t we embrace a transition that makes the world a more efficient, cleaner and healthier place?
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