Climate change

The economics of climate change mitigation


Remarks by Angel Gurría, OECD Secretary-General, for the launch of The economics of climate change mitigation

Paris, 18 September 2009

Ladies and Gentlemen, 

It is a great pleasure for me to present our new work on the Economics of Climate Change.

Climate change is the greatest collective challenge that we have ever faced. It is destroying our only planet at an accelerating pace.

In the coming months, we have a unique opportunity to address this threat. At the COP15 Conference in Copenhagen we must produce a bold and collective response. Yet, there are less than 90 days before that crucial event, and many questions still remain without answers.

This book can help us provide those much needed answers. It gives the analytical support and economic rationale to help decision-makers at Copenhagen reach a deal on climate change.


Main findings

Let me introduce very briefly the main findings of our book.

The most important message is that the world needs a significant reduction in global emissions from current levels. And we need it now! If we don’t change our behavior, global greenhouse gas (GHG) emissions will rise by about 70% between now and 2050. World temperatures could rise by 4°C, and possibly 6°C, by 2100.

Many developed countries have committed to reduce GHG emissions in the near-term, but the targets must be more ambitious. The combined effect of the developed country targets would only cut their emissions by about 8-14% by 2020 compared with 1990 levels. This falls short of the 25 to 40% reduction that the Intergovernmental Panel on Climate Change – the science experts – tells us is needed for developed countries to prevent temperatures from rising by more than 2°C.

Action to mitigate climate change must be taken at the lowest cost – at a cost that countries can afford. This can only be done if a cost-effective set of policy instruments, with a focus on carbon pricing, is applied as broadly as possible across all emission sources.

Cap-and-trade systems and carbon taxes should be key elements of the policy mix, to help build a global carbon market. However, it will need to be complemented by regulations and standards, increased investment in R&D, and information-based approaches, such as energy efficiency labels.

The book presents interesting results to support policy makers in making the right choices:

For instance, if a full-fledged global carbon market is developed in the next decade it would cost just one-tenth of a percent of average world annual GDP growth between 2012 and 2050 to achieve moderately ambitious climate targets. Put differently, this would mean a 4% reduction in GDP in 2050 compared to a scenario where no policy action is taken. Bear in mind that over the same period world GDP growth is projected to grow by more than 250%.


Competitiveness issues and carbon leakage

But the reality is that we’ll not get a worldwide carbon market overnight. Some countries may need to take the lead. Which brings us to the understandable fear that their industries will become less competitive if they reduce emissions and other countries don’t. To protect their energy-intensive industries, some may be tempted to exempt these industries from emissions caps, provide them with low targets, or allocate emission permits to them for free. This is a bad idea - exempting energy-intensive industries from carbon pricing could raise the cost of achieving global emissions targets significantly by as much as 50%.

First movers also worry about “carbon leakage” - the risk that emissions reductions in some countries will be offset by an increase in others. If a sufficient number of countries take action against climate change, carbon leakage rates are almost negligible. For example, if the EU acted alone to reduce GHG emissions by 50% in 2050, almost 12% of their emission reductions would be offset by emission increases in other countries. However, if all developed countries were to act, this leakage rate would be reduced to below 2%.

Some defend the use of border tax adjustments (BTAs) - import fees levied by carbon-restricting countries on goods manufactured in non-carbon-restricting countries to address concerns about competitiveness and carbon leakage. BTAs can reduce carbon leakage to some extent, but they are expensive, they create distortions and they may lead to trade frictions.

Developed countries need to take the lead in reducing emissions. But the most cost-effective way to tackle carbon leakage would be for the largest emitting emerging economies to join them and, later, all developing countries to curb their emissions. In the near future, a global carbon market may gradually develop through links between national and regional emissions-trading schemes or through crediting mechanisms or other trading systems.


Auctioned permits and taxes

And revenues from auctioned permits and taxes can have a very positive impact. For example, if all developed countries were to use carbon taxes or auctioned permits to reduce their emissions by 50% in 2050, additional fiscal revenues could equal 2.5% of their GDP by 2020. They could use this money to offset reductions in labour taxes, or to help provide the financing needed to support action in developing countries.

A negotiated agreement on allocation of emission targets across countries could also encourage large developing countries to participate in global action to achieve ambitious climate goals. Developing countries will gain significantly from permit allocation rules if their emission rights cover their business-as-usual emissions or take into account their historically lower emission levels.


Contributions from developing countries

If developed countries put in place ambitious emissions targets and provide capacity building, technology and financing, then emerging and developing countries will also need to do their part.

How can they contribute to reduce emissions while also growing their economies?

First, removing environmentally-harmful subsidies to energy consumption and production would be an important first step. Energy subsidies for consumers are particularly high in Russia, other non-EU eastern European countries, and a number of large developing countries. Removing fossil fuel subsidies could reduce global GHG emissions by more than 10% in 2050, as found by recent joint analysis by OECD and the IEA. It would also improve economic efficiency. For instance, the budgetary savings could be used to reduce other distorting taxes or to alleviate poverty in a more targeted and efficient way than through a uniform subsidy to fuel consumption.

Second, emissions from deforestation are substantial. In developing, countries, this amounts to about 17% of global GHG emissions. Reducing emissions from deforestation and forest degradation can be done at a relatively low cost and must be part of a comprehensive climate change agreement.


Ladies and gentlemen,

Our findings can be summarised with a short sentence and an imperative: The window of opportunity is limited. We must put the right instruments in place quickly!

The wealth of information in this book is designed to help. Its insights will help feed the climate change discussions at the G20 Summit in Pittsburgh, and hopefully open the path to a broad and ambitious agreement in Copenhagen.

Thank you!