Petersberg Climate Dialogue: Investing in Climate, Investing in Growth

 

Remarks by Angel Gurría,

OECD Secretary-General

Berlin, 23 May 2017

(As prepared for delivery)

 

Ministers, distinguished guests,


Governments around the world are striving to re-ignite growth in their economies. Widening inequalities – often related to the economic slowdown – are forcing a rethink of how the benefits of growth are shared. At the same time, governments face the imperative of tackling climate change to meet the Paris Agreement’s climate goals. It’s climate change that brings us together here today. But the growth, inclusiveness and climate challenges cannot be tackled in isolation.


Our Germans hosts have put climate squarely on the G20’s growth agenda because they clearly see a critical nexus between the need to re-ignite growth and the need to meet the goals of the Paris Agreement. Climate change poses profound challenges to our current development paradigm. But that does not mean a trade-off between sustained growth and inclusive economic wellbeing. The pursuit of high growth need not imply a high-emissions, high-risk development track. Today, I’m pleased to launch the OECD report on Investing in Climate, Investing in Growth.  Developed with the support of the German government, the report provides the evidence base that shows how governments can achieve strong and inclusive economic growth in the short term, while reorienting economies towards low-emissions development pathways with high resilience to the effects of climate change. That applies for both advanced and emerging economies.


Our work shows that a climate-friendly policy package can increase long-run output by up to 2.8% on average across the G20 by 2050, relative to the baseline. This includes: First, policy incentives to invest in low-emission, climate-resilient infrastructure, combined with other climate-friendly fiscal stimulus; Second, pro-growth reform policies to improve resource allocation; Third, measures to promote technology deployment and green innovation. Finally, policies that ensure a “fair transition” are also vital, because the transition will not succeed unless it’s inclusive.


If some of the positive impacts of avoiding climate damage are also taken into account, the net effect on output rises to nearly 5% by 2050. The impact of severe, non-linear economic damages from events such as flooding of coastal regions and increased frequency and strength of extreme weather events are difficult to predict and may be even more significant than this. Beyond 2050, unchecked climate change could lead to catastrophic losses. You don’t need me to tell you that the stakes are very high. Thus, the benefit of action today will involve even more benefits after 2050.


Importantly, acting now can be good for growth in the near-term too. Our modelling work indicates a net growth effect of around 1% for G20 economies in 2021.  There is, of course, a cost to waiting: if nothing is done in the short term, rear-guard action after that time would lead to average losses of 2% of GDP, relative to acting now. Waiting will mean that eventually more stringent climate policies will have to be introduced more urgently, stranding more assets, particularly for net fossil fuel exporters.


The window for action is narrow – uncomfortably so. Decisions made on infrastructure in the next decade in particular will be critical. Infrastructure generally has suffered from chronic underinvestment for decades. The report shows that around USD 6.3 trillion a year of investment in infrastructure is required, on average, between 2016 and 2030 to meet development needs globally – that’s without taking climate into account. The good news is that making these investments climate compatible would amount to less than 10% additional investment costs per year – a modest increase considering the short and long-term gains in terms of growth, productivity and well-being that both advanced and developing economies alike stand to gain. Indeed, such incremental costs would be offset by fuel savings of up to USD 1.7 trillion per year through 2030, for a positive net outcome of over a trillion dollars per year.


It comes down to the type of foundations we want to lay for future growth. Infrastructure projects won’t automatically be consistent with long-term, low-emission development strategies.  While renewables are making swift progress, almost in line with what is needed, the share of coal is still much greater than the level required to meet Paris Agreement objectives. Our analysis shows that 22% of planned additions to electricity generation capacity are coal-based,  a much lower level than the 8% required for the transition.


I won’t take you through the policy priorities that arise from our 300 page report in meticulous detail! But there are some priorities that merit mention here.

• One, as I’ve already noted, structural reforms that support climate action are critical for both growth and resilience. Reducing barriers to innovation, trade and investment are key to enabling the development and penetration of low-carbon options, along with increased R&D to help drive growth in productivity. Improving access to education and skills is also essential to support a re-focused workforce.
  
  
• Two, countries should broaden carbon pricing and eliminate inefficient fossil-fuel subsidies. Beyond energy, developments in agriculture, forestry and other land-use sectors will determine the scale and pace of the transformation needed elsewhere in the economy. Clearly, we should try to protect current stocks of carbon in tropical forests. 
  
  
• Three, the whole financial system needs to be geared for the transition. That means financial institutions tuned towards climate-friendly investment mechanisms to mitigate risks and mobilise capital from both private sources as well as public, and a correct valuation of climate-related risk. 
  
  
• Four, we need proactive policies to facilitate a “fair transition” for affected businesses and their stakeholders. This means identifying most exposed activities, labour forces, communities and regions, assessing local capabilities, and developing appropriate response measures such as retraining and reskilling.
  
  

I would like to thank the German government for entrusting the OECD with this important work. With the potential to drive progress on both growth and climate, there is good reason for governments to place the climate imperative at the heart of national growth and development strategies. The OECD looks forward to continue to work with governments to design, develop and deliver better climate policies for stronger growth, a cleaner environment and better lives.