Conference at Chatham House - The OECD and Globalisation: The Economics of Climate Change


Remarks by Angel Gurría,Secretary-General, OECD


London, UK, 30 June 2008

Ladies and Gentlemen

It’s a great pleasure to be back at Chatham House, at the Royal Institute of International Affairs.

In these turbulent times where the only constant seems to be “change” itself, it is reassuring to come to an institution that has been around for more than 80 years; measuring the pulse of international affairs; providing sound-independent analysis to create a brighter future.

The times are uncertain. But your commitment isn’t. Neither is ours. These are OECD times. Thanks for the invitation. And thanks to Bloomberg as well for co-organising and hosting this event.

I would like to share with you a few insights on how we perceive this new era of globalisation at OECD and on how we are responding to its multiple challenges. Climate change, the fundamental challenge of our time, stands out.

Globalisation and the new “whirled” order

It is difficult to think of another historical phase where human progress has been so viable and at the same time exposed to so many simultaneous challenges. As a recent study by the John Hopkins University argues, we are living a “New Whirled Order”, and only multilateral co-operation can turn this whirl into a roadmap.

Under the current wave of globalisation, the world economy has experienced one of its most dynamic expansions ever - growing 35% over the last seven years. International trade and investment flows have thrived, allowing developing countries to connect better to the global economy, lifting millions out of poverty.
Research and development (R&D) have bloomed and spread globally. International migration has created a “borderless workforce”, while the Internet - with nearly 1.4 billion users - is opening a virtual highway for human progress. Globalisation has also raised the importance of crucial multilateral instruments, like the Millennium Development Goals, the Kyoto Protocol or the World Food Programme.

It is important to take account of the manifold benefits of globalisation. They are opening countless opportunities to build a better world.

However, we are also witnessing a growing number of global challenges of increasing complexity and urgency. Challenges like climate change, rising commodity prices, the subprime crisis, international migration or cyber-crime.

At OECD we are helping governments address these challenges. And we are also helping them to build common international understandings and new frameworks to make globalisation a more transparent, balanced and harmonious process.

We do this by sharing governmental experience, by identifying best practices and by providing state-of-the-art analysis and reliable comparative statistics, in virtually all areas of public policy. We learn from each other to understand what works and what doesn’t.

Let me talk to you about our experience in helping the world to address the peril of climate change; the defining issue of our time.

Changing climate change: the ultimate challenge

Last week, scientists announced that three new planets - called super-Earths - have been discovered orbiting a sun-like star. Their presence apparently suggests that finding a world like ours is just a matter of time. But we are not yet there. For the moment, we only have one planet and we are wrecking it at an impressive rate.

Scientific evidence is pointing to a clear conclusion: humanity is living beyond the means provided by nature. Global industrialisation, population growth, overdependence on dirty energy and economies that base their success on the permanent increase of consumption are putting excessive pressure on natural resources.

Our technological capacity has never been greater, but we are still dumping 134 million tonnes of greenhouse gas emissions into the atmosphere every day. Despite an increasing understanding of the significant impacts climate change will have on our economies, our health and our security, we keep moving in polluting cars and planes, we keep using carbon-intensive energy, we keep forgetting that we are borrowing this world from our children.

Our OECD Environmental Outlook to 2030 projects that, if we continue to do business as usual, global greenhouse gas emissions are expected to grow by over 50% by 2050; which will cause world temperatures to rise between 1.7 and 2.4 degrees Celsius above pre-industrial levels by 2050, and between 4 and 6 degrees Celsius or more in the long-term. This would be equivalent to the change in absolute temperature and at a pace that is ten times greater than that experienced since the last ice age —an era in which much of Europe and North America was under more than one kilometre of ice.

We need to act now. It is time for collective decisions, for serious reforms and effective policies. Moving forward requires a new global deal on climate change; an international agreement must be signed in December next year, at the COP15 meeting in Copenhagen.

Based on more than 20 years experience, OECD has been providing analysis to support countries in building a sound economic and financial footing for climate action, to build a solid post-2012 architecture.
Let me share with you some of our conclusions and recommendations.

Achieving ambitious climate stabilisation goals is economically rational. Based on the analysis in the recent OECD Environmental Outlook, an ambitious scenario of stabilising greenhouse gas concentrations in the atmosphere at about 450 parts per million (ppm) of CO2-equivalent, although certainly not cheap, is nevertheless affordable in light of the expected economic growth over this period (world GDP is expected to double by 2030, and triple by 2050); and it is likely to be less expensive than the cost of inaction.

This scenario is based on two essential assumptions: 1) that all countries participate; and 2) that they apply the least-cost policies available today. In some of our new analysis, we have raised our baseline projections of greenhouse gas emissions to reflect that we are now seeing higher levels of emissions than what we projected just a few years ago.

This is both because of the lack of collective policy action to tackle climate change, as the more rapid economic growth in emerging economies and a growing trend towards increased coal use. With higher projected emissions in the business as usual pathway, of course, the costs of achieving a given target also increase -- but even with these higher costs, we still find that ambitious action is economically rational and has positive, cost-benefit outcomes.

The most difficult task now is to translate these objectives into policy action. The issue is not only how much it all costs, but also who is going to pay for it.

Developing countries will suffer most from the effects of climate change. Their economies are more dependent on natural resources - such as agriculture, forestry and fisheries - and they often lack the infrastructure, the financing and the capacity to adapt to a changing climate.

Our policy simulations show that the use of some approaches that would lead to least-cost emissions reductions worldwide--, such as a globally harmonised tax on emissions -- would lead to almost five times bigger GDP losses in many developing countries than in the advanced economies. Thus, if the costs are not shared, developing countries will not be in a position to participate and the scheme will fail.

Any successful policy has to include substantial reductions in future global emissions and participation of emerging and developing economies is an indispensable element. This is because of the rapid increase of emissions in fast-growing emerging economies, and of the many low-cost mitigation opportunities that can be found in these countries.

One option to share the costs of action would be through a relatively generous allocation of permits to these countries under a global cap-and-trade scheme. In applying such an approach to the  450 ppm scenario, our simulations found that while the total costs of action would be roughly the same as under the globally harmonised tax scenario, this case could lead to a more “equitable” sharing of the costs of action. Industrialised OECD countries would be able to buy emission permits from developing countries, effectively helping to pay for mitigation measures in those countries.

Moving to the national perspective, our analysis highlights the important role for economic instruments in the broader policy-mix. Instruments such as emission taxes and charges, tradable permits and the removal of environmentally-harmful subsidies keep the cost of action low and help to put an appropriate price on emissions.

But we will also need regulations and standards, in particular fuel efficiency standards for vehicles and energy efficiency standards for buildings, and voluntary agreements. We will need an enhanced support to basic R&D, as well as information-based instruments, such as energy efficiency labels.

Technological breakthroughs have a key role to play. Pricing emissions can provide powerful incentives for eco-innovation and lead companies to develop cleaner and more energy-efficient cars. New technological solutions are already developing: from light-weight plastic for car parts to hybrid vehicles, from new hydrogen fuel cells (which could make vehicles up to 80% more fuel efficient) to next-generation electric batteries which are bringing the “all-electric car” closer to reality.

A solution to stop climate change will demand a set of path-breaking policies to drive the transition of our industries and consumers to low-carbon economies. As State Secretary Hilary Benn argued a few days ago in this same arena: we require a major cultural change, driven by strong leadership and a new generation of cleaner and smarter energies.

We need to keep all technological options open, and governments should avoid “picking winners” amongst different technologies. Some potential solutions can have unintended harmful consequences in other areas.
FAO  and OECD agricultural and economics teams have explained how bio-fuels have become one cause of the current spike in food prices.

Let me touch on this crucial issue.

The spiral of food prices: a global tragedy

The current price spike in food prices is a symptom of a poorly managed aspect of globalisation.

By all measures, the spike is alarming. World prices of wheat, coarse grains, rice and oilseed crops nearly doubled between the 2005 and 2007 marketing years. And they have continued rising unabated throughout 2008.

Our recently published OECD-FAO Agricultural Outlook estimates that food prices will come down again, but they will not regain their historical levels. On average over the coming ten year period, prices of cereals, rice and oilseeds - in real terms - are projected to be 10 to 35% higher than in the past decade.

The spiral in food-prices is starting to reverse the progress we have made in recent years in reducing poverty. Millions of people are being pushed deeper into poverty and hunger by high food prices. According to the World Bank, the number is at least 100 million. 

What are the possible policy responses?

In the short term, there are immediate and urgent needs for food aid and humanitarian assistance to avoid that poor people go hungry. But beyond the emergency, we have to address the structural problem.
In the medium term, there is a real need to improve the purchasing power of poor food buyers. I am talking about doubling our efforts to combat poverty; about enhancing our development work; about fulfilling our aid commitments and making food affordable.

Agricultural trade policies require further reform. Trade restricting policies have undesirable and often unintended impacts; especially in the medium and long term. Subsidies to agricultural exports have contributed to damage the agricultural capacity and rural social stability of many developing countries. A swift and ambitious conclusion of the Doha Round of WTO negotiations could detonate the potential of markets to balance supply and demand at the global level.

OECD has launched a multidisciplinary project that brings together several areas inside the Organisation to analyse the various policy options to deliver on this ambitious development agenda. In the coming days, we will strengthen already close collaboration with FAO to look for effective and innovative solutions.

We will also work with the United Nations High Level Task Force on Food, which we have joined recently. And we will convene a series of high level events before the end of 2008, where governments of member and major non member countries can jointly consider alternative solutions.

Ladies and gentlemen,

Climate change and the spiral of food prices confront us with “the fierce urgency of now”, to use the expression of Reverend Martin Luther King.  We cannot afford any more delays. Losing time means losing lives.

Globalisation has moved us into a new era of complex interdependence. Gone are the days when a country could solve its problems in isolation. We have to work on the links; between different issues; between decision-makers and international organisations; between today and tomorrow.

In our daily behaviour, in our ideas and in our policies, we have to reflect on the close linkages between climate change, record oil prices, drought in East Africa, food and water scarcity, agricultural subsidies and massive consumption. 

Tackling climate change is possible. But it requires a collective global response; a historical new agreement in Copenhagen. To get there we will need a great deal of political will, a solid economic footing, greater multi-disciplinary analysis, more horizontal approaches in multilateral co-operation and better policy-coherence. OECD is working hard to provide these inputs. But we will not get far without your contribution.

This is a great opportunity to appeal to a group of creative minds, of successful entrepreneurs and opinion-makers like you to help us fast-forward change. We must tackle climate change together, before climate change beats us. It is our generational responsibility and there are no more excuses, there is no more time to waste.

Thank you very much.


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