Energy, Environment, Climate Change: Unlocking the Potential for Innovation


Keynote speech by Angel Gurría, OECD Secretary-General, during the World Energy Council: Energy Leaders Summit

London, 16 September 2008
Ladies and gentlemen, distinguished guests, good morning.

It’s a pleasure to be here among leaders of global energy businesses to speak on an issue that concerns us all: how to tackle climate change.

Climate change is especially of concern to the energy sector, since the use of energy accounts for some 60% of greenhouse gas emissions. But above all, climate change is a global concern, because without new policy action, we risk to irreversibly alter the environmental basis for sustained economic prosperity.

Climate change will impact on our health, our security and our economies. The damage could be large and irreversible. The costs are also likely to be unevenly distributed, with poorer economies and households incurring greater losses. This is one of many facets of the problem that complicates the international response to the climate change challenge. And, in a context of weakening growth and jittery financial markets, it may be tempting for our leaders to postpone dealing with climate change.

The political will to develop an ambitious, yet achievable, international response to the climate challenge is gaining momentum. I was with the leaders of the G8 countries and the major emerging economies in Hokkaido this July when they discussed climate change.

I saw both their commitment, but also the obstacles they confront. The differences in views on who should take responsibility for action; where the financing needed will come from; how best to spur technology development and deployment; and how to protect the competitiveness of their economies. Moving forward will not be easy.

Moving forward will not be cheap either. The OECD has long advocated that a least-cost strategy is key to success. To build consensus on what this will involve, the OECD is working on the elements of a sound economic foundation for the post Kyoto architecture.

The overall challenge is an energy “revolution”, a restructuring of our economies, in order to “de-carbonise”. The key question is how to get there? This is where the OECD’s more than 20 years experience on the economics of climate change makes a difference.

First, let me stress that there is no single “silver bullet”. Climate change is a comprehensive challenge. To tackle it successfully will need the combined partnership of national governments worldwide, local authorities -including cities -, the energy industry, other business and consumers. We are already seeing action by many of these partners, including in the energy sector, but a more co-ordinated, comprehensive and ambitious response is needed.

We are reaching a convergence in our understanding of the main elements of a cost-effective strategy to tackle climate change. We know, for example, that emphasis will be needed on instruments that put a price on greenhouse gas emissions, covering as many countries, sectors and greenhouse gasses as possible. Cap-and-trade schemes, or emission taxes are cost effective because they induce firms to look for abatement options where they are cheapest, and boost incentives to scale up climate-friendly R&D. Leaders must build on recent developments and act now to make greater use of economic instruments.

But economic instruments on their own will not be enough. They need to be complemented by other policies to help address market and information failures. For example, the lack of information about energy-efficiency performance of electrical appliances and light bulbs may prevent households from optimising energy consumption. Such specific problems can be addressed through energy efficiency standards, or eco-labelling requirements.

Some of the other elements of a cost-effective strategy are likely to include phasing out fossil fuel energy subsidies and supporting climate-friendly innovation through R&D policies. I will say more on developing new energy technologies in a moment.

We are currently extending our analysis of the costs and impacts of different policy mixes to address climate change. The results will be available later this autumn, but I’d like to give you a preview of a few key conclusions now.

We are anticipating that the cost of ambitious emission reductions to 2030 are likely to be higher than we had previously estimated. Much depends on the growth performance, especially in emerging countries, which could drive emissions upwards in the baseline. On the other hand, the development of oil and gas prices could result in some counterbalancing pressure on emissions. It is clear that we have to follow all this very closely. Ambitious action is still economically rational. With the right policy mix, significant emission reductions could be achieved at a small fraction of expected economic growth over the next few decades, an affordable cost when compared with the costs and consequences of inaction.

Our new analysis also emphasises the importance of applying a broad mix of instruments to tackle climate change. The exact mix will vary from country to country depending on specific circumstances, but in general they should tend towards the equalisation of abatement costs at the margin across economic activities. The analysis shows that costs will increase however, if action is only partial. For example, if only a limited number of countries act, or if some sectors – for example energy-intensive sectors -- are exempted from policies.

More limited action also raises concerns about “carbon leakage” and industrial competitiveness. We are examining the potential costs and impacts of strategies that could be used to address “carbon leakage”, including border tax adjustment and sectoral approaches. The results of this new analysis will be available later this Autumn.

Let me now return to the crucial topic of innovation, R&D and new energy technologies.
To achieve a low-carbon economy, the development and deployment of new technologies is essential, for two reasons. First, to bring down the cost of available or emerging emission-reducing technologies. And second, to expand the pool of available technologies and their mitigation potential. Together, they will help to lower future marginal abatement costs.

Renewable energies, nuclear energy, and carbon capture and storage (CCS) are some promising technological possibilities for the energy sector. In its recent report on Energy Technology Perspectives to 2050, the International Energy Agency, a sister organisation of the OECD, shows that a wide range of emerging technologies can contribute to a low-carbon economy provided the large investments needed to make them competitive start now.

For its part, the Nuclear Energy Agency, another sister organisation of the OECD will publish in mid-October for the first time a Nuclear Energy Outlook. This new report will emphasise the role that nuclear power can play in delivering cost-competitive and stable supplies of energy, while also contributing to reduced greenhouse gas emissions. The NEA’s Outlook projects that existing nuclear power technologies could provide almost four times the current supply of nuclear generated electricity by 2050. To accomplish that, however, the NEA underlines the crucial need to secure the support of society to expand nuclear capacity.

So far, however, progress towards a “low-carbon society” has been too slow. So how do we ensure the incentives and financing to support the development and deployment of clean technologies?
The first priority is to get an ambitious and credible climate agreement by all countries in Copenhagen in December 2009. This will signal a long-term commitment that will favour investments in low-carbon technologies. Our work suggests that under a predictable world carbon price path, world energy R&D spending would be many times higher by 2050 than under a scenario where no carbon price is set. Think about carbon capture and storage (CCS) for instance. Without a carbon price, the private return from investing in CCS is zero.

A predictable policy environment would also favour the deployment of less carbon intensive technologies and fuel types. This is particularly important in emerging economies. In the next two decades China is likely to construct new buildings equivalent to the total building stock in Europe today. Imagine the difference in energy needs and emissions if these buildings are all built to the highest energy-efficiency standards.

But what else can be done, in particular to expand the pool of available technologies and their mitigation potential?

For a start, governments need to scale up their research and development policies, because pricing carbon will likely not be enough to bring about the R&D spending we need. Given the global nature of climate change, one option is for governments to work together and with the private sector to strengthen international collaboration to speed the development and deployment of large-scale transformative energy technologies. For instance, global innovation funds can help share the risks and costs of these technologies. Technologies that are particularly well-suited to this type of collaboration are CCS, next generation nuclear, fusion power, and hydrogen-fuel cells.
We also need to speed up the deployment of already existing technologies. Apart from pricing carbon, the policy options are many. For renewable energy, governments can use investment incentives, tax measures, preferential tariffs, quantitative targets or obligations to provide a certain amount of electricity from renewables, tradable certificates for meeting such targets and voluntary programme.

But governments should use these policy tools carefully. First, technology development must be spread widely at least cost. Second, we need to avoid picking technology “winners”. In this regard, the lessons from some poorly designed government policies to support bio-fuels should serve as a salient reminder. Bio-fuel subsidies are not cost-effective. They also impose high social costs by contributing to higher food prices. We have estimated that the greenhouse gas reductions resulting from current bio fuels policies typically come at a costs of over ESD 1000 per tonne of CO2-eq avoided. In comparison, the price of avoided CO2 emissions under the EU ETS scheme is in the USD 30-50 range.

Once new low-carbon technologies are developed, they need to be rapidly deployed and diffused, including in developing countries where the greatest increases in emissions will occur in the future. They will need to be on board for action to reduce emissions and this will require support to facilitate their rapid uptake of cleaner technologies. Pricing their emissions, or at least scaling up the Clean Development Mechanism would help here.

International protection of intellectual property rights is essential too. OECD work has also identified other barriers to the diffusion of new technology, including import tariffs, cumbersome custom-clearance procedures, non-transparent government procurement, and divergent technical regulations.
To sum up, climate change is a global challenge demanding a global solution. Thankfully, the will to find and implement the policies that will bring us to a low-carbon future is gaining momentum. Now is the time to harness that momentum with an ambitious climate agreement. Doing so will require the continued commitment of all stakeholders - governments, business, consumers and researchers.

For our part at the OECD, we will continue to support our leaders to establish cost-effective national climate change policies and to ensure the post-2012 framework is built on a sound economic footing.

Thank you very much.


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