Remarks by Angel Gurría
25 September 2018 - New York, United States
(As prepared for delivery)
Ministers, Excellencies, Ladies and Gentlemen,
I am delighted to be here this evening to kick off the launch of the joint OECD, World Bank and UN Environment initiative Financing Climate Futures: Rethinking Infrastructure. We have worked together to produce an important body of work which can go a long way in helping us achieve our climate goals. I would, therefore, like to thank our partners in this project for their collaboration, as well as the German Minister of the Environment, Nature Conservation and Nuclear Safety, Ms. Svenja Schulze for her support.
The Financing Climate Futures initiative comes at a critical time for our planet. Greenhouse gas emissions have taken the climate well beyond the conditions in which human societies developed and thrived.
This summer we witnessed record-breaking temperatures across the globe. Intense droughts destroyed crops. Wildfires raged across North America and Europe, as far north as the Arctic circle. And heavy rainfall in India and Japan killed hundreds of people, and destroyed tens of thousands of homes.
Sadly, this is a mere snapshot – a short “teaser trailer” – of what lies ahead, should we continue on our current trajectory. We need to urgently deliver on our climate and development goals, and to do that we need to shift trillions of dollars towards low-emission and resilient investment.
The OECD’s “Investing in Climate, Investing in Growth” study found that in order to sustain growth and meet the basic needs of a rapidly growing global population, 6.3 trillion US dollars of investment in infrastructure per year is required between 2016 and 2030. And this number does not even take into account further action to mitigate climate change.
By comparison, global investment in renewables was 300 billion US dollars in 2017 – which accounts for about one-third of what was invested in upstream and downstream fossil fuel exploitation. If we invest in the wrong type of infrastructure we will lock-in emissions, and miss our climate targets, with disastrous consequences for the environment, our economies and human well-being. The effects will be particularly severe for those countries that are already feeling the brunt and which are in greatest need of green infrastructure, developing countries in Asia and Africa. I am talking about eco-nomics.
Making infrastructure investments “climate-compatible” has the potential to be cheaper and more profitable, especially if we take advantage of new developments in digitalisation, materials, and processes. However, it does require a radical and systemic shift in our business culture, our investments, away from carbon-intensive forms towards infrastructure that is resilient, and consistent with the well below 2-degree goal.
In this respect, ‘Investing in Climate, Investing in Growth’ and the OECD’s Framework for Policy Action on Inclusive Growth stress the necessity to step up investment in smart and clean infrastructure. And we are beginning to make some progress in steering capital flows to low-carbon, climate-resilient investments; but this is only incremental, and does not reflect the kinds of major transformations in infrastructure, finance, and investment that are necessary.
Green infrastructure investment is a mere drop in the bucket of the portfolios of institutional investors. The green bond market, for example, is approaching half a trillion dollars, but only accounts for less than one percent of the global bond market!
Moreover, addressing the climate change urgency – defined as Sustainable Development Goal 13 – will also allow us to better address other pressing challenges of our time such as: SDG 6 clean water and sanitation; SDG 7 affordable and clean energy; SDG10, reduced inequalities; SDG 11, sustainable cities and communities; SDGs 14 & 15 life below water and life on land; and even SDG 3, good health and well-being. The positive effect potential is great!
As such, the Financing Climate Futures initiative asks this very fundamental question: Are our current infrastructure planning practices, decision-making processes, and institutional settings fit-for-purpose? The answer is a resounding NO.
Policy change around issues such as carbon prices, fossil fuel subsidy reforms and renewable energy support are vitally important, but have been too incremental. To meet the goals of the Paris Agreement we must deliver transformational, not marginal change.
So how do we get there? Financing Climate Futures: Rethinking Infrastructure looks at the game changers that will unlock strong, climate-compatible development. We have identified six transformative areas to help us align financial flows with a low-emission, resilient future. Let me briefly describe them:
Firstly, plan today for a zero net emission future. Short-term decision-making locks countries into expensive mistakes in financing and developing infrastructure. To overcome this, all governments should develop long-term low-emission development strategies. I congratulate the nine countries that have already submitted such a strategy to the UNFCCC.
But this is not enough: the wider decisions we make today must also be consistent with these long-term plans. This includes stress-testing decisions in institutions, businesses, and governments against the 1.5 - 2 degrees pathways; ratcheting up the ambition-level of Nationally Determined Contributions; and aligning these decisions with financial planning.
Secondly, disentangling budgets. The way governments raise money is critical to driving change. Governments are hooked on fossil fuels. On average, rents extracted from oil, natural gas, and coal resources account for 10 percent of total government revenue. Broadening the tax base is a critical economic and development challenge. Carbon pricing is essential but we need to go beyond this to broaden energy taxation settings, as well as the mix of taxes on land, labour, and capital.
In fact, our latest Effective Carbon Rates (ECRs) report, which was released only last week, stresses the importance of pricing carbon emissions in order to move towards carbon-neutral growth. It specifically: focuses on the change of ECRs by comparing pricing patterns in 2012, 2015 and estimates for 2018; identifies carbon pricing gaps, which is the extent to which polluters do not pay for the damage from carbon emissions; and, stresses the importance of closing those gaps to encourage investment in clean technologies, create new markets and benefit from ever cheaper renewable power.
The way governments spend their money is also critical. Yet between 2010 and 2015, fossil fuel subsidies amounted to 373-617 billion US dollars annually across 76 economies, which collectively contribute over 90 percent of global carbon dioxide emissions. This is why last year at the One Planet Summit the OECD launched the Paris Collaborative on Green Budgeting – together with France and Mexico – which aims to support the strategic alignment of national budgetary processes with climate and other environmental goals.
Thirdly, resetting the financial system. The financial sector is becoming increasingly engaged in climate action, but has a long way to go to fully recognise its role and responsibilities. We must drive systemic change in finance allocation through improved disclosure, governance, and management of climate risk. We must re-set incentives to favour long-termism and sustainability.
Fourthly, harnessing innovation. Innovation has always been central to economic transformation. Today however – at a time of profound technological change – we must make the most of harnessing innovation to drive swift decarbonisation of our economies, and enhance resilience. This means scaling up new technologies, but also embracing new business models such as electric car sharing, or smart home technologies so consumers can better track and manage their consumption.
Fifth, reshaping development finance. Development banks and finance institutions are critical actors in the transformation that is necessary. Together, major multilateral development banks committed 35 billion US dollars in climate finance in 2017, a 28 percent increase from 2016. And yet, not all their investments are consistent with the goals of the Paris Agreement; and their potential to leverage private capital for climate-compatible development is yet to be fully realised.
Last but not least, empowering local governments. Actions at the global and national levels alone are not sufficient and the involvement of subnational actors is also very important. For instance, as urban populations grow, trillions of dollars will be spent on expanding and renewing urban infrastructure, particularly in the developing world. The failure to invest in the right urban forms will put residents, the local economy and social cohesion at risk, potentially entrenching and exacerbating today’s inequalities.
This is not a cherry-picking exercise. The economic transformation we need requires action across each of these six areas. And it will not come from a single financial actor, a single ministry, or a single country. It requires a multi-stakeholder, whole-of-government, and global approach.
Ladies and gentlemen:
Speaking at the OECD a few years ago, Johan Rockström stated: “We have moved from a small world on a big planet to a big world on a small planet.” It’s time to think BIG when crafting solutions. It’s time to be bold. It’s time to double our efforts to achieve green growth and climate compatible development.
Climate change is the defining issue of our time – and we are at a defining moment. We face a direct existential threat. Continuing along our current path is simply not an option. We must embrace the challenge that we face and we must deliver on our climate commitments.
I would like to thank the German government for supporting the OECD in this important work, and the UN Environment and the World Bank for their strong partnership. The OECD looks forward to continuing to work with you all in designing, developing, and delivering better climate policies for better lives. Thank you very much.