Climate, Carbon, COP21 and Beyond

ecfChris Barrett, Executive Director, Finance and Economics, European Climate Foundation, and former Australian Ambassador to OECD. Chris is one of the discussion leaders at the OECD Forum IdeaFactory “Climate, Carbon, COP21 and Beyond” on Tuesday 2 June.

The ECF was established in 2008 as a major philanthropic initiative to promote climate and energy policies to cut Europe’s greenhouse gas emissions and to help Europe play an even stronger international leadership role to mitigate climate change. I run our finance sector policy program, and would like to give you an idea of how I see that work and its role in delivering climate mitigation.

We’re all shaped by context and in my case that context is more than a decade working on various versions of what would become Australia’s carbon tax in 2012. My colleagues like to tease me that once the Australian carbon tax was abolished in 2014 my “theory of change, changed” and there’s something to that.

But you don’t need a political mugging in a dark alley to understand that we’re asking a great deal of today’s governments to mandate the emissions cuts science tells us we need. The politics are always devilishly hard when the avoided damage appears (and I emphasise “appears”) to be far off in the future, and the costs of action appear (emphasis again) large and immediate.

That’s not to say we shouldn’t demand a strong deal in Paris – we absolutely should and must, and I recommend my World Resources Institute colleague Jennifer Morgan’s recent work as a great primer on the contours of a powerful and effective Paris deal.

But successful political action never occurs in a vacuum and we’re better to understand a “threshold logic” at work in which a great many forces (political pressure, observable climate phenomena, changing personal and corporate behavior) build up momentum and facts on the ground which can then crystallise in a new policy consensus.

We typically think of these things as happening very slowly, but only because our habits of thinking don’t cope well with transitions where an unsustainable state exists for a long time before suddenly it ceases being sustained. What we need are analogies – never perfect in themselves – to demonstrate a long run-up and sudden resolution in the past to give us scenarios for how our current climate collective action problem may cross a critical threshold.

I think there are two powerful analogies from the world of finance, each of which underpins a crucial message about the low-carbon transition.

Message one: the carbon bubble is real

Consider a banker in 2006 holding a portfolio of credit default swaps based on US sub-prime mortgages. That US housing values were unsustainable has now entered the canon of global economic history, but it’s worth reflecting on the investor assumptions that held sway in the years approaching the crisis: investors assumed the underlying investment was sound, that any defaults would be distant in time or isolated in number or both and perhaps most importantly, that even if the trend of increasing home lending in debt was unsustainable, any unwinding would be slow and orderly, or slow enough for that particular investor to sell before the crash.

Of course you know where I’m going with this. The carbon bubble popularised by Bill McKibben, Carbon Tracker and others argues powerfully that holders of carbon-intensive assets are soothing themselves with the same false assumptions: asset values are safe, carbon regulations that might devalue them are in the distant future, and any decarbonisation path will at worst be slow or gradual and well-telegraphed for the astute investor which of course includes them.

But unquestionably, this view is even more deluded than for our sub-prime investor in 2006. The analysis is there for anyone who cares to look – fully 80% of proven carbon reserves – sitting on the balance sheets of companies around the world – are unburnable if the world is to maintain the 2° warming scenario to which governments committed already in Copenhagen.

There is a ready-made explanation for this of course, namely that investors do not believe governments are serious about the 2° target and they will never feel the value-destroying regulations they are supposed to fear. As a piece of political analysis, this would worry me deeply if I were one of those investors, and for four reasons:

One, those regulations exist already, and the trend is towards their increase, even before Paris commitments are finalized – the EU Large Combustion Plant Directive, the US Clean Air Act, and even the recent proposed coal levy in Germany are all examples;

Two, regulations don’t need to target carbon to destroy the value of carbon-intensive assets. The biggest climate story of the year so far – the nearly 5% year-on-year fall in Chinese coal consumption – has been driven to a very large extent by air pollution concerns.

Three, there is economic stranding of assets too, as I hardly need to explain given recent plunges in fossil fuel commodity prices.

Four, the political heat is being turned up on a critical component of high-carbon asset values, namely the implicit and explicit subsidies on which they depend. Explicit subsidies are falling as government budgets come under more pressure and the lower oil price makes reform less politically painful. And implicit subsidies have just had a spotlight shone on them by one of the best pieces of public good economic research I have seen in recent years – the IMF quantifying them at the lion’s share of an astonishing $10 million a minute.

…and all of this is before we consider the gathering impact of divestment campaigns around the world, which have the ultimate aim of removing what I would call the “social licence to operate in capital markets” for fossil fuel companies. Just last week, we saw arguably the most spectacular and consequential example of this, namely the divestment decision by Norway’s giant sovereign wealth fund.

And then let me add a further reason to worry about a carbon bubble, and I proceed from another analogy:

Message two: low carbon economics are transformational

Consider you are a stockholder in Kodak in the mid-1990s and again let’s look at the underlying assumptions for why your investment is safe. People need your film to record their memories, it’s an inexpensive product, it’s ubiquitous, and your market position is strong. You’re thoroughly unprepared for a competitor – a digital camera – with a marginal cost of zero.

You see where I’m going here too. Solar PV, just to cite the most obvious example – dematerialises energy the same way as digital photography dematerialised photography. I didn’t name or compile this next chart, but it makes in very dramatic fashion a point my colleagues at Agora Energiewende in Berlin recently devoted a long and fascinating analysis to: solar outcompeting conventional new coal and gas fired plants by 2025.

energy costs

And it is not just solar, of course, as recent announcements by Tesla of its move into home batteries have focused investors on the Moore’s Law cost trajectory of battery storage.

Nor is Kodak an isolated example. We have seen this again and again in recent decades with technology disruptions: floppy disks, video stores, CDs. Capitalism forces radical sectoral change all the time.

Reflections on the psychology of climate action

I started with personal stories, so let me finish with one. When we introduced the Australian carbon tax, our Treasury did some modeling to work out what the impacts on emissions and inflation might be. The impacts were extremely low – effectively a one-off increase in inflation of less than one percent, but the lived experience of the tax beat even that. When the tax was introduced, we saw emissions fall more than expected with a lower inflation impact than expected. As a practical matter, it always surprised me as an economist that we would spend decades in Australia pushing for a lightly regulated, flexible market economy and then freak out at the idea of the cost of one byproduct of production going up a bit in price.

This is just one example of my final message, which is that the costs of the low-carbon transition are routinely overestimated. Let me depart from economics and dabble for a moment in psychology. When we all (rightly) insist that climate change is an urgent and existential challenge, people almost automatically conclude the solutions must be painful and expensive. There’s no solution to this other than to be aware of it, and to be very disciplined about how we model and communicate the costs of action and repeat, repeat, repeat.

To re-cap, there are two powerful forces at work driving a low-carbon transition: a bubble building up in carbon-intensive assets, and transformative economics of many low-carbon investments. We have seen similar forces tip over into dramatic action in the past. And we needn’t fear the transition, since the costs will be lower than we expect.

What this all means for Paris is that the transition is coming, the question is how orderly it will be. In this context, the role for governments is clear – transitions are fairer, smoother and more durable when they are policy-led or at the very least, policy-enabled. And the clearer these underlying economic trends are to all players, the easier it will be for governments to act. Actually, a Paris deal has the chance to accelerate the transition and ensure a more orderly transition by sending clear signals reaffirming the messages that are flowing already. This is why we at ECF have a finance program, and why I’m delighted to be part of it.

Useful links

OECD work on climate change

The OECD’s Business and Finance Outlook looks at the Greatest Puzzle of Today

Business-Finance-Outlook-LaunchAdrian Blundell-Wignall, Director in the Directorate for Financial and Enterprise Affairs, Special Advisor to the Secretary-General on Financial Markets

The greatest puzzle today is that since the global crisis financial markets see so little risk, with asset prices rising everywhere in response to zero interest rates and quantitative easing, while companies that invest in the real economy appear to see so much more risk. What can be happening? The puzzle is even more perplexing when we see policy makers lamenting the lack of investment in advanced countries at a time when the world economy shows all of the characteristics of excess capacity: low inflation and falling general price levels in some advanced countries for the first time since the gold standard and despite six years of the easiest global monetary policy stance in history.

Will financial markets be proved wrong so that asset prices will soon collapse? Or, alternatively, will business investment take off and carry growth and employment to more acceptable levels validating the market optimism? The forthcoming OECD Business and Finance Outlook presents a reconciliation of these apparent contradictions based on the bringing together of new evidence about what is happening in some 10,000 of the world’s biggest listed companies as they participate in global value chains across 75 countries and which represent a third of world GDP. The salient points are these:

  • There is plenty of investment globally but from an advanced country perspective it is happening in the wrong places, as global value chains have broken down the links between policies conducted by governments inside their own borders and what their large global companies actually do. Short-termism too is apparent, where investors prefer companies that carry out more buybacks and dividends compared to those that embark on long-term investment strategies. Advanced country companies appear to prefer outsourcing investment risk to emerging market countries in global value chains when they can.
  • From a developing country point of view financial repression and exchange rate targeting are legitimate development strategies. Investment is enormous (running at double the rate per unit of sales in general industrial companies compared to those of advanced countries), but it is not well based on market signals and efficient value creation strategies. Instead, it is fostered by cross-border controls, the heavy presence of state-owned banks that intermediate the “bottled-up” savings into investment, local content requirements and pervasive regulations and controls. Over-investment—characterised as a falling return on equity in relation to the high cost of equity that opens a negative value creation gap—is a feature of many emerging market companies which, at the same time, are borrowing too heavily.
  • Concern about employment and growth in advanced countries has seen central banks vainly trying to stimulate investment at home: for six years they have kept close to zero interest rates and successive attempts at quantitative easing have been launched in the US, the UK, Japan and Europe. These actions are pushing up the value of risk assets in the search for yield, as pension funds and insurance companies face very real insolvency possibilities (with liabilities rising and maturing bonds being replaced by low-returning securities). The competition to buy high-yield bonds is seeing covenant protections falling, and less liquid alternative products hedged with derivatives are once more on the rise.
  • Many of these new products are evolving in what has come to be known as the “shadow banking sector”: as banks themselves have become subject to greater regulatory controls financial innovation and structural changes in business models are once again adjusting to shake off the efforts of regulators. Broker-dealers intermediate between cash -rich money funds on the one hand, which need to borrow higher-risk securities to do better than a “zero” return, and cash-poor institutional investors on the other, that need cash to meet margin and collateral management calls that the new-generation higher-yield alternative products demand. Shadow banking is focused on the reuse of assets and collateral. With this comes a new set of risks for financial market policy makers to worry about: leverage, liquidity, maturity transformation, re-investment and other risks outside of traditional banking system.

The Business and Finance Outlook provides evidence on some of these trends.

Nor are global value chains that facilitate the shift in the centre of gravity of world economic activity towards emerging markets serving economic development in the manner that might be expected.

Productivity of Sales versus Value Added in Advanced and Emerging Country Infrastructure & General Industrial CompaniesPrint

 Sales-per-employee, shown by the lines in the above graph, illustrate an astounding “catch-up” of emerging countries over the past decade. However, when company “value added” per employee is calculated (shown in the bars), there is much less sign of any emerging market catch up to advanced country productivity levels, in either infrastructure or general industrial companies.

Worse still, the “value added” productivity growth apparent in the rising columns prior to the crisis has not continued in subsequent years. This is no way in which to foster promises for ageing baby boomers, nor for the stable growth of employment for younger generations. The international financial and production systems will have to be reformed towards greater competition and openness if the world economy is to be put onto a more stable path.

Useful links

‌OECD Secretary-General Angel Gurría will present the findings in the Outlook at a launch event in Paris on 24 June 2015. This will be followed by a high-level roundtable debate on:

  • risks to the financial system in a low growth and low interest rate environment
  • whether pension funds and life insurers will be able to keep their promises

The event will be attended by representatives from the banking, insurance and pension fund sectors, senior pensions and insurance regulators, financial industry representatives, academics, journalists and other stakeholders.

OECD work on investment

OECD work on financial markets

Shedding light on government, one dataset at a time

opendata 2015Today’s post is by Bill Below of the OECD Directorate for Public Governance and Territorial Development

Transparency in government is the solution to many ills. To begin with, it promotes honesty. It supports accountability. It limits the effects of undue influence on policy by special interest groups. The more transparency we have in both the public and private sector the better off we are. As a societal value, transparency stipulates that the business of business and that of government shall be conducted in the light of day.

Such openness is the very foundation of trust. To launch his revolution, Gorbachev used the most radical word he could find—glasnost—meaning “openness to public scrutiny”. It could be argued that that single word brought down the iron curtain, itself a metaphor for a society cloaked in secrecy, unaccountability and the opposite of transparency.

The formal idea of government transparency can be traced back to the Enlightenment—le Siècle des lumières. In the age of reason, science, with its open inquiry, insistence on reproducible results and relentless assault on conventional wisdom became a dominant social and intellectual trope. It was a case of data vs. dogma. Politically, it offered a perfect foil to the lack of accountability of opaque and absolutist regimes. It was that very movement that gave us modern constitutional democracy.

Today, the Open Government movement, the direct descendant of the philosophy of transparency, is widespread. Openness is considered by many OECD countries to be a best practice. This has been manifesting itself over the last decades through the increasing prevalence and reach of Freedom of Information legislation. The unwritten manifesto of this movement is that “open” is the default position of government information, with exceptions made when the individual privacy, commercial information and in some cases national strategic information must be protected. This means that government institutions must prepare for and be organised to make their information available to the public. Freedom of information laws are manifested in the so-called Sunshine Laws mandating public access to government records.

Open Government Data (OGD) is yet another extension of this larger movement. Among other roles, governments are enormous data gathering organisations. Open Data means that this data must be made freely available to the public. This can be a daunting task even for governments with the best of intentions. Not because they have something to hide, but simply because many governmental agencies and institutions are poorly equipped to do so. For those who succeed, however, the benefits are significant.

Increasing public awareness of government activities is only the starting point. Just as importantly, OGD can allow government and the public to evaluate the expenditure and performance of government services with a view to improving, or axing, them—after all, if you can’t measure it, how can you know if it’s working? Also, access to more datasets will provide the tools for evidence-based government decision making and more informed public participation (that squeal you hear is the sound of pork projects running for the hills).

But perhaps one of the most exciting aspects of OGD is that part you can’t predict. That is, the plethora of useful applications that people are coming up with as more and more datasets become available. For example, the aptly named sitorsquat takes information on publicly maintained toilets to guide you to the closest public loo in working order. How practical is that?! It seems obvious but someone had to think of it and municipal data had to be available to make it happen. Appropriately, Proctor & Gamble, makers of Charmin brand toilet paper are the sponsors. Yes, private businesses will use open government data to make a buck, a euro, a yuan or other. And that’s o.k., as most governments are keen to leverage their data to support an uptick in economic activity.

On a slightly different register, the US Department of Health and Human Services has released government data allowing the comparison of health care costs for the 100 most common treatments and procedures in 3,000 U.S. hospitals. The data revealed enormous variations in rates from one hospital to another, including one procedure that cost USD 8,000 in one hospital and USD 38,000 in another. This is information that can make a huge difference in the life and wellbeing of citizens. These are but two of the thousands of ways that OGD is bringing value to the public.

As part of its Open Government Data (OGD) work, the OECD has created OURdata, an index that assesses governments’ efforts to implement OGD in three critical areas: Openness, Usefulness and Re-usability. The results are promising. Those countries that began the process in earnest some five years ago, today rank very high on the scale. According to this Index, which closely follows the principles of the G8 Open Data Charter, Korea is leading the implementation of OGD initiatives with France a close second.

ourdata

Those who have started the process but who are lagging (such as Poland) can draw on the experience of other OECD countries, and benefit from a clear roadmap to guide them.

Indeed, bringing one’s own country’s weaknesses out into the light is the first, and sometimes most courageous, step towards achieving the benefits of OGD. Poland has just completed its Open Government Data country review with the OECD revealing some sizable challenges ahead in transforming the internal culture of its institutions. For the moment, a supply-side rather than people-driven approach to data release is prevalent. Also, OGD in Poland is not widely understood to be a source of value creation and growth.

But Poland, as well as other countries, can take heart. A short time ago, today’s leaders in openness were in the same boat. By addressing legal, cultural, institutional and organisational issues systematically, and by sharing the experiences of other countries, progress was made. No matter how you measure it, government, business and the public are the clear winners.

Useful links

Digital Government Strategies

Social Media Use by Governments

Open Government

Fans demand level playing field

england-scotland-1872
It all started here

When you start to play football (or soccer, or whatever it’s called in your country) at a competitive level with real goalposts, referees and crowd trouble, one of the first things you learn is what to do when you commit a foul that elsewhere would get you arrested for causing grievous bodily harm (or aggravated assault, or whatever it’s called in your country). Don’t mutter “Sorry, old chap” and head shamefaced for an early bath. No, clamp your elbows to your sides, turn the palms of your hands upwards, hunch your shoulders, and stare incredulously at the approaching red card with a look of outraged innocence. That’s what was going on behind those bed sheets as FIFA’s finest were being led to their new team bus by the Swiss police.

The officials are charged with pocketing over 100 million euros thanks to illegal deals for various bits of footballing business. What may be surprising to people who aren’t interested in money football is that what surprises fans is the fact that the FIFA bosses were arrested, not that they may be corrupt. Even here at the OECD where a search on our website for “sports” brings up a discussion of the Australian Trade Practices Act or restrictions on franchise relocation in the US, questionable practices concerning the rights to broadcast football (one of the deals in question) appear regularly in country submissions regarding competition policy, such as this one in 2013 from Poland to the Global Forum on Competition.

Sepp Blatter, FIFA president, says he’s glad his friends got caught: “we welcome the actions and the investigations by the US and Swiss authorities”. And at tomorrow’s meeting of the Association, there will no doubt be calls to strengthen the fight against corruption. It’s a problem any authority handling large sums of money has to deal with. An OECD Policy Brief on fighting bribery cites World Bank estimates that more than $1 trillion dollars are squandered every year on bribes paid to public officials in exchange for advantages in international business.

When Sepp won his first presidential election in 1998, you could actually deduct bribes from your taxes as a legitimate business expense in some OECD countries. All that changed in 1999 when the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions came into force. FIFA itself is a private business of course, but it deals closely with governments when awarding the right to stage its major tournaments, especially the World Cup. One if its conditions is the right to BEPS – it doesn’t have to pay tax on its earnings in the host nation.

Even so, countries, cities or regions hope to benefit from the World Cup, Olympics and other big shows to promote economic growth by focusing efforts to provide and improve infrastructure, make the locality known to potential investors, and so on – “legacy” as they call it.

But as another OECD report on the benefits of staging global events warns, “Too many events have left places worse off, with expensive facilities that have no use, and a big bill to pay into the future”. That seems to be the case in Cuiaba, Brazil that has so far spent a billion reais ($350 million) of public money on a light rail system for last year’s World Cup that so far only has one station and will take at least another $100 million to finish. According to BloombergBusiness “Cuiaba’s rail system is the most visible failure of projects linked to the 2014 World Cup. The city has failed to complete 22 other promised legacy works including a hospital and several transport infrastructure programs.”

Oxford University’s Said Business School isn’t a fan of the 2010 World Cup’s legacy in South Africa either:  “Instead of the economic growth the stadiums were intended to stimulate, six newly built stadiums all have annual maintenance costs which exceed their revenue, and five out of six require ongoing taxpayer support. […] the legacy of these stadiums is having an undeniably negative effect on South Africa.” But it would be unfair to single out the World Cup when there are claims that the billions Greece spent on the Athens Olympics in 2004 is partly to blame for the current crisis.

In any case, we now have the answer to the question we asked last year when launching the Portuguese version of our Better Life Index in Brazil: Is there more to life than football? The answer is “Yes, prison”.

Useful links

More bad news for FIFA:Today the BWI (Building and Wood Workers’ International) filed a complaint against FIFA under the OECD Guidelines for Multinational Enterprises for failing to engage in due diligence concerning human rights for migrant construction workers in Qatar. The submission asks the Swiss National Contact Point to use its good offices with FIFA to facilitate change and to facilitate productive discussions between FIFA and BWI. BWINT web site

The next Global Forum on Responsible Business Conduct (18-19 June here at the OECD) has a highly topical session on “Responsibility in International Sporting Events”. Here’s the programme note:
International sporting events involve an intensely competitive bidding process for the host country and large corporate sponsorship amounts. In light of the upcoming Brazil (2016), PyeongChang (2018), Tokyo (2020) Olympics and FIFA World Cups in Russia (2018) and Qatar (2022), this session will be an opportunity to reflect on the role and responsibilities of governments, international bodies and enterprises (such as IOC, FIFA and Formula One) in ensuring that RBC standards are observed throughout the organisation of such events.

OECD work on bribery and corruption

Transport, trade and tourism

ITF SummitTo mark the opening of the International Transport Forum’s Annual Summit, today’s post is by the Summit’s keynote speaker Pravin Krishna, Chung Ju Yung Distinguished Professor of International Economics and Business at Johns Hopkins University

We live in exciting times. Globalization is deepening at a very rapid rate. In the last decade and a half, international trade in goods has nearly tripled and international tourism has nearly doubled in magnitude. Increased connectivity has led to globally fragmented production processes.

We are now more internationally connected in our economic interactions. We have a better appreciation of the peoples of different countries and their cultures through our travels. We have greater economic prosperity and a greater civilization through these interactions. A large part of this is due to the availability of transportation systems and the increased efficiency of their operation over time.

I will address three broad issues of the complex and multidimensional triangular relationship between transport, trade and tourism.

First, the crucial importance of transportation in generating economic gains, and the concerns about the effects of globalization on poverty and inequality.

Transport networks have obviously provided the backbone for the process of globalization. And, study after study has shown that improved access to transportation infrastructure can be beneficial at the local, national and the international levels. Research from the World Bank has shown that reducing delays at borders in an exporting country by 1 day, through improved trade facilitation, increases exports by 1 percent and that a 10 percent improvement in the quality of transport infrastructure would result in a 10 percent increase in trade, which suggests a very significant impact of improved transportation logistics on trade.

Going beyond the straightforward consequence of lower transport costs for trade flows; there seem to be other productivity benefits as well. For instance, following the Golden Quadrilateral project, which upgraded a central highway network in India, we observe an increase in size of the most productive firms and reduction in the size of the least efficient firms, signaling improvements in allocative efficiency in the economy.

In my own research, I have investigated a rather different set of issues concerning trade, poverty reduction and the availability of transport networks. The claim is often made that exposure to globalization may lead to greater levels of poverty and inequality. However, by looking across various regions within India, comparing regions which are proximate to ports and transportation networks with those that are not, we actually found the opposite. Without trade openness, poverty reduction is actually lower in geographically remote areas due to their lack of exposure to international markets (Krishna, Mitra and Sundaram, 2010). This is important for countries where persistent poverty is a major policy issue. Access to transport networks should clearly be an important part of equitable progress and poverty alleviation strategies.

Second, despite the obvious infrastructure gaps in transportation in large parts of the world, the question of whether to invest more in transport and in what forms, can only be answered in its specific context.

While we generally believe that there is a positive effect of infrastructure on output and productivity, it is not always the case that the benefits of additional infrastructure outweigh the costs. It is, of course, only with productive spending that value is created. Indeed, after surpassing certain thresholds in infrastructure levels, the marginal productivity of infrastructure declines. And, there is some evidence that the productivity of public capital has been declining in advanced economies. As transport networks have become more complete, the average impact of additional segments has been lowered.

Furthermore, the link between infrastructure and growth is much weaker when we measure infrastructure supply using pecuniary measures such as public investment flows. And there is a good reason for this: namely the lack of a close correspondence between public capital expenditure and the provision of infrastructure services, owing to inefficiencies in public procurement and outright corruption (Pritchett, 2000).

Evidence of waste of public resources can cost governments dearly in terms of lost credibility and trust on the part of citizens, even for well-designed projects. In rapidly growing India, the intense struggles of the current government, which is attempting to push through legislation on land acquisition to advance its infrastructure agenda, against a backdrop of long-standing cynicism about public capital expenditure, bear testimony to this fact.

Third the nature of change is complex, and while trade and tourism have grown steadily, this has not taken place in a uniform manner.

Over the last few decades, the center of global production activity has begun to shift back from the West to Asia, and in recent years especially towards China, which has become an important venue for offshore production. But many variations and uncertainties remain. Businesses looking for low-cost export platforms in Asia are increasingly considering countries such as Thailand, Indonesia and Vietnam. Indeed, even Mexico is possibly returning back to favor for many US based manufacturers.

These shifts raise important questions.

For instance, how is freight demand expected to evolve over time? On the one hand, demand could increase dramatically due to rising wealth and rising trade. On the other hand, changes in energy prices, in trade patterns and in economic geography, could affect the origin, destination and mode of traffic, possibly decreasing demand in particular segments and modes. Are our transport networks capable of flexibly adapting to these changes in demand and usage? Are there alternative infrastructure strategies that allow both efficiency and flexibility of response to changing demand?

The demographics of the planet are rapidly changing. A decade or two from now, populations in the United States, Japan, Europe and even China are likely to be significantly older than today. This may, in turn, alter demands for tourism and transportation. However, enhancements in information and communication technologies and other trends such as the movement of aging citizens to urban, pedestrian-friendly areas may mitigate the need for changes to be made in supply. It is unclear which way this will go and by how much.

Interestingly, other parts of the world will be getting younger. For instance, it is estimated that over 30 percent of India’s population, roughly 400 million people, are under 15 years of age and that, going forward, about 1 million young Indians will join the labor force each month, many in urban areas.

These are big trends and they are relatively easy to forecast. But how well do we understand the impact they will have on transportation? And how prepared are we for those challenges?

In addressing these issues, institutional gaps may be as large a problem as infrastructure gaps. Lack of co-ordination between transportation and tourism ministries, for instance, may yield mismatches in mutual expectations of both supply and demand. Similarly, with international trade, infrastructural improvements need to go hand in hand with other behind-the-border reforms, as bottlenecks may lie as much, for instance, in poor customs facilitation, as in poor transport infrastructure.

Long range planning has an outlook of 20-30 years, but is often largely a linear projection based on current relationships between economic and demographic patterns – much like the Times of London forecast in 1894, that given the growth rate of horse carriages, every street in the city of London would be buried under nine feet of horse manure by 1950! These linear projections may be the single greatest weakness of policy making for transport today. A wide range of technological, demographic, social and economic changes will likely affect demand and supply patterns in the future.

These changes and their impacts are not as well understood as we would like. But I am sure that the collective talent of the ITF Summit audience is very well equipped to address them, today and in future research.

Useful links

Pravin Krishna, Devashish Mitra and Asha Sundaram, 2010, “Trade, Poverty and Lagging Regions in South Asia,” in The Poor Half Billion in South Asia, Ejaz Ghani, ed., Oxford University Press

Lant Pritchett, 2010, “The Tyranny of Concepts: CUIDE (Cumulated, Depreciated,Investment Effort) is Not Capital”, Journal of Economic Growth, 5 (4): 361–84

Free ebooks from ITF

More and better private investments

Erik Solheim, Chair of the OECD Development Assistance Committee (DAC)

Extreme poverty has been halved in a few decades and more than 600 million people have been brought out of poverty in China alone. Child mortality was also halved and children born today will reach 70 years of age on average. The enormous development progress over the past decades is one of the most significant achievements in human history and business and private investments have played an integral part.

Business and private investments under strong national leadership have been instrumental in all the greatest development success stories. Just think of Singapore, Korea, China, Ethiopia, Turkey and Rwanda. More and better business and investments will be crucial to eradicate extreme poverty by 2030 and implement the sustainable development goals to be agreed at the United Nations later this year. Only businesses can provide jobs for the around one million young Africans joining the labour market every month. Private investments are hugely important to green our agricultural systems and invest in clean energy for billions of people with little or no access to electricity. Private business is generally a huge force for good. But strong national leadership and responsible business conduct is necessary to avoid super-profits, exploitation of workers and degradation of the environment.

More investments

More of the $20 000 billion estimated to be invested around the world annually over the coming years must be directed to green investments in developing countries. Good investment policies are the most important thing. China now receives much more foreign direct investment in a single day than it did in the whole of 1980. Investments to Ethiopia have increased 15 times in just seven years as a result of good policies and focus on manufacturing, agriculture and energy. Development assistance can also help by reducing risk and mobilizing much more private investment. By blending public and private investments, the EU used $2billion in aid to mobilize around $40 billion for things like constructing electricity networks, financing major road projects and building water and sanitation infrastructure in recipient countries.

Better investments

We also need better investments and better business conduct. Corporate super-profits, corruption and tax avoidance must be stopped. Far too often, profits are private while the destruction of forest, pollution of rivers and the effects of climate changing gasses are borne by the public. Workers must make decent wages, work in safe environments and have the right to join unions.

The OECD has developed the Guidelines for Multinational Enterprises, which set out recommendations on what constitutes responsible business conduct in areas such as employment and industrial relations, human rights, environment, information disclosure, combating bribery, consumer interests, science and technology, competition, and taxation.

Mechanisms are in place to deal with grievances and the Guidelines have had some great successes. The UK-based oil company Soco decided to halt oil exploration in Africa’s Virunga national park until UNESCO and the government of the Democratic Republic of Congo agree that oil production does not threaten the unique biodiversity in the area. G4S, a major global security guard employer, stood accused of underpaying and denying rights to employers in Malawi, Mozambique and Nepal while blacklisting union members. After mediation by a global union of 900 national unions, G4S agreed to improve employment standards across the company and to help improve the standards in the whole global security industry. The Norwegian salmon farming giant Cermaq stood accused of inadequately considering the environment and the human rights of indigenous people in Chile. The company agreed to enter into mutually beneficial agreements with indigenous peoples and to even further minimise risk of any environmental damage. The parties also agreed that certain claims about the company made by civil society groups were baseless and that future dialogue should start with mutual trust and clarification of facts, a win-win solution for both parties.

States must be responsible for framing the market in such a way that companies can make a healthy profit and provide jobs while protecting the environment and people’s rights. But companies can also be advocates for more responsible business conduct. The world moves forward when the best companies push others to improve social and environmental standards. Wilmar, the largest palm oil producer in Asia, became an advocate for conservation and after they themselves committed not to cut down rainforests.

Such business norms works best when leading global companies take the initiative. Last year, China was ranked by Forbes as home to the three biggest public companies in the world and five of the top 10. The OECD and China are now working on moving towards common standards for businesses. More global guidelines would make a huge difference because China now provides 1 out of every 5 dollars invested in Africa. Chinese companies are building important infrastructure around the world like the East African railroad linking Kenya with Uganda, Rwanda and South Sudan. Chinese companies are increasingly moving manufacturing plants to Ethiopia and Rwanda.

More and better private investment is necessary to eradicate poverty and provide food, electricity and jobs for a future 9 billion people without destroying the planet. More responsible business conduct is a hugely important part of that.

Useful links

The Global Forum on Responsible Business Conduct 18-19 June 2015 is held to strengthen international dialogue on responsible business conduct (RBC) and provide a ‌‌‌platform to exchange views on how to do well while doing no harm in an effort to contribute to sustainable development and enduring social progress.

Let’s talk money: What will it take to save our planet?

Step away from the subsidies
Step away from the subsidies

Ariana Mozafari, OECD Environment Directorate

That wise mantra that knowledge is power has clearly never stepped inside a business meeting. In this day and age, money is power. Money builds hospitals and roads and civilisations. The OECD can work its hardest to raise awareness on the truths of climate change, but the world won’t see developments in green technology and infrastructure unless we have eager investors backing up investment and research and development in low-carbon technologies.

In the past, many have claimed that environmental protection and green projects are a high-risk investment that can hinder economic development. Low returns and low confidence in green growth and high-capital needs in low-carbon infrastructure projects make investing in environmentally-friendly technologies a seemingly unprofitable business. Less-developed nations have even fewer incentives to invest: as they try to climb out of the poverty rut, how can they possibly spare financial resources to focus on preserving the environment?

Contrary to popular belief, climate change and economic development don’t have to be two opposing policies competing for governments’ attention. This week’s second annual Green Investment Financing Forum at the OECD showed that huge investors that have traditionally invested in fossil fuels and high-emissions activities are, in fact, the best financial resources to save our planet from climate disaster.

Like the Porter Hypothesis says, climate change action and economic growth can feed off  each other. The Green Investment Financing Forum gathered senior representatives from investment firms and institutional investors from around the world such as Goldman Sachs and Aviva. The GIFF proposed suggestions to achieve a balanced future global economy, which should ideally be centered on an environmentally-conscious, competitive and productive investment field that delivers the risk-adjusted returns that fiduciaries need. The discussions included:

  • Providing greater transparency in risk evaluation for investing in green projects. Green growth needs to become a predictable engine for business and the economy. Greater transparency means greater confidence in the investment project, which will hopefully facilitate more long-term investments in green infrastructure.
  • Driving up demand for investing in green growth. There should be a competitive and open market for providing environmentally-conscious products and services. There needs to be a shift to a customer-focused approach to drive up competition.
  • Creating more financial literacy, so that politicians can create policies that have positive incentives for businesses and mainstream investors can understand how to invest in the sector. We need to know what businesses expect in return for their investments, and we need to create efficient and effective incentives and solutions that benefit them directly.
  • Improving data collection and disclosure for banks, investors, and businesses. We need to know how companies view green growth and the carbon content of their businesses and assets if we’re going to attract more investors towards green growth. Governments and international bodies should be able to track past green investments and how they perform.

Professor Daniel Esty, Hillhouse Professor of Environmental Law and Policy at Yale University, also argued that finding capital is not the issue in furthering green technology—in fact, financial resources are abundant. According to Esty and the Connecticut Green Bank, the world needs more innovative projects for green growth.

Esty also urged governments to steer private capital in the direction of low-carbon investment, with a three-step plan outlined below. The current actions governments are taking, he said, are not enough to save our planet from climate change.

  1. Governments need to provide clarity and normalize the marketplace. Leaders need to change the image of green investments to prove that these environmentally-friendly projects will not be “high-risk” financial ventures.
  2. Governments should minimize the soft costs for these green projects. Examples of these include mitigating building and permit costs to encourage green growth.
  3. Governments must also frame a new idea of what is “clean energy.” Leaders should not be pushing renewable energy standards that allow burning “biomass” (aka firewood), for example, to slide by as “clean energy reform.”

And, overall, governments should be subsidising industries who are the “winners” in green development and stepping away from subsidising fossil fuels, taking the golden opportunity to do so in today’s low-interest economy. Just take a look at Indonesia’s government if you need some low-carbon inspiration. They seized the opportunity to reform fossil fuel subsidies and put the money towards better use to help the poor and reduce carbon emissions.

The road to climate change is a long one, and yet the need for policymakers to shift archaic policies towards greener growth has never been more critical. As Nobel Peace Prize winner Al Gore commented on the nature of drastic policy changes throughout history: “After the last no, comes a yes.”

Useful links

For more policy suggestions that facilitate low-carbon investment, check out the OECD’s policy highlights on Investment in Clean Energy Infrastructure and the OECD’s report for the G20 on Mapping Channels to Mobilise Institutional Investment in Sustainable Energy.