Kurt Van Dender, Centre for Tax Policy and Administration
Pricing carbon is one of the surest policy means we know for curbing greenhouse gas emissions and meeting the targets of the Paris Climate Agreement agreed in 2015. Has there been any progress with its implementation since then? Not enough, is the verdict of some of the world’s leading experts.
Some 85% of global emissions are currently not priced, according to a report issued in May 2017 by a High-Level Commission on Carbon Prices, co-chaired by Joseph Stiglitz and Lord Nicholas Stern, both respected figureheads in the fight against climate change. Moreover, about three quarters of the emissions covered by a carbon price are priced below USD 10 per tonne of CO2 (tCO2).
That price is much too low, since according to the report, if we are to achieve the Paris temperature target the explicit carbon-price level should be at least USD 40-80/tCO2 by 2020 and USD 50-100/tCO2 by 2030.
One gap in these numbers is that they do not take into account excise taxes on the likes of transport fuel, heating and energy use more widely, that have virtually the same behavioural impacts as more narrowly defined carbon taxes, and should therefore also lead to reduced emissions.
If these rather commonplace excise taxes on energy use are added into the mix, we can form a broader view of how carbon emissions are currently being priced. To gauge this, we have developed “effective carbon rates”, which are made up of all specific taxes on energy use, carbon taxes, and prices of tradable emission permits. This database, which we presented in our 2016 OECD report on Effective Carbon Rates , calculates effective carbon rates for 41 OECD and G20 countries, covering 80% of global energy use and the associated carbon emissions.
In one sense, the picture that effective carbon rates depict is a little brighter than that presented by Messrs Stiglitz and Stern, as it includes a broader range of taxes, so higher rates. In another and more fundamental sense, the picture actually is a little darker, as effective carbon rates show the enormous size of the challenge we face in battling down greenhouse gas emissions, even when taking a broader view of carbon pricing.
Indeed, according to our database, 60% of emissions from energy use in the 41 countries are currently not priced (compared with 85% in the commission’s report). However, some 78% of emissions are priced at less that EUR 10/tCO2, which is no less discouraging. So while our more comprehensive estimates indicate that carbon pricing is more widespread than the High Level Commission’s report suggests, they nevertheless reinforce the Commission’s main point that carbon pricing still only plays a very limited role, and that we are a far cry from what is required to reach the Paris Agreement objectives.
The High Level Commission estimates that carbon prices should range between EUR 40 and EUR 80/tCO2 in 2020 for the Paris Agreement targets to have a chance of being met. Currently, effective carbon rates are below EUR 40/tCO2 for 93% of emissions, and are below EUR 80/tCO2 for 95% of emissions. Omitting road transport (where excise taxes are relatively high) from the calculation increases these shares to 99%.
In short, almost no emissions from energy use are priced at levels required to keep global temperature increases below 2 degrees Celsius limit, beyond which climate change could spin out of control. The world’s leaders understood the gravity of this prospect by signing up to the Paris Climate Agreement. It is now critical that they take the policy action needed to meet those goals, and that means increasing carbon prices now.
COP23 side event: Carbon pricing for the low-carbon transition, 15 November 2017, Bonn, Germany: http://www.oecd.org/tax/tax-and-environment.htm#COP23-tax-env-event.
More about the OECD at COP23: http://www.oecd.org/environment/cc/cop23.htm.
References and links
High-Level Commission on Carbon Prices (2017), Report of the High-Level Commission on Carbon Prices, World Bank, Washington, DC. License: Creative Commons Attribution CC BY 3.0 IGO, https://static1.squarespace.com/static/54ff9c5ce4b0a53decccfb4c/t/59b7f2409f8dce5316811916/1505227332748/CarbonPricing_FullReport.pdf.
OECD (2016), Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264260115-en.
OECD (2017), Investing in Climate, Investing in Growth, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264273528-en.
A widely heard criticism of carbon pricing is that it will simply hurt the poor. But just like other similar schemes with environmental aims, such as water charging, the opposite is true. It all depends on having the right policies in place.
One very effective policy for reducing air pollution and mitigating risks from climate change, such as storms, floods and sea level rise, is to raise taxes on domestic energy use. In fact, by taking just one-third of the revenues raised through such taxes to fund cash transfers, policy makers would make it easier for households to pay their energy bills, not harder.
The message that higher energy prices are indeed quite compatible with social policy objectives is the main finding from a new OECD working paper, “The impact of energy taxes on the affordability of domestic energy”.
Energy affordability is the ability of households to pay for the necessary levels of electricity and heating. While the concept of being able to pay of one’s bills has intuitive appeal, measuring affordability is challenging in practice.
The paper uses household level data covering 20, mainly European, OECD countries to analyse energy affordability at current energy prices and after a hypothetical, environmentally-related energy tax reform. It compares three indicators, which are based on expenditure shares, relative incomes, and a combination of both for the third (and strictest) indicator. The strict indicator says that households face energy affordability risk if they spend more than 10% of their disposable income on electricity and heating, and their income is less than 60% of the median income.
Energy affordability concerns are manifest at current prices. According to our strict indicator, less than 3% of Swiss households face energy affordability risk, while more than 20% in Hungary do; the median share is around 8%. Low energy affordability also results in utilities cutting off supply to households. More than 100 000 households see their electricity supply cut each year in France, Germany and Spain. In the United Kingdom more than 1.5 million households cut off their electricity supply because they cannot afford to top up pre-pay meters.
In many countries domestic energy prices are rising, partly as a result of charges that finance the expansion of renewable energies. In practice, incentives for renewables often burden poor households, particularly because the poor tend to spend a higher share of their income on electricity and heating than the rich.
Unfortunately, some politicians have used this relationship to argue against stronger emission cuts. It is a blinkered view. Using taxes to make polluters pay for their emissions actually raises revenues that can be used to support households. This has been done to good social effect in Switzerland, for example.
The simulated energy tax reform aligns prices with environmental objectives, and increases energy prices by 11.4% on average for electricity, 15.8% for natural gas, and 5.5% for heating oil. Redistributing a third of the additional revenues resulting from this reform to poor households, by means of an income-tested cash transfer, is sufficient to improve energy affordability according to the three indicators. Under the strict indicator combining expenditure shares and relative incomes , energy affordability risk would decline by more than 10% on average across all countries considered. Uniform transfers are less effective at combatting affordability problems, although affordability would still improve according to the strict indicator.
Mitigating the adverse impacts of higher energy taxes, which are needed to cut harmful carbon emissions and air pollution, on energy affordability, requires no more than one-third of the revenues raised by the higher taxes. The remaining revenue can be used to make the tax mix for other social objectives, or for more inclusive growth.
References and further reading
Flues, F. and A. Thomas (2015), “The distributional effects of energy taxes”, OECD Taxation Working Papers, No. 23, OECD Publishing, Paris, http://dx.doi.org/10.1787/5js1qwkqqrbv-en.
Flues, Florens, and Kurt van Dender (2017), “The impact of energy taxes on the affordability of domestic energy”, OECD Taxation Working Papers, No. 30, OECD Publishing, Paris, http://dx.doi.org/10.1787/08705547-en.
Kurt, Van Dender (11 October 2016), “Resistance is futile. Higher carbon process needed to guide the transition to carbon neutral growth”, OECD Insights blog, http://oecdinsights.org/2016/10/11/higher-carbon-prices-for-carbon-neutral-growth.
OECD (2016), Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems, OECD Publishing, http://dx.doi.org/10.1787/9789264260115-en.
OECD (2015), Taxing Energy Use 2015: OECD and Selected Partner Economies, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264232334-en.
OECD work on taxaxation and the environment: www.oecd.org/tax/tax-policy/tax-and-environment.htm
Resistance is futile. Higher carbon prices needed to guide the transition to carbon neutral growth
Kurt van Dender, Tax and Environment Unit, OECD Centre for Tax Policy and Administration
Limiting the cost to societies of climate change and reducing the risk of catastrophic impacts requires deep cuts in greenhouse gas emissions. The agreement reached in Paris during the 21st session of the Conference of Parties in December 2015 (the COP21 Paris Agreement), which will enter into force on 4 November, aims to limit average temperature increases to well below 2 degrees Celsius. The agreement is clear on what is required to attain this goal, namely evolve towards zero net greenhouse gas emissions in the second half of this century. A different way of stating the challenge is to say that burning all currently known fossil fuel reserves exceeds the amount that can be burned while limiting temperature increases to 2 degrees Celsius by a factor of three.
Comprehensive efforts to transform the energy base of our economies are urgently needed. Further delay will only reduce the chances of success and will drive up the cost of the transition by allowing more investment in fossil fuel assets that ultimately will become stranded. Intensifying efforts now will not only limit the cost – it will also maximise the potential for economies to shift to a carbon neutral growth path and thrive.
Shifting to a low carbon path of economic development requires adopting policies that cut carbon at the lowest possible cost and that incite businesses and households to find new ways to produce and consume in a carbon neutral way. Carbon prices are indispensable to accomplish this goal. They can be aligned with the cost of damages resulting from emissions, and it can then be left to the ingenuity of consumers and suppliers of goods, services and infrastructure (both public and private) to reduce emissions as they see fit. There is no need for politicians to figure out precisely how to cut emissions – these decisions are left to the agents best placed to do so, and who have an interest in keeping abatement costs as low as possible. Pricing greenhouse gas emissions is not the alpha and omega of climate policy, but it is an indispensable component. If emissions needed to be cut just a little bit, perhaps some countries might choose options for political expedience rather than for cost-effectiveness. This, however, becomes less tenable when the goal is to become carbon neutral.
So how are prices currently being used to mitigate greenhouse gas emissions? The recent OECD report Effective Carbon Rates – Pricing CO2 through taxes and emissions trading systems answers this question for CO2 emissions from energy use, covering 41 OECD and G20 countries which represent 80% of global energy use and of the associated CO2 emissions. Effective carbon rates include price signals resulting from emissions trading systems and from carbon taxes, but also from specific taxes on energy use, notably excise taxes. These three components all increase the price of CO2 emissions compared to other spending items, so they capture the economically relevant contribution of tax and emissions trading policies to the cost of emitting CO2.
The results are stark: carbon pricing policies are falling a long way short of living up to their potential. Most emissions across the 41 countries are not priced at all; 90% are priced at less than EUR 30 per tonne of CO2, a conservative estimate of the costs resulting from a tonne of CO2 emissions. High effective carbon rates occur mostly in the road transport sector, because of the higher excise taxes on motor fuels. In addition to cutting CO2 emissions, motor fuel taxes can help curb air pollution and congestion, among others, so that high rates are justified. Outside road transport, rates are usually below EUR 30 (only 4% of emissions across all countries face a price of EUR 30 or more), which is very hard to justify, now and especially going forward. Rates differ strongly across countries, and it is worth noting that the 10 countries with the highest effective carbon rates represent 5% of the 41 countries’ carbon emissions, whereas the 10 countries with the lowest rates – which include several large countries – account for 77% of emissions. Finally, as is well known from other OECD work, in several countries there are ‘negative carbon taxes’ in the form of fossil fuel support, only some of which are captured in the effective carbon rates.
Why have governments up to now been reluctant to do the obvious, namely increase effective carbon rates? One reason is that the increasing awareness of the urgency of climate action has not translated into political momentum everywhere. The Paris Agreement and subsequent initiatives can do much to change this situation. A second reason is that potentially adverse effects of higher energy prices on poorer households render them a difficult political proposition. Here, the adage applies that there are better ways of delivering support to poorer households than via energy prices. And if higher taxes were levied, there is evidence that only part of the revenue – between a quarter to a third – would be needed to compensate poorer households.
Concerns about reduced competitiveness of businesses are a third reason behind the reluctance to raise carbon rates. However, the available ex post evidence finds no adverse impacts of prevailing carbon rates on competitiveness. Of course, these rates are low, but nevertheless it is apparent that businesses can adapt to gradually increasing carbon prices. And if the climate challenge is taken seriously, the only way to stay competitive in the long run is to adapt to ultimately very high carbon rates and a carbon neutral way of operating. This will require phasing out some activities but firms can adapt and thrive. Strong public commitment to a rising carbon price path will help them do so, not least by establishing an environment in which investments in long-lived carbon neutral assets can be made with confidence. Arguing for low carbon prices on competitiveness grounds increasingly involves fighting a rearguard action.
The Paris Agreement has raised support for carbon pricing, crystallised for example in the Carbon Pricing Leadership Coalition, and there is concrete action in several countries. We need to seize these opportunities to move to comprehensive carbon pricing at meaningful levels.
Liisa-Maija Harju, Environmental Coordinator in the OECD Operations Service on the OECD’s environmental performance, for World Environment Day 2015
Today, more than 22% of global emissions are covered by a carbon price. Almost 40 countries and over 20 cities, states and provinces use carbon pricing mechanisms or are planning to implement them.
These are great figures. The OECD recommends that countries make carbon pricing the cornerstone of climate policy. Price signals sent to consumers, producers and investors alike need to be consistent and facilitate the gradual phase-out of fossil fuel emissions.
It is not just countries but also companies who are interested in this policy tool. A 2014 study shows that nearly 500 companies globally report that they are regulated through global carbon markets. What is not so well known is that at least 150 major companies already use their own, internal price on carbon to manage their greenhouse gas (GHG) emissions.
Some knowledge institutions are riding the trend as well. A Yale University task force concluded that it would be feasible and effective for Yale to institute an internal, revenue-neutral carbon pricing mechanism as part of the university’s sustainability efforts.
The charge at Yale will be set at the social cost of emissions, currently estimated by the US federal government to be $40 per tonne of carbon equivalent (tCO2e). The task force recommended that all facilities operated by the university should be included in the footprint for the carbon charge. Additionally, the carbon charge should be used as a shadow price in planning for major capital investments.
The OECD has been piloting a similar tool. In 2013, the OECD Secretary-General introduced an internal OECD carbon price to address the growth in air travel-related GHG emissions and to encourage management and staff to give greater consideration to environmental aspects in making their travel decisions and arrangements
75% of the OECD GHG emissions from operations relate to official air travel. This volume reflects the missions considered necessary to implement the Organisation’s Programme of Work, as well as the location of events which the Organisation manages or in which its officials participate.
In its initial two-year trial period, 2013-2014, the carbon price was set at 20 euros per tCO2e and was calculated on the basis of the GHG emissions generated by air travel by OECD Directorates and Programmes in the previous year.
The funds collected are invested annually in projects that improve the environmental footprint of the Organisation.
In 2013 the funds were allocated to improving the Organisation’s remote conferencing facilities. In 2014 they were directed to, for example, raising employee awareness about energy consumption, developing employee engagement materials related to energy and paper consumption and the initiation of rainwater harvesting in the Organisation’s premises.
The initiative has been continued into 2015-16. Among changes to the initial scheme, the price has been increased to 25 euros in 2015, and will increase again in 2016 to 30 euros.
The most important objective in the OECD’s GHG management strategy, as is the case for countries and companies, is to reduce emissions in the first place. Indeed, we continue to reduce our operations’ carbon intensity overall: since 2010, per capita emissions have decreased by 0.7 tCO2e/employee (16%) and emissions from buildings have fallen by 21 kgCO2e/m2 (65%). Total GHG emissions (facilities, air travel, employees commuting) in 2014 amounted to 9100 tCO2e, 6% less than in 2010.
We have been able to demonstrate for several years that the accomplishments of our environmental responsibility strategy, [email protected], are consistent with the pursuit of more effective and efficient resource use at the OECD. They enable value for money.
To read more about the overall environmental footprint of the OECD Secretariat’s operations, including the GHG emissions, click on the infographic.
Explore this website to understand OECD’s work on effective carbon pricing.
The Global Forum on Responsible Business Conduct 18-19 June 2015 is held at the OECD to strengthen international dialogue on responsible business conduct (RBC).
Today’s post is by Nicolina Lamhauge of the OECD Environment Directorate and Ariana Mozafari, Journalism & French major at the American University in Paris
It’s easy to dream about holidays in far-off exotic islands, especially with current global petrol prices. A sustained low oil price has allowed many of us to put away a little more of that paycheck and think seriously about buying an iWatch or taking that much-deserved break.
As we fantasize about wriggling our toes in the sand or finally being able to wear a phone, big oil companies like BP and Exxon Mobil are scrambling to adjust to this loss in revenue. BP recently announced that it will freeze pay increases in 2015 for its 84,000 staff members and lay off 300 employees. Fossil-fuel giants have had to make drastic changes to reflect that oil is now worth $50-$60 per barrel, rather than over $100 per barrel.
This slide in oil prices did not come without warning. The former oil minister of Saudi Arabia, Sheikh Ahmed Zaki, predicted the end of the Oil Age 15 years ago, and in 2009 Fatih Birol of the IEA urged us to “leave oil before it leaves us”. Zaki said that discoveries of new oil fields and advancing technology in the energy sector will eventually wipe out the demand for oil. “I can tell you with a degree of confidence that after five years there will be a sharp drop in the price of oil” and his premonitions finally seem to be coming true.
We don’t know how long oil prices will stay low, so with energy bills bottoming out, it’s prime time to introduce a tax on carbon, along with policies that push energy innovation in cost-effective ways, and shift decisions about production and consumption towards low-carbon choices.
“Every government will need to explain how their policy settings are consistent with a pathway to eliminate emissions from fossil fuel combustion in the second half of the century,” says OECD Secretary-General Angel Gurría. This means looking at all policy measures to assess if they are effective in reducing CO2 emissions and in line with governments’ climate change objectives. An OECD report, Climate and Carbon: Aligning Prices and Policies outlines specific actions:
- Put an explicit price on carbon. Explicit carbon pricing mechanisms, such as carbon taxes and emissions trading systems, are generally more cost-effective than most alternative policy options in creating the incentive for economies to transition towards zero-carbon trajectories.
- Identify other cost-effective policy instruments that put an implicit price on carbon. A number of other policies affect a country’s CO2 emissions and can effectively place an implicit price on carbon. Often these policies have been introduced to achieve objectives other than climate-related goals (such as combatting air pollution or raising revenue), with the result that the CO2 emissions abatement achieved may come at a relatively high cost.
- Review broader fiscal policy to ensure that it is coherent with stated climate goals. Coherent carbon pricing should also include a review of the country’s fiscal policy to ensure that budgetary transfers and tax expenditures do not, directly or indirectly, encourage the production and use of fossil fuels.
- Ensure that any regressive impacts of carbon pricing measures are alleviated through complementary measures and that a clear communication strategy is developed to explain them. A good communication strategy can raise awareness of the benefits of the reforms. It can reassure those most affected regarding any compensatory or other measures to mitigate the regressive impacts of reforms without losing the incentive to reduce emissions.
- Ensure coherence between stated climate goals and domestic policies. Consumers, producers and investors must get a clear policy signal of a rising cost for CO2 emissions over time as a result of explicit and implicit carbon pricing policies.
It’s time for governments to ramp up the development of alternative energies and to nail a price onto every tonne of CO2 emitted. With COP21 taking place in Paris in November, sending the right message on climate change means gradually increasing the cost of CO2 emissions, and creating a strong economic incentive to reduce the carbon entanglement and to move towards a zero-carbon world.
Today’s post is from OECD Secretary-General Angel Gurría
Saving the Earth’s climate is sometimes compared to saving the world’s financial system following the crisis in 2007. But it’s not. The taxpayer saved the financial system by bailing it out a cost of trillions of dollars over a very short period, but there is no bailout option for the climate. If we let things go on as they are until disaster threatens, we’ll have no way of preventing disaster, however much we spend.
The consequences of inaction are stark. Our recent projections show that impacts of unabated climate change could dampen global GDP in 2060 by some 1.5% on average, and by almost 6% in South and Southeast Asia. ..
We have to act now. The newly-published report on the “The New Climate Economy” from the Global Commission on the Economy and Climate , argues that the next 15 years will be crucial for the world’s climate system. Beyond this, the cost of inaction on climate change will become very high and may be too great for economies to absorb .
We have to transform the global energy economy radically. Reducing emissions here and there won’t do. We have to achieve zero net emissions from the combustion of fossil fuels in the second half of this century. That’s not going to be easy. Two-thirds of electricity is generated by fossil fuels and the world’s transport system runs almost entirely on fossil fuels. Moreover fossil fuels are still relatively abundant and the exploitation of shale gas and other unconventional sources is reducing the sense of urgency that scarcity or a lack of energy security bring.
Governments and the private sector alike also see financial advantages to continued reliance on oil and gas. Investments in carbon-intensive technologies remain more profitable and attractive than those in low-carbon technologies, in many cases. Income from oil and gas taxes accounts for a considerable share of total government revenue in many countries.
To put it bluntly, there is often quite a gap between what governments are saying about climate change and what they are actually doing to combat it. If governments have inconsistent and incoherent policies, you cannot expect business to invest in the greener technologies needed to bring about lasting change.
Consumers, producers and investors react to the signals governments send them. Domestic and international policy settings influence the choice between non-fossil energy investments and fossil fuels in terms of whether the expected return justifies the risk. One policy that would send a clear, strong signal would be to put a price on carbon through a carbon tax or an emissions trading system (ETS), as more than 40 countries have already done.
We could also stop paying to make things worse. By that I mean we need to reform fossil fuel subsidies. The OECD calculated that support to fossil fuel consumption and production in our Member Countries is around $55-90 billion per year. The IEA estimates subsidies to fossil fuel consumers in developing and emerging economies at $544 billion. (The argument that these subsidies help fight poverty is unconvincing since their poor targeting makes them an inefficient way of achieving this.)
These actions will help send a clear, long-term signal that the price of emissions will rise, and governments must be frank about the distributional impacts of the transition to a zero emissions economy. But that cost can also be seen as an investment. As I said to ministers here in Paris in May for the session of the OECD Ministerial Council Meeting on promoting environmentally sustainable “greener” growth: “with the right policy mix and bold decisions, we can turn environmental sustainability into a source of growth, employment and economic resilience. Green can go hand in hand with growth.”
The Global Commission on the Economy and Climate agrees with this way of looking at things: “We have a unique opportunity now to achieve better growth and a better climate together […] the right policies, stimulating better investment in cities, land-use and energy systems could drive the transition to a more productive, more innovative low-carbon economy.”
So if we agree on what needs to be done, why it needs to be done, and how it can be done, let’s do it.
On Oct 16, 2013, the OECD Secretary-General addressed a high-level delegation in London on achieving zero emissions. The lecture, co-organised with the London School of Economics and the Climate Markets & Investors Association (CMIA), centred on the ambitious policies needed to meet the long-term objective of achieving zero net emissions from fossil fuels in the second half of this century. Mr Gurría specifically discussed how consistent carbon price signals can help reduce fossil fuel dependence, encourage renewables and energy efficiency, foster the deployment of carbon capture and storage technologies and influence the flow of future investments in the energy sector. (Read the full speech)
OECD work on climate change
OECD Green Growth and Sustainable Development Forum To be held on 13-14 November 2014, this 3rd Forum will focus on addressing the social implications of green growth. It will examine its impact on employment, skills and income and will inform policymakers on how best to respond to changing demands, with a focus on the equity considerations of energy sector reforms.
March for the climate! UN Secretary-general Ban Ki Moon is one of thousands of people worldwide who’ll be marching on Sunday 21 September in New York to show their support for action to save the climate. You can find local events in your country by clicking on the NY link, or on this one.
Our leaders must get to grips with the huge risk that carbon dioxide emissions pose to the economy and the environment. As we know, carbon dioxide is a long-lived gas. It hangs around. Of every tonne of CO2 emitted this year, some will still be around thousands of years from now. Even small ongoing emissions will continue to add to the atmospheric concentration.
This is already having a serious environmental impact.
The Intergovernmental Panel on Climate Change’s 2013 report finds it extremely likely that human influence has been the dominant cause of global warming since the mid-20th century. Many countries are taking these findings seriously. However, mounting evidence suggests that a stronger approach is needed.
At the 16th session of the Conference of the Parties (COP 16) to the United Nations Framework Convention on Climate Change in Cancun, Mexico, countries agreed to limit the increase in global average temperature to below 2°C above pre-industrial levels. However, UNEP estimates that country pledges to reduce emissions by 2020 get us only between a quarter and half way to our goal of maintaining a two degree ceiling on the global average temperature increase.
This is why I am making a strong call for governments to put us on a pathway to achieve zero net emissions from the combustion of fossil fuels in the second half of this century. Unlike the financial crisis, we do not have a “climate bailout” option up our sleeve. Nothing short of a transformation of the energy economy will suffice. But we face significant obstacles towards meeting this goal.
Ending our reliance on fossil fuels was never going to be easy. Two-thirds of electricity generation and nearly 95% of the energy consumed by the world’s transport systems relies on fossil fuels.
Several factors compound the challenge of weaning ourselves off this energy source. First, we have recently moved from a world of threatened scarcity to one of potential abundance, due to the exploitation of unconventional fossil fuel deposits such as shale gas in the United States. Second, investments in carbon intensive technologies remain more profitable and attractive than those in low-carbon technologies, in many cases. Third, oil and gas rents account for a considerable share of total government revenue in many countries. Given this “carbon entanglement”, it is not surprising that cash-strapped governments worldwide are hoping to find and exploit new reserves of oil and gas.
There is currently a credibility gap between what governments are saying about climate change and the policies they have in place. Most businesses do not take governments seriously when it comes to climate, primarily because many governments have inconsistent and incoherent policies and then often keep changing them, sometimes retroactively. This makes businesses reluctant to invest in greener technologies.
I propose the following action agenda to reverse this trend.
Action 1: Put a price on carbon. This can be done through a carbon tax or an emissions trading system (ETS). Here, governments have made important progress, with more than 40 countries having implemented some form of carbon tax or emission trading scheme. The “flexibility” of ETS’s makes them politically attractive, although their design and implementation can be improved. However, not all governments have shied away from explicit carbon taxes. There are some strong success stories of introducing carbon taxes smoothly and incrementally over time.
Action 2: Reform fossil fuel subsidies. We have to reconsider our approach to subsidies. The OECD recently inventoried support to fossil fuel consumption and production in our Member Countries. The support we uncovered is in the range of US$ 55-90 billion per year. This is in addition to the US$ 544 billion provided as subsidies to fossil fuel consumers in developing and emerging economies estimated by the IEA. Urgent reform is needed in all countries to phase out fossil fuel subsidies that encourage carbon emissions. While the subsidies are often used to fight poverty, their poor targeting makes them an inefficient way of achieving this goal. Fossil fuel already has a huge advantage as the energy resource of choice. It doesn’t need more help.
Action 3: Address incoherent and inconsistent policies. Governments need to stand back and consider the entire range of signals they are sending to consumers, producers and investors. A key question is whether non-fossil energy investments can currently compete with fossil fuels in terms of their risk-return profile with the policy settings in place domestically and internationally. To help get a consistent picture and to compare country’ performances, carbon pricing and climate policies will soon be a key element of our OECD Economic Surveys. Thus, by mid-2015 we will have a good idea of the progress and remaining challenges in both OECD countries and key emerging economy partners.
The actions outlined above will help to create a clear, long-term signal that the price of emissions will only go one way – up – and put us on a trajectory towards zero emissions. The transition to a zero emissions economy will not be costless, and governments must be frank about the cost of the transformation. But building a post-carbon world will offer some incredibly exciting economic opportunities.
At the same time, inaction also entails huge consequences. For instance, Hurricane Sandy cost the US about 0.5% of the country’s GDP. Recent analysis suggests that the annual costs to deal with flood exposure in coastal cities may increase to over US$ 50 billion by 2050. Typhoon Haiyan, which hit the Philippines, was a stark reminder that developing countries are most vulnerable to the impacts of climate change.
We are on a collision course with nature. Now is the time for us to take bold decisions. Cherry-picking a few easy measures will not do the trick. There has to be progress on every front, particularly with respect to carbon pricing. I feel confident that leaders will rise to this challenge with a stronger commitment to tackle climate change and seize the economic opportunities that a post-carbon world has to offer.
The climate challenge: Achieving zero emissions Full text of the OECD Secretary-General’s speech at an event in London in October 2013, co-organised with the London School of Economics and the Climate Markets & Investors Association (CMIA),