In the absence of Marty and Doc’s time machine…

Eco consequences climate changeElisa Lanzi , OECD Environment Directorate

You may have seen recent Back to the Future festivities marking 21 October 2015 as the date Marty and Doc travel to the future in the famous second film with Michael J. Fox. If only we had a similar time machine allowing us to travel to 2045 to see what the climate has in store to better decide what policies to adopt today. Alas, no time machine has been invented yet but, in the absence of such a cool device, we can rely on climate and economic models that attempt to shed light on how climate change may affect the future of our societies. The new OECD report The Economic Consequences of Climate Change, does this using a global multi-sector, multi-region modelling approach.

Covering impacts on agriculture, coastal zones, some extreme events, health and energy and tourism demand, the report finds that climate would cost the global economy 1.0-3.3% of GDP annually by 2060 and 2-10% by the end of the century in the absence of new policies (the range reflects the uncertainty surrounding the way the climate may respond to the concentrations of greenhouse gases). However, most importantly, the impacts vary drastically across regions: in some regions they’re slightly positive while in others, starkly negative.

Climate impacts particularly affect regions in Africa and Asia, which are especially vulnerable to a range of different impacts, such as heat stress and crop yield loss. GDP losses in 2060 are projected to amount to 1.6-5.2% in the Middle East & North Africa regions, 1.7-6.6% in the South- and South-East Asia regions and 1.9-5.9% in the Sub-Saharan Africa regions. Impacts are projected to be smaller in most OECD countries. The model results show that for a few countries, especially those in higher latitudes, i.e. Canada and Russia, the benefits from impacts such as gains in tourism, energy and health, outweigh the negative ones, at least to 2060.

The model also allows us to identify the impacts that will affect the economy the most. Of the impacts included in the modelling assessment, changes in crop yields and in labour productivity due to health impacts are projected to affect the economy most strongly, causing losses to annual global GDP in 2060 of 0.9% and 0.8%, respectively, and several percent in the most vulnerable regions. Each of the impacts causes important indirect effects on other sectors and regions as well.

As we learn from combining climate and economic models, once greenhouse gases are emitted, they will have unavoidable and enduring effects on the climate and the economy for a century or more. This doesn’t just mean that there will be higher impacts in the long term but also stronger risks of tipping points and very severe impacts. Together, this leaves no doubt that policy action both on mitigation and on adaptation is needed.

So while economic models are not as cool as a time machine would be, they do have the advantage that they can be used to study how policies may affect the future economy. Simulation results from The Economic Consequences of Climate Change show that ambitious adaptation and mitigation policies can reduce the future costs of climate change, but above all limit the risks of more catastrophic impacts. In an optimal policy scenario, both adaptation and mitigation are implemented, while also leaving some remaining market impacts (it would be too costly to reduce all impacts). The benefits of adaptation policies, from a reduction in the selected market impacts alone, may amount to more than 1 percentage point of GDP by the end of the century. Early and ambitious mitigation action can help economies avoid half of the macroeconomic consequences by 2060 and could reduce projected GDP reductions from 2-10% to 1-3% of global GDP by the end of the century.

While the fictitious elements and machines in the Back to the Future films are still not reality, climate modelling analysis tells us that strong policies are needed now to address climate change. Maybe even better than a time machine taking us to the future, would be one going back to tell our ancestors to reduce emissions. But since that’s not an option, we should really at least change our present choices and adopt climate policies now. That would spare future generations from having to invent a time machine to correct our mistakes.

Useful links

Policy highlights from The Economic Consequences of Climate Change

OECD on the road to COP21

If this is a war on emissions, governments need a strong arsenal

mitigationSuzi Tart, OECD Environment Directorate

More than 150 countries have submitted their post-2020 Intended Nationally Determined Contributions (INDCs) to the United Nations Framework Convention on Climate Change (UNFCCC). Such contributions are vital to the #COP21 climate change conference in Paris this December. They are often met with fanfare from UNFCCC Executive Secretary Christiana Figueres, who cheer-leads the much-needed international co-operation in the realm of climate change.

Indeed, significant progress has been made since 1990, when the first assessment report by the Intergovernmental Panel on Climate Change (IPCC) was written. The use of coal has declined in 29 of the 34 OECD member countries, and greenhouse gas emissions per unit of GDP have decreased in nearly all of the 45 countries and regions that are responsible for producing 80% of the world’s greenhouse gases (that is the OECD member countries, the OECD 10 partner economies, and the EU). This decoupling of GDP from GHG emissions proves that it is possible to grow the economy while cutting emissions.

Such developments mark great progress and need to be touted as so. But they do not mean that we can become complacent with the fact that we could be doing much more. Aggregate emissions continue to go up worldwide, and many countries continue to rely on fossil fuels to power their economies. When we look at our incredible capabilities, humans are doing a mediocre job on climate.

A new OECD report, Climate Change Mitigation: Policies and Progress, shows that current emissions trends are NOT in line with countries’ targets. It finds that annual emission reduction rates need to be accelerated—sometimes at unprecedented levels—in order to meet many of the mitigation targets and goals that have been announced, let alone the standards required for a two-degree trajectory.

This is an overwhelming finding for your average citizen. So what can we do? We can start by pushing our governments to implement policies that are in line with a shift to a low-carbon lifestyle. Currently, our economies are hardwired around fossil fuels, and putting a price on carbon is essential for this shift. Emissions trading systems and taxes on energy (such as carbon taxes) are the most cost-effective policy approaches for countries to take in order to reduce their emissions, and they are being implemented the world over. Yet, the current trading schemes in place cover only a small share of emissions, and taxes on carbon are unfortunately too low to alter consumer behavior or spur technological change.

A perhaps more difficult, yet equally important approach is cutting policy support for the production and consumption of fossil fuels altogether. India and Indonesia have proven that this IS feasible. More countries need to follow suit. Fossil fuel subsidies remain widespread, and cutting them is often met with resistance from the public and other groups. It is imperative we let our governments know that we stand behind such changes to improve our system in the long-run.

Huge structural changes are required across more than the energy sector if we are to achieve our goal. Agriculture, forestry, industrial processes, and waste are all significant sources of greenhouse gases in some countries. In such cases, efficiency standards, information programs, and government support for research and development need to be implemented in these sectors as well.

While pomp and circumstance accompany the agreements being made at the international level, follow-up action needs to take place at the local and national levels. Without such action, the International Energy Agency (IEA) predicts that the world will exhaust its carbon budget for the two-degree goal by the year 2040. Time is of the essence, and our current efforts are simply not good enough. We must convince our governments to start restructuring our economies to be sustainable, and we must convince them to do this today.

Useful links

Guyana and Norway are showing how climate action can deliver results

Download the highlights in English, French or Spanish
Download the highlights in English, French or Spanish

Today’s post,  by Bharrat Jagdeo, former President of Guyana, is one in a series of ‘In my view’ pieces written by prominent authors on issues covered in the “Development Co-operation Report 2015: Making Partnerships Effective Coalitions for Action”

Cruelly, the most vulnerable communities and poorest countries in the world are the ones that suffer the most from climate change, despite the fact that they have done almost nothing to cause the problem. Yet if our climate is to be stabilised, today’s developing countries need to lead the world to a solution – and as has been emphasised elsewhere in this chapter, there is no solution to climate change without halting deforestation.

In 2008, people in Guyana recognised this. Climate change had already caused suffering in the country. In 2005, floods inflicted damage equivalent to 60% of that year’s gross domestic product (GDP). Yet, as a country with 85% of its land mass under forest, an area larger than Great Britain, our people didn’t want to just complain about climate change – we were prepared to act.

So we set out to find partners who shared our vision.

Speaking on behalf of Guyana’s people, I addressed the Commonwealth Finance Ministers in 2008 outlining an offer to the world. We were prepared to deploy almost our entire forest in the global fight against climate change, providing: we could access the right economic incentives to value our standing forests; and our people’s sovereignty over their forests would not be diminished. Soon after, a nation-wide consultation enabled us to develop a strategy that aimed even higher: we would seek not just to protect our forests, but to shift our entire economy onto a low-carbon trajectory with economic growth coming from new sectors, and with our country’s economy powered almost entirely by renewable energy.

The result was Guyana’s Low Carbon Development Strategy. This plan had a simple proposition at its core: those who benefit from our standing forests must contribute to their maintenance. We realised that most efforts to maintain our forests would continue to come from the people of Guyana, including our Amerindian (indigenous) communities. Yet we felt that international citizens must also pay their share, given the immense benefits our forests contribute to stabilising the global climate, securing carbon sequestration, and maintaining water and other ecosystem services.

In time, we hope that the international REDD+ mechanism will create the necessary incentives. In 2008, however – even before the REDD+ mechanism had been agreed – we wanted to show that progress was possible.

Guyana was fortunate to find a progressive partner who shared our views. Norway was one of the first developed countries to recognise that protecting tropical forests was both an essential and highly cost-effective way to combat climate change. In November 2009, the then Norwegian Minister of the Environment and Development, Erik Solheim, and I travelled to Fairview Village, deep in the forests of Guyana; there we signed the document that started the Guyana-Norway partnership on forests. Under this partnership, Norway – as a proxy for the broader world – pays Guyana for some of the global carbon value provided by our forests. In turn, Guyana invests this money in our Low Carbon Development Strategy. By April 2015, Norway had paid Guyana about USD 150 million in carbon payments.

The carbon payments are funding numerous investments. For example, they are enabling our Amerindian communities – about 10% of the people in our country – to own their own land through a titling programme and to put in place ambitious community development plans. In partnership with local banks, small and medium enterprises are advancing ambitious low-carbon business ideas. The government is building emergency and long-term flood defences and water management infrastructure. Climate action is being introduced in our school curricula. Guyana is about to build a world-class centre for biodiversity. We are improving practices in mining and other extractive industries. And while all of this is happening, Guyana is maintaining strong economic growth despite the global financial crisis.

The carbon payments are also catalysing other, much larger private investments, for example in renewable energy. As a result, Guyana is on track to not only maintain the world’s lowest level of deforestation, but also to reduce energy-related greenhouse gas emissions by over 92% – more than any developed country.

Together, Guyana and Norway have learned many lessons that are relevant to far bigger countries and to the global community – lessons in areas such as financing low-carbon development, sustaining national support, and making progress in the absence of an international agreement on climate.

While there is still much to be done in the years ahead, I believe that Guyana and Norway, working together as equal partners, are showing how climate action can deliver real results to combat poverty, increase prosperity, sustain vital ecosystem services and advance the fight against climate change for the good of the entire world.

Useful links

Development Co-operation Report 2015: Making Partnerships Effective Coalitions for Action

Dear Coal: it’s not you, it’s me…

End of the line?
End of the line?

Ariana Mozafari, OECD Environment Directorate

The OECD is calling it quits with an era of coal.

On 3 July, Secretary-General Angel Gurría gave a lecture at the London School of Economics entitled, “Climate: what’s changed, what hasn’t, and what we can do about it – six months to COP21”. He discussed the usual mitigation tactics that royal family members and celebrities are jumping onto: rewiring the economy, an end to fossil fuel subsidies, financing investments in green infrastructure, and aligning contradictory policies to complement the climate effort.

He also, however, discussed one issue in unprecedentedly stark terms for an international body: Gurría said governments need to be seriously skeptical about new coal, which is a primary energy source that many OECD members rely upon.

The Secretary-General pointed his finger at unabated coal power generation as one of the biggest challenges to reducing global emissions to stay within a 2°C target, the agreed climate change threshold to avoid potentially dangerous consequences. Gurría said that coal was usually the least heavily taxed of all fossil fuels, and yet, looking at the way we’re going through coal right now, will result in more than 500 billion tonnes of carbon dioxide released into the atmosphere between now and 2050. That’s around half of the remaining carbon budget to stay within our 2°C target.

“The IEA expects global demand for coal to continue to grow in the near term, which would result in a disastrous 4°C plus trajectory,” said an impassioned Gurría. “We cannot continue building coal-fired plants simply because we have been doing so for the last 150 years.”

Coal is also an attractive energy source for developing countries that perhaps don’t have natural gas reserves waiting to be harvested or the financial and technical means to develop renewable sources of energy. But Gurría argued that coal is not cheap if you count all the costs it causes such as land disturbance, contamination of water sources, air pollution, damage to ecosystems and impacts on the health and life expectancy of miners. In the case of developing countries, Gurria called on the support of richer nations: “If the only thing separating coal from cleaner alternatives is a purely financial gap then we need to mobilise climate finance to bridge it.”

Media outlets buzzed over Gurría’s strong words on coal. Alex Kirby from Climate News Network said that Gurría was an “unlikely source” to make a case against coal, as he is the head of an organisation “representing wealthy nations that relied on coal for 32 per cent of electricity generation last year.”

Other media outlets praised the head of the OECD for going beyond the role of a “club” for the world’s richest countries to making firm recommendations against this particular energy source.

However, some are criticizing the OECD’s failure to crack down on all fossil fuels that contribute to climate change. “What about gas?” asked Tristan Edis from Climate Spectator. Fiona Harvey from The Guardian also cited the U.S.’s recent boom in shale gas as the reason coal is more tempting than ever with its lower prices.

This strong stance on coal is complementary to the huge media attention climate change has been attracting recently, due to support from high-profile figures from the entertainment industry, non-profit sector and international organisations. The buzz seems to only keep growing as the UN’s 21st Conference of Parties in Paris (#COP21) nears, where countries are expected to come up with new agreements to reduce emissions and keep our planet’s temperature within the 2°C target.

If there’s one thing that the biggest oil companies in the world and the smallest startup NGO’s seem to agree on, it’s that coal is out. Although it’s not the only fossil fuel that we need to become independent from for a sustainable future, it’s finally looking like humanity is serious about cutting ties with that inconspicuous little black rock that’s causing immense damage to our planet.

Useful links

Fast facts on coal from the IEA:

  • Coal supplied 1520 mtoe of the 3292 mtoe of additional global primary energy supply from 2000 to 2012. That’s 46% of added energy.
  • 200 MW/day of new coal generation capacity was commissioned in the world in 2010-14.

Taxing Energy Use 2015 Just published by the OECD

OECD work on climate change

The Earth Statement: for an ambitious, science-based, equitable outcome to COP21 in Paris

Earth LeagueToday’s post, for Earth Day 2015, is from Johan Rockström, Nobel Laureate Mario Molina, Jeffrey Sachs, Leena Srivastava and John Schellnhuber on behalf of the Earth League, a network of 17 leading climate scientists and economists who, supported by the Global Challenges Foundation, have just published the Earth Statement this article is based on.

2015 is a critical year for humanity. Our civilization has never faced such existential risks as those associated with global warming, biodiversity erosion and resource depletion. Our societies have never had such an opportunity to advance prosperity and eradicate poverty. We have the choice to either finally embark on the journey towards sustainability or to stick to our current destructive “business-as-usual” pathway.

Three times this year, world leaders will meet to set the course for decades to come. In July 2015, heads of state meet in Addis Ababa to discuss Financing for Development. In September 2015 in New York, the UN Sustainable Development Goals (SDGs) will be adopted. In December 2015, nations negotiate a new Global Climate Agreement in Paris.

Decisions made in this single year will be the legacy of our generation. In particular, if we do not succeed in tackling climate change, the sustainable development goals, livelihoods in many parts of the world and the wellbeing of our close and distant kin will be threatened.

In 2015, a good climate future is still within reach. If we act boldly, we can safeguard human development. It is a moral obligation, and in our self-interest, to achieve deep decarbonization of the global economy via equitable effort sharing. This requires reaching a zero-carbon society by mid-century or shortly thereafter, thereby limiting global warming to below 2°C as agreed by all nations in 2010. This trajectory is not one of economic pain, but of economic opportunity, progress and inclusiveness. It is a chance too good to be missed. We have just embarked upon a journey of innovation, which can create a new generation of jobs and industries, whilst enhancing the resilience of communities and people around the world.

Avoiding Earth Tipping Points

We can still avert dangerous climate change. However, we are currently on a warming trajectory that will leave our world irrevocably changed, far exceeding the 2°C mark. This gamble could propel us into completely uncharted waters, with unmanageable sea-level rise and a vastly different climate, including devastating heat waves, persistent droughts and unprecedented floods. The foundations of our societies, including food security, infrastructure, ecosystem integrity and human health, would be in jeopardy, impacting most immediately the poor and vulnerable.

The latest science indicates that there are critical thresholds in the Earth system. Transgressing them may lead to dramatic and irreversible environmental changes. We are probably edging very close to such thresholds and may already have crossed one with regards to melting of parts of Antarctica. Sea-level rise of more than one meter due to this event alone may be inevitable. Tipping points can also lead to feedbacks and self-amplified climate change, pushing warming far beyond current estimates. No dollar price tag could ever measure the resulting human suffering and loss of countries, cultures and ecosystems.

Crossing Civilization Tipping Points

A new global citizens’ movement is heeding the scientific evidence, demanding immediate climate action. Societies across the world have given political leaders a mandate and a responsibility to act for a safe climate future now. Informed by scientific knowledge, inspired by economic assessments and guided by the moral imperative, we call on world leaders to work towards the following eight essential elements of a Paris Agreement and associated set of actions and plans that would represent a global turning point in December 2015:

Eight Essential Elements of Climate Action in Paris

  1. Governments must put into practice their commitment to limit global warming to below 2°C. We should aim to stay as far below it as possible, since even 2°C warming will cause significant damage and disruption. However, we are currently on a path to around 4°C warming by 2100, which would create unmanageable environmental challenges. If we do not act now, there is even a 1 in 10 risk of going beyond 6°C by 2100. We would surely not accept such a high risk of disaster in other realms of society. As a comparison, such a 1 in 10 probability is the equivalent of tolerating about 10,000 airplane crashes every day worldwide!
  2. The remaining global carbon budget – the limit of what we can still emit in the future – must be well below 1000 Gt CO2 to have a reasonable chance to hold the 2°C line. Humankind has already emitted around 2000 Gt CO2 since the beginning of industrialization. Respecting the global carbon budget means leaving at least three quarters of all known fossil fuel reserves in the ground. With current emissions trends, the remaining 1000 Gt CO2 would be used up within the next 25 years.
  3. We need to fundamentally transform the economy and adopt a global goal to phase out greenhouse gases completely by mid-century. Deep decarbonization, starting immediately and leading to a zero-carbon society by 2050 or shortly thereafter, is key to future prosperity. This long-term goal, paired with strong national commitments, including a price on carbon, and a possibility to ramp up ambition via regular reviews, are essential elements of the Paris agreement. Fossil fuel subsidies should be removed urgently, and investment should be redirected to spark a global renewable energy revolution, warranting energy access for all and particularly for those most in need.
  4. Equity is critical for a successful global agreement in Paris. Every country must formulate an emissions pathway consistent with deep decarbonization. For the sake of fairness, rich countries and progressive industries can and should take the lead and decarbonize well before mid-century. Developing countries should formulate plans far beyond what they can be expected to pursue on their own, reaping benefits from leapfrogging into a sustainable economy, well supported by international climate finance and technology access. Safeguarding the right to development of the Least Developed Countries (LDCs) is fundamental.
  5. We must unleash a wave of climate innovation for the global good, and enable universal access to the solutions we already have. The unprecedented challenge of climate change requires unprecedented technological advances. We need targeted research, development, demonstration and diffusion (RDD&D) of low-carbon energy systems and sustainable land use, and capacity building to enhance access for those most in need. International cooperation, stringent laws and standards, public and private investments and clear economic incentives are all crucial steps in the global transition.
  6. We need a global strategy to reduce vulnerability, build resilience and deal with loss and damage of communities from climate impacts, including collective action and scaled-up support. With 1°C of warming already having taken place, many societies are challenged by water scarcity, shifting rain patterns and other impacts. This poses a threat to human development in all countries, particularly among the poorest and most vulnerable. A 2°C or more warming of the planet would impose huge social and economic burdens that need to be shouldered through international solidarity.
  7. We must safeguard carbon sinks and vital ecosystems, which is as important for climate protection as the reduction of emissions. Cutting down forests and degrading grasslands and aquatic systems is like killing our best allies in the fight against climate change. A precondition for sustainability is the strengthening, not the weakening of the resilience of natural and managed ecosystems and food production systems.
  8. We must urgently realize new scales and sources of climate finance for developing countries to enable our rapid transition to zero-carbon, climate-resilient societies. This includes additional public funding for mitigation and adaptation at a level at least comparable to current global ODA (around 135 billion USD p.a.). Innovative schemes such as globally funded renewable energy feed-in tariffs are required. The private sector must be encouraged to mobilize substantially larger sums. Governments should engage with banks and pension funds, enabling a shift to climate-friendly investments. Global and national climate funding must be effective, transparent and accountable.

Useful links

Stockholm Resilience Centre

OECD work on climate change

To cap global carbon, use a global licence scheme

Going, going, gone?
Going, going, gone?

Today’s post is by John Jopling of the Irish think tank FEASTA on behalf of CapGlobalCarbon

Irreversible climate change currently threatens everything the OECD does and stands for. This post suggests how the OECD could play a crucial part in helping to establish an effective global response to climate change.

The science is clear: the main cause of climate change is increased emissions of CO2 from human use of fossil fuels. The global total of emissions is all that matters in the context of avoiding calamitous change in the Earth’s climate system. To avoid runaway climate change, the aggregate global total of emissions from the use of fossil fuels must be reduced by something like 6% each year if we start reducing now, or by a greater percentage the longer we delay.

The reason we now have a global crisis is that the current system of inter-governmental negotiations under the 1992 United Nations Framework Convention on Climate Change (UNFCCC) cannot be relied on to achieve these reductions in the overall total of global emissions.

The science on climate change is worrying enough. The knowledge that there is currently no effective system for addressing it is worse.

The reason is that the current system lacks a vital component: a regulator of total aggregate global emissions. To prevent climate change becoming irreversible, it is essential that an effective regulator of the aggregate global total of emissions from the use of fossil fuels is put in place, not to replace the system of inter-national negotiations but as a back up in case it fails. In case, to be specific, the outcome of the negotiations is not enough to satisfy climate science. We are faced with an emergency. We need to design and implement a system that enables us to address it.

There is no time to be lost. The regulator must be science-based and market-friendly. The easiest way to control emissions is to control production. The easiest way to control production is by a global licence scheme administered by a global institution established for the purpose. The number of licences should be determined in compliance with climate science, the number being reduced each year. The global institution would auction the licences and these would then be tradable. Fossil fuel extraction companies would pay the market price for the licences they buy; and pass on the cost to their customers. The global institution would arrange for the net proceeds from the auction to be distributed to or for the benefit of people throughout the world in equal shares, so low carbon fuel uses would benefit. The scheme would thus contribute to social justice and should attract wide support.

Such a scheme would need the cooperation of nation-state governments. The government of each country would have to ban the introduction into that country of fossil fuels not covered by a global licence.

That is the simplest possible way to make sure that aggregate global emissions from fossil fuels are reduced as required by climate science. It involves the least possible interference with market forces and the least negotiation between nation states. The concept is simple and clear. It can, and should, be sold to all concerned in a non-confrontational way, not blaming anyone for anything. We owe it to ourselves and our children to implement it.

As the current system of inter-governmental negotiations shows no sign of introducing any such scheme or any other effective system to regulate the aggregate global total of carbon emissions, and cannot be relied on to do so, the initiative to do this has to come from the global non-governmental sector. The necessary global institution to run the scheme, call it the Global Climate Trust, would need to be independent of both governments and the fossil fuel industry. It could be established by ordinary citizens and thereafter accepted by governments. This is in practise the only way such a body could ever be established; and it is also probably the only way to make sure that this body is indeed independent.

The Trust could be established by a group of institutions and individuals. If established, for example, in England or Ireland, it could be constituted as a trust for public purposes. It would be a legal entity competent to develop relations with nation-state governments and the fossil fuel industry.

Under its constitution, the Trust would be charged with acting on behalf of humanity as a whole, including future generations. It would be subject to the appropriate regulatory and court system of the country in which it is based. The law requires trustees to act with undivided loyalty to the purposes of the trust and they must act transparently. Obligations written into the constitution of the Trust to ensure transparency and accountability would be enforceable in courts of law.

The idea that an international institution could arise from a citizen’s initiative is not new. There is the inspiring example of Henri Dunant whose actions, after he had seen 40,000 soldiers left dead or dying on the battlefield at Solferino in 1859, led to the formation of the International Committee of the Red Cross.

A number of individuals and non-governmental organisations, with a very wide range of interests and activities, need to discuss the details of the Trust and take responsibility for establishing it. The OECD could perhaps host some of the necessary discussions.

The role of the OECD could be crucial not only in hosting discussions and helping to promote this idea but also in bringing governments on board to support it.

Useful links

Cap and share doesn’t appeal to everybody:

OECD work on carbon markets

Transition to a Low-carbon Economy: Public Goals and Corporate Practices

Climate change: Price carbon now, before low-cost oil says “ciao”

Relics of the Oil Age
Relics of the Oil Age

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.

Useful Links

Carbon pricing Policy Perspectives on ISSU

OECD work on climate and carbon: aligning prices and policies