If we are to meet the goal of keeping global warming to 2 degrees, governments need to engage now to get on the right track to achieve zero‑net greenhouse emissions from combustion of fossil fuels in the second half of this century (OECD Secretary General Angel Gurría’s Climate Change Lecture, 2013). Given the urgency of doing so, why does our dependence on fossil fuels appear to be unshaken?
Firstly, there is an abundance of fossil fuels. We have consumed roughly 1.2 trillion barrels of oil to date, while proven and other recoverable reserves total another 6 trillion barrels (IEA, 2013). Coal and gas are similarly plentiful. Secondly, the entire physical fabric of our built civilisation has been constructed on the basis of access to dense, convenient fossil fuel. But the lock-in extends beyond that: institutional, contractual and regulatory regimes have been designed for a fossil world. Undoing it will not be easy. For example, many countries are facing challenges with regulatory constraints on the ownership of electricity system assets or long-term contracts that discourage competition and entry of renewable energy suppliers.
Finally, those who own fossil energy reserves will try to defend their value. This is not just a question of private interests. Globally, governments have a huge stake in the fossil economy. OECD governments are receiving around USD 200 billion per year from royalty payments, taxes and other revenue streams associated with upstream oil and natural gas rents. But that is small alongside the dependence of some non-OECD governments on income from oil and gas. Some cannot survive without the huge rents they extract. This is what we call carbon entanglement.
How can we untie this carbon entanglement? Such a transition needs decisive shifts in investment flows towards infrastructure that will ensure a low-emissions future. However, infrastructure as an asset class receives little attention from long-term investors. “Green” infrastructure receives even less.
The shift toward green investment may require additional spending in the short term, but it could also result in net savings in the long run with system-wide efficiency gains. An upper-end estimate puts short-term costs in the order of a further 11% or around USD 350 billion per year (WEF, 2012). It is, however, possible that greening infrastructure investment could result in net savings instead, as much as USD 450 billion annually or around 14% less costly than traditional infrastructure investment needs (Kennedy and Corfee-Morlot, 2013). For example, potential savings could stem from energy and transport transformations that entail better and more efficient utilisation of electrical systems and increased use of rail and port infrastructure for transport, once capacity is freed up through decreased fossil fuel trade. The IEA has estimated that each additional dollar invested today in clean energy could generate 3 dollars in future fuel savings by 2050 (IEA, 2012).
The annual green infrastructure investment gap – an illustration.
Source: OECD (2013), Long-term investors and green infrastructure, Policy Highlights, OECD Publishing.
Smarter investment choices matter rather than merely unlocking enormous amounts of additional capital. First, explicit carbon pricing is the cornerstone of “investment-grade” green policy making. Re-orienting finance and investment is urgent with support of green banks, since the consequences of infrastructure investments are long lasting (OECD Investment for Green Growth; Green Investment Financing Forum). As seen in British Columbia, introducing environmentally related taxes can lower consumption of fuels without slowing economic growth (Harrison, 2013). Second, fossil fuel subsidies should be phased out (OECD, 2013; IEA, 2013). Indonesia’s experience shows that subsidy reform can be successful if accompanied by social protection measures and communication campaigns (OECD, 2012). Third, the government needs to consider the entire range of signals sent to consumers, producers and investors to curb environmental pressures and support deployment of new technologies (OECD Green Growth and Sustainable Development Forum 2013). Finally, the right policies are needed to realise beneficial effects on equity, employment and income, and to ameliorate any adversities (OECD, 2013).
Since the launch of its Green Growth Strategy in 2011, the OECD has been working with countries to integrate green growth objectives into economic and industrial policies and to support progress through core OECD surveillance reports: the Economic Surveys, Environmental Performance Reviews, Investment Policy Reviews, and Innovation Reviews. The OECD has also been extending its expertise to partner countries. For example, as part of the OECD strategy on development, the “Towards Green Growth in Emerging and Developing Asia” project addresses policy coherence, and the design and implementation aspects of green growth policies in ASEAN economies.
A greener growth model needs effective communication. We need to get a firm grip on the numbers – governments cannot afford unnecessarily costly policies so understanding what the most cost effective policy interventions would entail is vital. Without clear indicators to help us measure progress across key sectors, the transition to greener growth will not happen (OECD, 2014; OECD, 2013). And the Green Growth Knowledge Platform Scoping Paper “Moving Towards a Common Approach on Green Growth Indicators” is a milestone of successful international cooperation to facilitate countries’ attempts to marry green with growth.
There is nothing easy about changing a growth model that has taken fossil fuel for granted. But we take resource and environmental challenges seriously. A key step is to overcome the “silo” approach to policy making and to align policies across energy, climate, investment, market regulation, finance, and trade dimensions. That is why Ministers, meeting at the OECD on 6 and 7 May 2014, charged us together with the IEA and other sister organisations, to advise governments on how to deliver effective packages of policy instruments that will facilitate the transition to a low-carbon economy. Watch this space a year from now!
Based on the article originally published in ENVISION Magazine, Issue 6, National Environment Agency of Singapore
The opinions expressed herein are solely those of the authors and do not necessarily reflect the official views of the GGKP or its Partners.