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The Zero-Emissions Imperative

DAVOS – Our planet is warming dangerously. And, as the 2013 report by the Intergovernmental Panel on Climate Change makes clear, our carbon-dioxide emissions over the past half-century are extremely likely to be to blame. A more robust approach to global warming is needed if we are to avoid catastrophe. Unlike the recent financial crisis, there is no bailout option for the earth’s climate.

Three years ago, at the United Nations COP 16 climate-change meeting in Cancún, countries agreed to reduce their emissions by 2020 to a point that would prevent the average global temperature from rising more than 2°C above pre-industrial levels. However, UN estimates show that current trends would bring the world only 25-50% of the way to this target.

This is why I am calling on all governments to be more ambitious – to aim for zero net emissions from fossil fuels by the second half of this century. Nothing short of a wholesale transformation of the energy economy will suffice.

Just this week, the European Commission unveiled new energy and climate targets for 2030 – calling for a 40% reduction in the bloc’s greenhouse-gas emissions from 1990 levels, with 27% of energy to come from renewable sources. This is an extremely important step, and more countries should follow suit.

To be sure, we will encounter huge obstacles. Two-thirds of electricity generation, and nearly 95% of the energy consumed by the world’s transport systems, comes from fossil fuels. Our energy security is increasingly tied to the exploitation of unconventional fossil-fuel deposits like shale gas, especially in the United States. Carbon-intensive technologies remain more profitable than low-carbon alternatives in many cases. And cash-strapped governments continue to encourage oil and gas exploration, in part because the rents received by some account for a large part of their revenues.

But change is possible. There is a yawning gap between what governments promise to do about climate change and their often-inconsistent (if not incoherent) policies. Even when appearing to support greener technologies, governments are prone to sudden policy changes, sometimes retroactively, leaving businesses reluctant to commit to significant investments, or even take official statements seriously at all.

I believe we can make substantial and rapid progress by setting a clear direction on three issues:

Put a price on carbon. By pricing the cost of carbon, we can manage its use (or disuse). More than 40 countries have already implemented some form of carbon tax or emissions-trading scheme. Trading schemes are often politically more attractive, because they can be flexible (although their design and implementation could be improved in many cases). But we can be bolder. Several governments have successfully introduced carbon taxes without adversely affecting growth, and we should encourage more countries to follow their example.

Cut fossil-fuel subsidies. The OECD estimates that fossil-fuel subsidies in member countries amounted to $55-90 billion annually from 2005 to 2011. And the International Energy Agency estimates that in 2012 fossil-fuel subsidies worldwide grew to $544 billion. Most of these subsidies should be scrapped; the energy industry does not need more state aid to burn fossil fuels (and, in developing and emerging economies, subsidies are a grossly inefficient and probably unnecessary way to help the poor).

Clarify policies. Governments must address inconsistencies in their energy strategies, consider the links with broader economic policies, and stop sending mixed signals to consumers, producers, and investors. In particular, they must assess whether the right regulatory arrangements are in place to allow clean-energy investments to compete on a risk-return basis. This will be essential if investors are to redirect investment toward climate-friendly alternatives.

The OECD will play its part. In order to understand and compare countries’ performances more accurately, OECD Economic Surveys will now include data and analysis of climate policies. By mid-2015, we expect to have a clear picture of the progress being made and the challenges that remain in OECD countries and all major emerging economies – and to have advised these countries how they can realistically increase the ambition and cost-effectiveness of their policies.

These steps will signal that the price of emissions must rise substantially if we are to reach our goal of zero net emissions. The transformation will not be costless, and governments must be frank with their electorates about its social and economic impact. But a low-carbon, climate-resilient world will also offer new economic opportunities.

More important, the alternative – inaction, or too little action – would be far more expensive in the long run. Hurricane Sandy, for example, cost the US the equivalent of 0.5% of its GDP. The annual bill for flood protection in coastal cities worldwide is likely to rise above $50 billion by 2050. The consequences for developing countries are more dire: Typhoon Haiyan, which hit the Philippines in 2013, was a stark reminder of how vulnerable poor countries can be to climate change.

If the world is to avoid a collision with nature – one that humanity surely cannot win – we must act boldly on every front, particularly with respect to carbon pricing and the coherence of our economic and energy policies. And we must do so now.

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