Aligning Policies for the Transition to a Low-carbon Economy

Richard Baron, project coordinator, OECDDavid Fischer, OECD

Joint workshop OECD – Ministry of Finance Government of IndonesiaBogor, 4 November 2015

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OECD Ministerial Council Meeting 2014

At their Ministerial Council Meeting, OECD countries invited “OECD, in cooperation with the IEA, the NEA and the ITF […] to examine how to better align policies across different areas* for a successful economic transition of all countries to sustainable low-carbon and climate-resilient economies and report to the 2015 OECD MCM.”

“ *economic, fiscal, financial, competition, employment, social, environmental, energy, investment, trade, development co-operation, innovation, agriculture and sustainable food production, regional as well as urban and transport policies” C/MIN(2014)23/FINAL

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Agenda

WHY LOOK AT “POLICY ALIGNMENT” ?

ALIGNING CROSS CUTTING POLICY DOMAINS

ALIGNING SECTORAL POLICIES

CONCLUSIONS

WHY LOOK AT “POLICY ALIGNMENT”?

The climate challenge

Source: IPCC, 2014, Synthesis Report

Net zero emissions by the second half of the century

Southeast Asia – projected CO2 from energy

Source: IEA, 2015, South East Asia Energy Outlook 2015, World Energy Outlook Special Report.

Emission reductions by 2030 in ‘Bridge Scenario’

Source: IEA, 2015, South East Asia Energy Outlook 2015, World Energy Outlook Special Report.

Stable and predictable climate policies– A strong price signal on carbon, to make

low-carbon investments competitive with carbon intensive technologies.

• Public sector choices can rely on monetary carbon values and full cost-benefit analyses

WHY LOOK AT “POLICY ALIGNMENT”?

Core climate policies are necessary…

Source: Based on data from the International Carbon Action Partnership and IEA (2014), Energy, Climate Change and Environment: 2014 Insights. Excludes developments in countries not studied

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Carbon pricing : overview of domestic existing and planned CO2 emissions trading systems

KoreaGuangdongHubei

California

ShanghaiChongqing

TianjinBeijing

Shenzhen

Washington (planned)Quebec

NZ ETS

Tokyo

Manitoba (planned)Ontario (planned)

EU ETS

Swiss ETS

China (planned)

RGGISaitama

Stable and predictable climate policies– A strong price signal on carbon, so that low

carbon investments are competitive with carbon intensive technologies.

– Strong regulatory support in areas where price signals are not efficient, such as in energy efficiency measures.

– Support for the uptake of low-carbon technologies

WHY LOOK AT “POLICY ALIGNMENT”?

Core climate policies are necessary…

… but not sufficient

WHY DOES POLICY COHERENCE MATTER?

Climate policy comes on top of other policy goals

ECONOMIC

TRADE

COMPETITIONFISCAL

DEVELOPMENT COOPERATION

SOCIALINVESTMENT

CLIMATE

Policy domains• Investment & finance• Tax policy• Innovation and skills• International trade• Adaptation

Aligning Policies for a Low-carbon Economy

Specific activities• Electricity (regulations)• Urban mobility (governance of

local decisions)• Rural land use

• General policy frameworks were not designed with climate goals in mind.

• Existing policies and infrastructures are influenced by many decades of convenient fossil fuel use.

• First diagnosis on misalignments of existing policy frameworks with climate policy facilitate climate action, lower cost

• Diagnosis has to be led at country-level.

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Agenda

WHY LOOK AT “POLICY ALIGNMENT” ?

ALIGNING CROSS CUTTING POLICY DOMAINS

ALIGNING SECTORAL POLICIES

CONCLUSIONS AND NEXT STEPS

• Restore coherence between energy-related taxes and expenditures and the transition to low carbon– Fossil Fuel Subsidies (incl. actual government spending in

support of fossil fuel production and uses) – Taxing Energy Use (across fuels and sectors,

gasoline/diesel, etc.)

TAX POLICIESLooking at energy and beyond

Taxes and tax expenditures send multitude ofpowerful signals to companies and households

TAX POLICIES

Taxation of energy in the OECD area (in €/tCO2)

TAX POLICIES

Taxation of energy in Indonesia (in IDR and €/tCO2)

• Restore coherence between energy-related taxes and expenditures and the low-carbon transition

• Beyond energy taxes, other tax provisions hinder low-carbon choices, e.g.: – Fiscal treatment of company cars and commuting expenses – Property and land taxes, fiscal incentives for home

ownership, …– Corporate income tax provisions: are they biased towards

investment in heavy industry?

TAX POLICIES

Looking at energy and beyond

Taxes and tax expenditures send multitude of powerful signals to companies and households

• Public RD&D expenditures fall short of the low-carbon energy transition challenge.

INNOVATION AND SKILLSDelivering innovation and skills for the transition

Innovation needed to bring low-GHG technologies and practices to market, and allow new dynamic firms to emerge

INNOVATION AND SKILLS

Public Sector Energy RD&D in IEA Countries

Source: IEA databases, 2014 cycle.

• Public RD&D expenditures fall short of the low-carbon energy transition challenge.

• Innovation incentives are not always fostering new entrants that can challenge existing firms and practices

• There may be significant skill gaps, e.g. buildings sector.

INNOVATION AND SKILLS

Delivering innovation and skills for the transition

Innovation needed to bring low-GHG technologies and practices to market, and allow new dynamic firms to emerge

1. SCALING-UP: $53 trillions needed by 2035 in RE and EE (IEA)2. SHIFTING : Two-third of global investment in energy supply still goes

to fossil fuels

500

1 000

1 500

Billi

on d

olla

rs (2

012)

2000 2005 2010 2011 2012 2013

Renewables

Power transmission& distribution

Fossil fuels

Nuclear

Source: IEA, World Energy Investment Outlook, 2014

Annual energy supply investment

INVESTMENT AND FINANCE

Scaling-up and shifting investment

• Private finance– Develop a green investment policy framework

conducive to low-carbon investment: avoid stop-and-go policies, price carbon

– Align the rules governing the financial sector with long-term investment goals, e.g. unintended consequences of prudential regulations

– Enhance disclosure and valuation of climate risks and liabilities in investors’ portfolios, e.g risks stranded assets, carbon footprint, vulnerability to climate risks

• Public finance: Mainstream climate goals in public spending and development policies

INVESTMENT AND FINANCE

Scaling-up and shifting investment

Channelling public and private sources of finance towards low-carbon infrastructure

• Can tariff-based trade barriers affect the low-carbon transition?

• How can trade in services enhance the transition?

• Are “green” domestic support measures conducive to international trade?

• Are policies for aviation and maritime fuel aligned with climate objectives?

Misalignments relating to international trade

Trade itself is not the climate villain

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Agenda

WHY POLICY COHERENCE AND ALIGNMENT MATTER FOR CLIMATE?

ALIGNING CROSS CUTTING POLICY DOMAINS

ALIGNING SECTORAL POLICIES

CONCLUSIONS AND NEXT STEPS

Electricity: Contribution to annual emission reduction

Source: IEA (2015), Energy Technology Perspectives: Mobilising Innovation to Accelerate Climate Action, International Energy Agency, Paris .

• “Current designs of wholesale electricity markets in many OECD countries are not strategically aligned with the low-carbon transition”– Weak price signals for investment increase capital cost– Low-carbon technologies particularly capital intensive

• Rethink electricity market design to secure timely investment in low-carbon technologies

• Look at investment incentives in regulated systems

Reframing investment signals in electricity systems

Electricity market liberalisation was made possible by flexible fossil-based technologies (flexible combined-

cycle gas turbines)

Risk raises the cost of low-carbon power significantly

Financing costs can dominate all other components of LCOE for solar PV.

Impact of cost of capital on the levelised cost of solar PV

• Look beyond ‘core climate policies: – Governance: Integrate land-use planning and transport

policies• Adopt a co-benefits approach to transport• Integrate national and sub-national actions to improve

coherence• Overcome government fragmentation at the local level

– Finance: Empower local governments by removing fiscal and regulatory impediments

– Innovation: Provide infrastructure to encourage technology breakthroughs (e.g. CNG refuelling stations, electric vehicle infrastructure).

MOBILITY

Opting for sustainable urban mobility

Current transport systems are fossil-fuel based, with a high environmental costs in urban settings

How to shift away from individual cars to mass transport modes, reduce the need for travel, improve fuel and vehicle efficiency?

• Governance: Integrate land-use planning and transport policies at the metropolitan level

• Finance: Empower local governments by removing fiscal and regulatory impediments

• Innovation: Remove bottlenecks to energy efficiency and technology breakthrough

MOBILITY

Opting for sustainable urban mobility

How to shift away from individual cars to mass transport modes, reduce the need for travel, improve fuel and vehicle efficiency?

LAND USE

Strengthening incentives for sustainable land use

• Redirect agricultural support policies towards low-carbon practices

How land use could move from a net contributor of one fourth of GHG emissions in 2014 to a net carbon sink by the end of the

century, while feeding a growing population?

Evolution of producer support in OECD countries by potential environmental impact

Source: OECD (2013), “Producer and Consumer Support Estimates”, OECD Agriculture Statistics Database

LAND USE

Strengthening incentives for sustainable land use

Net carbon sink by the end of the century?

• Redirect agricultural support policies towards low-carbon practices

• Liberalise trade measures to support mitigation, adaptation and food security agenda

• Remove insurance subsidies to support agriculture’s resilience

• Value services provided by forests and ecosystems in economic decisions

• Join-up policies to address the roots of food waste

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Agenda

WHY POLICY COHERENCE AND ALIGNMENT MATTER FOR CLIMATE?

ALIGNING CROSS CUTTING POLICY DOMAINS

ALIGNING SECTORAL POLICIES

CONCLUSIONS AND NEXT STEPS

This first broad-based policy diagnosis points to the need for ‘whole-of-government’ approach to the climate challenge Streamline institutions and policies (avoid multiple

responsibilities and overlapping policy objectives) Head of government should ask Ministries: are your existing

policy frameworks hindering or helping climate goals? Misalignments can be many: what are the major ones that

could, once resolved, facilitate effective climate policy?

CONCLUSION

A new approach to the climate policy challenge

This first broad-based policy diagnosis points to the need for ‘whole-of-government’ approach to the climate challenge

Resolving misalignments can foster sustainable, inclusive growth. Early lessons: More progressive taxes, pro-development infrastructure

investment, enhanced innovation Energy security, lower local pollution, better mobility,

sustainable agriculture Alignment issues at international level?

A global agreement at COP21 should encourage co-operation on domestic climate policies

CONCLUSION

A new approach to the climate policy challenge

THANK YOU

For full report, synthesis and video:http://oe.cd/lowcarbon

richard.baron@oecd.org