1. Economic Sustainability - the
Norwegian Experience
CELM Breakfast
Friday 29 October 2010
Professor Oluf Langhelle, Dr. Polit.

2. Outline …
• The Norwegian Experience – What is it?
- Creating economic sustainability
- The Pension Fund - Global and its political and
economic logic
• The challenges of delivering sustainability
economically
- How to reconcile ambitious climate change targets
with the extraction and consumption of fossil fuels? -
Carbon, Capture and Storage (CCS)
- Diversification to new renewable energy?
• The role and importance of the Engineering
Sector

3. Defining it first …
• The World Commission on Environment and
Development defined sustainable development as
“development that meets the needs of the
present without compromising the ability of
future generations to meet their own needs”
(WECD, 1987).
• Sustainable development rests on three pillars:
economic, environmental and social, which must
all be satisfactorily safeguarded on a global basis
(Bruvoll et al., 2009).

4. The significance of the petroleum
sector to the Norwegian society

5. Norway is heavily dependent upon oil
and gas
• Oil and gas generates huge incomes for
politicians to spend on welfare
• Oil and gas is important for employment, wealth
creation nationally and regionally
• The petroleum sector represents huge
investments (and sunk costs), technological skills
and competencies
• The oil and gas sector is especially important for
the Stavanger region
• Oil and gas moved Norway from being one of the
poorest countries in Europe in the 1950s to one
of the richest in the World 2010

6. The financial crisis – what crisis?
• The Norwegian economy has been particularly
resilient during the financial crisis with a
relatively shallow recession and moderate
increase in unemployment. … Norway moves into
what is projected to be a strong recovery …
• The global financial crisis did not spare Norway,
but the economy has been more resilient … The
recession was short-lived, starting later and
ending earlier, than in other OECD countries
• While overall GDP in the OECD area fell by 5%
between mid-2008 and mid-2009, the fall was
less than half of this in Norway (OECD, 2010).

7. A slight increase in unemployment …
OECD, 2010

8. So, why did (and still do) Norway
suffer less from the financial crisis?
Several explanations, but three important factors,
according to OECD (2010), which are linked to the
importance and management of oil and gas in
Norway:
1. The basic macroeconomic policy framework:
based on saving most petroleum revenue in an
offshore fund and spending only the underlying
return
2. A swift policy response: The authorities met the
crisis with massive fiscal stimulus an dramatic cuts in
interest rates
3. A strong contribution from the petroleum
sector: There was no immediate impact on
investments (on the contrary) and oil and gas was
less affected by falling demand

9. The Pension Fund – Global, short
history
1990: The Norwegian Government Petroleum Fund formally
established
1996: First transfer from the state budget to the Petroleum
Fund (no budget surplus from 1990 to 1994)
1998: New guidelines making it possible to invest 30-50
percent of the Fund in equities (international stock
markets), the rest in fixed income assets
2000: Opening for investments in ”emerging markets”
2001: The “Spending Rule” established (Handlingsregelen)
2004: The Petroleum Fund’s Advisory Council on Ethics
established and ethical guidelines for investments)
2006:The name changed to The Government Pension Fund -
Global
2007: The stock portion raised to 60 percent.
2009: Up to 5% of the fund can be invested in real estate,
starting in 2010

10. The Pension Fund – Global, its political
and economic logic (economic
sustainability)
”One of the challenges of policymaking is to
illustrate complex ideas in a way that is easy to
understand … it goes to the core of policymaking.
No policy can ever be implemented if it does not
have public support, and no policy can build
public support unless it is communicated in a
clear and powerful way” (Skancke, 2002:316).
”Advocating fiscal restraint is not easy
when the general government budget
surplus is around 15 percent of GDP”
(Skancke, 2002:316).

11. The underlying challenges …
1. Oil revenues are extremely volatile, so there is a
need for some sort of mechanism to decouple
government spending from oil revenues in the
short term.
1. The effects of rising pension expenditures and
declining oil revenues over the next decade will
be considerable, so there is also a need to
soften this blow to public finances (Skanche,
2002, Eriksen 2006).

12. Interaction between the Pension Fund
– Global and the fiscal budget
The ”spending rule”: The use of petroleum revenues over
the Government budget should be gradually phased into the
economy approximately in pace with an estimated 4 percent
real return on the assets in the Pension Fund – Global
(Skanche, 2006)

13. The revenues …
SDFI = The State’s Direct Financial Interest. (The state owns
interests in a number of oil and gas fields, pipelines and onshore
facilities).

14. The size of the Government Pension
Fund - Global

15. Passing 3 trillions …

16. “Taking the business cycle into account”
(flexibility in the spending rule)
OECD, 2010

17. Preliminary Conclusion …
• Norway has made some substantial progress in securing economic
sustainability based on the extraction of petroleum resources. The
Fund represent an intergenerational transfer of capital to future
generations. However, some challenges are;
- Will Norway experience growing pressure to spend more of its petroleum
revenues? (violate the spending rule?). Today, the Progress Party is the
only party advocating this position (that is about every 5th Norwegian)
- The Pension Reform (2009) reduces pension expenditures, but is it
enough? (Estimated to be reduced from 14% to 11% of mainland GDP in
2050). Will pension expenditures have to be reduced even more to
secure economic sustainability?
- How much oil and gas can be produced on the NCS? Limited reserves on
NCS? Oil has peaked, production forecasts are uncertain, the future
demand for gas in Europe is questioned, and there is strong political
tension surrounding access to new areas – the Barents Sea, and Lofoten
and Vesterålen

18. Reconciling economic and
environmental sustainability
How has the Norwegian Government approached
environmental sustainability? And especially the
relationship between petroleum and climate
change?
- A carbon tax (1991)
- Inclusion in the European ETS
- Huge investments in CCS (Kårstø and Mongstad)
- Ambitious climate change targets

19. Norway’s GHG emissions … (look at
oil and gas emissions!)

20. Overall conclusion …
• Norway has done substantial progress in securing
economic sustainability
• In terms of environmental sustainability, there is
much more that needs to be done, in addition to
CCS
• But, it is far easier to contribute economically to
environmental sustainability with money than
without money
• In order to further strengthen economic
sustainability, Norway needs to diversify more,
especially into new renewable energy
• Environmental sustainability requires substantial
reductions in GHG emissions

21. Economic and environmental sustainability. The
strategic requirements of reconciling economic
growth and environmental concerns …
• Energy efficiency …
• Cleaner and smarter use of fossil fuels …
• CCS – reducing the energy penalty, reducing capture costs,
securing safe storage …
• Integrating renewable and fossil fuel energy (biomass, wind,
solar etc.) …
• New cars (hybrid-, plug-in-, electric-, fuel cell hydrogen
cars)
• Making new renewable energy more cost competitive, more
efficient …
Lifestyle changes will not be enough. Only the
Engineering community can deliver what is needed!
You are the most important people on Earth. Use your
skills well!

22. Thank you for your attention!