Aligning Policies for the Transition to a Low-carbon Economy - Presentation by Richard Baron, OECD

1. Richard Baron, project coordinator, OECD
David Fischer, OECD
Joint workshop OECD – Ministry of Finance
Government of Indonesia
Bogor, 4 November 2015

2. 2
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

3. 3
Agenda
WHY LOOK AT “POLICY ALIGNMENT” ?
ALIGNING CROSS CUTTING POLICY
DOMAINS
ALIGNING SECTORAL POLICIES
CONCLUSIONS

4. WHY LOOK AT “POLICY ALIGNMENT”?
The climate challenge
Source: IPCC, 2014, Synthesis Report
Net zero emissions by the second half of the century

5. Southeast Asia – projected CO2
from energy
Source: IEA, 2015, South East Asia Energy Outlook 2015, World
Energy Outlook Special Report.

6. Emission reductions by 2030
in ‘Bridge Scenario’
Source: IEA, 2015, South East Asia Energy Outlook 2015,
World Energy Outlook Special Report.

7. 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…

8. 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
8
Carbon pricing : overview of domestic existing
and planned CO2 emissions trading systems
KoreaGuangdong
Hubei
California
ShanghaiChongqing
Tianjin
Beijing
Shenzhen
Washington (planned)
Quebec
NZ ETS
Tokyo
Manitoba (planned)
Ontario (planned)
EU
ETS
Swiss
ETS
China (planned)
RGGI
Saitama

9. 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

10. WHY DOES POLICY COHERENCE MATTER?
Climate policy comes on
top of other policy goals
ECONOMIC
TRADE
COMPETITION
FISCAL
DEVELOPMENT
COOPERATION
SOCIAL
INVESTMENT
CLIMATE

11. 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.

12. 12
Agenda
WHY LOOK AT “POLICY ALIGNMENT” ?
ALIGNING CROSS CUTTING POLICY
DOMAINS
ALIGNING SECTORAL POLICIES
CONCLUSIONS AND NEXT STEPS

13. • 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 POLICIES
Looking at energy and
beyond
Taxes and tax expenditures send multitude of
powerful signals to companies and households

14. TAX POLICIES
Taxation of energy in the
OECD area (in €/tCO2)

15. TAX POLICIES
Taxation of energy in
Indonesia (in IDR and €/tCO2)

16. • 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

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

18. INNOVATION AND SKILLS
Public Sector Energy
RD&D in IEA Countries
Source: IEA databases, 2014 cycle.

19. • 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

20. 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
Billiondollars(2012)
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

21. • 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

22. • 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

23. 23
Agenda
WHY POLICY COHERENCE AND ALIGNMENT
MATTER FOR CLIMATE?
ALIGNING CROSS CUTTING POLICY
DOMAINS
ALIGNING SECTORAL POLICIES
CONCLUSIONS AND NEXT STEPS

24. Electricity: Contribution to
annual emission reduction
Source: IEA (2015), Energy Technology Perspectives: Mobilising Innovation to
Accelerate Climate Action, International Energy Agency, Paris .

25. • “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)

26. 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

27. • 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?

28. • 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?

29. 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

30. 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

31. 31
Agenda
WHY POLICY COHERENCE AND ALIGNMENT
MATTER FOR CLIMATE?
ALIGNING CROSS CUTTING POLICY
DOMAINS
ALIGNING SECTORAL POLICIES
CONCLUSIONS AND NEXT STEPS

32.  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

33.  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

34. THANK YOU
For full report, synthesis and video:
http://oe.cd/lowcarbon
richard.baron@oecd.org