Looking to avoid irreversible damage

The OECD says the cost of avoiding a global environmental catastrophe are affordable, but only if governments around the world act quickly


Just how much will it cost to address the world’s key environmental problems? That’s a big question, but one that the OECD believes it has answered. The organisation recently unveiled what it says is a groundbreaking report that combines economic and environmental forecasts. Its conclusions are bleak. “I must warn you: the report does not make for an uplifting read,” OECD Secretary General Angel Gurria said when he presented them in February. “It paints a grim picture of our planet in 2030 if no policy reforms are introduced.”

On the positive side, however, Gurria said the report identified solutions to the key environmental challenges that were “available, achievable and affordable, especially when compared to the expected economic growth and the costs and consequences of inaction.”

There are four priority areas where action is needed, according to the 2008 OECD Environmental Outlook Report. These are: climate change, biodiversity loss, water scarcity and the impact on human health of pollution and toxic chemicals. Its economic-environmental projections show that world greenhouse gas emissions are expected to grow by 37 percent to 2030 and by 52 percent to 2050 if no new policy action is introduced.

To meet increasing demands for food and biofuels, world agricultural land use will need to expand by an estimated 10 percent to 2030; 1 billion more people will be living in areas of severe water stress by 2030 than today; and premature deaths caused by ground-level ozone worldwide would quadruple by 2030. “Countries will need to shift the structure of their economies in order to move towards a low carbon, greener and more sustainable future,” Gurría said. “The costs of this restructuring are affordable, but the transition will need to be managed carefully to address social and competitiveness impacts, and to take advantage of new opportunities.”

The report projects that world GDP will almost double by 2030. And the OECD policy simulation shows that it would cost just over 1 percent of that growth to implement policies that can cut key air pollutants by about a third, and contain greenhouse gas emissions to about 12 percent instead of 37 percent growth under the scenario without new policies. It recommends use of a mix of policies and says that to keep the costs of action low these should be heavily based on economic and market-based instruments. Examples are the use of green taxes, efficient water pricing, emissions trading, polluter-pay systems, waste charges, and eliminating environmentally harmful subsidies. But there is also a need for more stringent regulations and standards, investment in research and development, sectoral and voluntary approaches, and eco-labelling and information, it says.

The report identifies ways to share the cost of policy action globally. Developed nations have been responsible for the majority of greenhouse gas emissions to date, but rapid economic growth in emerging economies – particularly Brazil, Russia, India and China – means that by 2030 the annual emissions of these four countries together will exceed those of the 30 OECD countries combined, it predicts, noting: “Fair burden-sharing and distributional aspects will be as important as technological progress and the choice of policy instruments.”

“The main message of the report is that solutions to the key environmental challenges are available, achievable and affordable, especially when compared to the expected economic growth and the costs and consequences of inaction,” said Gurría. “This does not mean it will be cheap or easy, but they are affordable.”

Gurria said current policy actions would significantly reduce greenhouse gas emission but would not be sufficient to reach the more ambitious climate change targets currently being discussed internationally. However, the OECD report contains a simulation that suggests a slow phase-in of a carbon tax could stabilise greenhouse gas emissions at 450 parts per million (ppm) in the atmosphere. This would cost about 0.5 percent of global GDP in 2030 and 2.5 percent in 2050. The global tax on greenhouse gas emissions needed to achieve this would be equivalent to an additional 0.5 cents of a US dollar per litre of gasoline in 2010, which then increases to 1.5 cents in 2020, 12 cents in 2030 and about 37 cents in 2050, the report said. “Timing is crucial,” said Gurria. “We need to act now, before we pass critical thresholds beyond which we face irreversible damage or the costs of policy action increase significantly.”

“The window of opportunity is open – today – for cost-effective approaches towards a clean and green future. For example, the rapidly growing emerging economies will be making significant new investments in energy infrastructure and buildings in coming years. These will lock-in the fuels used and the efficiency of buildings for decades to come. So let’s make those fuels and buildings of the future as environmentally friendly as possible for the generations to come.”

To contain costs and to provide incentives for innovation, policies should focus on pricing the “bad”, rather than on subsidising the “good”, Gurria said. But market-based instruments will need to be accompanied in the policy mix by other instruments – such as regulations and standards (e.g. energy efficiency standards for vehicles and buildings), investment in basic R&D, sectoral and voluntary approaches to harness industry initiatives, and eco-labelling and information approaches to enable consumers to use their market power to reward green producers. “Technological developments will also certainly contribute to the solution. We need to consider, however, that the generalised application of breakthrough technologies poses important challenges in the area of intellectual property rights which will have to be confronted.”

The OECD report said countries will need to shift the structure of their economies in order to move towards a low carbon, greener and more sustainable future. The costs of this restructuring are affordable, in its analysis, but Gurria said the transition will need to be managed carefully to address social and competitiveness impacts, and to take advantage of new opportunities, like eco-innovation. “Last, but not least, we must be aware that getting it right in the field of the environment is not only about what to do and how to do it. We also need to address the question of who will pay for what,” he said. “The distributional aspects will be as important as technological progress and the choice of instruments. Thus, finding the best solutions will require political will and international co-operation on an unprecedented scale.”

“This will include the need to work closely together between developed countries and emerging economies – especially Brazil, Russia, India, Indonesia, China and South Africa – as well as with other developing countries. The global cost of action will be much lower if all countries work together to achieve common environmental goals.”

It will be increasingly important to 2030 for developing countries to share the burden of solving global environmental challenges. But the distribution of the responsibility for action amongst countries is likely to prove increasingly problematic and, if unresolved, may prevent major advances in environmental co-operation, the report predicts.

Environmental aid has been decreasing since1996 as a share of donor country GDP and as a share of total aid. “While many countries are working to address environmental issues through international means and instruments, a coherent and effective system at the international level is still lacking,” the report says. “Improvements in the international environmental governance system are taking place, but at a slow pace.” Environmental issues are becoming more prominent in

the international economic governance frameworks, but the number of trade and investment agreements with commitments to co-operate on environmental matters are still comparatively few.

Environmental concerns are, however, moving higher up the OECD agenda. Gurria said he wanted to engage with prime ministers and finance ministers on the topic, not just ministers responsible for the environment. Environmental issues will dominate the agenda at the 2008 meeting of the Annual Ministerial Meeting of the OECD Council, which will take place in June. “The main topic of analysis will be the economics of climate change,” said Gurria. “We aim to develop a sound economic footing for the post-Kyoto architecture.”

“At the OECD, we now know that the policies to address the main environmental challenges are achievable and affordable,” he said. “And we know how they can be implemented. Equally important, we also know that, to avoid irreversible damage to our environment and the high costs of inaction, we must get to work right away.”

Grim reading
The OECD Environmental Outlook report predicts that, without new policies. Global greenhouse gas emissions will increase by over 50 percent to 2050. This could cause the global temperature to rise above pre industrial levels by a range of 1.7 to 2.4° degrees Celsius by 2050, and more than 4-6 degrees Celsius over the very long-term, leading to increased heat waves, droughts, storms and floods and resulting in severe damage to key infrastructure and crops.

Animal and plant species will continue to become extinct to 2030 due to pressures from expanding agriculture, urbanisation, and climate change. Failure to stop biodiversity loss will result in further deterioration in essential ecosystems, as well as in the natural resource base for agro-business and pharmaceuticals industries, among others.

Over 3.9 billion people –1 billion more people than today – will live in water stressed areas by 2030. Water scarcity will be exacerbated by pollution of water resources, agriculture being the largest user and polluter of water.

The impact on human health of air and water pollution is expected to worsen. By 2030, we are likely to see four times as many premature deaths caused by ground-level ozone and over 3.1 million people dying early because they’ve breathed in fine particulates. And that doesn’t include the health hazards resulting from exposure to chemicals in the environment and in products, where information available is still not enough to have a clear picture.

Green growth?
World economic growth is going to increase the volume of by-products that need to be dealt with as waste, the OECD Environmental Outlook report predicts. It says that the global economy will grow by 2.8 percent a year from 2005 to 2030. Differences in sectoral growth rates will continue to be manifested as a ‘decoupling’ of economic growth from environmental impacts. This reflects the changing structural composition of economies.

The shift towards service-based industries from energy-intensive, polluting industries and agriculture is projected to continue to 2030, reflecting changes in consumer demand. Technological developments reflected in productivity growth will continue to increase the efficiency of industrial production and reduce levels of pollution and waste per unit of output. However, the scale of economic growth anticipated is such that failure to act on environmental challenges will have even more impact than it currently does.

Natural resource sectors will find demand increasing for their output as large economies continue to experience rapid growth. Sectors such as agriculture, energy, fisheries, forestry and minerals will need to have strong policies in place to keep the environmental impact of this rapid growth at an acceptable level, the OECD says, but since all economies will see increasing material wealth, the demand for clean environments will also grow everywhere.