Investing in a low-carbon India

Delivered 03-July-2018, New Delhi, India

We are in complex times, politically, economically and environmentally.

In our ever-connected world, we are seeing that many people have been left behind by the benefits of globalisation and are rejecting a multilateral system they feel does not benefit them. However, the multilateral system has delivered significant achievements in recent years, just look at the SDGs and the Paris Agreement.

Climate is one area where multilateralism is crucial, together with domestic action.

Governments across the world face many challenges domestically: the enormous challenge of ensuring growth is inclusive, improving well-being while also addressing global challenges like climate change. The message I would like to convey today is that these do not have to be mutually exclusive.

(Slide)

Last year, Chancellor Merkel asked the OECD to produce a report for Germany’s G20 presidency to show the growth angle to climate change action. So we produced this: Investing in Climate, Investing in Growth [hold up].

With this report, we turned the debate around to show that with the right policies and incentives in place, governments can generate inclusive growth while reducing climate change risks.

And importantly, it shows countries how to do this by transitioning to a low-emissions economy.

A climate friendly policy package to limit global warming to below 2ºC can increase growth by 2.5% on average across G20 countries by 2050[1].

(slide 8)

If we also take into account the benefits of avoiding climate damage from increased flooding, storms, droughts and extreme weather events, the net effect on output rises to nearly 5% by 2050.

And the benefits will not just be felt thirty years down the line.

We can start reaping the rewards of this approach now. The OECD’s modelling work indicates a net growth effect of around 1% for G20 economies – including India – as early as 2021. Jobs could be created in the manufacturing of pollution-control devices and renewable energy production, or from land filling and waste incineration to recycling.

The alternative of doing nothing in the short-term would lead to average losses of up to 2% of GDP in the medium-term.

Delaying action would also mean that even tougher measures would need to be introduced later to prevent catastrophic climate change, and estimates show that unmitigated climate change could push 100 million people in developing countries into extreme poverty by 2030[2].

Doing nothing would also exacerbate inequalities; poorer communities are ill-prepared to meet the challenges of climate change, being less able to invest in ex-ante preventative measures or ex-post mitigation.

So now is the time to act, and governments need to embed their climate policies into their domestic growth agendas.

(slide 9)

Making the transition to a low-emission, high-growth and resilient economy means significant investment in infrastructure over the next decade. Around 6.3 trillion dollars a year of investment in infrastructure is required between 2016 and 2030 to meet global development needs – that’s without taking climate into account.

The good news is that making these investments “climate-compatible” is a relatively smaller cost – an additional 0.6 trillion dollars a year.

This is a modest increase in infrastructure investment, less than 10%, relative to the significant gains in growth, productivity and well-being for both advanced and developing economies.

Of course, any politician would ask where this money would come from.

 

 

Our report gives a concrete suggestion in this regard: these incremental costs could be offset by savings in fuel costs of up to 1.7 trillion dollars per year up to 2030, producing a net saving of over 1 trillion dollars per year.

(slide 10)

The OECD advocates a “whole-of-government” approach to achieve low-carbon growth consisting of three key elements:

  • First, pro-growth structural reforms that are supportive of the necessary low-carbon investments.
  • Second, policies targeted to climate change: carbon pricing, but also well-designed investment incentives.
  • Third, making broader investment conditions supportive of low-carbon investments: removing fossil subsidies, improving planning processes and regulation.

It is this integrated policy approach to the climate and growth question that makes this report unique. Climate policy must not exist in a vacuum.

It should interact with a large number of policy areas, cutting across competition, labour, education, trade, agriculture, health, gender equality, and more.

Acting on climate change can also help reduce inequalities, for example, by reducing exposure of people to air pollution, which is generally higher in poorer communities, and can thus have a knock-on effect on people’s health and employment outcomes.

In India, outdoor air pollution caused more than a million premature deaths in India in 2015, estimated at a cost of more than 800 billion dollars[3].

(slide 11)

India, with the large population and growing economy – especially in the technology sector – has enormous opportunities and potential gains from transitioning to a low-carbon economy.

Let me highlight three specific areas of action for India:

First, getting fiscal policy right for low-carbon, climate-resilient and inclusive growth.

India has made strong progress to “green” fiscal policies, including by strengthening carbon pricing, and pursuing fossil fuel subsidy reforms after the complete deregulation of diesel prices in 2014.

India could go even further; fossil fuel subsidies remain significant, and India’s energy taxes could be applied more consistently and could be increased; they are currently too low compared to the damage generated by emissions. This is particularly the case for natural gas, liquid petroleum gas and coal.

Raising excise tax rates on fuels and extending taxes to emitters who currently do not face a price, would encourage emissions reductions where they are cheapest.

It would also deliver important co-benefits: increasing revenue from energy taxes improves fiscal flexibility, and cutting emissions helps reduce air pollution.

Second, finance. Strong, climate-resilient growth requires capital – lots of it. And the public sector can’t do it alone.

Now, more than ever, we need to take action to overcome the remaining barriers to mobilise additional private investment.

This means improving the investment environment and supporting various financial instruments designed for climate-compatible investment.

Guarantees, credit enhancements and insurance offerings help to mitigate and better allocate risk, while green bonds and securitised loans are playing an increasing role in securing a reliable long-term funding basis.

India’s first green bond was issued in 2015 and the market is growing rapidly, with annual issuance increasing from around 1 billion dollars in 2015 to 4 billion in 2017[4]. Estimates suggest India has the potential to more than double its green bond issuance this year to 8 billion dollars[5]. As a founding member of Mission Innovation, India is driving forward global efforts to mobilise investment to fight climate change.

Third, the transition must be inclusive, progressive and good for business – what we call a “just” transition.

India’s economy, like most countries, is “entangled” with fossil fuels intensive sectors: rents extracted from oil, natural gas and coal resources account for over 2% of GDP and over 13% of total government revenue, the fifth highest in the G20.

To liberate economies from fossil fuels, countries need to adopt a cross-cutting, whole-of-government approach to climate action.

Developing a long-term low emission development strategy to 2050 is an important step to reduce the risk of locking-in emissions, and leaving stranded assets with stranded communities alongside them.

The OECD supports countries on all these issues, and we are ready to collaborate with India to help design, develop and deliver polices to  ensure low-carbon, climate-resilient and inclusive growth.

Let me close by outlining two exciting initiatives at the OECD.

(slide 12)

First, the OECD is leading a G20 mandated project called Financing Climate Futures: Rethinking Infrastructure. This project builds on the Investing in Climate, Investing in Growth report and helps countries make financial flows consistent with a low emissions and climate-resilient future.

It focuses on the game-changing interventions that move beyond an incremental approach to a more ambitious agenda needed for climate action.

Second, this year OECD is launching a new programme on Clean Energy Finance and Investment in emerging economies, focusing on renewable energy and energy efficiency. The objective is to undertake country reviews and work with countries to support implementation and scale up private investment.

Ladies and gentlemen, OECD’s evidence shows that putting the climate imperative at the heart of economic development will help to drive progress on both inclusive growth and climate.

We must take bold, collective and decisive action at the domestic level, but we must also “green” the multilateral system and work together to save our planet. It is shocking that by the middle of the century, the ocean could have more plastic than fish by weight!

India has demonstrated huge potential to push the frontier of innovation and investment in low-emissions technologies and to drive forward the transition. And with India on the path to low-carbon, the rest of the world would follow.

Count on the OECD to support you in this endeavour.

[1] Relative to the baseline, which assumes a continuation of current policies

[2] World Bank, 2016

[3] Roy, R. and N. Braathen (2017), “The Rising Cost of Ambient

Air Pollution thus far in the 21st Century: Results from the

BRIICS and the OECD Countries”, OECD Environment

Working Papers, No. 124, OECD Publishing, Paris.

http://dx.doi.org/10.1787/d1b2b844-en

[4] Climate Bonds Initiative (2018) “Securitisation as an enabler of green asset finance in India” https://www.climatebonds.net/files/files/Indian%20ABS%20_%20CBI%20_%20conference%20brief%20_%20May%202018.pdf

[5] SEB 2018 https://sebgroup.com/siteassets/large_corporates_and_institutions/our_services/markets/fixed_income/green_bonds/seb_the_green_bond_january_2018.pdf

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