Economic growth can be achieved through countries pursuing climate-friendly policies. Anthony Cox, acting director of the Environment Directorate of the Organization for Economic Co-operation and Development (OECD), stressed in an interview with The Japan News that governments can kick-start economic growth that will build resilience against the effects of climate change with structural reforms. He also said Japan has an important role in this area. The following are excerpts from the interview with Cox.
The Japan News: About one year has passed since the Paris Agreement was concluded. What do you think is the meaning of the agreement?
Cox: The Paris Agreement was a tremendous demonstration of cooperation between countries. It was very different to the agreements that we had reached before, particularly the Kyoto Protocol, in that all countries all 190-odd countries signed up to a common set of goals as one set of countries. There was no differentiation between developed and developing countries. And the important achievement was that it was a bottom-up agreement in that all countries decided what they were going to do to contribute to the fight against climate change.
Q: The OECD compiled an interesting report titled Investing in Climate, Investing in Growth in May. It showed climate-friendly policies could provide a net increase of nearly 5 percent to the GDP of Group of 20 countries by 2050.
A: The German government asked the OECD to do the work to bring together the economic and the climate agendas to try and make that case and they asked us to do it in the context of the G20 presidency. The big thing about this report, what was different about it, is that we recognized that climate policy did not take place in a vacuum. Climate policy is an integral part, has to be an integral part of structural policy reform, of fiscal policy reform. So when you put together a package of those policies in such a way that you are supporting both economic growth and strong climate action, then you can see a dividend.
And the window of opportunity is now, because most of the OECD countries are in a low-growth track there’s low productivity, low economic growth, governments are struggling to find ways to kick-start economic growth. We believe that investing in infrastructure is one way to kick-start the growth, and if you’re going to be investing in infrastructure, you should make it sustainable because that builds in long-term resilience to the effects of climate change. There are multiple benefits to taking strong climate action now, and the links to the economy are that if you want to kick-start economic growth, you need to have structural policy reforms to open up product markets to enhance competition to generate the kind of enabling environment that will make investors want to invest. And you can either do that in a climate-friendly way or a climate-not-friendly way, and the long-term benefits are definitely to do it climate-friendly, and we showed that the net benefits of such a package are positive both in the short term and the long term.
Pursue structural reform
Q: How will climate-compatible policy packages increase long-term GDP?
A: One of the things that we highlight in the report is the need for reforms to make industry more flexible and responsive to the kinds of challenges that are coming forward both in terms of the climate challenges, but also in terms of the digital transformation that’s taking place. So we need to have economic regulation that allows new firms to come into industries and old firms to exit, so that kind of dynamic process can take place. On the financial market side, we need to have the enabling environment in the financial sector to enhance the green finance that can flow to the low-carbon economy, to the sector. So we have seen the growth in green bonds, and that’s been spectacular, but it’s the start of what we believe is something new you need to then support the growth of those kinds of financial instruments. But things like having corporate reporting disclosure requirements, increasing the familiarity of investors with the kind of vehicles that you’ve got in place there, looking at the fiduciary duty rules around institutional investors. Are these compatible with a low-carbon economy, or are they are a barrier?
When you think about the links to food security and land degradation, deforestation, there’s very important links to be made there and government policies are quite fundamental structural policies have a big role to play in whether those will be supporting a low-carbon economy or actively working against it.
And then of course there’s what we call core climate policies. The big one is of course carbon pricing. There is an abundance of evidence that carbon pricing works, there’s an increasing use of carbon pricing around the world more than 40 countries have implemented some form of carbon pricing and then there is a number of regions that put it in place in the United States for example, in Canada. There is a trend towards increased use of carbon pricing. And we think that’s going to continue, and as it grows, there will be more links made between these markets, so you’ll get the birth of a more internationally competitive carbon market. And that’s built into the Paris Agreement, but the rules around it have not been elaborated, and that’s what they are doing now.
The other core climate policy is fossil fuel subsidy reform. The world still gives out around $600 billion worth of fossil fuel subsidies a year both in developed and developing economies to producers and consumers, and that’s like a negative carbon tax. It’s an obvious one to reform. Most of those subsidies are not well targeted they go to middle-class and upper-class consumers. They’re often put in place to benefit, or for social reasons, to try and benefit the poorer segments of society to try and increase energy access and increase fuel security.
So carbon pricing, fossil fuel subsidy reform, the structural policy reforms I mentioned and then of course the technology, it’s the R&D and innovation that’s a core structural policy, and this is where the policy leadership of countries like Japan are very important.
Q: What do you estimate will be the investment needed in the future?
A: Just to meet the development goals, the countries themselves, we estimate that around $6.3 trillion a year is needed between now and 2030. If you want to make that climate-compatible, it’s $6.9 trillion a year an extra 10 percent. So it’s not a huge amount, but it is when you consider that at the moment, the current infrastructure investment levels are around $3.4 trillion to $4.4 trillion a year. So even to just get to the development goals that we have, we are still $2 trillion short. First of all we have to boost infrastructure investment, and at the same time we have to make it climate friendly.
Green finance revolution
Q: But the scale of green bonds is still small, so how do you intend to expand the scale?
A: I think that we have a green finance revolution underway. The reputational risk and corporate social responsibility are now a much bigger factor in companies’ thinking than it was 10 or 15 years ago, so there’s a lot greater recognition on the part of companies themselves that they have to take this into account. Things like corporate reporting and corporate social responsibility are increasing. Issues around disclosure rules, fiduciary duty, as I mentioned before, will be important going forward. And it’s not just green bonds, it’s also green loans, green equities, green investment banks who are starting to become more visible in the marketplace.
Q: What is the OECD’s role?
A: One of the roles of the OECD here is to help provide policy guidance in how you ensure, for example, that blended finance is effective and is not a drain on countries’ budgets. How to develop guidelines for green bonds to make sure they are credible, and that they are doing what investors think they are doing. And that’s the role of the OECD here, and so providing policy guidance, sharing best practices, across the whole range of policies with carbon pricing through the fossil fuel subsidy reforms, through the green bonds and investment plans and so on.
That’s one of the reasons that we have developed platforms like the green investment finance forum, which I mentioned before. That brings together the different stakeholders in the green finance world: investors, regulators, policymakers, end users. Because we need to keep the conversations going. The other thing the OECD has done recently is set up the Centre on Green Finance and Investment, which does the analysis and provides a mechanism for bringing in research on the policy side the exchange of good practices that will inform policymakers in Japan and Australia and the rest of the OECD countries.
Q: What do you think about the risks and opportunities in the financial market related to climate change?
A: I think we are starting to move from seeing climate just as a risk factor. It certainly is a risk factor, and companies are having to deal with that and investors and ratings companies are having to factor it in, but it’s also a business opportunity. You are certainly seeing that in some of the big companies. For example, HSBC has just set up a director for sustainable financing. And that reflects the fundamental recognition at the highest levels in HSBC that green finance issues are here to stay that companies [and] their clients have to take climate risk into account seriously and they have to do it in a systemic way and not in an ad-hoc half-baked way. It’s part of core functioning and core responsibilities of a bank and investing company.
Q: What role would the OECD like Japan to play in this area?
A: I think, without doubt, Japan has a huge leadership role to play. You have been a leader not just in technology, but also in getting agreement at the Paris Agreement. You were one of the core countries which helped to forge the agreement, and that’s tremendously important. I think that there are things that Japan can still do. For example, it can articulate its long-term vision for the economy as it moves to a low-carbon economy.
Q: What do you think of the United States’ decision to withdraw from the Paris Agreement?
A: I think it’s very serious when the world’s leading economy withdraws from a major agreement like the Paris Agreement. It’s very unfortunate. However, what is also important and quite positive is that no other country has followed suit, [and] that a number of the cities and regions within the United States have committed to undertaking action at their own level.
It’s not the death of the Paris Agreement at all.
The Yomiuri Shimbun