Meeting agreed climate change targets will require steadfast policy action in the years to come to underpin the needed transition to a low-carbon economy. Countries have made ambitious pledges to reduce emissions and announced climate change mitigation policies to honour those commitments. However, action remains by and large out of step with stated ambitions, and the 2015 Paris Agreement’s goal of keeping the rise in world temperature “well below 2 degrees compared to pre-industrial levels” is unlikely to be met (Figure 1). At the same time, the ongoing war in Ukraine is putting pressure on energy markets. Policymakers will need to take steps to ensure energy security and diversify energy sources in a manner that creates incentives for the transition in the years to come.
Figure 1.Global emissions of greenhouse gases are out of step with the net-zero target by 2050
Scenarios of CO2 emissions during 2000-50 and associated expected temperature rise by 2100
Notes: The Announced Pledges Scenario (APS) is updated with COP26 pledges as of November 3rd, 2021; the Net-zero Emissions Scenario (NZE) shows the global energy-related emission pathway developed by the IEA where technology, investments and policies are deployed in line with the objective of reaching net-zero emissions by 2050. Expected temperature rises by 2100 are relative to pre-industrial levels, and are subject to an upward risk due to uncertainties in the estimate and possible future changes in policy.
Sources: IEA (2021), CO2 emissions in World Energy Outlook scenarios over time, 2000-2050, IEA, Paris; IEA (2021), Temperature rise in 2100, by scenario, IEA, Paris; and IEA (2021), World Energy Outlook 2021, IEA, Paris.
Bold political choices are needed
Policymakers will need to make choices to redress this situation. Success will depend largely on how well and how far they use the policy instruments at their disposal. Of course, countries differ in their economic structure, social preferences and political constraints, which influence policy choices. For example, in the OECD area as a whole about 80% of greenhouse gas emissions come from energy, even though this average masks large cross-country disparities. Manufacturing and industry typically account for the bulk of those emissions, followed closely by transport and housing. Taking account of these economic and social specificities, understanding the expected effects of policy commitments, identifying gaps in abatement trajectories relative to targets, managing risks along the transition and considering corrective measures where and when needed are all part of a successful strategy.
There is no shortage of policy tools to deliver a successful low-carbon transition. Rather than relying on a single instrument, policymakers actually need a comprehensive climate policy package to achieve cost-effectiveness along with social acceptability of decarbonisation strategies (D’Arcangelo et al. 2022). The toolkit includes market-based instruments, such as carbon pricing and emission trading schemes, but also non-market levers, such as subsidies, standards and regulations. These instruments have different abatement potential and associated costs that need to be quantified to the extent possible to inform policy choices. For example, carbon prices remain low around the world, in part due to concerns about their distributional implications, which motivates public opinion resistance (Figure 3). Policy instruments also differ in their impact on government budgets.
Figure 3.Carbon pricing has yet to fulfil its potential worldwide
Carbon pricing score, 2018
Notes: The carbon pricing score (CPS) measures the extent to which countries have achieved the goal of pricing all energy-related emissions for carbon costs, at certain benchmark values. For example, a CPS of 100% against a benchmark of EUR 60 per tonne of CO2 means that the country prices all energy-related carbon emissions in its territory at EUR 60 or more. In practice, EUR 60 is a midpoint estimate for carbon costs in 2020, and a low-end estimate for 2030. Pricing all emissions at least at EUR 60 in 2020 shows that a country is on a good track to reach the goals of the Paris Agreement to decarbonise by mid-century.
Source: OECD, Effective Carbon Rates 2021 Database.
Standards, regulations and subsidies can effectively complement carbon pricing and other incentive-based policies. These non-market instruments include a variety of mechanisms, such as emission quotas, green certifications, technology mandates and others. They can help to overcome coordination failures and can be used instead of market instruments, where firms and households do not respond strongly to explicit price signals. The costs associated with these non-market instruments can be seen as implicit prices on emissions and need to be quantified. They also need to be designed appropriately to avoid blurring price signals, blunting economy-wide incentives and complicating performance monitoring.
How to reduce social and economic costs? Deploying all these instruments effectively calls for action in other policy areas to lower the economic and social costs of transition. For example, new technologies may reduce the costs of abatement and can be supported through R&D and innovation incentives. These incentives can take the form of grants, tax credits or innovation prizes. They can also be delivered through demand-side policies, such as public procurement. Appropriate regulation of product markets is essential to create an environment of contestability that is, in turn, crucial for business dynamism and the diffusion of innovation.
Leveraging the private sector will also require policy support. Green investments need transparent and consistent disclosure standards, as well as appropriate labels, taxonomies and rating methodologies to come to fruition. There are indeed many investment opportunities that could support a low-carbon transition, including in power system flexibility, public transport infrastructure, energy-efficient retrofitting of buildings, carbon capture facilities and renewable energy deployment. The financing needs for these investments are large and far outweigh the wherewithal of government budgets.
War in Ukraine: transition at risk from derailing?
The war in Ukraine has brought to the fore the heavy reliance of many countries, especially in Europe, on fossil fuel energy with a high risk of price shocks and even shortages (OECD, 2022). Redressing this situation requires policy action to improve the security of energy supply, encourage through appropriate incentives a move away from fossil fuels, boost investment in clean energy and energy efficiency, and support innovation to develop the green technologies needed to underpin the low-carbon transition.
At the same time, safety nets and labour market policies will have to respond to the specific needs of those adversely affected by the transition. Low-income households are the most exposed to price hikes in “polluting” goods, and policymakers need to devise strategies to support them. In addition, workers in declining “brown” sectors may face persistent joblessness and earnings losses, whereas firms in expanding “green” activities may have to deal with shortages of workers with the necessary skills.
To achieve a just transition, policymakers will need to invest in education and training/retraining programmes, as well as making sure that labour mobility and market competition are not thwarted by ill-conceived regulation and other policy-related impediments. The same is true for active labour market policies and appropriate social safety nets for the most vulnerable. By emphasising protection for workers, rather than jobs, these interventions have the additional merit of helping to muster public opinion support for climate change mitigation initiatives.
The importance of international policy coordination: a matter of trust
Effective strategies for the transition to a low-carbon economy will require international policy coordination. This is key, not only because the climate change mitigation goals are global in nature and scale, but also to reducing risks of carbon leakage, as countries pursue different standards with different levels of ambition and conviction.
Another crucial, yet often forgotten, element of an effective low-carbon transition strategy is trust in policy and institutions. Building a solid evidence base to inform policy choices, promoting climate education and awareness campaigns, communicating the benefits and costs of policy alternatives, engaging the relevant stakeholders, combating disinformation, dealing with interest groups and supporting those adversely affected by the transition are just a few key necessary steps towards building trust in institutions and policymakers.
All in all, the social and economic transformation of the scope and depth required to secure a smooth transition to a low-carbon global economy will have leaders and laggards, across and within countries. Vision and ambition, international coordination and effective use of all available policy tools are central requisites for a successful transition and need to be part of national strategies.