OECD Observer
Energising change

Energy has moved to the top of our policy agendas, and with good reason. First, there is the price of oil, which though easing a little in recent months, remains historically high. This has pushed up costs for producers and consumers alike.

Second, there is the security of supply, as conflicts and geopolitical uncertainties threaten oil and gas flows in particular.

But the main reason for our wake-up call on energy is global warming. We now know that greenhouse gas emissions from transport and power generation are partly responsible for this fact.

Energy is the heartbeat of growth and development, and is a globalisation issue par excellence. Over 70% of new energy demand in the next 25 years will come from developing countries, a third of that in China, but economic activity in developed countries will remain a major source of emissions. Devising new energy strategies for our world will demand international co-operation which the OECD must help forge. What are the steps forward?

The recent Stern Report, commissioned by the UK government, argued that climate change, if left unchecked, would cost between 5% and 20% of worldwide GDP. However, the report said it would cost just 1% of GDP to correct. Another report by PricewaterhouseCoopers in September came to a similar conclusion. The International Energy Agency, a sister body of the OECD, in its latest World Energy Outlook, also warns of the dangers of following our current energy path and considers different policy scenarios.

We may all differ on precise numbers, but the task remains the same. As the IEA puts it, our global energy situation is vulnerable, dirty and expensive. Fortunately, as OECD and IEA work shows, we have the tools to make energy smarter, cleaner and cost-effective. New strategies are affordable, but will only work if we embark on them without delay.

Looking for options gives rise to passionate debates, about the car industry, nuclear energy, markets, taxation and regulation. There is excitement over renewable energy technologies, not least because of the business opportunities these provide.

Listening to the arguments and sizing up the facts is one of our main jobs at the OECD, so that we can help governments decide how to proceed. Our message to all sides is simple: renewable energy technologies are not a panacea, far from it. And “business as usual” with fossil fuels is not an option. The smart solution is an energy mix based on better technologies and, above all, greater efficiency.

Striking a new energy approach is a realistic way forward since it means implementing policies already being considered. Demand for energy is rising and so all options must be involved, whether oil and gas, carbon sequestration, nuclear power, biomass, wind or solar energy. Some new technologies will have to be further developed, and others made more effective.

Take coal. This is the most carbon-emitting fuel in power generation, but it is an abundant and dense energy source. China is the world’s largest user of coal and it is the main fuel for electricity generation in the US and Germany too. Its use is set to go on rising. Equipping new coal generators with technologies to capture carbon to reduce emissions and increase efficiency will be important.

In fact, policies that promote efficiency in output and use of energy contribute to 80% of the CO2 emissions avoided under the IEA’s alternative policy scenario. This demands changes which governments can promote.

Setting effective fiscal policies is an obvious step. We know taxes can discipline energy use. However, energy products and motor vehicles already account for the largest number of environmentally-related taxes in the OECD area. Their effectiveness could be improved if some exemptions to energy and motor vehicle industries were better controlled. As for subsidies, these should target cleaner energy innovations and practices, and not distort or protect markets.

Governments must provide a business environment that incites change and encourages new energy models. They must be innovative in funding research and demonstration, and promoting competition in all energy markets. Government can lead the way in their own procurement practices, in cleaner transport contracts, for instance. And carbon trading must be allowed to function.

Governments can also lead by setting building standards and energy requirements for industry. Such standards should spur market opportunities among energy suppliers and promote energy-efficient habits among businesses and households, in building insulation, heating, lighting or transport.

Many initiatives will be nationally or locally focused though with a global impact. And as we focus on solving the side-effects of our insatiable appetite for energy, let us not forget that 1.6 billion people have no electricity at all. Over a million people, mainly women and children, die every year because of fumes from inefficient cooking stoves. We must do more to bring modern energy systems to developing countries and save lives.

Do we have the political will to change? The messages in this edition’s special roundtable of OECD ministers responsible for energy policy reflect a determination which suggests that we do. Thus, we must step up the momentum. Time is not on our side.

©OECD Observer No 258/259, December 2006

Updated April 2007.