Climate policy making today demands balancing the need for immediate, accelerated climate action with essential responses to punctual crises such as the COVID-19 pandemic and Russia’s war of aggression in Ukraine. Meeting this challenge requires a new approach centred on systemic resilience and the need to develop future-proof climate and economic policies that will endure potential diverse disruptions. This report offers policy makers a cohesive set of recommendations on how to build such resilience, derived from climate-relevant work from across OECD policy domains including economic and tax policy, financial and fiscal affairs, development, science and technology, employment and social affairs, and environmental policy, among others. It provides fresh insights on how to ensure the transition to net-zero emissions is itself resilient, while simultaneously building resilience to the increasing impacts of climate change. This report provides a synthesis of the OECD Net Zero+ project, covering the first phase of an ongoing, cross-cutting initiative, representing a major step forward for an OECD whole-of-government approach to climate policy.
Net Zero+
Abstract
Executive Summary
The substantial global upheavals of recent years have come at a time of unprecedented urgency for faster action on climate change. Addressing this challenge is the focus of Net Zero+: Climate and Economic Resilience in a Changing World. The project draws on the breadth of the OECD’s multidisciplinary expertise to present resilience as the backbone of effective, whole-of-government climate policy. Net Zero+ is about how we reach net zero in a rapidly changing world – it is about not only making sure climate policies are as ambitious as they need to be but also resilient in a world of overlapping disruptions. This means building resilience to the impacts of climate change itself, as well as designing policies that fully take into account socio-economic implications and considerations of fairness and equity. This report is the final output of the first phase of this project.
Turbulent times call for a more systemic approach to climate policy making
The climate crisis is more pressing than ever. The threat of crossing climate system tipping points means overshooting 1.5oC of warming will likely result in catastrophic consequences. Avoiding this requires a much faster transformation of economies and systems than has so far been achieved or is projected. Reaching global net-zero emissions by 2050 is not enough by itself: the shape of the pathway to get there will be critical to whether tipping points are triggered or not. Rapid and deep emissions cuts are required already this decade, with a parallel emphasis on improving resilience to climate impacts.
The scale and speed of the net-zero transition will have profound economic and social implications. Designing climate policies with these in mind is key to building economic resilience while ensuring that the net-zero transition is itself resilient. Climate policies are not carried out in isolation, however. The disruptive events of recent years, including the COVID-19 pandemic and the widespread implications of Russia’s war of aggression in Ukraine, have highlighted the importance of maintaining a focus on climate priorities while responding to other urgent social and economic needs. These disruptions have also underlined the need to pursue resilience, ensuring that systems can anticipate, absorb, recover and adapt to potential future shocks. Strategic foresight tools and techniques can help to anticipate disruptions, building in buffers to absorb initial impacts and ensuring the capacity to invest in recovery efforts.
An accelerated net-zero transition must be resilient for the long term
A successful net-zero transition needs to combine an increase in the scale and speed of policy action with a focus on resilience. Governments can do more to get the policy basics right in the near-term, including the mix of price-based and other instruments and reform of fossil fuel subsidies. A resilience lens requires an awareness of potential bottlenecks that could slow down or derail the transition, and the development of strategies to anticipate and overcome such challenges. Materials shortages, supply-chain vulnerabilities, skills gaps, rising costs of capital, and clean energy supply are just a few examples where policy action is required to avoid bottlenecks that could pose barriers to accelerated climate action.
One important pre-requisite for a resilient net-zero transition is the long-term sustainability of public finances. Governments need to consider public finance resilience as part of their efforts to develop comprehensive and resilient climate policy frameworks. New OECD modelling carried out for this project shows that different climate policy mixes, and how they interact with the domestic economic structures in different countries, result in highly heterogeneous implications for public finances, and in some cases considerable public finance risks.
Public finances alone are not enough to meet transition needs. Aligning investment and financial markets and getting private sector buy-in is critical but current commitments too often lack credibility. Environmental Social and Governance (ESG) investing could become a conduit for change but is held-back by a lack of standardisation and prevalent greenwashing. In addition to aligning finance and investment flows, businesses outside of the financial sector have an essential role to play in turning climate policy commitments into resilient action across the real economy, and governments' responsible business conduct tools are an important pillar in that regard.
Widespread public support will be essential for a resilient transition. Climate policies have considerable distributional impacts, whether directly (on household incomes and labour markets) or indirectly (on consumption baskets and economic activity), as well as implications for gender equality. Identifying and carefully communicating on distributional outcomes and means to manage these is integral to building support and ensuring a fair and equitable transition. Revenue from carbon pricing can be substantial and used to balance distributional concerns. Similarly, labour market shifts require a careful balance between labour market flexibility and worker protection as well as enhanced assessments of skills needs in order to inform vocational training and education policies.
The net-zero transition cannot be cost-effectively achieved with existing technologies. Technological innovation is an essential pillar of a resilient transition. Current policies focus too much on technology deployment and not enough on research and development. To fully harness innovation potentials, governments will need to do more than just redirect their science, technology and innovation policies, shifting instead towards a mission-oriented approach to technology development and deployment to ensure that efforts are streamlined across policy areas.
Climate change is a global problem requiring globally co-ordinated responses and strong trust internationally. A global response is critically dependent on the ability of developing countries to meet development needs whilst simultaneously decarbonising. Development co-operation has a key role to play in supporting the design of policies that align development priorities with climate objectives.
Building systemic resilience to climate impacts
Some climate impacts are already “baked in” and adaptation efforts will be necessary to avoid losses and damages. Here too, a systemic approach is needed, moving from adapting individual systems components to specific climate risks towards building overall resilience. There are limits to adaptation, however. This reinforces the need to overcome the compartmentalisation of climate policy into adaptation and mitigation. Reducing emissions is essential to minimising climate risks and adaptation to climate impacts are both essential to a resilient transition to net-zero. Synergies between the two abound, also considering other natural systems such as biodiversity. Nature based solutions offer one example of how such synergies can be harnessed to produce cost-effective win-win policy options, but implementation remains sparse.
To meet adaptation needs, finance flows and investments need to be aligned with resilience objectives. Governments can be instrumental in creating an enabling environment for enhanced adaptation spending. The strategic use of grant or concessional finance by multilateral development banks can be highly impactful but will require institutional reforms. The insurance sector, as both a provider of financial protection and major portfolio investor, has a particular role to play in enhancing adaptation efforts, including development of risk assessment tools and providing important risk signals and incentives.
Accelerating action: 12 steps for governments to build climate and economic resilience
1. Faced with threat of climate tipping points, do everything possible to limit overshoot beyond 1.5C – faster reductions and shape of the pathway matters.
2. Ensure spending for crisis relief and economic stimulus is aligned with climate goals and sufficiently targeted.
3. Make climate strategies as “future-proofed” as possible, stress-testing using strategic foresight techniques and anticipating bottlenecks to the transition: e.g., on public finance, cost-of-capital, energy and materials supply, skills, innovation.
4. Focus policy making on the systems level, rather than considering individual components or outcomes, to accelerate transition and improve systemic resilience.
5. Get the climate policy basics right, including a mix of price-based and other instruments tailored to regional, national and local contexts and greening of public governance.
6. Mainstream climate change adaptation throughout national policy processes and exploit synergies between interlinked mitigation and adaptation policy objectives, while minimising trade-offs.
7. Address public finance implications of transition through careful fiscal planning, assessing direct and indirect effects of policies, and transition to net-zero aligned tax instruments.
8. Accelerate innovation through a mission-oriented, outcome-based approach to drive the whole innovation cycle. Target support measures for early-stage innovation and R&D.
9. Carefully assess direct and indirect distributional impacts of climate policy; consider multiple options for revenue recycling and employ effective, accurate, clear, and easily accessible communication with the public about how policies work.
10. Support new employment patterns by ensuring reasonable labour market flexibility and mobility while promoting job quality and protecting workers; identify skills needs and bottlenecks and prioritise up- or re-skilling.
11. Better align financial system policies with both climate mitigation and adaptation goals, including improved market practices, alignment of core investment policies, use of responsible business conduct tools, and harnessing the double role of the insurance sector as both investor and insurance provider.
12. Embed a global approach that recognises the interlinkages between climate and development transitions, drawing on all levers of development co-operation support to converge on a ‘common approach’ that aligns development and climate objectives.
