Excellencies, Ladies and Gentlemen,
I’d like to begin by thanking Her Excellency Hakima El Haite, Minister for the Environment of Morocco and also COP21 High Level Champion for Climate, for her invitation to join you here today.
And I couldn’t be more delighted that it is here in Marrakech we will turn the ambition of the Paris Agreement into the action of the world.
As you know last year saw the adoption of two landmark agreements. The Paris Agreement on Climate Change of course, but also the Sustainable Development Goals.
Climate change is a development challenge.
It is obvious to all those who live and work here in Africa.
The challenge of sustainable food production as we experience changing rainfall patterns and increasing unpredictability of weather.
The opportunity of providing cheap, sustainable energy for all through solar power instead of coal.
The challenge of rapid urbanization of Africa’s cities, and the opportunity to leapfrog the congested, polluted city models in Europe and elsewhere, and develop better, lower carbon solutions that deliver a better quality of life.
At the heart of this development challenge is the need for a low carbon infrastructure revolution.
And getting the right type of infrastructure will be determined by our success, or otherwise, in the pricing of carbon emissions and carbon risk.
Before I say more about that I’d like, if I may, to remind us all of the context in which we meet.
It is 6 months since the Paris Agreement was adopted.
Still only 19 countries have ratified it. We can and must do better.
In just 2 years, the critical 2018 stock-take of post-Paris action will take place.
We must be ready to raise our ambition if we are to keep the 1.5 degree target in sight.
In just 4 months we will return to Marrakech for COP22.
And in less than 24 hours we must all leave this meeting with a clearer sense of what we can individually do to drive climate action forward, faster.
Those most vulnerable to climate change need us to act in a fast and focussed way.
Together we must deliver on both the Paris Agreement and the Sustainable Development Goals;
And make good on our promise of leaving no one behind.
Finding interventions that address these agendas together is key.
For example:
- Access to energy that supports growth and reduces emissions;
- Land use policy that enhances farmers’ livelihoods and protects forests;
- Climate smart agriculture policy that helps grow more food and protects our soils for future generations.
The fact is that companies are already moving.
Leading businesses are now acting in expectation of the policy that they believe is inevitable:
- Over 1000 businesses have committed to an internal price of carbon;
- 675 companies and 175 investors with over 11 trillion in assets signed the Paris Pledge for Action, committing to help implement government commitments;
- Over 2000 companies have made nearly 5000 commitments through the NAZCA platform.
Many leading companies have signed up to the UN Global Compact’s Business Leadership Criteria on Carbon Pricing.
Unilever is one of them.
Our stretching targets - which act internally as an implicit carbon price - have seen CO2 emissions from energy reduced by 40% per tonne of production since 2008.
This has been part of a company-wide eco efficiency programme which has avoided EUR 600m in costs since that time.
We are now introducing internal carbon prices into our capital investment decisions to future proof our business even further.
Yet on almost every issue, companies cannot do this alone.
Action areas – such as eliminating deforestation in supply chains – need partnership with government in order to deliver.
On energy, some countries’ regulations prohibit the sale of surplus renewable electricity back to the grid.
This reduces the investment case for companies’ own renewable energy plans, unnecessarily holding back private sector investment and job creation.
And when it comes to pricing carbon, companies’ internal carbon prices can only be sustained if that price materializes in the real economy, through policies that create a level playing field for all.
That is why we need to scale up the dialogue between committed companies and action-oriented governments to identify and unblock the barriers to rapid implementation at scale.
This dialogue is already making progress.
Just three weeks ago in Rabat, the Forum on Alliances and Coalitions addressed in detail what is needed to advance cooperation on critical issues such as eliminating deforestation.
Deforestation accounts for up to 15% of global greenhouse gas emissions, and together with agricultural emissions it’s almost a quarter of the total.
At the heart of the challenge is that the negative climate impacts – whether the clearing of a tropical forest or the emissions from a coal fired power plant - do not factor highly enough in our decisions.
And it is increasingly clear that without better efforts to price carbon and other greenhouse gases we will fail to align market forces with the political ambition for a more sustainable world.
Carbon pricing schemes are moving forwards but need accelerating.
Already 66 jurisdictions, home to more than 1.6 billion people, are implementing emissions trading programmes or carbon taxes.
This covers an estimated 13% of annual global greenhouse gas emissions.
This is triple the coverage of a decade ago.
And this number will rise.
With China moving to a carbon trading scheme as of 2017 this will move above 20%. A clear tipping point.
Over 90 countries refer to some form of a carbon pricing scheme in their national pledges for the Paris Agreement.
Governments are feeling increasingly confident in how to establish these mechanisms in a way that helps, not hinders, growth.
Your presence here today at Carbon 360 is an essential part of that confidence building and learning process.
As a businessman, one concern I share with governments is that of competitiveness:
Competitiveness of my business versus that of my competitors;
Competitiveness of countries where we manufacture and sell our goods;
And trends in competitiveness: is the landscape improving or deteriorating when I think about our business growing into the future?
Those who hesitate when considering the effects of carbon pricing often do so because of these concerns.
They believe that moving too soon - or too fast - to price carbon will lead to “carbon leakage” where carbon-intensive industries move out to jurisdictions with less stringent regulations.
My message today is that these concerns, while well intentioned, are misplaced.
There are three reasons for this:
First, the evidence to date shows that where countries or states have introduced carbon pricing there has been little or no impact on the performance of the economy as a whole.
Early evidence from California and British Colombia suggests the adoption of carbon pricing has not harmed industrial growth. In its first 5 years, British Columbia’s carbon tax helped reduce emissions by 10%, while economic growth held up better than that of the rest of Canada. The 9 states in the United States’ Regional Greenhouse Gas Initiative (RGGI) performed better than other US states, growing 0.4% more from 2009-2013, while reducing their emissions significantly. The RGGI itself has contributed a net US$1.3 billion to their states’ economies.
Norway, Switzerland, Sweden and France have implemented carbon taxes without adverse effects on industry, and instead have seen robust economic growth.
Ireland’s carbon tax, introduced in 2010, raised much-needed revenues and avoided even harsher fiscal tightening measures during the global financial crisis.
After a century of economic growth tied to fossil fuel consumption these examples can appear counter-intuitive.
But the reality is that in the 21st century, it’s the efficient, low cost, high quality business models – those which take an inclusive approach to societal value creation - which are winning.
Inefficient businesses, including those which are carbon inefficient, offloading the costs of pollution onto their customers and consumers, run greater risks of adverse regulatory regimes, higher future costs, and risk their licence to operate.
Smart carbon pricing acts as a nudge to all businesses to prepare for the future ahead of time, and to seize the first-mover advantages of doing so.
Second, smart design of carbon pricing schemes ensures that any potential short term competitive impacts on specific industries can be avoided.
We have to recognise that some sectors of the economy face more structural challenges to the transition;
In particular, energy intensive industries such as steel production and power generation.
While industrial sectors such as these remain essential to our economy, the reality is that they can be supported through targeted measures within carbon pricing schemes which are designed to ease their transition over time.
For example, the EU’s Emissions Trading Scheme provides free allocations to business sectors exposed to carbon leakage.
The top 10% of performers can even receive free allocations to cover all of their emissions.
This creates a race to the top – an incentive for firms to outperform others within their sector in terms of energy efficiency.
Clearly, free allocations need to be managed carefully and phased out over time, but they can provide governments and industry with time they need to transition to new models.
Done right, these schemes act not to inflict short term damage to specific companies, but rather to support their renewal and transition, shifting over time the structure of the global economy in favour of efficient, low carbon activities.
Finally, a smart combination of carbon prices and other targeted measures can ensure that sectors at risk of being disadvantaged competitively are protected, while at the same time encouraging best practice.
Incentives for companies to invest in newer, more efficient technologies - introduced at the same time as carbon prices - can enhance the competitive landscape and encourage the modernisation of older, less efficient infrastructure:
- Research & development tax credits;
- Accelerated capital depreciation for low carbon infrastructure; and
- Feed-in tariffs
These are already playing their part in a suite of pro-growth, pro-climate policies and go a long way towards eliminating residual concerns about competitiveness.
As the debate on carbon pricing matures, the conversation turns from whether to have a price, to what that price should be.
While the EU ETS succeeded in some areas, most agree that lack of flexibility to tighten the allocation of free permits in a period of economic downturn has led to an unhelpfully low price.
Emissions fell, but in a way that was unforeseen, and the system was unable to adapt.
So what is the right price?
The UK government has had a steadily increasing carbon floor price for power generation since 2013, with current prices at £18 per tonne.
The French government has also announced the intention to set a floor price of EUR 30 per tonne, and a trajectory towards EUR 100 per tonne.
A step in the right direction and a marked difference with the EUR 5 per tonne for which permits currently trade in the EU.
The report of the Global Commission on the Economy and Climate recommends $75 for developed and $35 for developing markets as desired levels.
Today I would like to argue that what the private sector needs is clarity and certainty;
That we must both respect the urgency of the situation but play a long game.
A focus purely on the price may miss other important aspects.
For example, in a volatile political climate – carbon pricing schemes with wide political support are more reliable than those backed by one political party alone.
Political risk is now the most significant factor in many infrastructure investment decisions.
An ambitious price may be supported by the government of the day.
But consider what happens if this is at risk of being rejected and rescinded by a future government.
The potential volatility in this situation increases the risk and reduces the attractiveness of any investment.
I therefore urge all governments to work in cross-party consensus when considering proposals for carbon pricing schemes to increase their ‘bankability’ and longevity.
Another important aspect is the price trajectory.
Few businesses invest on the basis of prices today, but rather expectations of future prices.
Carbon pricing schemes must themselves reflect the principles of the Paris Agreement:
- They must set out clear trajectories both for emissions reductions and future carbon prices.
- They must have ratchet mechanisms that ensure ever increasing in ambition and no backsliding on progress made.
- They should be free from interference from political or commercial vested interests, yet flexible enough to deliver the outcomes we all need.
Crucially, we must remember that that carbon pricing is a means to an end, not an end in itself.
The carbon pricing debate is evolving.
We are beginning to understand the wide range of options available to us:
- Options for setting the price, and
- Options for spending the revenues in support of the transition.
- Of course carbon pricing schemes are only one part of the picture.
Removing negative carbon prices in the form of fossil fuel subsidies is the other side of the coin.
Subsidies cost our economies over $600bn per year; $5.3 trillion – according to the IMF – if you factor in the costs of the externalities such as public health impacts.
This is money which could be used more effectively to provide some of the targeted policy measures in support of the introduction of carbon pricing.
Some countries are rising to the challenge.
In May, the G7 countries agreed to a 2025 deadline for the end of inefficient government support for fossil fuel subsidies.
I would especially like to recognise the leadership shown by the Kingdom of Morocco in their own work to phase out fossil fuel subsidies.
They are not alone:
India began eliminating diesel subsidies in 2014;
Indonesia has raised petrol and diesel prices by a third in both 2013 and 2014.
In the past year, Saudi Arabia, Qatar, Oman, Bahrain, and the UAE have increased petrol prices, which allows for investment in infrastructure, stabilizes national budgets, and reduces wasteful energy consumption.
And most encouragingly we see a new wave of African leadership from countries such as Ethiopia and Cote D’Ivoire as well as Morocco, playing a critical role as partners in the Carbon Pricing Leadership Coalition.
Through their partnership they demonstrate their ambition and commitment to making this a truly global effort.
It is actions like these that show that reform is
- possible;
- inevitable;
- and already underway, as we tackle climate change together.
Of course carbon pricing is no silver bullet and as the title of this forum Carbon 360 suggests – we need to look at every possible angle to ensure we maintain momentum.
Put simply, if the pre Paris period was all about climate policy, then post-Paris is about every policy:
That’s because delivering the Paris Agreement is now a cross-government, strategic change agenda.
As well as policy to support renewable energy, we should expect to see action across the board:
- tightening of energy efficiency regulations for buildings,
- agriculture policy that lowers emissions from farming, and even,
- urban development policy that supports efficient mobility in our growing cities.
This must be an economy wide programme, championed by heads of state, with the active support of ministers in many critical departments.
And there is perhaps none more important than finance ministries.
Indeed one area where we all need to step up is in increasing transparency in financial markets.
Last year the G20 Financial Stability Board set up its Taskforce on Climate Related Financial Disclosures.
Its task?
To make recommendations on how climate related risk and opportunity should be analysed and communicated to shareholders.
This is essential for the efficient functioning of markets.
Without clearer information flows about the risks to businesses of climate change, the risks will be incorrectly priced.
Pricing risk correctly is essential to ensuring that capital flows more readily to the low carbon infrastructure investments we need.
And this matters.
Sustainable low carbon infrastructure is the only growth story of the future.
Annual global infrastructure investment has grown by around US$1 trillion over the past decade to just over US$3 trillion per year.
But current demand requires around US$6 trillion per year to 2030, or approximately US$90 trillion between now and 2030.
Rising to this challenge, over 400 investors with over US$25 trillion in assets have joined the Investor Platform for Climate Actions, declaring their commitment to increasing low carbon and climate resilient investments.
This includes working with governments and policy makers to ensure financing at scale.
By aligning the full force of the private capital markets with this latent demand for low carbon sustainable infrastructure we will reap the benefits in growth, jobs and cleaner technology for people around the world.
If we can solve these aspects:
- Pricing;
- Subsidies;
- Policy Integration; and
- Transparency;
We will have gone some way towards ensuring the right frameworks for a revolution of climate action and investment.
The fifth and final ingredient is leadership.
For it is increasingly clear that we all face the challenges of implementation together.
Our obligation is not only to act individually, but also together;
To implement what we can in our own businesses or countries;
And to share the lessons learnt in doing so with our peers.
This must be active leadership;
Supportive of one another but also challenging each other to go further.
Not only will this help accelerate our progress;
It will also minimise the risks.
Carbon pricing schemes can work best when developed with neighbouring countries, as carbon leakage fears are minimised;
In addition, the potential to link schemes over time is greater.
So in closing I would ask just three things.
First, whether you are a company or a country, join us in the Carbon Pricing Leadership Coalition and signal to the world that you will lean in on this effort.
Second, commit to returning from this meeting with a clear message to your colleagues in government or around the board table;
That carbon pricing – while not an end in itself – is an essential tool to support our transition to a sustainable economy.
Third, encourage your peers and neighbours to join you.
More likely than not, their questions will be your questions;
Their concerns, your concerns.
And in partnership we will find the answers to those questions;
And overcome the challenges.
Only in this new spirit of collaboration - the same one which enabled the historic Paris Agreement and the Sustainable Development Goals to be adopted - will we succeed in their implementation.
Your presence here today is evidence of that commitment to cooperation, and we must add to it our conviction that we can accelerate our efforts, in the days and weeks ahead.
Thank you.
