1. Increasing incentives for climate action using a well-being lens
This chapter argues that approaching climate change mitigation through a well-being lens can help countries identify and implement measures to reverse rising greenhouse gas emissions, avoid lock-in of carbon-intensive technologies and reduce long-lived carbon dioxide emissions to zero on a net basis by the middle of the 21st century, or shortly thereafter. The implications of this approach are likely to differ across jurisdictions, reflecting their levels of development and the particular challenges and opportunities they face. Adopting and adapting a well-being approach will put governments in a better position to reach their climate and broader well-being goals.
The world has already warmed by an average of 1°Celsius and July 2019 was the hottest July ever recorded. Extreme weather events are taking their toll across the globe. Without accelerated mitigation action, risks to human health and food and water security will continue to grow, threatening our ability to meet the Sustainable Development Goals (SDGs). We need to reverse and then rapidly reduce global CO2 emissions to zero on a net basis by 2050 or shortly thereafter.
The low-emissions transition requires an unprecedented scale of transformation in our societies but this is not happening quickly enough to achieve international goals. Investments in renewable technologies such as wind and solar have stalled, despite being cheaper than fossil-fuel alternatives in many places. Coal plants, particularly young plants in Asia, are still responsible for 30% of energy-related CO2 emissions, which according to the IEA are increasing faster (2.9% in 2018) than the overall growth in such emissions (1.7%).
Systematically placing people’s well-being at the centre of decision-making is necessary to increase the political and social support for more ambitious mitigation action and to overcome the barriers to change. The concept of well-being goes beyond economic welfare and incorporates such aspects as political and social rights, health, education, security and environmental quality. This report refers to present and future well-being and is a synonym of sustainable development.
Climate change mitigation has the potential to deliver wider well-being benefits for current generations and to underpin the resources needed for future well-being. Importantly, the potential trade-offs between climate policy and other goals such as affordability, competitiveness and jobs constrain the ambition of climate action. Using a well-being lens helps make these synergies and trade-offs visible, allowing decision-makers to increase “two-way alignment” between climate change mitigation and broader well-being objectives.
Adopting a well-being lens means ensuring that decisions aim to deliver simultaneously on multiple well-being objectives, including climate. It also requires an economy-wide perspective, rather than focusing on a single or very narrow range of output-related objectives, independently of others. For example, tackling damaging air pollution problems by eliminating fossil-fuel combustion takes advantage of one of the major synergies between climate action and health. In terms of trade-offs, addressing in advance the potential impacts on the affordability of transport from increased fuel prices through targeted compensatory measures or investments in public transport infrastructure, makes such price increases more acceptable and effective.
We can improve our collective chances of limiting climate change, while securing important well-being improvements, by applying a well-being lens to key sectors. This report examines five economic sectors (electricity, heavy industry, residential, surface transport, and agriculture), which together represent over 60% of global GHG emissions. It explains how reassessing policy priorities and adapting the set of indicators used to track progress and guide decisions in each sector can support governments in creating “two-way alignment” between climate and a number of other well-being benefits, such as public health and safety, affordability, reliability, natural resource management, and new employment opportunities. It also discusses how climate policies in these sectors can be implemented, designed and evaluated while taking into account potential synergies and trade-offs.
[J]ust as any comprehensive well-being agenda must feature strong climate action as necessary to underpin human quality of life, we need to put people at the centre of climate policy to ensure equitable outcomes across countries, communities, individuals and generations. (Angel Gurría, OECD Secretary-General)
Climate change is happening now. Without accelerated efforts to reduce greenhouse gas (GHG) emissions, it will transform the world in which society has evolved over several millennia. The global average surface temperature has already increased by around one degree Celsius (°C) relative to pre-industrial levels, largely driven by higher atmospheric concentrations of GHGs and the complex effects of atmospheric aerosols resulting from human activities (Berkeley Earth, 2017[1]). The impacts of climate change on human well-being are increasingly being felt (Watts et al., 2015[2]) and the risks of “severe, pervasive and irreversible” impacts will grow as the global temperature increases (IPCC, 2014[3]). The recent Intergovernmental Panel on Climate Change (IPCC) report, Global Warming of 1.5°C (IPCC, 2018[4]), highlights the significant benefits of restricting the global temperature increase stemming from GHG emissions to 1.5 degrees Celsius (°C) instead of 2°C or higher, particularly in terms of preventing impacts on unique and threatened systems (e.g. coral reefs), and reducing the impacts of extreme weather.
To meet individual countries’ climate mitigation goals, carbon dioxide (CO2) emissions into the atmosphere – the major driver of climate change – will need to reach zero on a net basis in the early second half of the 21st century, i.e. in 30 years’ time or slightly later, depending on the stringency of the mitigation goal. This will require deep reductions in emissions across the whole economy in all countries, with differences in priorities and phasing depending on country circumstances and capabilities. High-income economies will need to reach zero net emissions earlier, to give low-income countries more time. The extent to which emissions of other non-CO2 GHGs are reduced will influence the level of cumulative CO2 emissions consistent with a given global temperature goal. State-of-the-art modelling suggests that recourse to large-scale atmospheric carbon dioxide removal (CDR) technologies would be needed to achieve stringent mitigation goals, effectively relaxing the very tight limits on remaining cumulative CO2 emissions consistent with such goals.1 However, in the absence of large-scale demonstration and deployment of key technologies,2 large uncertainty prevails about the availability of CDR technologies at a sufficient scale, as well as their cost and potential implications for land use and water resources. These uncertainties reinforce the need for much stronger near-term reductions in CO2 emissions. “Hoping for the best” is not a policy the OECD recommends.
As a way to support greater near-term mitigation action, this report argues for approaching climate change mitigation through a well-being lens in order to increase the political and societal support for ambitious, early action to reduce GHG emissions. Adopting a well-being lens means that societal goals are defined in terms of well-being outcomes (including the risks and impacts of climate change) and are systematically reflected in decision-making across the economy. Moreover, multiple well-being objectives need to be taken into account simultaneously and the interrelations between them sufficiently well understood.
The report reviews efforts to move beyond gross domestic product, a key step for placing climate and wider well-being at the centre of decisions across the economy. Initiatives addressed include the Sustainable Development Goals (SDGs) and the OECD Framework for Measuring Well-being and Progress (henceforth the OECD well-being framework). The report proposes a change in perspective on policy making for five different sectors: electricity, industry, residential, transport and agriculture, and identifies key policy priorities that are central to promoting the wider sustainable and well-being goals captured by the SDGs and the OECD well-being framework. A key issue is the need to develop adequate measurement systems that allow policy makers to capture potential synergies and trade-offs between multiple priorities in each sector and across systems.
Adopting the well-being lens across sectors and using more adequate indicators to track performance as well as criteria in decision-making will greatly influence policy design and prioritisation. Where climate action is concerned, this new approach will result in policy packages that can tackle climate change more effectively and garner more consensus, by yielding several other benefits. These are the focus of Part II of this report, which examines policy practices to achieve this “two-way alignment” for each of the sectors mentioned above.
1.1.1. A decisive moment
The required transitions are of an unprecedented scale (IPCC, 2018[4]). They will require significant new investment in low-emission technologies and infrastructure (OECD, 2017[5]), as well as maintaining and restoring ecosystems that are important in drawing down and sequestering atmospheric CO2. The OECD, UN Environment and World Bank Group in their report, Financing Climate Futures: Rethinking Infrastructure, further explore the transformative agenda governments must take in key areas including planning, innovation, public budgeting, private finance, development finance and cities (OECD/The World Bank/UN Environment, 2018[6]).
At the same time, meeting the 17 SDGs – of which climate is just one, but one on which progress towards many of the others depends – is an urgent challenge. Achieving the goals of no poverty, zero hunger, quality education for all, gender equality, sustainable cities, and biodiversity on land and in the oceans depends on the collective ability to limit climate risks. Clearly, these agendas cannot be pursued separately, either financially or substantively. The SDGs are intimately interconnected, and well-designed action to address them can yield significant synergies across many different goals.3
The resource costs of making these simultaneous transitions in many different sectors will undoubtedly be large, but they can easily be overstated. In some areas, they will be outweighed by reduced fuel costs (OECD, 2017[5]) and offset by (non-climate) benefits, even before the main benefits of reduced climate-risk become apparent. A recent World Bank study (World Bank, 2019[7]) finds that achieving full decarbonisation by the end of the century in lower- and middle-income countries need not cost most than more emission-intensive development pathways.
Indeed, as recently highlighted by (Zenghelis, 2019[8]), the costs of a transition in the energy sector are endogenous and depend on the pathway chosen. The radical and rapid reductions in the cost of renewables technologies over the past decade or so were not widely anticipated, but have completely overturned the traditional logic of decarbonisation in the electricity sector. Indeed, many projections for the share of solar energy in the energy mix by 2050 look set to be exceeded.4 Similar progress is both needed and achievable in other sectors, albeit more easily in some than in others. An effective response to climate change will require a steep change in innovation and the diffusion of a wider range of technologies for sustainability. It will also require changes in financial systems and regulations, lifestyles and the management of ecosystems (to name just a few).5 At the core of these many changes is the need to rethink the priorities guiding decisions and policies across the economy, ensuring they are consistent with the ultimate goals set for the climate and other transitions needed to ensure human well-being, now and in the future. Encouraging and supporting the revision and rethinking of policy priorities across the economy is a central aim of this report.
The world stands at the junction between different alternative futures. Even if achieved in full, the stated scale of national action to reduce GHG emissions (the so-called nationally determined contributions [NDCs] for post-2020 action) does not yet, in aggregate, match the ambition of limiting warming to well-below 2°C or even 1.5°C (UNEP, 2018[9]). Without additional mitigation efforts, emissions are expected to rise to levels that would result in temperature increases of 3°C above pre-industrial levels by the end of the century – yet G20 countries collectively are not yet on track to meet their NDCs (UNEP, 2018[9]).
It is now known that an increase of such magnitude in global mean surface temperatures will have major systemic impacts. The recent IPCC special report, Global Warming of 1.5°C (IPCC, 2018[4]), notes that “Climate-related risks to health, livelihoods, food security, water supply, human security, and economic growth are projected to increase with global warming of 1.5°C and increase further with 2°C.” Disadvantaged and vulnerable populations, and those dependent on agricultural or coastal livelihoods, are most exposed to these risks (IPCC, 2018[4]). How can the broader range of SDGs be achieved against such a headwind?
To achieve either a 1.5°C or below 2°C goal, the IPCC assesses that global CO2 emissions will need to fall by 20-45% by 2030 relative to 2010.6 Yet energy-related CO2 emissions rose by an estimated 1.7% in 2018, driven by rapid increases in energy demand.7 Data compiled by the Global Carbon Project (Figure 1.1) show no sign that global CO2 emissions are approaching a peak, a prerequisite for achieving zero net emissions early in the second half of the century. According to the International Energy Agency (IEA), the bulk of emission increases in 2018 came from coal power plants, with the majority located in Asia. These plants are only 12 years old on average, thus constituting a major lock-in of CO2-intensive generation assets. Worryingly, recent OECD analysis suggested some 200 GW of coal capacity (equivalent to 10% of current installed coal-generation capacity) will be constructed over the next five years. In the absence of massive deployment of carbon capture and storage (CCS) technologies, this is not compatible with a goal of well below 2°C, which would require coal capacity to fall rapidly in coming decades (Mirabile and Calder, 2018[10]). Adding to these concerns is a flattening of investment in new renewables capacity and energy efficiency in 2018, despite continuing cost reductions in renewables (IEA, 2019[11]). The evidence shows that the continued prevalence of fossil-fuel subsidies (OECD, 2018[12]) significantly reduces investment in renewable generation capacity (Röttgers and Anderson, 2018[13]).
In his 2015 speech, the Governor of the Bank of England, Mark Carney, famously highlighted a key challenge facing climate action, the “tragedy of the horizon”, in which, “the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix,” (Carney, 2015[14]). Building on this seminal contribution, the OECD Secretary-General, Angel Gurría, in his 2017 climate lecture, highlighted a further challenge, namely, overcoming a purely national horizon in addressing what is actually a global challenge (OECD, 2017[15]). Underlining the importance of subnational and other non-state actors for climate action, Mr Gurría also stressed that action on issues (such as local air pollution) with important shorter-term benefits can help align short-term national incentives with longer-term goals for climate action, and that adopting an inclusive approach is essential to this agenda.
Note: The level of total emissions estimated by the Global Carbon Project differs from that used by the IEA, but provides a consistent picture of the trend. Red dot represents a projection for 2018: 37.1 ± 2 GtCO2, 2.7% up on 2017 (range 1.8% to 3.7%).
Source: (Le Quéré et al., 2018[16]).
There is a strong argument that, even from a purely national perspective, current NDCs are insufficiently ambitious... Incentives to reduce emissions should also be enhanced by the co-benefits of mitigation action, such as improved health from reduced air pollution and reduced traffic congestion from greater use of public transport. (Angel Gurría, OECD Secretary-General).
A conceptual model can help illustrate how these different effects play out at different timescales, abstracting from the challenges of co-ordination and co-operation across different countries (Figure 1.2). The model consists of two periods in which the current generation lives and a long term in which a new generation will make its own decisions. The model captures the fact that the world is only one investment cycle away from locking in severe climate damages.8 Box 1.1 discusses the model further, highlighting some critical issues in determining the scale and timing of climate action. These include that initial income and the emissions intensity of the production technology is important in shaping the mitigation response, while the weight placed on long-term outcomes and the nature of climate damages will also influence the extent of mitigation action.
Source: Based on the model developed in (Buckle et al., 2014[17]).
This stylised model does not capture the political economy issues surrounding the impact of the transition on incumbent firms and workers – and yet these are also critical in determining the ambition of mitigation action. One of the key advantages of applying a well-being lens (see below) to climate change mitigation is that it helps identify synergies and trade-offs between mitigation and other well-being goals. It also helps build a broader political constituency for mitigation action and addresses the concerns of individuals who might otherwise face adverse consequences, e.g. workers in industries that may disappear during a transition to a low-emission economy - an issue addressed by the 2015 ILO guidelines for a just transition (ILO, 2015[18]). Other complementary approaches – e.g. adopting the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures – will also be important to drive changes in financial and corporate strategies, governance, risk management and metrics.9 Over time, as more companies focus on the benefits and opportunities of strong climate action, these will change the dynamics of the political economy.
In light of the troubling emission and investment trends mentioned above, and the implications of the aggregate level of ambition in the first round of NDCs under the United Nations Framework Convention on Climate Change (UNFCCC) process, what can be done to improve society’s collective chances of limiting climate change to well-below 2°C? Much analysis and commentary has focused on the extent to which decision-making should and does factor in the long term. In itself, moral exhortation to care more about future generations will only have limited impact. In many, particularly low-income countries, it will be met with the understandable reaction that the poor of the current generation need to be prioritised. Institutional mechanisms to enshrine a duty to future generations could change the nature and dynamics of decision-making. Arguably, the United Kingdom’s Climate Change Committee fulfils this role, Wales has a Future Generations Commissioner, and New Zealand has a Parliamentary Commissioner for the Environment.10 The recent youth protests about climate inaction also have the potential to change the political calculus. Like efforts to enhance firms’ climate disclosure, these mechanisms could address the tragedy of the horizon, increasing the priority placed on future generations in current decisions.
Each of the periods in the stylised model illustrated in Figure 1.2 can be thought of as relatively long lifetimes – perhaps lasting 20 years – of infrastructure investments. The current generation in Period 1 (starting around 2015-20) inherits a capital stock with a given CO2 emission intensity and makes decisions about the share of production it will either consume or invest. It also decides to what extent investment in future production is composed of low-carbon rather than carbon-intensive technologies. This, in turn, determines both the level of production and the extent to which emissions are locked in for Period 2 (2035-40). Period 2 production is shared between consumption in that period and a bequest to the future generation, reflecting the policy weighting placed on the long term during the initial investment decisions. The value of any bequest is affected not just by investment levels but also, critically, by the cumulative CO2 emissions from production in both of the preceding periods.1
While presented only in a stylised way, the model highlights some of the critical issues and incentives facing decision makers with regard to climate action, including:
Starting points matter. The initial income and emission intensity of the production technology is important in shaping the mitigation response: the higher the level of locked-in emissions from current production relative to desired cumulative CO2 emissions, the higher the incentive to mitigate from a social welfare perspective. Locked-in emissions, in turn, depend on both the level of production (GDP) and emission intensity of the economy. Other things being equal, in a very low-income world – or one with very clean technology – the incentives for mitigation would therefore be lower than in an economy with a higher GDP and a dirtier technology. The initial level of atmospheric CO2 also matters, the incentives are lower with lower atmospheric CO2 concentrations, than with higher concentrations, as climate damages would be lower. Current atmospheric CO2 concentrations are far higher than at any time in the last 800 000 years, and CO2 emissions continue to rise rapidly.
Current income determines levels of investment and mitigation. According to the well-known inter-temporal effect, future consumption from an investment today is discounted relative to current consumption, owing to a component related to time preferences and another reflecting aversion to risk or income inequality. It follows that the marginal cost of investment in terms of, foregone Period 1 consumption, influences its extent. All things being equal, a lower initial income would tend to make investment in any technology more costly in terms of foregone consumption. To the extent that cleaner technologies are more (or less) expensive than carbon-intensive alternatives, this effect would be augmented (or reduced). However, if there exist other social costs from production (e.g. the impacts of air pollution on health), these would increase the incentive to invest in clean versus dirty technologies. Significant social and economic adjustment costs are also likely to exist in real-life; these might reduce investments in clean technologies relative to established technologies.
The value placed on the long-term is an important determinant of the stringency of mitigation action. This is essentially the tragedy of the horizon: conventional economic decision-making frameworks, and political and economic actors, may underweight the long term. Cost-benefit analysis can address concerns about undervaluing the long term by using discount rates that decline over time. (Stern, 2006[19]) argued for strong climate action based on a low discount rate, but a case for stringent mitigation action can be made even with higher discount rates (Sterner and Persson, 2008[20]).
The nature and severity of climate damages. The level and degree to which climate damages increase with rising CO2 concentrations also significantly influence a country’s incentive to mitigate. There exist strong arguments suggesting countries have not adequately factored into their decision-making the full range of climate damages or the “likelihood of severe, pervasive, and irreversible impacts,” (IPCC, 2014[21]). Countries are intimately linked through intricate trade and global value chains. Hence, damages elsewhere in the world can have impacts that countries may not fully understand or value if they evaluate investments based on purely national climate damages and do not consider the risks transmitted through such value chains.
← 1. In reality, of course, generations overlap. But the sharpness of this distinction helps make clear the different inter-generational incentives at play. In this model, everything is determined by the initial investment decisions, assuming that subsequent social welfare is maximised in the light of preferences.
Source: Authors, based on (Buckle et al., 2014[17]).
Mitigation policies are likely to be easier to implement politically, economically and socially – and more cost-effective – when there is two-way alignment between climate action and the broader goals of human well-being and sustainable development. The first imperative is that action in non-climate policy areas should support rather than undermine the pursuit of climate change mitigation goals. This was a major theme of the OECD publication Aligning Policies for the Low-carbon Economy (OECD/IEA/NEA/ITF, 2015[22]). Examples of misalignments needing to be resolved include lower tax rates for company cars or a faster depreciation rate for tax purposes for fossil-fuel infrastructure compared to renewables, which incentivises perpetuating emission-intensive activities. The Investing in Climate, Investing in Growth report (OECD, 2017[5]) examined transition pathways that are inclusive, progressive and good for business.
The second imperative is that to be more attractive, climate change mitigation should also meet other important societal goals, or at least not have negative impacts on key dimensions of well-being. Any well-being effects will often be realised on a shorter timescale than those of climate change mitigation policies, which accrue over the longer term. In the case of well-being benefits, their greater immediacy will help counter the short-termism pervasive in decision-making at all levels, from individuals to governments, that inhibits climate mitigation action. Where there are negative well-being impacts, e.g. on jobs in certain sectors or affordability of key services such as energy or transport, these are likely to inhibit further or even roll back action on climate change mitigation.
Two-way alignment is a condition that is currently insufficiently achieved, constituting a major obstacle for governments and society to accelerate mitigation action. This report argues for the systematic inclusion in decision-making of the wider well-being impacts of climate change mitigation as a central step to making potential synergies and trade-offs visible and manageable, and thus, contributing to generating the two-way alignment and putting mitigation action back on track. It refers to this change in perspective to policy making as adopting a well-being lens, which in this report means that: 11
Policy goals are defined in terms of well-being outcomes (including the risks and impacts of climate change) and are systematically reflected in decision-making across the economy.
The decisions taken consider multiple well-being objectives, rather than focusing on a single (or very narrow range of) objective(s) independently of others.
The interrelations between the different economic sectors and systems in which a policy intervenes are sufficiently well understood.
Viewed through a well-being lens, climate change mitigation has the potential to deliver wider well-being benefits for current generations and underpin the resources needed for future well-being.12 The most obvious is perhaps that of improved health from reduced air pollution (see Box 1.2 in this chapter) from reduced emissions from electricity generation (Chapter 2), transport (Chapter 4) and agriculture (Chapter 6). Reducing fossil-fuel combustion will cut CO2 emissions but will also reduce levels of air pollution due to fine particulate matter and chemical compounds, some of which are precursors of highly damaging tropospheric ozone. As documented in (Perera, 2017[23]), children and the developing foetus are more vulnerable to many of the effects of toxic air pollutants than adults. Thus, fossil-fuel combustion doubly impacts on future generations, not only through future climate damages, but also through current health and developmental potential. That both of these impacts disproportionately affect the poor only amplifies the injustice. But there are many other benefits that can be realised throughout the economy that would justify a far greater level of mitigation action than is currently undertaken at an aggregate level. For instance, earlier and stronger mitigation action targeting long-lived GHGs (such as CO2) will also limit the inevitable increases in sea level that could threaten major concentrations of economic and social capital in both coastal cities and rural communities forced to retreat in the face of rising seas (OECD, 2019[24]).
Equally important, a well-being approach also brings into sharp focus the need to consider potential trade-offs between climate change mitigation and wider well-being goals. Trade-offs between policy goals cannot always be avoided, but adopting a well-being lens is key to identifying and assessing them, thus improving policy design and prioritisation of mitigation actions across the economy. For instance, to the extent that mitigation action raises household costs for key energy and transport services, distributional issues affecting the political feasibility and sustainability of such actions may arise in the absence of compensating measures or alternatives (e.g. public transport). In each such case, a detailed analysis of the issues is required. Overall, such trade-offs may be related to socio-economic inequalities, but non-income aspects are also important. The discussion in OECD (2019[25]) about the recent “Gilets Jaunes” protests in France emphasises that re-distributional policies may not always be the answer to problems more deeply rooted in societal exclusion – an important dimension of a well-being approach.
The character of the resulting two-way alignment is likely to differ across jurisdictions, reflecting their development levels as well as the particular challenges and opportunities they face. By adopting this approach, governments will be in a better position to secure both their climate and broader well-being goals in a way that is appropriate to their situation. Looking at climate action through a well-being lens is therefore necessary to assess and better manage political economy factors. With respect to employment, there are clear similarities between this approach and the discussion of opportunities, challenges and guiding principles for the Just Transition (ILO, 2015[18]).
An international consensus is emerging on some key ingredients of a well-being approach. The concept of well-being goes beyond economic welfare: it incorporates such aspects as political and social rights, health, education, security and environmental quality (OECD, 2014[26]). In broad terms, reaching well-being “requires meeting various human needs, some of which are essential (e.g. being in good health), as well as the ability to pursue one’s goals, to thrive and feel satisfied with [one’s] life” (OECD, 2011[27]). Throughout this report, the term “well-being” refers to present and future well-being. As such, it is a synonym of sustainable development (Brundtland, 1987[28]).
The OECD well-being framework comprises both current well-being outcomes and the resources that help sustain it over time. It acknowledges that maximising current well-being could come at the cost of depleting future resources and recognises the need to monitor both dimensions in parallel. Ultimately, policy must be able to balance the sometimes differing interests of current and future generations, addressing both the tragedy of the horizon and issues of two-way alignment. The well-being framework is also part recent progress in improving measurement systems “beyond GDP”, including through the SDGs and a number of country initiatives (Exton and Shinwell, 2018[29]). The next section describes efforts to underpin this change in perspective with changes in measurement systems at an economy-wide level and provides more detail on the OECD well-being framework. The following chapters illustrate how adopting a well-being lens could be done in the five economic sectors selected for this report, including discussions on how measurement systems at sector specific level would also need to be adapted.
1.2.1. Measuring progress: Moving beyond GDP
GDP is a measure of the production of goods and services in a given country and period,13 but is widely used as a proxy for well-being. Although criticisms on the relevance of GDP as a measure of well-being are as old as the measure itself, GDP has maintained its position as the main metric to gauge societal progress or “success”, which can be problematic (Durand et al., 2018[30]; Boarini and Mira D’ercole, 2013[31]). The correlation between GDP and certain well-being dimensions can also be negative depending on the chosen well-being dimension, e.g. air pollution (see Box 1.2). Hence, focusing on GDP outcomes alone can lead to suboptimal outcomes, particularly where major externalities exist.
Van den Bergh (2009[32]) argues that while positive correlations exist between certain well-being dimensions, they change over time and depend on country characteristics. Additionally, approaches that are limited to GDP completely obscure income, spatial and social differences. That said, better measures of well-being will come with an extra level of complexity, which will be need to be justified if they are to gain acceptance. The contention here is that climate change mitigation is one of those areas where the benefits should far outweigh the costs of adopting a more sophisticated approach. The need for urgent and effective action to address a number of major intra- and intergenerational externalities simultaneously and in an integrated manner demands a step change in the sophistication of the policy tools used.
Macroeconomic policymaking is always going to depend on economic indicators such as the components of GDP, if not the aggregate measure itself. The real issue is when GDP is misused and the growth maximisation doctrine spills over into all aspects of policy, regardless of the quality of GDP growth and distributional issues. Some of the key problems in this regard are (Van Den Bergh, 2008[33]):
GDP is a flow and not a stock measure. It does not directly capture the change over time of the different types of capital or “wealth” (environmental, economic and social), although measures of physical capital can be constructed from its investment component. Therefore, GDP does not directly provide information about the sustainability of the economic activity or the possibility of achieving well-being over time (Boarini and Mira D’ercole, 2013[31]; Fleurbaey, 2009[34]).
GDP does not provide information on factors beyond the material conditions that affect well-being, such as security, social rights, health or leisure time (OECD, 2011[27]).
GDP has nothing to say on the distribution of “income” across society, which is an important feature for individual and societal well-being, particularly at a time of intentional structural change.
GDP includes activities that can negatively affect well-being or that remediate the social or environmental costs generated by the production of goods and services (“regrettables”), rather than increasing well-being. Examples include higher transportation costs due to congestion, the costs of remediating environmental destruction (e.g. the cleaning of coastal areas after an oil spill) and increased consumption stemming from reduced ecosystem services (e.g. bottled water or masks due to undrinkable water and unbreathable air) (OECD, 2011[27]; Fleurbaey, 2009[34]).
GDP generally values the supply of goods and services at market prices, which may reflect marginal costs but not the welfare derived from it, as in the case of cheap food staples.
GDP excludes non-market activities potentially contributing to well-being, such as services produced by households (e.g. childcare) (OECD, 2011[27]; Giannetti et al., 2015[35]).
These considerations have important policy implications, particularly for addressing climate change through public policy approaches that avoid stark trade-offs between climate and economic policy. Among others, OECD (2017[5]) has demonstrated that such trade-offs are avoidable. In specific cases where a pro-growth policy could be harmful to well-being, policy makers should look for ways to improve policy design so that negative well-being impacts are neutralised or even turned into positive impacts. The same is true for mitigation activities that reduce GHG emissions, but have significant negative impacts on wider well-being goals. Conversely, some mitigation policies may improve well-being, while reducing or changing the composition of GDP, which may be wrongly valued precisely because of deficiencies in GDP as a well-being indicator. For example, policies promoting a modal shift from motor vehicles to bicycles may be undervalued if analysed solely in terms of economic output, as their positive impacts on health, air quality, equity and reduced emissions may be only partially captured and may also reduce GDP. Furthermore, GDP does not provide the information needed for efficient management of natural resources and waste (i.e. in a circular economy).
Growth and well-being are inextricably linked through factors such as income, earnings, jobs and economic capital. Clearly, a well-being lens would provide a much stronger rationale for a policy with compelling well-being gains and neutral growth impacts than a strategy with a simple growth objective. This is a very important concrete advantage of adopting a well-being approach. It focuses on the quality of economic growth and its well-being outcomes, rather than just the magnitude of that growth. Additionally, a well-being approach explicitly forces attention on those things (e.g. social connections and a clean environment) that money alone cannot buy, and GDP does not value. Perpetuating the current model of economic activity (i.e. with insufficient regard for environmental, distributional and social impacts) would ultimately put everyone’s long-term well-being at risk.
CO2 and other GHG emissions are strongly linked to air pollution. Reducing energy use and emissions could increase well-being through improved air quality, environmental quality and health. Exposure to outdoor air pollution from combustion engines (i.e. PM2.5, PM10 and ozone) is associated with premature mortality, cardiorespiratory disease, lung cancer and asthma (WHO, 2015[36]).
The burden of disease from ambient outdoor PM2.5 contributed to 3.7 million premature deaths globally in 2012, 88% of which occurred in low- and middle-income countries (WHO, 2015[36]). Without additional action, the market and non-market costs of outdoor air pollution reported in (OECD, 2016[37]) will grow rapidly, reaching an estimated 1% of GDP by 2060 (market) and USD 18-25 trillion in 2060 (non-market), compared to USD 3 trillion in 2015. Indoor air pollution from the use of polluting fuels for basic cooking, heating and lighting is estimated to have caused 4.3 million premature deaths, mostly of women and children (WHO, 2015[36]). The deployment of modern forms of energy could reduce emissions and improve the health of the world’s 3 billion poorest people (Shindell et al., 2017[38]).
Children suffer the most from the health impacts of air pollution, which impairs their development (WHO, 2018[39]) and can diminish their educational outcomes substantially and lastingly (Heissel, Persico and Simon, 2019[40]). Air pollution is also linked to the incidence of dementia (Bishop et al., 2018[41]). Finally, it reduces worker productivity, lowering agricultural yields (OECD, 2016[37]).
These health benefits of reducing carbon emissions have led many to argue for prioritising action on short-lived climate pollutants (SLCPs), which include methane, black carbon and hydrofluorocarbons. Although the major health benefits are unambiguous, the climate benefits of SLCP reductions are context-dependent (Pierrehumbert, 2014[42]). SLCP mitigation will be most effective when CO2 emissions are already decreasing rapidly; it will be largely irrelevant to reduce the scale of climate change if CO2 emissions continue to increase and are not close to reaching zero on a net basis. It is therefore important not to substitute mitigation action to reduce SLCPs for action on CO2, which would only provide limited short-term benefits in terms of temperature reduction early on for far higher temperatures later. Many CO2 mitigation measures will also reduce emissions of SLCPs, and some action on SLCPs may also reduce CO2 emissions (Shindell et al., 2017[38]).
Rethinking societal goals and the definition of progress is increasingly recognised as crucial to putting well-being and sustainability at the centre of policy decisions (e.g. when considering the criteria for implementing policies) (EUROSTAT, 2010[43]). In recent years, significant efforts have been made to improve measurement systems to go “beyond GDP” (see Box 1.3). In January 2019, the Prime Minister of New Zealand, Jacinda Ardern argued at the World Economic Forum that well-being should be the metric used to gauge societal progress, instead of GDP. On 30 May 2019, New Zealand launched its Well-being Budget, explicilty contrasting this new approach with traditional measures of successon such as GDP. The budget required new governmental spending to be directed towards five social goals: taking mental health seriously; improving child well-being; supporting the aspirations of indigenous people; building a productive nation; and transforming the economy (including climate change mitigation). All new spending will be assessed against 61 indicators to measure well-being. The approach aims to foster cross-government co-operation to achieve these goals, while addressing fiscal sustainability, infrastructure investment and support for the economy.14
Initiatives focusing on the development of alternative measures of progress or well-being have increased and accelerated over the last decade in the wake of the (so-called) Stiglitz-Sen-Fitoussi report (Stiglitz, Sen and Fitoussi, 2009[44]) and the EU communication entitled “GDP and Beyond: Measuring progress in a changing world” (European Commission, 2009[45]).
The Stiglitz-Sen-Fitoussi (2009[44]) report highlighted the need for a “shift of emphasis from a production-oriented measurement system to one focused on the well-being of current and future generations, towards broader measures of social progress.” It described the limitations of GDP as an indicator of progress, and provided 30 recommendations for data collection to move beyond GDP and improve measures of well-being and progress (Stiglitz, Sen and Fitoussi, 2009[44]).
The European Commission outlined a set of actions – captured in a roadmap – to improve progress indicators to better respond to citizens’ concerns, as well as capture the complexity of a globalised world with environmental constraints and a population of over 7 billion (European Commission, 2009[45]). Motivated by numerous academic publications calling on Europe to end “growth dependency”, ten Members of the European Parliament organised a Post Growth Conference in 2018 (EEB, 2018[46]).
In 2009, the Conference of European Statisticians, jointly with the United Nations Economic Commission for Europe, the OECD and Eurostat, established the Task Force for Measuring Sustainable Development (TFSD), with the goal to develop a broad conceptual framework (Europe, 2014[47]).
In 2011, the OECD launched the OECD Better Life Initiative, following many of the recommendations issued by the Stiglitz-Sen-Fitoussi report, the TFSD, and national and international initiatives (Durand et al., 2018[30]). The resulting OECD well-being framework provides an analytical tool to study the multidimensional concept of both current and future well-being.
In 2013, as a response to the United Nations Conference on Sustainable Development outcome document “The Future We Want” (United Nations, 2012[48]), an Open Working Group was established and developed the SDGs, which country leaders officially adopted in 2015.
In parallel, various countries have developed national well-being frameworks involving diverse agencies and institutions (e.g. environmental agencies, and finance and health ministries). In 2011, for example, New Zealand presented the Living Standards Framework, aiming to achieve higher living standards and sustainable well-being for New Zealanders. The framework follows a capital approach: natural, human, social, and financial/physical capital, described as interdependent, are the basis for the country’s achievement of well-being outcomes. Many other countries, including Italy (Measures of Equitable and Sustainable Well-being), Germany (Well-being in Germany) and Sweden (New Measures for Prosperity) have developed well-being metrics, as described in Table 1.1 of the New Zealand Economic Survey 2019 (OECD, 2019[49]).
Globally, the SDGs adopted in 2015 are a list of internationally agreed policy commitments aiming to address global challenges and acknowledging they are all interconnected. The SDGs include poverty and inequality reduction, climate change mitigation, environmental conservation and justice. The OECD well-being framework is an analytical tool aiming to assess societal progress through the lens of well-being. It is structured around both current well-being and the resources needed for future well-being (see Figure 1.3).15 All these approaches recognise that societal progress is about improving people’s present and future well-being, moving away from a sole focus on GDP to include multiple well-being dimensions. As argued above, such approaches are important to increase the ambition of climate change mitigation policies.
1.2.2. The OECD well-being framework
The OECD recognises that promoting better policies for better lives requires rethinking societal goals and shifting from the current focus on economic growth to a focus on improving people’s well-being (OECD, 2018[50]). The OECD well-being framework provides an analytical tool to examine the multidimensional concept of well-being beyond its purely economic aspects. Focusing on individuals and households – rather than aggregating them at the level of the economy – it allows analysis of the distribution of well-being across the population. The framework also looks into both current and future well-being, a particularly relevant distinction for climate change mitigation policies (Boarini and Mira D’ercole, 2013[31]).
Source: (OECD, 2013[51]).
Figure 1.3 presents the conceptual framework proposed by the OECD. In line with a large body of research16, current well-being is defined as falling into two domains, material conditions and quality of life, broken down into 11 dimensions. Future well-being is assessed in terms of the availability of the natural, economic, human and social capital stocks necessary to maintain well-being for current and future generations. Figure 1.4 illustrates the capital stocks (middle column) needed to sustain the different dimensions of well-being over time (right column), as well as the drivers that may influence these stocks. The drivers – represented in the left column – include investments (e.g. to increase the stock), depreciation or depletion (e.g. loss of soil quality for farming, or deforestation), and emissions and waste (OECD, 2013[51]). Current well-being is related to the long-term sustainability of well-being, because current consumption and production decisions have an impact on investment and hence the productive base of future well-being.
The OECD well-being framework – as well as other “beyond GDP” alternative measures, such as the SDGs or the country initiatives described in Box 1.3 – can provide the evidence and language for politicians and policy makers to explain the rationale behind more ambitious climate change mitigation policies. Analysing policies through a well-being lens has the potential to inform policy makers on three important aspects that are not reflected in the measure of GDP, as follows:
How do policies affect the different dimensions of well-being today?
How do policies affect the distribution of well-being across society (e.g. are they key for ensuring an inclusive transition to a low-carbon economy)?
How do policies incentivise a sustainable utilisation of resources (to ensure future generations can achieve well-being)?
How do policies affect the different dimensions of well-being today? Analysing policy actions through a well-being lens allows examination of trade-offs and synergies between the different well-being dimensions. Using this perspective, policies can be assessed according to their potential impact on the different dimensions of well-being, rather than simply their economic impact. For example, the negative impacts of fossil-fuel subsidies on present well-being, due to increased air pollution, and on future well-being, due to the depletion of non-renewable resources and increased likelihood of climate change, would be more visible through a well-being lens. In this light, policies that increase quality of life or resources for future well-being would be valued more positively than policies focusing more narrowly on GDP. The well-being framework still requires policy makers to weigh the implications for income, wealth, jobs and earnings. It will provide them with greater incentive to design better policies that offer more win-win outcomes, or at least win-neutral outcomes. While the well-being approach can reveal, clarify - and ideally quantify - the synergies and trade-offs, it does not of itself deliver the synergies or resolve the trade-offs; that remains the job of governments.
How do policies affect the distribution of well-being across society? A poor distribution of well-being has present and future impacts across the whole of society, through reduced economic development; risks of political instability stemming from people’s low trust in institutions or perceptions of injustice, intolerance and discrimination; and limited connections to others owing to “social barriers”. Analyses of GDP do not capture the increasing levels of inequality, including in OECD countries over the last 30 years as found in OECD (2015[52]) and OECD (2016[53]). Inequalities are often analysed in terms of income distribution, through indicators such as the Gini coefficient. Although a balanced income distribution is a key element for societal well-being, it is not the only “type” of inequality that matters in terms of achieving a good life. Looking at inequality through a well-being lens allows expanding the measurement to outcomes such as life expectancy, exposure to air pollution, education and skills, and health status.
Source: Extracted from (OECD, 2013[51]).
Information on the distribution of the different dimensions of well-being can help policy makers understand the interaction of the impacts of specific policy decisions on different parts of society. This information is particularly relevant to ensuring that climate change mitigation policies result in an equitable transition to a low-emission economy, rather than increasing existing inequalities.
Designing policies to ensure the costs and benefits of the transition are fairly shared across society also reduces the likelihood of political resistance to climate change mitigation policies. For example, identifying the impact of mitigation action on different regions or job categories can help governments design policies that take into account the adverse impacts of these policies on specific regions and job types. There are clear similarities here with the approach advocated in (ILO, 2015[18]). Similarly, carbon-pricing instruments that typically put a higher burden on lower-income households can be designed in a non-regressive manner. This type of approach could avoid exacerbating pre-existing economic inequalities; with proper design, it could even benefit lower-income households, eventually prompting them to support transition (Van Dender and Marten, 2019[54]).
How do policies incentivise a sustainable utilisation of resources? The notion of capital is helpful to assessing sustainability. One generation’s choices regarding the accumulation or depletion of capital stocks influence the next generation’s opportunities to achieve well-being (OECD, 2013[51]). For example, failure to mitigate the current unsustainable levels of GHG emissions will affect the livelihoods and subsistence of future generations, which will bear the impact of climate change on their economic, natural, social and human capital.
Thus, informing policy by viewing it through a well-being lens can help governments develop more comprehensive policy packages that exploit synergies between the different well-being dimensions, duly considering the potential trade-offs and barriers to policy implementation. As such, the OECD well-being framework, as well as the other frameworks introduced in Box 1.3 and the sector-specific analysis offered in this report (linking to the SDG and OECD well-being frameworks throughout), can be useful tools for developing long-term low-emission development strategies (LT-LEDS), briefly described in Box 1.4. The following section briefly discusses the relationship between carbon pricing and the well-being approach.
1.2.3. The well-being approach and carbon pricing
The well-being framework aims to increase the incentives for mitigation by aligning them as much as possible with other well-being goals that may weigh more heavily in cost-benefit analyses and other decision frameworks. It also acknowledges and helps identify potential trade-offs between mitigation and broader well-being goals, and highlights the need to manage these trade-offs.
Focusing on carbon pricing and fossil fuel subsidy reform remains an essential component of any effective approach to climate change mitigation, including applying a well-being lens. However, low-emission pathways require profound transformations rather than changes at the margin, entailing a political economy perspective to navigate the transition(s). In some sectors, carbon pricing alone is not going to drive the necessary changes, e.g. in terms of coherent approaches to urban development and transport infrastructures. Effective carbon rates are highest in the transport sector, but elasticities are such that carbon pricing may not change behaviour and technologies that much. Moreover, while the right pricing is vital to encourage both investment and innovation in cleaner technologies, concerns about the implications for well-being (e.g. affordability, competitiveness and jobs) are likely to be important factors inhibiting more stringent policy settings.
The well-being approach is used to assess “two-way alignment” between climate and other well-being goals in order to better identify and manage the synergies and trade-offs. In this context, it calls for full cost accounting – including through carbon pricing – or at least factoring in the (sometimes uncertain) costs of externalities. It embraces and stresses the importance of pricing externalities, but looks at this critical policy component from the broader perspective of supporting the transition to a low-emission development pathway while achieving broader well-being goals and avoiding some of the negative trade-offs that may arise from a sole focus on carbon pricing and other climate policy instruments.
This report aims to encourage and support governments in meeting their national and international climate change mitigation goals. It explains how adopting a well-being lens could lead to different policy approaches and change the overall perspective on policy making in specific economic sectors, namely, electricity, heavy industry, residential, surface transport and agriculture, which together represent over 60% of global GHG emissions (IPCC, 2014[3]). It highlights that setting priorities across sectors to deliver multiple well-being and sustainability outcomes both enhances the potential benefits, and helps identify the opportunities and needs for co-operation and co-ordination in order to meet stringent mitigation goals.
For policy makers to be able to adopt a well-being lens for policy making, the measurement system used to track progress, set criteria for decision-making frameworks and evaluate policy outcomes needs to capture multiple well-being objectives. Decisions are often based on a single objective or a very limited number of objectives; the associated measurement and monitoring systems often have limited ability to capture broader well-being impacts, often conflating outputs with well-being outcomes. In transport, for example, measurement focuses on the number of passengers and tonne-kilometres, instead of the access to opportunities and services provided by transport. A measurement system that better monitors diverse well-being outcomes can also be a crucial step for setting shared goals and targets across governments, where co-operation and co-ordination are key to delivering climate and other well-being goals.
Without political commitment to act on them, the development of indicators is a symbolic exercise.
LT-LEDS are a powerful planning instrument that allows countries to deliver on climate change mitigation while improving the well-being of current and future generations. Article 4.19 of the Paris Agreement calls on signatory countries to formulate “long-term low greenhouse gas emission development strategies, mindful of Article 2 taking into account their common but differentiated responsibilities and respective capabilities, in the light of different national circumstances,” (UNFCCC, 2015[55]). While the Paris Agreement provides no methodological insights about how LT-LEDS should be developed, a rapidly developing literature identifies several key characteristics and requirements for such strategies to generate the structural change needed to reach the well-below 2°C goal.
The Institute for Sustainable Development and International Relations (IDDRI) defines LT-LEDS as “structured strategy exercises [should be] embedded in the national policy process and represent a useful way of structuring national policy debates in a transparent, productive and ambitious way. The point of departure should be national socio-economic objectives, alongside the well below 2°C objective,” (IDDRI, 2016[56]).
IDDRI defines a set of principles for developing a multi-stakeholder framework. In line with the two-way alignment, it aims to: i) review climate and non-climate policies that deliver on climate-change mitigation and other dimensions of well-being; and ii) explore cross-sector linkages, as well as the need for meeting mitigation, adaptation and other SDGs. This report discuss these linkages in more detail for each sector (Electricity; Heavy Industry; Residential; Surface Transport; and Agriculture).
Developing LT-LEDS is not a straightforward process. Adequate mechanisms for interactions between all parts of the government (e.g. between ministries and different levels of government), as well as between government and other stakeholders, will be necessary. Governments may also need to expand their technical capacity (e.g. by developing adequate modelling tools or improving interactions between the different models used) and address numerous political economy factors, such as government revenues’ dependence on fossil fuel and vested interests. The rest of the report examines a range of political economy factors in each of the five sectors, notably those related to affordability and acceptability, which are central to guaranteeing an equitable transition.
LT-LEDS are likely to be one of many planning instruments in national frameworks (e.g. sectoral plans, local plans and strategies focusing on the delivery of other policy goals, such as improved health through reducing air pollution). If efforts to develop LT-LEDS are in line with the set of principles introduced above, this process could become an opportunity to rethink economy-wide policy priorities, and align other planning instruments at the national and subnational levels with these. Designing effective and coherent policies for meeting multiple goals related to well-being outcomes and the SDGs is the major purpose of the OECD Framework for Policy Coherence for Sustainable Development (OECD, 2018[57]).
While some of the indicators proposed in this report are relatively new, many are not. The novelty lies in the recognition that they need to be widely available (since only a few countries or databases may have them), and considered simultaneously and with the same level of priority, rather than viewed in isolation and with a hierarchical order (e.g. focus on GHG emissions, regardless of the impacts on agricultural soils). In addition, a change in the measurement system can be a significant step towards more ambitious climate change mitigation policies only if the new approach is effectively used to inform policy decisions, as “without political commitment to act on them, the development of indicators is a symbolic exercise” (Winston and Eastaway, 2008[58]). The evidence base that enables this to happen still needs to be built, including by embedding well-being indicators in policy evaluations. Discussions across sectors focus on this point and provide examples of good practice where available.
The report discusses how the well-being lens could be applied in different sectors and the type of measurement system that could support the shift in perspective needed to decarbonise that particular sector while achieving two-way alignment. While chapters have a sectoral focus, they also make linkages across sectors, where this is important (e.g. for electricity, and for the residential and transport sectors in particular). Rethinking policy goals and reframing the measurement system is central to designing, evaluating and implementing climate policies while taking into account potential synergies and trade-offs, thereby to better aligning incentives towards both climate change mitigation and wider well-being benefits.
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Notes
← 1. See the discussion in (IPCC, 2018[4]), “Summary for Policymakers”.
← 2. Such as carbon capture and sequestration, which could be combined with biomass combustion to deliver so-called negative emissions.
← 3. See for example, https://sdgindex.org/news/behind-the-numbers:-joint-research-centre-audit-of-the-sdg-index-and-dashboards/.
← 4. See the discussion in (Liebreich, 2018[59]).
← 5. Loorbach (2017[60]) notes that “The energy transition is thus much more than merely a technological shift; it is a power struggle and a socio-cultural change having a deep effect on incumbent institutions, routines, and beliefs.”
← 6. The 45% reduction for a 1.5°C goal assumes little overshoot of CO2 emissions and therefore limited requirement for atmospheric CO2 removal. The 20% figure corresponds to a 66% chance of keeping the temperature change below 2°C.
← 7. See: https://www.iea.org/geco/emissions/.
← 8. It should be noted, however, that this simple framework does not capture the dynamic nature of innovation in the context of climate modelling.
← 9. For more information, see: https://www.fsb-tcfd.org/.
← 10. Hungary had a Parliamentary Commissioner for Future Generations during 2008-12.
← 11. See also the discussion in (Durand and Exton, 2019[61]), outlining that “Putting people’s well-being at the heart of policy requires better data, but this alone is not enough. It also requires building well-being into the machinery of government, and the tools used to take decisions.”
← 12. A point highlighted in the OECD Secretary-General’s 2017 speech and related to the way in which current income determines levels of investment and mitigation in the description of the conceptual model.
← 13. Or equivalently, a measure of income and expenditure.
← 14. See https://treasury.govt.nz/sites/default/files/2019-05/b19-wellbeing-budget.pdf.
← 15. There exists a significant overlap in how well-being is defined in the SDGs and the OECD well-being framework (as well as in many individual country initiatives). A key difference between the two frameworks is that the OECD framework is an analytical tool, while the SDGs are a set of goals and targets agreed internationally, with the aim of achieving sustainable development. As such, the SDGs are a concrete example of a move towards improving well-being in practice.
← 16. See (Stiglitz, Sen and Fitoussi, 2009[44]) for a literature review.