Economic Sustainability - the Norwegian Experience

CELM Breakfast Friday 29 October 2010

Professor Oluf Langhelle, Dr. Polit.

Outline …

• The Norwegian Experience – What is it? - Creating economic sustainability- The Pension Fund - Global and its political and

economic logic

• The challenges of delivering sustainability economically

- How to reconcile ambitious climate change targets with the extraction and consumption of fossil fuels? - Carbon, Capture and Storage (CCS)

- Diversification to new renewable energy?

• The role and importance of the Engineering Sector

Defining it first …

• The World Commission on Environment and Development defined sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WECD, 1987).

• Sustainable development rests on three pillars: economic, environmental and social, which must all be satisfactorily safeguarded on a global basis (Bruvoll et al., 2009).

The significance of the petroleum sector to the Norwegian society

Norway is heavily dependent upon oil and gas

• Oil and gas generates huge incomes for politicians to spend on welfare

• Oil and gas is important for employment, wealth creation nationally and regionally

• The petroleum sector represents huge investments (and sunk costs), technological skills and competencies

• The oil and gas sector is especially important for the Stavanger region

• Oil and gas moved Norway from being one of the poorest countries in Europe in the 1950s to one of the richest in the World 2010

The financial crisis – what crisis?

• The Norwegian economy has been particularly resilient during the financial crisis with a relatively shallow recession and moderate increase in unemployment. … Norway moves into what is projected to be a strong recovery …

• The global financial crisis did not spare Norway, but the economy has been more resilient … The recession was short-lived, starting later and ending earlier, than in other OECD countries

• While overall GDP in the OECD area fell by 5% between mid-2008 and mid-2009, the fall was less than half of this in Norway (OECD, 2010).

A slight increase in unemployment …

OECD, 2010

So, why did (and still do) Norway suffer less from the financial crisis?

Several explanations, but three important factors, according to OECD (2010), which are linked to the importance and management of oil and gas in Norway:

1. The basic macroeconomic policy framework: based on saving most petroleum revenue in an offshore fund and spending only the underlying return

2. A swift policy response: The authorities met the crisis with massive fiscal stimulus an dramatic cuts in interest rates

3. A strong contribution from the petroleum sector: There was no immediate impact on investments (on the contrary) and oil and gas was less affected by falling demand

The Pension Fund – Global, short history

1990: The Norwegian Government Petroleum Fund formally established

1996: First transfer from the state budget to the Petroleum Fund (no budget surplus from 1990 to 1994)

1998: New guidelines making it possible to invest 30-50 percent of the Fund in equities (international stock markets), the rest in fixed income assets

2000: Opening for investments in ”emerging markets”2001: The “Spending Rule” established (Handlingsregelen)2004: The Petroleum Fund’s Advisory Council on Ethics

established and ethical guidelines for investments)2006:The name changed to The Government Pension Fund -

Global 2007: The stock portion raised to 60 percent.2009: Up to 5% of the fund can be invested in real estate,

starting in 2010

The Pension Fund – Global, its political and economic logic (economic sustainability)

”One of the challenges of policymaking is to illustrate complex ideas in a way that is easy to understand … it goes to the core of policymaking. No policy can ever be implemented if it does not have public support, and no policy can build public support unless it is communicated in a clear and powerful way” (Skancke, 2002:316).

”Advocating fiscal restraint is not easy when the general government budget surplus is around 15 percent of GDP” (Skancke, 2002:316).

The underlying challenges …

1. Oil revenues are extremely volatile, so there is a need for some sort of mechanism to decouple government spending from oil revenues in the short term.

2. The effects of rising pension expenditures and declining oil revenues over the next decade will be considerable, so there is also a need to soften this blow to public finances (Skanche, 2002, Eriksen 2006).

Interaction between the Pension Fund – Global and the fiscal budget

The ”spending rule”: The use of petroleum revenues over the Government budget should be gradually phased into the economy approximately in pace with an estimated 4 percent real return on the assets in the Pension Fund – Global (Skanche, 2006)

The revenues …

SDFI = The State’s Direct Financial Interest. (The state owns interests in a number of oil and gas fields, pipelines and onshore facilities).

The size of the Government Pension Fund - Global

Passing 3 trillions …

“Taking the business cycle into account” (flexibility in the spending rule)

OECD, 2010

Preliminary Conclusion …

• Norway has made some substantial progress in securing economic sustainability based on the extraction of petroleum resources. The Fund represent an intergenerational transfer of capital to future generations. However, some challenges are;

- Will Norway experience growing pressure to spend more of its petroleum revenues? (violate the spending rule?). Today, the Progress Party is the only party advocating this position (that is about every 5th Norwegian)

- The Pension Reform (2009) reduces pension expenditures, but is it enough? (Estimated to be reduced from 14% to 11% of mainland GDP in 2050). Will pension expenditures have to be reduced even more to secure economic sustainability?

- How much oil and gas can be produced on the NCS? Limited reserves on NCS? Oil has peaked, production forecasts are uncertain, the future demand for gas in Europe is questioned, and there is strong political tension surrounding access to new areas – the Barents Sea, and Lofoten and Vesterålen

Reconciling economic and environmental sustainability

How has the Norwegian Government approached environmental sustainability? And especially the relationship between petroleum and climate change?

- A carbon tax (1991)- Inclusion in the European ETS- Huge investments in CCS (Kårstø and Mongstad)- Ambitious climate change targets

Norway’s GHG emissions … (look at oil and gas emissions!)

Overall conclusion …

• Norway has done substantial progress in securing economic sustainability

• In terms of environmental sustainability, there is much more that needs to be done, in addition to CCS

• But, it is far easier to contribute economically to environmental sustainability with money than without money

• In order to further strengthen economic sustainability, Norway needs to diversify more, especially into new renewable energy

• Environmental sustainability requires substantial reductions in GHG emissions

Economic and environmental sustainability. The strategic requirements of reconciling economic growth and environmental concerns …

• Energy efficiency … • Cleaner and smarter use of fossil fuels …• CCS – reducing the energy penalty, reducing capture costs,

securing safe storage …• Integrating renewable and fossil fuel energy (biomass, wind,

solar etc.) …• New cars (hybrid-, plug-in-, electric-, fuel cell hydrogen cars)• Making new renewable energy more cost competitive, more

efficient …

Lifestyle changes will not be enough. Only the Engineering community can deliver what is needed! You are the most important people on Earth. Use your skills well!

Thank you for your attention!