4. Selected policy avenues

Co-ordination and integration across sectors and among levels of government

Governing net-zero emissions require horizontal and vertical policy co-ordination. Policymakers should actively seek to identify and correct existing policy misalignments. This can mean moving from a patchwork of individual policies designed and pursued in a sectoral manner to developing an integrated policy approach. Policy coherence and co-ordination towards the objective of net-zero emissions also helps create the necessary links between sectors. For instance, reaching net-zero consistent mobility requires changes in land use and spatial planning.

Several countries are developing governance platforms to co-ordinate transport and land use development policies among national, regional and local governments with the objective of climate-neutral transport. The Norwegian Urban Growth Agreement and the Swedish Urban Environmental Agreements are both examples (Westskog et al., 2020[6]). Finally, dialogue among levels of government supports strong climate governance. Platforms for knowledge sharing among local and regional governments provide an opportunity to empower local actors. Networks such as the Covenant of Mayors for Climate and Energy and the ICLEI Green Climate Cities Programme help identify and share best practices internationally.

In addition to effective co-ordination as discussed above, subnational governments will also benefit from additional financial resources to effectively redirect their expenditure towards climate-neutral assets and scale up investment. The OECD Council adopted a Recommendation on Effective Public Investment Across Levels of Government (OECD, 2014[7]), which is organised around three pillars (Box 4.2).

Box 4.2. OECD Principles on Effective Public Investment Across Levels of Government

Across the OECD, subnational governments are responsible for about two-thirds of direct public investment. Well-managed public investment can be growth-enhancing and contribute to higher levels of productivity growth. Poor investment choices, on the contrary, may not only waste public resources but also hamper future growth. In 2014, the OECD Council adopted the Recommendation on Effective Public Investment Across Levels of Government. The principles set out in the recommendation are meant to help governments assess the strengths and weaknesses of their public investment capacity and set priorities for improvement. The 12 recommendations are grouped into 3 pillars representing multi-level governance challenges to public investment:

Figure 4.2. The 12 Principles on Effective Public Investment Across Levels of Government

Source: OECD (n.d.[8]), Effective Public Investment Toolkit, http://www.oecd.org/effective-public-investment-toolkit/.

Incorporating non-state actors into multi-level governance for climate policy

The effective governance of complex sustainability issues relies on new forms of collaboration with actors from government, science, business and civil society (Ehnert et al., 2018[9]). A broad actor set can help strengthen the participation of civil society and local communities in climate governance and advocate for partnerships with subnational and national governments on local climate action. They can also provide policy and technical advice to local governments.

Making the most of contractual instruments to deliver on climate objectives

Formal instruments such as intergovernmental “contracts” or agreements can help foster harnessing place-based action for reaching national and international climate objectives. Several examples of “deal-making” or contractual arrangements are found in OECD countries: France, especially, has a long tradition of State-Region Planning Contracts but also Australia (city and regional deals), Italy and the Netherlands (City deals) (Box 4.3).

Making the most of grants and subsidies to deliver on climate objectives

In OECD countries, grants and subsidies to subnational governments represent around 37% of their revenue, around USD 3.5 trillion in 2018 (OECD, 2020[11]). Grants and subsidies may be unconditional (block grants) or earmarked to finance subnational government responsibilities in a wide range of sectors (education, social protection, health, environment, etc.), covering current or capital expenditure needs. They may be allocated by international organisations (including the European Union), national governments as well as state governments in federal countries. Through their grants and subsidies policies, international organisations, national and state governments are already influencing subnational spending and investment towards climate priorities. They can serve climate objectives in two ways:

• Environmental and climate considerations should be integrated into national transfer policies to subnational governments, including for general and earmarked grants, to provide incentives and resources to contribute to the net-zero emissions target.

• Specific earmarked grants and subsidies could be additionally introduced to finance targeted policy instruments to reach the net-zero policy target.

Making the most of grants and subsidies to deliver on the objectives of the net-zero transition implies that these grants and subsidies need to be designed to provide incentives for subnational governments to deliver on the objective of the net-zero transition. There are several ways to do this. For example, governments could review their entire intergovernmental grant system through a climate lens. As stressed in the Chicago Proposal for Financing Sustainable Cities (OECD, 2012[12]), grants can be used to correct incentives for unsustainable behaviour and reward subnational governments that create environmental benefits through their policies. Climate objectives and indicators, as well as an assessment of climate change impacts, should be more systematically integrated into intergovernmental transfers. The national system of grants should also ensure cross-sectoral policy coherence (e.g. with the energy, agriculture, transportation and land use planning sectors) with climate objectives. How to best design the incentives for subnational governments to prioritise investments and expenditures that support the objective of the net-zero transition will depend on the type of region. For some regions, the transition might require specific objectives with regard to afforestation; for others the transition to renewable energy production and use or sustainable transport provision might be most feasible. Incentives for subnational governments need to be consistent with predictable provision to foster the net-zero transition, so local governments steer the transition and send the right signals locally, especially for investment decisions that need to be taken now.

When conditionalities are attached to grants, they are primarily used to align national and subnational spending priorities, to promote subnational spending in particular areas, to address fiduciary and accountability concerns and to promote minimum public service standards (OECD, 2018[10]). This mechanism, which can support environment- and climate-friendly practices and standards, may be further promoted in the context of the green recovery plans.

The European Union (EU) has considerably extended the use of conditionalities in its cohesion policy in the 2014-20 period. These include ex ante conditionalities (general and thematic), macroeconomic conditionality and the link to country-specific recommendations (OECD, 2018[10]). Environmental conditionalities are now an integral part of many policy areas.

Some countries have also introduced environmental conditionalities in the allocation of their grants and subsidies for their infrastructure projects. In Canada for example, the Climate Lens programme is a requirement for projects seeking funding through the Investing in Canada Infrastructure Program, Disaster Mitigation and Adaptation Fund, and Smart Cities Challenge (see Box 4.4).

The use of conditionalities is not without controversy. Some evidence suggests that the use of conditionalities has not always been effective in improving economic policies in recipient countries. There are different inefficiencies associated with the uptake of conditionalities (OECD, 2018[10]). Some particular issues are crucial for the effectiveness of conditionalities, which should be taken into consideration when designing and implementing a grant system using conditions (see Box 4.5).

Establishing and developing specific climate funds targeted at subnational governments

The international community and national/state governments could further develop specific or matching grants to support climate-related projects developed by regions and municipalities. The international community (multilateral banks such as the World Bank, as well as bilateral banks, the United Nations Development Programme [UNDP], the Global Environment Facility, etc.) has established a series of funds providing support from developed countries to developing countries. These funds are earmarked for environmental protection and climate action. While a large part of these funds provides loans, in 2018 around 20% were allocated as grants (OECD, 2020[15]). While subnational governments can benefit from these multilateral funds, in reality, there is limited access for regional and local governments. Few donors are permitted to work directly with subnational governments and most resources are channelled through international implementing entities and the national governments of recipient countries. Even when subnational governments are accredited as intermediaries, they often face capacity challenges. Subnational governments willing to benefit from these funds will have to negotiate access with their national government and ensure compatibility with bilateral agreements negotiated between the fund and the government (OECD, 2019[1]; Colenbrander, Lindfield and Lufkin, 2018[16]).

At the European level, in the context of the Green Deal and the post-COVID-19 recovery measures, there is a new impetus for climate action at the national and subnational levels. The European Green Deal, adopted by the European Commission (EC) in December 2019, aims to make the EU climate-neutral by 2050.

Some national and state governments have also established dedicated funds to finance subnational government projects (Canada, Germany, the state of Jalisco, Mexico, the state of California in the US, etc.) but much more could be done to really foster climate priorities at the subnational level (see Box 4.6).

Developing and optimising tax revenues, user charges/fees and other revenues to support climate objectives

Making use of external finance mechanisms and attracting private investors for subnational climate-related projects

A number of potential instruments exist for mobilising external financing for the net-zero transition, including debt financing, subnational public-private partnerships (PPPs) and equity funds.

Aligning subnational government expenditure with net-zero-emission objectives and direct subnational spending and investment towards climate priorities

Subnational governments can set climate targets and incorporate them into their spending policies and budget priorities. Greening expenditure applies to both current and capital expenditure. It is important to recall that, on average in the OECD, investment expenditure represents around 13% of subnational expenditure while current expenditure represents the remaining part. Therefore, a comprehensive review of the budget should be conducted for both current and capital expenditure (OECD, 2020[11]).

Several tools can be mobilised to direct spending and investment towards environmental and climate objectives. They include: i) providing climate-related financial support to firms and households; ii) integrating environmental benefits in costs analysis; iii) developing the use of green public procurement; and iv) developing subnational green budgeting.

National urban policy frameworks are beginning to integrate climate policy

National urban policies (NUPs) can co-ordinate sectoral policies relevant for the net-zero-emission transition in cities. A NUP is a government-led, coherent set of decisions to co-ordinate actors in order to promote more productive, inclusive and resilient urban development consistent with environmental goals (UN-Habitat, 2014[59]). A NUP must be accompanied by an effective institutional framework and governance that allow for co-ordination and collaboration with urban stakeholders (OECD/UN-Habitat, 2018[52]). NUPs can cover a wide range of national policies with a profound effect on urban development. They can help deliver climate change mitigation and adaptation responses and achieve cross-sectoral synergies. Land use zoning, for instance, impacts sectors such as transport, housing, energy, natural resources, water and waste. For example, national ministries have often pursued housing programmes without subnational governments and without co-ordinating the housing programme with local transport (OECD, 2015[60]; Rode et al., 2017[61]). This often results in low-cost urban periphery construction, more car dependence, a higher carbon footprint and emissions from a land use change such as deforestation. This ultimately results in higher costs from connecting housing to infrastructure, aggravated by congestion (Moreno Monroy et al., 2020[62]) as recently illustrated in a case study of Ethiopia (OECD, forthcoming[63]). The location of housing developments at urban peripheries can also result in high home vacancy rates, as in Mexico (OECD, 2015[60]). National governments can improve local capacity to implement national development plans, consistent with climate objectives, and establish a central body responsible for cross-sectoral co-ordination of key policy areas, such as in Colombia’s interagency commission (Rode et al., 2017[61]).

Among 65 countries that have participated in a survey of NUPs, including 22 OECD countries, most, but not all, have integrated climate action. According to preliminary survey findings (OECD/UN-Habitat, forthcoming[64]), 51 country NUPs addressed adaptation and mitigation, while 13 reported that their NUP did not address climate change at all. Some countries have identified related co-benefits in their NUPs (Figure 4.5). Half of the countries (26) identified “enhanced urban biodiversity and ecosystems” and “better protected lives and livelihoods from extreme weather”. These allow nature-based urban solutions to provide wider ecosystem services and protect against extreme heat or flooding. “Increased local energy production in cities” was a key objective for only 16 respondents. Only 14 national governments – 2 of which are from OECD member countries – regard economic competitiveness and job creation as a reason to integrate climate change into NUPs.

Where climate action is included in NUPs, the survey results do not allow us to assess whether they are consistent with national or Paris Agreement emission reduction objectives. To deploy sectoral policies consistent with net-zero GHG emissions in 2050 in housing, for example, national governments will have to integrate the refurbishment of the entire buildings stock. This is likely to require refurbishing around 5% of cities buildings per year. NUPs can also integrate scenario analysis to set benchmarks for urban renewable electricity generation, transport and the reduction of consumption-based emissions as discussed below.

Figure 4.5. Key objectives identified by national governments to mainstream climate action in their NUPs

Note: 52 respondents (22 OECD member countries) reported their NUP addressed climate change through mitigation, adaptation or both.

Source: OECD/UN-Habitat (forthcoming[64]), Global State of National Urban Policy: 2nd Edition, OECD Publishing, Paris/United Nations Human Settlement Programme, Nairobi.

Networks of cities and their metropolitan areas must also be supported, as highlighted in the report Managing Environmental and Energy Transitions for Regions and Cities (OECD, 2020[26]). They in turn can support the replication, scaling up and mainstreaming of successful experiments. Urban pilot projects to introduce novel transport systems that contribute to the net-zero-emission transition in a city, such as digital-based ride-sharing described below, can serve rapid diffusion and should also be integrated into NUPs.

There are two main ways to support more structured learning in and between cities:

• Intracity learning focuses on the exchange of information and knowledge between initiatives and actors within the boundaries of a particular city or region. Urban policymakers can promote knowledge exchange and collaboration (Bulkeley and Castán Broto, 2013[65]).

• Intercity learning focuses on the exchange of information and knowledge about practices, experiences and knowledge between cities via networks. City networks, such as C40 and Champion Mayors, can help spread urban innovation by transferring lessons across localities. Members of climate networks such as C40 cities adopt more ambitious climate targets and actions (Salvia et al., 2021[51]), although this may in part be because cities with relatively ambitious climate action may wish to showcase it through membership. C40 Cities have committed to zero location and production-based emissions by 2050 (C40 Cities, 2016[66]).

Knowledge about how successful experiments and innovation travels across contexts and how they are transferred is still limited but knowledge-sharing initiatives have an important role (Lee and Jung, 2018[67]). National city and municipality networks, such as the Dutch Klimaatverbond, Sweden’s Klimatkommunerna and Finland’s KINKU network, may play this role (Hakelberg, 2014[68]). These networks still generally appear to be financed by member cities themselves.

Prioritising solar energy in cities

Prioritising photovoltaic electricity generation is indispensable to achieve climate targets with massive installation to be undertaken within a period of 10 years (Jäger-Waldau et al., 2020[81]). While potentials vary depending on sunshine and other geographic factors (see the online country notes to this Regional Outlook report), there are huge untapped potentials for cities. For example, in US cities, the share of suitable rooftops ranges from 15% in Washington to 55% in Chicago, 84% in San Bernardino and 85% in Riverside. But actual rooftop solar penetration ranges from 0.3% in Chicago, 7% in Riverside, 8% in San Bernardino and 12% in Washington (Reames, 2020[82]). This reinforces the need to legislate, for example new house construction to install solar panels. Such legislation can be at the city or regional level, as in California. Australia is the world leader in this domain. More than 2 million houses have rooftop solar panels with a combined capacity of 7 GW, contributing 62% of total PV capacity, although this may also reflect lagging policy support for large, utility-scale installations. Rooftop PV technology is continuing to expand (Say, Schill and John, 2020[83]).

Beyond electricity market regulation, which is mostly national, city governments can influence the uptake of solar panels by households.

• In the US city of Riverside, for example, socio-economic factors such as lack of Internet access and older housing stock were found to reduce solar panel adoption. Low-income reduces solar panel penetration in both Chicago and San Bernardino. Language barriers also reduced the adoption of solar panels in San Bernardino. This calls for cities to proactively engage with the communities. This is particularly important as subsidies for solar panels risk otherwise being regressive.

• Regulation of multi-apartment shared property matters. In Australia, residents in multi-unit apartments can install shared batteries and solar panels on the roof of a common property, which can be managed by owners’ corporations without the involvement of utilities (Roberts, Bruce and MacGill, 2017[84]). This shared system can reduce load variability, reduce costs compared to standalone systems, whilst providing 60% self-sufficiency to residents (Syed, Morrison and Darbyshire, 2020[85]).

• Cities can promote large-scale solar panels alongside other renewables outside city borders, as is the case of the city of Adelaide in South Australia in its pursuit of carbon neutrality by 2023 (City of Adelaide, 2019[86]).

• Cities can stimulate investment through incentive schemes. For example, in Adelaide, one Australian Dollar (AUD) of city-provided funding generated AUD 6.45 in investment in sustainable technologies such as light-emitting diodes, solar hot water systems and electric vehicle charging stations among others (City of Adelaide, 2019[86]).

The spatial distribution of population within a city or metropolitan area can have a strong influence on the cost of providing public transport

As shown in the Cities in the World report (OECD/EC, 2020[45]), there is a clear link between cities’ shape and the needed length of its public transport network to provide the same quality of service. Cities such as Hong Kong, China, or Mumbai, India, which have a very strong concentration of their population in the central part of the city, can provide public transport to 80% of its residents with a network of only 6 km per 100 000 inhabitants. Houston needs a 26-fold and Atlanta a 45-fold longer network than Hong Kong, China, to provide the same access. In practice, this usually means that a much lower share of the population has access to public transport in cities like Atlanta and Houston. Thus, as neighbourhood density falls, the total network costs increase. For example, reducing the density from 15 000 to 12 000 increases costs by 30%, while reducing it from 6 000 to 3 000 increases costs by 120%.

Across the globe, the conditions of providing public transport in metropolitan areas differ widely between world regions (Figure 4.6).

Figure 4.6. Simulated public transport network length in 37 metropolitan areas, 2015

Source: See Jacobs-Crisioni, C., L. Dijkstra and A. Kucas (2020[90]), “Does density foster efficient public transport? A network expansion simulation approach”, Manuscript submitted for publication. Work is based on the boundaries of Moreno-Monroy, A., M. Schiavina and P. Veneri (2020[91]), “Metropolitan areas in the world. Delineation and population trends”, https://doi.org/10.1016/j.jue.2020.103242.

Cities need to support urban mobility in several ways, including shared mobility, electric mobility and active mobility. The integration of walking, cycling, bus, e-rollers, subway and railway regimes into an intermodal transport system could also make a modal shift to public transport more attractive, as happened in London, where car use declined by 25%-35% between 1995 and 2015 (Cass and Faulconbridge, 2016[92]). Additionally, public transport systems need to be sufficiently accessible to offset a potential growth in inequality as a consequence of price-based instruments, such as carbon taxes or congestion charges (OECD, 2020[93]). Such policies can have negative distributional effects when individuals being taxed do not have alternative means of transport to turn to. Steps to meet connection and access needs with fewer vehicle kilometres will be particularly effective in reducing multiple negative impacts of road transport. Such an approach will also help lower energy demand, a key priority on the way to net-zero emissions (Chapter 3). A transition with radical systemic innovation in road transport is therefore necessary (Frantzeskaki et al., 2017[94]). Such a transition will require both technological and institutional changes.

The development of location-based connectivity and accessibility indicators for all residential areas helps to guide cost-effective decisions for housing development or improve accessibility and connectivity through walking, cycling and public transport use. It ensures that people are easily able to reach jobs or everyday public services with sustainable transport modes, such as walking, cycling or public transport. This can include, for example, steps to make pedestrian and cycling access to public transport hubs quicker and safer. Transport-oriented development requires integrated accessibility and connectivity for commercial and residential development (OECD, 2019[95]). Complementary policies, such as increased housing supply through the densification around transport links or dedicated affordable housing, are needed to ensure accessibility is improved for everyone (OECD, 2020[96]).

Shared mobility solutions

Digital-based ride-sharing can lower CO₂ emissions sharply and deliver large reductions of traffic, eliminating congestion, freeing expensive urban space while improving connectivity and accessibility, provided it replaces individual car use. It improves connectivity and accessibility especially for low-income households and households in suburban areas, which are often less well connected to public transport. In such ride-sharing models, individual private car rides and ideally all rides in an entire metropolitan area are replaced by rides in shared taxis or minibuses. These services are modelled to be available on demand, at the doorstep or at the next street corner. Supply and demand of on-demand services are co-ordinated by a digital platform, which optimises routing (Box 4.11). Professional staff drive the vehicles.

Recent modelling for the daily mobility patterns of metropolitan area Dublin, Ireland, shows that the number of vehicles, traffic, CO₂ emissions and congestion would be reduced by up to 98%, 38%, 31%, and 37% respectively (ITF, 2018[97]). Broadly similar results have been obtained for other cities, such as Auckland, Helsinki, Lisbon and Lyon (ITF, 2020[98]). Ride-sharing is also low-cost. For Dublin, the cost of shared minibus services would be less than the price of a public transport ticket, yet would not need to be subsidised. Shared rides could substitute inefficient bus lines and provide feeder service to rail. Further benefits would include substantially lower pollution and freeing up space occupied by parked cars, for example, for active mobility. Emission reductions are larger if the shared vehicle fleet is electric.

Survey results suggest that 20% of car drivers would be willing to switch to shared rides in Dublin, although this share could be substantially higher if more information about the ride-sharing system (e.g. example about the lower cost of ride-sharing for users compared to using and operating private cars, for many, incentives to switch, such as lower prices for early adopters) are provided. If 20% of private car trips were replaced with shared modes, shared services could still be provided at a sufficiently low cost to ensure uptake. Emissions could fall by around 20% and congestion by 7%. Survey results for Lyon suggest that most citizens are willing to use shared modes.

Relying on on-demand ride-sharing also reduces the cost of electrifying transport. By reducing the number of vehicles and using them more intensively, ride-sharing would take advantage of the low operating costs of electric vehicles, while limiting electricity demand, material used for battery and car production and infrastructure needs. At the same time, more intensive vehicle use results in more frequent renewal and therefore quicker technology diffusion (ITF, 2018[97]; 2020[98]). Digital-based sharing models and multimodal transport systems require steps to regulate smart mobility and the role of data (Box 4.11).

Fostering active mobility

Cycling and walking are low-cost means of transport to users and taxpayers alike. To users, they provide the health benefits from regular exercise on daily trips they need to undertake anyway. To governments, infrastructure is cheap to build. Facilitating cycling and walking benefits low-income households. For example, cycle-hire facilities increased cycling substantially, in particular in low-income areas of London (Lovelace et al., 2020[102]). The reach of cycling as a means of transport can be extended to 20 kilometres with electric bicycles. Fostering active mobility should be seen as a complement to public transport. Low-cost options for cities to facilitate walking typically also facilitate public transport use.

City governments have redistributed street space to pedestrians and cyclists as part of their post-lockdown COVID-19 strategies (Kraus and Koch, 2020[103]). On average 11.5 kilometres of provisional pop-up bike lanes have been built per city in 106 European cities. Each kilometre may have increased cycling by 0.6%. The new infrastructure could generate USD 2.3 billion in health benefits per year. This suggests that every kilometre of cycle land produces annual health benefits of about USD 2 million, so the investment may often pay off in less than a year.

The application of a broad range of ethical fair allocation principles also argues in favour of moving street space from cars to pedestrians and cyclists on a larger scale (Creutzig et al., 2020[104]). For example, it would improve the safer, more autonomous use of streets for the least able, in particular children, the elderly and the disabled. Especially the allocation of curbside space to car parking appears difficult to justify on any fair allocation principle. In Berlin, for example, parked cars hold 22% of street space but only a 5% share of users (Figure 4.7). Cycling, on the other hand, uses less than 10% of space for 16% of users. A fairer allocation would reduce the space allocated to car parking by more than half while increasing the street space allocated to biking, walking and public transport. Some of the allocation mechanisms and principles considered include well-being, environmental efficacy, economic efficiency and intergenerational justice.

Road use charges need to complement the widespread uptake of electric vehicles

As highlighted in Managing Environmental and Energy Transitions for Regions and Cities (OECD, 2020[26]), electric vehicles (EVs) have great potential as a way for cities to reduce local air pollution and GHG emissions. However, they still contribute to congestion and air pollution due to particles released from tyres and braking. Therefore, a shift to EVs should be positioned within a wider plan for city journeys to be made by public transport, ride-sharing, bike or on foot. Some cities have announced specific goals for EVs (Table 4.1).

Little is known if and how local policies and strategies affect EV usage and its supporting infrastructure (Roelich et al., 2015[105]). One successful policy has been to invest in public charging infrastructure. The need for public charging varies based on housing stock, private charging availability and commuting patterns.

Figure 4.7. Fair street space allocation provides more space for biking, walking and public transport while significantly reducing the space for parking

Street space by usage and space allocation for five transport modes, Berlin, Germany

Note: The arrows show the suggested direction of change from considering a range of ethical principles. Cones represent uncertainty values.

Source: Creutzig, F. et al. (2020[104]), “Fair street space allocation: Ethical principles and empirical insights”, http://dx.doi.org/10.1080/01441647.2020.1762795.

Electric cars already have lower operating costs than cars with internal combustion engines and they are likely to become cheaper for most users within this decade, even including the purchase price. The diffusion of electric cars could therefore risk intensifying car use in cities, aggravating congestion. Automated driving adds to these risks, as it will reduce the opportunity cost of the time spent in the car. Fuel taxes have priced only a fraction of the full external costs in cities, where they are particularly high. In any case, fuel taxes disappear with net-zero-emission policies and EV use. Electrification of car use will need to come with the adoption of road use charges in order to replace fuel taxes also for revenue (Atkinson, 2019[107]). This will lower excess driving demand and shift mobility to other modes of transport (OECD/ITF, 2019[22]).

Cities will have an important role to play in setting road use charges. Introducing road use charges also offer the opportunity to price external costs more precisely, by varying them over time and place. Lessons from the London Congestion Charge show that attitudes change in favour of policies to reduce car demand after their successful introduction as the benefits of less car use materialise (Downing and Ballantyne, 2007[108]). Pricing of mobility will also be important when accessibility and connectivity improve, for example as a result of digital-based ride-sharing. Such improvements would lower the cost of mobility, raising the demand for it, including by encouraging urban sprawl.

Current approaches

There is a range of policy instruments that aim to address climate change and ecosystem degradation on the land use side. The most common policies can be organised around the categories of regulatory approaches, i.e. rules and standards for land use planning, economic instruments (taxes, abatement payments and subsidies), information instruments (ecolabelling, green procurement) and other (knowledge transfer and research). Information instruments are particularly important to ensure a level playing field where goods are internationally tradeable and low-emission production entails higher market costs, for example because GHG emissions cannot be priced or where regions are progressing unevenly in their low-emission pathways. Overall, these policies and the change they entail does not happen in a vacuum but tend to play out and affect the local realities of people on the ground. Most importantly, they need to be economically viable to be able to be accepted and successfully implemented. Some offer important development opportunities for rural areas. Table 4.2 summarises the most common policy instruments and their considerations for rural development.

Agriculture emissions per capita across regions vary enormously and are highest in regions with high meat and milk production, for example in Ireland or New Zealand (see Figure 4.9). So-called “hot spot areas” are associated with intensification. Examples from France show nitrogen surpluses range from 16 kg to 69 kg per hectare of agricultural land (Hardelin and Lankoski, 2018[145]). These contribute to emissions as well as water pollution. This uneven distribution of emissions highlights that place-based approaches are needed to address individual challenges.

Figure 4.9. Agricultural emissions per capita for each TL2 region, sorted by national average, 2016

Note: Does not include emissions from land use and land use change.

Source: OECD calculations based on EC (2020[47]), EDGAR - Emissions Database for Global Atmospheric Research, Joint Research Centre, European Commission.

Housing, transportation, energy, water, agriculture, tourism and economic development all make demands on how land is used. For instance, maximising food production without regard to environmental impacts can raise GHG emissions and negatively impact habitats (and biodiversity), while increasing carbon sequestration from afforestation and bioenergy use combined with carbon capture, use and storage (CCUS) can reduce arable land. Likewise, extending protection in one area might shift deforestation but can also generate income. Consequently, sustainable land use presents a complex governance challenge that has to deliver simultaneously on social, economic and environmental policy outcomes as well as a large number of stakeholders (OECD, 2020[147]). Sectoral policies dealing with only one aspect are usually not suitable to address interconnected needs. The OECD Principles on Rural Policy stress the need to promote integrated spatial planning with Principle 4: “Set a forward-looking vision for rural policies”, requiring land use planning to consider multiple aspects such as environmental quality, waste management, natural resources development, community attractiveness, climate change mitigation and adaptation as well as population ageing and out-migration (OECD, 2019[148]).

Regional governments have significant roles to play in transitioning to more sustainable land use, but co-ordination is needed. While the national governments generally set the over-arching framework, subnational governments, in particular at the local level, are in charge of spatial planning and land use policies. In order to co-ordinate well, national and regional governments can establish frameworks to support integrated planning across functional territories. The Austrian Conference on Spatial Planning, for example, provides effective co-ordination across levels of government and across policy sectors. Better integration and co-ordination of policies is particularly important if a wider range of policy instruments is used to steer land use. Without better co-ordination mechanisms, it will not be possible to align an even more diverse set of policies to influence land use effectively (OECD, 2017[149]).

Land use policies must pay greater attention to the incentives that other public policies provide to use land. Whenever possible, policies unrelated to land use should not provide incentives that contradict spatial objectives. For example, countries that wish to restrict urban sprawl should not provide greater tax incentives for ownership of single-family homes over multi-family homes. More generally, policies outside of the planning system should be used to encourage desired forms of spatial development. Tax policies are of particular importance; higher transport taxes, for example, increase the costs of commuting and thus provide incentives to live closer to employment centres, in turn encouraging compact development (OECD, 2017[149]).

Managing rural land use change through landscape approaches

Landscape planning approaches can help regional policymakers balance the social, environmental and productivity goals in their regions. These approaches offer an alternative to siloed measures focusing on production sectors or farm-level and consider the social, economic and ecological functions of an area holistically to develop spatial and development plans. They offer an organising framework, facilitate the investigation of different courses of action and are increasingly being used, for example as part of the World Bank Forest Action Plan FY16-20 (OECD, 2020[147]). Most importantly, however, they give practitioners a tool to adapt to local conditions (Sayer et al., 2014[150]).

Supporting landscape approaches in rural regions:

• Introduction of new decision-making tools that incorporate non-market values. Multi-criteria decision analysis (MCDA) is a method that can combine ecological objectives with social and economic criteria and is able to consider non-market values of ecosystem services. It has been developed to allow the inclusion of data from various sources (e.g. economic, ecological, stakeholder opinions) into quantitative decision-making models and has been used extensively for land use. Multiple Danish studies have shown that the tool is useful to identify areas for land use improvements through scenarios that allocate weights to environmental services (Vogdrup-Schmidt, Strange and Thorsen, 2017[151]; 2019[152]). MCDA requires sound sociotechnical design, reflecting both the social (who participates, when and how) and technical (which methods, which software) considerations. Overall, MCDA is made up of the following participants: decision-makers who choose between alternatives; stakeholders who are the source of scores and weights; analysts who are responsible for design and implementation; and experts who provide advice. Generally, the method relies heavily on the weights used by the decision-maker and/or relevant stakeholders (Kennedy et al., 2016[153]).

• Improve local data availability. Data can strengthen the design, implementation, monitoring and enforcement of landscape approaches. Data availability, however, is often a challenge, especially in rural places. Geographic information systems (GIS) are fundamental tools of local land use planning. The use of satellite spatial data can provide important insights on land use change, land degradation and waste. In Europe, the European Environment Agency (EEA) is an important source of open data on land use, including the CORINE Land Cover (CLC) dataset, which provides land cover information at a resolution as fine as 100 m. Further, the INSPIRE Directive aims to create a new EU-wide spatial data infrastructure (Weber, Eilertsen and Suopajärvi, 2017[154]). Apart from ecological information, cultural, historical and visual aspects are much more difficult to capture through data.

• Landscape approaches can and should integrate regional climate adaptation challenges. Regional climate modelling can provide important insights into local adaptation challenges. Future climate-change-induced extreme weather events will get worse in many regions but will also change in nature. Heat waves and drought will become common in many regions where they have not been so far. Regional policymakers need to work with climate modellers and local authorities to harness local knowledge and define potential socio-economic vulnerabilities, on which regional climate models can provide further insights.

• Support through larger rural policy agendas. Rural policy across OECD countries is currently undergoing a paradigm shift from a sectoral focus to a more place-based approach, underpinned by the recognition that rural places are diverse and structural changes, such as climate change, need to be addressed through a multidimensional multi-stakeholder approach (OECD, 2020[19]). New rural policy approaches can work to support local landscape approaches by giving them the needed validation and authoritative support recognising the value of working across policy and administrative barriers. A first step in the right direction is that a number of countries already embed climate change objectives in local economic development strategies and programmes and seek to break up silos this way (OECD, 2013[155]). While the EU Rural Development Programme (RDP), under Pillar II of the Common Agricultural Policy (CAP), is still largely focused on funding individual actors who undertake different actions (Rega, 2014[156]), its LEADER programme, albeit small, seeks to address aspects of territorial governance, so important for the implementation of landscape processes, and the co-ordination of actors that undertake individual actions.

Creating value from ecosystem services

In rural communities, policy drivers and market incentives are still forcing land users to prioritise unsustainable economic development over climate protection. Market values only capture provisioning ecosystem services such as the production of food, wood and energy, rather than the full range of supporting, regulating and cultural ecosystem services, including nutrient cycles, pollination, water filtration, biodiversity, disaster prevention (i.e. floods), recreation and cultural heritage (Natural Capital Germany, 2016[157]). In this context, policymakers must find ways to reward the provision of supporting, regulating and cultural ecosystem services. For instance, in agriculture, market price support is currently based on crop-specific area payments. Commodity production increases but often at the expense of higher GHG emissions and a lower capacity of vegetation and soils to absorb carbon. Biodiversity and water quality may also worsen (Hardelin and Lankoski, 2018[145]) Yet, land use practices consistent with climate objectives must be scaled up sharply. Redirecting subsidies for agriculture to payments for ecosystem services, to strengthen CO₂ sinks by preserving carbon-rich soils and vegetation and encourage emission reduction, is one policy option to scale up climate action in rural regions (Box 4.14).

Understanding and rewarding the true value of ecosystem benefits, including GHG emission reductions, offers potentials for rural development – but also holds challenges. A key challenge for policies to protect ecosystem services, such as ecosystem service payments, is the difficulty to measure and manage them. Currently, measurements and metrics largely depend on multidimensional spatial and temporal variations. Furthermore, ill-defined payment schemes can lead to unintended consequences, for instance through the introduction of fast-growing (often non-native) trees that satisfy carbon sequestration but also consume much water or cause soil loss (Chan et al., 2017[158]). Hence, while ecosystem service payments can make sustainable land use practices economically viable, they cannot regulate such practices alone through the incentives they provide. Other challenges relate to building the required local scale and limited understanding of and inhibition in switching behaviours. This means that smart policy design needs to integrate economic incentives as well as potential social and cultural barriers and ecologic consequences.

PES are used to incentivise land managers to provide certain services (conservation and restoration, water, carbon and biodiversity purposes) in certain regions. Payment schemes related to ecosystem services often do not pay for the service itself but cover the cost of adopting certain practices to increase the provision of ecosystem services. This approach may miss rewarding those who already protect ecosystem services at the time of introduction. Alternative approaches seek to involve producers, extractors and the supply chain in mitigating impacts, for instance through paying ecosystem “stewards” (i.e. the land users who are already undertaking positive actions) (Chan et al., 2017[158]). Overall, PES programmes are diverse and can be public, private or a combination of both, voluntary or mandatory, as well as small or large in monetary and geographical scale (OECD, 2013[159]; Hardelin and Lankoski, 2018[145]).

The following considerations may serve to link rural development and PES:

• Regional policy and linked fiscal transfers need to recognise the fundamental benefit of ecosystem services from natural asset protection. Assessing, measuring and communicating positive externalities of ecosystem services can help to promote understanding and inform regional policymaking. In the UK, the National Ecosystem Assessment framework considers economic value, health value and shared social value when evaluating changes in ecosystems (UK National Ecosystem Assessment, 2011[160]). Other examples include the EU Mapping and Assessment of Ecosystems and their Services (MAES), which aims to build a coherent analytical framework as well as common typologies of ecosystems for mapping across the EU. As part of this initiative, the EFESE (L’évaluation française des écosystèmes et des services écosystématiques) in France has produced six assessments of different ecosystems (OECD, 2020[147]). Despite some success in using the results of MAES in policy design, a recent EU assessment suggests that unclear relationship of results and regulatory frameworks in respect to land use/landscape planning, lack of human and financial resources to make results operational and rigid national legislation not open to incorporation of the ecosystem services concept hamper the process (Ling et al., 2018[161]).

• The geographical scope is an important element for successful PES. The application of PES is often heterogeneous with a wide variety of approaches, low availability of information and inconsistent monitoring and evaluation. This limits the needed geographical scope to improve the sustainability of larger land use systems as participation is often split among small land parcels and does not correspond to the spatially dependent nature of ecosystem services. National systems like the one in Mexico (the world’s first) can help address fragmentation. Mexico’s PES scheme was introduced in 2003, mainly targeting forest ecosystems. The scheme avoided 18 000 ha of deforestation between 2003 and 2007 and reduced forest fragmentation (OECD, 2020[147]). More local approaches to build scale include stimulating co-ordination between land users across parcel or farm boundaries. One option to incentivise this includes agglomeration bonus payments for participants co-operating cross-boundary (Wätzold and Drechsler, 2014[162]).

• PES should seek to contribute to economic development opportunities more broadly. This can include driving regional innovation, diversifying the economic base or adding to community well-being. In Australia, PES are linked with the economic development of Indigenous communities. One example is earning revenues from carbon credits. Indigenous fire management practices have reduced the intensity of bushfires, limiting carbon release. Roughly 118 ranger groups exist across the country and employ over 2 900 Indigenous Australians. Overall, rangers reported they felt greater individual and community well-being, including self-worth, health, closer connections to family and country as well as safer communities, strengthened culture, ability to find meaningful employment, increased respect for women and more role models for younger people (NIAA, n.d.[163]). These land management practices have also driven technological innovation. For example, the Yawuru Indigenous community in Western Australia is developing capability in GIS mapping to support their land and water management (Raderschall, Krawchenko and Leblanc, 2020[164]). Other local benefits from PES can include the development of new leisure services, as research has shown that tourists prefer rural landscapes of forest patches interlinked with hedgerows, rather than open landscape dedicated to agriculture or only forest (Hardelin and Lankoski, 2018[145]). Further benefits can include local branding of the products and advertising from sustainable land use.

• Regional institutions can offer support, provide information, raise awareness and promote social inclusion. Existing power structures and inequalities can easily undermine equitable access to PES. In Costa Rica’s national PES programme for instance, participants continue to be wealthier and more educated landowners, despite the addition of explicit social goals and associated requirements to include less wealthy and more vulnerable people (Chan et al., 2017[158]). A review in Indonesia highlighted the importance of local-level working groups to improve programme uptake, provide information and promote co-ordination between beneficiaries and other stakeholders (OECD, 2020[147]).

• Make PES attractive for land users. Inflexible programmes targeting only one ecosystem service are often not successful because ecosystem services function as bundles. So-called stacking approaches allow land managers to receive payments for different ecosystems services provided in the same area, thereby increasing the cost-effectiveness (Lankoski et al., 2015[165]). Also, stacking can be used to incentivise the development of higher-quality projects, such as restoring a wetland instead of simply planting a vegetative buffer. Similarly, bundled payments describe programmes where participants receive single payments for multiple ecosystem services (Cooley et al., 2011[166]). The French Flowering Meadows agri-environmental measure (AEM) is known for its flexibility: the results-oriented scheme allows farmers to choose how they achieve the desired result. Farmers commit to ensuring that at least four plants from a reference list of 20 species with high ecological value are in their meadows. The reference list was drafted by a range of stakeholders, including farmers. Acting in collaboration with other stakeholders to define the goals and means may also increase motivation (Fleury et al., 2015[167]).

• Clearly defined and enforced land tenure is a prerequisite for sustainable land use. If land users have sufficient certainty over land tenure and clarity about who owns or has the rights to manage land, they will be more willing to plant trees or restore peatland (Wreford, Ignaciuk and Gruère, 2017[168]). Lack of clarity can also lead to illegal logging, mining and agricultural activities, in Brazil, Indonesia and Mexico for example. Supporting and intensifying ongoing land reform efforts is essential for effective land use policies (OECD, 2020[147]).

• Identify land use incentives that are inconsistent with the net-zero-emission transition and ecosystem services. Switzerland, for example, has reformed its direct payment system by removing direct payments to livestock farmers and increasing payments to farmers engaging in extensive upland grazing. Transition payments were used to minimise negative impacts on farmers and environmental groups helped make sure that potential beneficiaries were informed (OECD, 2017[169]).

Rural regions have a comparative advantage in producing renewable energy

Rural regions, especially remote ones, are leading in renewable electricity production. Overall, rural regions account for 43% of the electricity produced in OECD countries, generate 38% of their electricity using renewable sources. In total, regions far from metropolitan areas account for around half of the total electricity produced from renewable sources in the OECD, with hydropower being the most used renewable source (OECD, 2020[173]).

Cost reductions in renewables and innovations have opened up new possibilities for rural areas. Since 2010, the cost of investment for photovoltaics decreased by 82%, for onshore wind by 39% and offshore wind by 29%. These falling costs have enlarged the possible group of owners with raising the potential for profit margins. In terms of innovations, offshore wind, in particular, has high potential to meet electricity demand, offering higher capacity factors due to ever-larger turbines that tap higher, more reliable wind speeds and floating turbines that open up possibilities for new locations for instance in the North Sea (IRENA, 2020[174]; IEA, 2019[175]).

Renewable energy can have positive effects on the job market but aspects such as technology type and regional fit matter. For example, in EU countries, under the scenario of 80% emission reduction by 2050, deploying wind and solar panels may create one million jobs (direct and indirect) between 2014 and 2050. The share of jobs across three stages of wind and solar panel deployment will be 40% at the manufacturing stage, 23% at the installation stage and 37% at the operations and maintenance stage. Estimates however vary, depending on the learning rate of the technology, fossil fuel prices, energy demand and policy initiative among others (Ortega et al., 2020[176]).

Figure 4.10. Sources of electricity production, 2017

Note: Renewable energy sources include hydropower, wind, waste, biomass, wave and tidal, geothermal and solar. Fossil fuels are divided into two subcategories: coal, which corresponds to the most carbon-intensive energy source; and the other fossil fuels, including oil, petroleum, coke and gas.

Source: OECD (2020[173]), Regions and Cities at a Glance 2020, https://doi.org/10.1787/959d5ba0-en.

 StatLink https://doi.org/10.1787/888934237140

Developing renewable energy projects to the advantage of rural development is not straightforward. Evidence is mixed on whether construction, operation and maintenance activities from renewable energy projects actually support long-term rural development (Clausen and Rudolph, 2020[177]; OECD, 2012[171]). While there is an indication that renewable energy creates jobs, for instance from operation and maintenance of equipment, studies suggest that the largest potential for employment is rather indirect and can develop along the value chains, the reallocation of abandoned facilities or more affordable local energy can make other production activities possible, including food processing, storage and transport (European Court of Auditors, 2018[178]; OECD, 2012[171]; ILO, 2019[179]). In addition, considerations on how profits of local resource use are distributed and retained locally to benefit social and economic development is a central question (OECD, 2020[26]). Experience with other types of resource extraction including mining has demonstrated the importance of assuring local community benefits and local participation in resource development projects to ensure community ownership and acceptability.

Regional level governments play an essential role in decision-making for renewable energy. While national-level governments are important to establish legal frameworks and supply financial support for technological innovations, the final decisions about renewable energy deployment are better placed at the local or regional level. This is because potentials for renewable energy development are unevenly distributed across countries and closely linked to spatially diverse natural conditions (OECD, 2012[171]). Conducting economic and social benefits assessments can help decision-makers to understand what kind of impact renewable energy deployment can have in their regions and help to illustrate regional benefits to the population (Jenniches, 2018[180]).

Making use of renewable potentials for the benefit of rural regions

Place-based innovation policies need to support and direct structural change

As shown in Regions in Industrial Transition (OECD, 2019[210]), industrial innovation policies based on the concept of smart specialisation aim to boost economic activity through economic diversification and by connecting new activities to established local businesses and worker skills. This avoids employment loss and the emigration of businesses, firms and workers, which tend to characterise persistent regional decline. Establishing clear priorities in the regional development policy agenda according to this principle facilitates the allocation of available resources in the face of industrial transitions (McCann and Ortega-Argilés, 2015[211]). The approach helps avoid spreading public support thinly across a wide spectrum of activities or to copy experiences that may have been successful elsewhere with no real regard for regional context. Both have resulted in proliferating small-scale initiatives incapable of exploiting the full benefits of the positive network externalities characterising industrial clusters that help establish an industrial fabric that will prevent regional decline (Foray, 2017[212]).

Unlike previous shocks to the industrial fabric of regions, the net-zero-emission transition allows identifying economic activities that are likely to suffer employment losses or substantial technological or business model transformations well in advance, making this approach particularly useful to prepare regional transitions. To be able to anticipate the transition, a clear timetable for phasing out industrial activities that are inconsistent with the transition or require a major transformation is useful. Such a timetable can remove uncertainty, avoid risks of stranded assets and can be based on scenario analysis. For example, countries in the Powering Past Coal Alliance, committed to exiting coal use in electricity generation by 2030, argue that this was a cost-effective date for high-income countries to pursue efforts to limit global warming to 1.5°C.

Smart specialisation has two main characteristics:

• First, a smart specialisation strategy (S3) consists of identifying the economic activities that have potential, based on established local resources, including worker skills, infrastructure, local technology and other comparative advantages, and prioritise the development of these sectors through innovative activities or technologies. Selection criteria can include a critical mass of companies in a specialisation, innovation capacity, clustering and entrepreneurial dynamics. The consistency of smart specialisation with the net-zero emission transition is critical (Asheim, Grillitsch and Trippl, 2017[213]).

• Second, the choice of the activities that will receive government support should be based on the evidence collected through the interaction of key stakeholders (central, regional and local governments, businesses and higher education institutions). The aim is to explore and assess new activities and their possible development trajectories as well as their policy needs. The search for and discovery of new activities is known as the entrepreneurial discovery process (Foray, David and Hall, 2009[214]).

Successful industrial transformation needs to rest on the participation of local actors and an evidence-based approach

Engaging stakeholders to identify investment priorities for smart specialisation requires an inclusive and interactive bottom-up process in which participants from different environments uncover and produce information about potential new activities. Most regions are endowed with important innovation actors, such as higher education institutions, innovative businesses, the regional and local governments and civil society. Their knowledge is however often fragmented over sites and organisations. Smart specialisation processes, therefore, introduce a range of tools to foster collaboration, such as working groups, advisory boards, partnerships and public-private committees. Recent approaches argue that stakeholder engagement should be built together with evidence-based analyses, such as studies relating local to global scientific, technological and economic trends (Kroll, 2015[215]).

A key question is whether governments have the right governance mechanisms to build long-lasting broad partnerships with private sector actors. Arguably, the process of smart specialisation has been most successful in the Northern countries, e.g. Sweden, home to high-quality institutions and strong existing innovation networks. Leveraging multi-stakeholder networks to identify future-oriented priority areas can however also work in moderately innovative regions. The Pomorskie region in Poland provides an example of a well-designed entrepreneurial discovery process within an environment that lacks a legacy of strong collaborative ties (Box 4.17).

The OECD report on Broad-Based Innovation Policy for all Regions (OECD, 2020[217]) has shown that regional development agencies can play an important role in fostering innovation. In Andalusia, Spain, for example, the regional Innovation and Development Agency (IDEA) has been instrumental in strengthening the capacities of the aerospace industry. It provided a platform for universities and companies to realise that researchers could develop prototypes with local SMEs. With the Centre for Technological Innovation and Advanced Aeronautical and Naval Manufacturing (CFA), the region then provided a place and infrastructure where collaboration can take place (OECD, 2020[217]).

Building consensus around future specialisations can help target policy instruments better to serve transition-consistent structural transformation. These policy instruments include support for firms to become more innovative and to encourage knowledge exchange and collaboration. University-industry partnerships can be supported through collaborative research tools such as grants and innovation vouchers. The OECD evaluation of the smart specialisation academy in Värmland has indeed shown that the co-operation between the regional government and the local university – in this case with a formal agreement – has been important to identify future activities that build on regional strengths and research and development capacities.

Regulatory or fiscal incentives strengthen the engagement of local actors for regional innovation and collaboration. Examples are direct funding to businesses for R&D or R&D tax credits, which are mostly provided at the national level. At the regional level, R&D contract opportunities can help develop innovative products or organisational practices that can increase productivity. Universities can also receive funding from the government to support spin-offs and academic entrepreneurship, one good way to spur entrepreneurial dynamism in the region. Open research laboratories or student hiring are additional instruments to support exchange between industry and university. Important preconditions to make collaboration instruments work are adequate and sustainable funding, clear rules on property rights and confidentiality issues, and sufficient trust among actors. An example of a university taking a leadership role in local industrial transitions comes from Northeast Ohio in the US (Box 4.18).

Regions that transform their industries to become consistent with the net-zero GHG emissions need to take into account international contexts when activities are subject to international competition. For example, zero-emission consistent steel production faces higher costs than conventional steel production. Carbon border adjustments are one option (OECD, 2020[218]); integrating trade agreements could include environmental criteria while minimising compliance costs (Bellmann and van der Ven, 2020[219]). Else, government incentives to decarbonise these industries may need to be designed to keep them competitive (DIW, 2018[220]). Another approach may be for regions hosting similar activities to work together across international borders, for example in maritime port regions.

As outlined in the OECD report Regions in Industrial Transition (2019[210]), policymakers can support digital take-up by people, firms and local governments. They can help firms and their workers acquire digital competencies and support business innovation networks. Policy instruments can include targeted loans and vouchers to small firms. Training support can include a mix of support activities, events, webinars, counselling and training programmes to foster digital competencies. These programmes often have a specific focus on SMEs, as they frequently lag in the adoption of digital technologies.

Prompt remediation and restoration of contaminated sites, especially when mining activities are abandoned, support ecological redevelopment as well as economic development on brownfield sites with access to infrastructure and increase the local economic attractiveness for new business development (Sartor, 2018[224]). Mining companies should establish appropriate financial mechanisms for the remediation of past damage to land and water resources. If individual companies’ resources are insufficient, this should be financed by revenues from a charge on the mining industry as a whole (OECD, 2013[225]).

On-the-job training helps laid-off workers to settle in new employment structures

Reflecting strategically on existing skills and making use of them to transform local industrial specialisation so it becomes consistent with the net-zero-emission transition can help avoid depreciation of skills and make training in green skills correspond with local job creation (OECD, 2019[210]). The OECD Programme on Local Economic and Employment Development (LEED) has highlighted that green skills can take the form of industry-specific technical skills as well as transversal skills. Transversal skills include technological knowledge (e.g. energy efficiency), innovation management as well as “transversal generic skills” to support worker transitions (OECD/Cedefop, 2014[207]; OECD, 2017[226]). Green skills will be required across occupations and economic sectors, and play an important role in local industrial transitions (OECD, 2017[226]). “Greening” of skills is likely to require upskilling, as low-carbon sectors are estimated to require more skills than carbon-intensive industries. It can help accelerate transitions, for example in waste management systems. It has been highlighted that transferring workers to new jobs and providing on-the-job training at a new place of employment should be given priority over external and/or additional retraining programmes to avoid large-scale training programmes being set up without a connection to job prospects. Such on-the-job training may therefore be a good candidate to receive government funding and facilitate the transition (IDDRI, 2017[227]).

Policies to support redundant workers may include entrepreneurial training. However, it should be noted that only a limited share (2%-3%) of displaced workers typically return to work by starting a business (OECD/EC, 2017[228]). Although findings vary, overall, start-ups supported in this way have relatively high survival rates, though they require multifaceted support, including coaching (Caliendo, 2016[229]).

Engaging employers – and SMEs in particular – is essential for training success and lifelong learning in the workplace

Engaging employers in skills development programmes can help align skills programmes with industry needs. Subnational leadership can play a role in reaching out to employers to promote awareness and participation in training (OECD/ILO, 2017[230]). Regions undergoing sharp employment transitions can liaise with firms to understand their skill requirements. For example, OECD firm interviews conducted in Pomorskie, Poland, found the training system may not dispense the green economy skills needed in the local labour market (OECD, 2017[231]). Training systems may benefit from greater knowledge of local skill needs, particularly in emerging green industries or occupations, so that they can be integrated into their learning programmes.

The OECD has highlighted that governments should encourage firms to support their workforce through lifelong learning (OECD, 2018[221]). This can take the form of workplace or offsite training and education, ensuring workers both grow professionally and absorb skills needed to green production processes (OECD/Cedefop, 2014[207]). Production methods will need to become more energy and resource-efficient, calling for upskilling. Development training subsidies, training vouchers and tax incentives can encourage upskilling.

Given the strong presence of small firms in regions in industrial transition, it is important to involve SMEs in skills planning. This can take the form of encouraging their participation in regional employer councils or co-designing and co-delivering training initiatives with vocational colleges, universities and large firms. The OECD has highlighted the role of integrating SMEs into such networks to foster trust-based relationships among firms, knowledge sharing and generate opportunities to pool training costs and resources.

Compensation policies

As regional industries face sustainability risks, some workers will be able to retrain and find gainful employment, while others will be unable to find work with equal pay and conditions. Some workers will require prolonged economic support. Specific economic compensation for laid-off workers supports the well-being of communities during transitions. In economically undiversified regions, tax revenues and local incomes can be heavily reliant on high emission companies and their employees (OECD, 2019[210]). Worker compensation policies specific to industrial transitions support workers financially in addition to unemployment benefits and compensation rights established in national labour law. Compensation can range from temporary unemployment schemes to early retirement.

Extensive case studies in France, Germany, Italy, Slovenia and Sweden found that policy co-ordination, stakeholder involvement, rapid and appropriate taking of action, comprehensive communication to workers and adequate financing are key (OECD, 2020[190]). Many workers were largely hesitant to travel for work or relocate, highlighting the relevance of local labour market solutions. Younger or higher skill workers are more willing to move for work and find employment more easily. Companies, unions and governments need to take into account the preferences and situations of workers with widely different backgrounds, as well as local labour market realities.