Energy is a major component of OECD economies as a sector and as a factor input to all economic activities. Energy production and use have environmental effects that differ greatly by energy source. Fuel combustion is the main source of local and regional air pollution and GHG emissions. Other effects involve water quality, land use, risks related to the nuclear fuel cycle and risks related to the extraction, transport and use of fossil fuels.

Energy end-use prices influence overall energy demand and the fuel mix, which in turn determine environmental pressures caused by energy activities. They also help internalise environmental costs. Though price elasticity varies considerably by end-use sector, historical and cross-country experience suggests that the overall price effect on energy demand is strong and that increases in energy prices have reduced energy use and hence its environmental impact.

Transport is a major component of economic activity in and of itself and as a factor input to most other economic activities. It has many effects on the environment: air pollution raises concern mainly in urban areas where road traffic and congestion are concentrated, though road transport also contributes to regional and global pollution problems such as acidification and climate change; vehicles present waste management issues; and transport infrastructure exerts pressures on the environment through use of space and physical transformation of the natural environment (e.g. fragmentation of natural habitats).

Prices are a key form of information for consumers. When fuel prices rise relative to other goods, this tends to reduce demand for fuels, as well as for vehicles with high fuel consumption. This stimulates energy saving, and may influence the fuel structure of energy consumption. However, there may be a rebound effect whereby greater use of more fuel-efficient vehicles encourages greater vehicle usage.

Agriculture’s environmental effects can be negative or positive. They depend on the scale, type and intensity of farming as well as on agro-ecological and physical factors, and on climate and weather. Farming can lead to deterioration in soil, water and air quality, and to loss of natural habitats and biodiversity. These environmental changes can in turn affect the level of agricultural production and food supply, and can limit the sustainable development of agriculture. Farming can also provide sinks for greenhouse gases, conserve biodiversity and landscapes and help prevent floods and landslides.

Prices and financial transfers (taxes, subsidies) provide important market signals that influence the behaviour of producers and consumers. Along with regulations, they can be used to address the environmental externalities of economic activity and to leverage more environment-friendly production and consumption patterns.

Technology development and innovation are key drivers of economic growth and productivity. They are important for managing energy and materials successfully and have a bearing on policies intended to preserve natural resources and materials and to minimise the pollution burden.

International financial flows have an important role in the uptake and dissemination of technology and good practices. They contribute to cross-country exchange of knowledge, stimulate entrepreneurship and partnerships, and are a key aspect of work to combine development and environmental objectives.

This section provides important socio-economic background information, particularly with regard to economic growth, population and consumption.

The main international agreement is the United Nations Framework Convention on Climate Change (Rio de Janeiro, 1992), ratified by 196 parties. Industrialised countries committed to taking measures aimed at stabilising GHG emissions by 2000 at 1990 levels. The 1997 Kyoto Protocol established differentiated national or regional emission reduction or limitation targets for the six major GHGs (CO2, CH4, N2O, PFCs, HFCs and SF6) for 2008‑12, with 1990 as the reference year. The Kyoto Protocol has been ratified by 192 countries, including all but two OECD countries, and has been in force since 16 February 2005. In 2010 and 2011, negotiations in Copenhagen and Cancun led to progress on, among other things, goals for emission reductions, including from developing countries; finance; adaptation; and reducing emissions from deforestation and degradation (REDD).