E/2009/50/Rev.

1
ST/ESA/319

Department of Economic and Social Affairs

World Economic and Social Survey 2009

Promoting Development,
Saving the Planet

United Nations
New York, 2009
 DESA
The Department of Economic and Social Affairs of the United Nations Secretariat is a vital
interface between global policies in the economic, social and environmental spheres and
national action. The Department works in three main interlinked areas: (i) it compiles,
generates and analyses a wide range of economic, social and environmental data and
information on which States Members of the United Nations draw to review common
problems and to take stock of policy options; (ii) it facilitates the negotiations of Member
States in many intergovernmental bodies on joint courses of action to address ongoing or
emerging global challenges; and (iii) it advises interested Governments on the ways and
means of translating policy frameworks developed in United Nations conferences and
summits into programmes at the country level and, through technical assistance, helps build
national capacities.

Note
Symbols of United Nations documents are composed of
capital letters combined with figures.

E/2009/50/Rev.1
ST/ESA/319
ISBN 978-92-1-109159-5

United Nations publication

Sales No. E.09.II.C.1
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 iii

Preface
Unprecedented steps have been taken to halt the global financial meltdown and to enable the world to recover from the
economic crisis that emerged in 2008. But the world also faces a climate crisis which has been building over a much
longer period of time. If we do not bring to this challenge the same determination and sense of common cause with
which we have addressed the economic crisis, not only will the climate catastrophe feared by the scientific community
occur, but recovering from it will be an impossibility. Fortunately, the appropriate responses to the climate crisis can
also contribute to long-term economic prosperity.
Scientists warn that global emissions must peak within a decade or we will face grave consequences,
particularly in the developing world, where the vast majority of humanity live and where the vulnerability to climate
impacts is greatest. If rising incomes in the developing world are to be achieved through high-emissions growth,
such as that pursued by today’s developed countries, then our environmental fabric will be stretched to the breaking
point.
Indeed, the tremendous scale of the climate challenge reflects two centuries of unchecked emissions growth.
Continuing along this route is not what was promised under the Kyoto Protocol to the United Nations Framework
Convention on Climate Change. The sad fact is that we have missed multiple opportunities to change course.
Developing countries are the first—and worst—sufferers from a problem for which, from a historical perspective, they
bear the least responsibility. Issues of equity and burden-sharing must be addressed.
The United Nations Climate Change Conference, to be held in Copenhagen in December 2009, will
provide an unprecedented opportunity to map out a more sustainable economic future. As the advanced economies
have the resources and the responsibility to lead the way, they will be required to make bold commitments to reducing
their emissions and helping developing nations undertake mitigation and adaptation.
Climate change represents a global challenge whose impact can be addressed only through open, inclusive
and frank dialogue. The United Nations is at the heart of that dialogue. The World Economic and Social Survey 2009
makes the case for meeting both the climate challenge and the development challenge by recognizing the links
between the two and proceeding along low-emissions, high-growth pathways.
There is no single blueprint for achieving these goals. The Survey examines the key building blocks in order
to assess the best possible options available to countries at different levels of development. At the same time, it rejects
the polarization of mitigation and adaptation and the notion that one must choose between them. Both are essential,
as are the financial and technological resources needed to support them.
There are huge synergies to be generated through big investments in energy efficiency, renewable energy,
reduction of vulnerability and broader development projects. This will necessitate truly integrated policy responses,
as well as enormous adjustments in the global economy. Yet, we must demand no less of ourselves if we are to put the
world on a more sustainable path of development. The onus is on the international community to deliver the resources
and leadership required to ensure that whatever is feasible becomes both practical and fair. The present Survey makes
a timely contribution to that effort, and I commend it to a wide global audience.

BAN KI-MOON
Secretary-General
iv

Acknowledgements
The World Economic and Social Survey is the annual flagship publication on major
development issues prepared by Department of Economic and Social Affairs of the United
Nations Secretariat (UN/DESA). This year’s Survey was prepared under the general
supervision and leadership of Rob Vos, Director of the Development Policy and Analysis
Division (DPAD) of UN-DESA. Richard Kozul-Wright led the team that prepared the
report. The core team at DPAD included Imran Ahmad, Piergiuseppe Fortunato, Nazrul
Islam, Alex Julca, Oliver Paddison and Mariangela Parra. Alex Izurieta, also of DPAD,
provided the model simulations presented in chapters I and IV. Important guidance for the
overall analysis was provided by Tariq Banuri of the Division for Sustainable Development
(DSD) of UN-DESA, who, together with David O’Connor, Chantal Line Carpentier and
Fred Soltau, provided the principal inputs to chapters II and V of the report. Manuel Montes
and Frank Schroeder of the Financing for Development Office of UN-DESA provided
principal inputs to chapter VI. Jan McAlpine and Barbara Tavora-Jainchill of the secretariat
of the United Nations Forum on Forests provided inputs to chapters III and VI.
Inputs and comments were also gratefully received from funds and organizations
across the wider United Nations system, including the Global Environment Facility, the
International Finance Corporation, the International Labour Office (Employment Strategy
Department), the United Nations Development Programme (Bureau for Development
Policy, New York), the United Nations Environment Programme (Division of Technology,
Industry and Economics, Paris), the United Nations Environment Programme Risø Centre
(Copenhagen) and the United Nations Framework Convention on Climate Change
secretariat (Bonn). Specific inputs were also received from researchers at the Australian
National University, Tufts University and the University of Oregon and from the South
Centre, Geneva.
The analysis benefited from a number of background papers prepared especially
for the Survey by a number of prominent experts on climate change and development.
Those background papers are available at http://www.un.org/esa/policy/wess.
Helpful overall guidance was provided by Jomo Kwame Sundaram, Assistant
Secretary-General for Economic Development at UN-DESA.
 v

Overview
Addressing climate change is the concern of all
The central message of the World Economic and Social Survey 2009 is that addressing the
climate challenge cannot be met through ad hoc and incremental actions. In the first
place, it requires much stronger efforts by advanced countries to cut their emissions. The
fact that in this regard more than a decade has been lost since the adoption of the Kyoto
Protocol to the United Nations Framework Convention on Climate Change1 only adds
urgency to those efforts. However, even if advanced countries begin to match their words
with deeds, their efforts are, by themselves, unlikely to be sufficient to meet the climate
challenge. The active participation of developing countries is now required and such par-
ticipation can occur only if it allows economic growth and development to proceed in a
rapid and sustainable manner.
This Survey argues that switching to low-emissions, high-growth pathways in
order to meet the development and climate challenge is both necessary and feasible. It is
necessary because combating global warming cannot be achieved without eventual emis-
sions reductions from developing countries. It is feasible because technological solutions
that can enable a shift towards such pathways do in fact exist. It is, however, neither inevi-
table nor inconsequential. Such a switch would entail unprecedented and potentially very
costly socio-economic adjustments in developing countries—adjustments, moreover, that
will have to be made in a world more rife with inequalities than at any time in human his-
tory. If it is to happen, the switch will require a level of international support and solidarity
rarely mustered outside a wartime setting.
The Survey also argues that achieving such a transformation hinges on the
creation of a global new deal capable of raising investment levels and channeling resources
towards lowering the carbon content of economic activity and building resilience with
respect to unavoidable climate changes. Most developing countries do not currently have
the financial resources, technological know-how and institutional capacity to deploy such
strategies at a speed commensurate with the urgency of the climate challenge. Failure
to honour long-standing commitments of international support in those three areas re-
mains the single biggest obstacle to meeting the challenge. Bolder action is required on
all fronts.
The Survey contends that, in line with common but differentiated responsibili-
ties, the switch will demand an approach to climate policy in developing countries differ-
ent from that in developed ones. It will, in particular, require a new public policy agenda
—one that focuses on a broad mix of market and non-market measures while placing a
much greater emphasis than has been seen in recent years on public investment and ef-
fective industrial policies, to be managed by a developmental State. The mix in developed
countries is likely to entail a larger role for carbon markets, taxes and regulations.
Finally, issues of trust and justice will need to be taken much more seriously so
as to ensure fair and inclusive responses to the climate challenge. The Survey argues that
one determinant of success will be the capacity of developed and developing countries to
create a more integrated framework and joint programmes with shared goals on, inter alia,
climate adaptation, forestry, energy (including energy access), and poverty eradication.
1 United Nations, Treaty Series, vol. 2303, No. 30822.
vi World Economic and Social Survey 2009

Projections and principles

The climate challenge for developing countries
Even if the annual flow of emissions were to stabilize at today’s level, the stock of green-
house gas emissions in the atmosphere would be twice the pre-industrial level by 2050,
entailing a high probability of dangerous temperature rises, with potentially destabilizing
economic and political consequences. The latest findings of the Intergovernmental Panel
on Climate Change (IPCC) suggest the following:
For many key parameters, the climate is already moving beyond the
patterns of natural variability within which our society and economy
have developed and thrived. These parameters include global mean
surface temperature, sea-level rise, ocean and ice-sheet dynamics, ocean
acidification, and extreme climatic events. There is a significant risk that
many of the trends will accelerate, leading to an increasing risk of abrupt
or irreversible climatic shifts.2
In light of these findings, the Survey recognizes a maximum temperature in-
crease of 2o C above pre-industrial levels as the target for stabilizing carbon concentrations
at a level that prevents dangerous anthropogenic interference in the climate system. This
corresponds to a target greenhouse gas concentration (in terms of carbon dioxide equiva-
lents (CO2e)) of between 350 and 450 parts per million (ppm) and to global emission
reductions of the order of 50-80 per cent over 1990 levels, by 2050. In terms of actual
emissions, this would be equivalent to a reduction from roughly 40 gigatons of carbon
dioxide (GtCO2) at present to between 8 and 20 GtCO2 by 2050.3
This challenge is the consequence of over two centuries of unprecedented
growth and rising living standards, fuelled by an ever increasing quantity and quality of
energy services. Traditional (biomass) energy sources were initially replaced by coal and
(beginning in the early 1900s) by oil. Today, fossil energy sources provide for some 80 per
cent of total energy needs.
However, the activities that utilize these services have been very unevenly dis-
tributed, resulting in a sharp divergence of incomes between the developed and the devel-
oping world and huge economic and social disparities globally (figure O.1). Moreover, as
a result of this uneven development, the advanced countries have, since 1950, contributed
as much as three quarters of the increase in emissions despite the fact that they account for
less than 15 per cent of the world’s population.
It follows that the response to climate change in developing countries will
necessarily unfold in the face of vastly more daunting challenges than those confronting
developed countries and in a far more constrained environment. The major challenge
remains that of economic growth. Economic growth is important not only for achieving
poverty eradication but also for bringing about a gradual narrowing of the huge income
differentials between the two groups of countries. The idea of freezing the current level
of global inequality over the next half century or more (as the world goes about trying
to solve the climate problem) is economically, politically and ethically unacceptable.

2 Key message 1: (Climatic trends) from the International Scientific Congress Climate Change: Global
Risks, Challenges and Decisions, Copenhagen, 10-12 March 2009.
3 A gigaton is equal to 1 billion metric tons.
 Overview vii

Figure O.1
The income gap between G7 and selected regions, 1980-2007
Difference in average income per capita
10 000
Purchasing power parity (PPP), current United States dollars

5 000
G7 income line
0

-5 000

-10 000

-15 000

-20 000 Sub-Saharan Africa-36

Latin America-5
-25 000 Source: DESA/DPAD/DSP
First tier Asiaa calculations, based on WB-
WDI online database.
-30 000 Second tier Asiab
a Hong Kong Special
China Administration Region of
-35 000 China; Republic of Korea,
India Singapore; Taiwan Province
-40 000 of China.
b Indonesia, Malaysia,
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Philippines, Thailand.

Synergies between the climate and development challenges

Is it possible to combine high economic growth in developing countries with a radical
lowering of their emissions trajectory? The literature on climate and development encom-
passes two different approaches to this issue. Proponents of the “top-down” approach
focus on the global challenge and what kind of emissions trajectories and targets for
developing countries would be consistent with meeting this challenge. Th is approach
has also been used to calculate representative costs of climate action. Proponents of the
alternative, “bottom-up” approach focus on the concrete actions that are being under-
taken by developing countries, in the context, for example, of energy efficiency, pilot
programmes in renewable energy, and afforestation projects. Th is approach has also been
used to develop cost estimates of specific mitigation. However, there are very few studies
that translate both these approaches into the kind of strategic programmes that would
put the economy on a sustainable development trajectory.
Combining the two approaches leads to the conclusion that it is indeed pos-
sible to integrate the climate and development agendas, although this would require a
very different stance on climate policy in developing countries than the one that has
emerged in developed ones. While there will be similarities between the two groups
of countries in terms of a subset of national policy instruments (smarter incentives,
stronger regulations), developing-country Governments would need to steer resources
mobilized for large-scale investments into new production sectors and new technologies.
While the emphasis in developed countries is on the development of the carbon market,
the preferred option for developing countries should be an emphasis on active industrial
policies. Th is combination of large-scale investments and active policy interventions
viii World Economic and Social Survey 2009

requires strong and sustained political commitment embodied by a developmental State

and, as critically, sizeable and effective multilateral support with respect to both fi nance
and technology.

Synergies between developed

and developing country actions
The search for synergies between developed and developing countries in respect of climate
action has led to three rather different approaches. Application of the first approach means
that developing countries follow the example of developed countries, either voluntarily or
through some form of coercion, by adopting emissions reduction targets. Under the sec-
ond option, either setting targets or undertaking actions is conditional on the availability
of finance and technology from developed countries. Under the third option, developed
and developing countries jointly adopt both climate and development targets.
The Survey’s conclusion is that the fi rst approach is bound to fail. The second
approach is a necessary one, but it runs the risk of producing only incremental action
on a project-by-project basis. Quite understandably, this approach has focused attention
on the question of fi nancial transfers through official development assistance (ODA).
If ambitions with respect to meeting the climate challenge were more modest, this ap-
proach would suffice; given, however, the scientific consensus on the dangers of climate
change, it is most likely inadequate. It is the third approach that is in fact best suited
for reconfiguring the development trajectory. As it turns out, the recent multiplicity of
food, energy and fi nancial crises may have created just the context in which such co-
operative action could take root. While the origins of those crises may be distinct, like
the climate crisis they pose a common threat to actions still to be completed under the
agenda for achieving economic development and poverty eradication.
In response to the global economic and fi nancial crisis, steps have been taken
to bring about recovery, to prevent a return to the fi nancial excesses of “casino capital-
ism” and, through the inclusion of green investments in stimulus packages, to address
environmental concerns, including those pertaining to climate change. While these
initiatives do not yet add up to a long-term sustainable solution, they do point in the
right direction. Still, much more needs to be done. There has been, in particular, a
reluctance to acknowledge both the scale of the adjustments that developing countries
will be required to make to pull their economies out of the global recession and shift
onto low-emissions pathways, and the resulting economic and political costs. If develop-
ing countries are to undertake such adjustments, a much greater level of international
cooperation will be needed.

Burden-sharing
The climate crisis is the result of the very uneven pattern of economic development that
evolved over the past two centuries, which allowed today’s rich countries to attain their
current levels of income, in part through not having to account for the environmental
damage now threatening the lives and livelihoods of others. Indeed, it has been estimated
that for every 1o C rise in average global temperatures, annual average growth in poor
countries could drop by 2-3 percentage points, with no change in the growth performance
of rich countries. It is even possible that the advanced countries will actually benefit from
 Overview ix

temperature rises in the medium term thanks to, for instance, improved agricultural yields
(due to carbon fertilization) and lower transportation costs (across ice-free arctic shipping
routes). That uneven pattern of development is reflected in per capita emissions, which are
still on average 6-7 times greater in advanced than in developing countries.
Working these considerations into a consistent climate framework has
proved a difficult task. Since the United Nations Conference on Environment and De-
velopment, held in Rio de Janeiro in 1992, it has been agreed that countries have “com-
mon but differentiated responsibilities” for dealing with the climate challenge. (The
principle was restated at the thirteenth session of the Conference of the Parties to the
United Nations Framework Convention on Climate Change, 4 held in Bali, Indonesia,
in December 2007). It has been difficult to reach a consensus on what this means in
practice, however, because rich countries do not want to give too much significance to
past actions that would place the bulk of the responsibilities on their shoulders, while
developing countries fear, for the same reason, giving too much importance to current
and future emissions.

Correcting a market failure …

A breakthrough of sorts occurred with the Stern Report released in late 2006 by the Gov-
ernment of the United Kingdom of Great Britain and Northern Ireland, which identified
greenhouse gases as “the greatest market failure the world has ever seen” and provided the
first serious attempt to model the cost of doing nothing in comparison with the cost of
adopting an alternative strategy which would hold emissions below a manageable thresh-
old. From this perspective, a form of climate ethics emerges around the need to realign
social and private cost by making the polluters pay for the damage they inflict on others.
The Stern Report concluded that it was possible to ensure that future generations would
be much better off at relatively little cost to present generations.
Stern’s analysis has triggered a heated debate among economists about the
right methodology for costing climate damage and the most efficient mechanisms for
correcting the underlying market failure. Th at debate has encouraged policymakers to
think more clearly about the management of climate risk under conditions of imperfect
information and uncertainty, and to develop a sense of both historical considerations
(regarding how far back the polluter-pays principle should reach) and geographical ones
(regarding whether the polluter is the producer or the consumer of the goods that add
to the stock of greenhouse gases).
The resulting “top-down” metrics have generated complicated country sched-
ules for bringing carbon emissions down to sustainable levels. So far, however, this ap-
proach has provided surprisingly little policy guidance on how countries might manage
transformative change, with discussion in this regard being limited to the subjects of the
distribution of emission rights and the determination of the right price for carbon.
Creating carbon markets and establishing a predictable carbon price will
be part of the policy mix, but they do not address the development dimension of the
challenge. For instance, the cap-and-trade system has been designed to conform to the
policy experience, institutional capacity and economic conditions of rich countries. By
default, this provides significant advantages to them, as the essential baseline is the cur-
rent emissions of the high-emitting countries.

4 United Nations, Treaty Series, vol. 1771, No. 30822.

x World Economic and Social Survey 2009

… or promoting development rights

Others have argued that the economists’ focus on market failure is overly reliant on cost-
benefit calculations and thereby underestimates the threat of catastrophic climate shocks
and understates the plight of the most vulnerable communities. The rural poor in the
developing world will likely face the largest adjustments to climate change and helping
them meet their adaptation challenge should be an essential feature of a fair climate
framework.
However, divergent growth and rising global inequality over the past 60
years make the development policy challenge into something much bigger than that
of eliminating extreme poverty (United Nations, 2006). Moreover, over that period,
advanced countries, in their climb to the top of the development ladder, have used up
a good part of the atmospheric space for greenhouse gas emissions. Given the close link
between energy use and economic growth, there is a real concern that the sustainable
development ladder has already been kicked away and with it any real chance of com-
bining climate and development goals.
A possible framework based on the idea of “greenhouse development rights”
combines a measure of responsibility and ability to pay as a possible basis for sharing
the burden of climate change that is consistent with the scale and urgency of the climate
challenge as well as development objectives. Th is would be realized by establishing the
right to be exempt from sharing the burden of climate protection up to a given world av-
erage income of $9,000 (purchasing power parity (ppp)). Th is figure is above the current
global average and represents a threshold consistent with the situation of more diversi-
fied economies and beyond which further income increases have little effect on human
development indicators. Individual citizens above that income threshold in a country
whose average income fell below it would be expected, however, to share in meeting
that burden. In essence, this makes the capacity to pay similar to that determined by an
income tax with a personal exemption of $9,000.
While this threshold is only illustrative, on any realistic calculation, devel-
oped countries will assume a much more significant share of the global costs of climate
protection, while developing countries will assume only more responsibilities in line
with their level of development. It is possible that some arrangement along these lines
will eventually emerge from discussions on common but differentiated responsibilities.
On the other hand, this approach still tends to avoid discussing the specifics of policy
design in moving towards low-emissions, high-growth development pathways and the
kinds of international mechanisms needed to effect such a transition.

Greening catch-up growth

Policies designed to deal with the threat of dangerous climate change are lagging far be-
hind the scientific evidence. At the same time, existing international commitments have
fallen well short of promises and progress on new commitments is moving slowly. Th is
represents a dangerous impasse as developing countries strive to accelerate growth through
industrial development and rapid urbanization. The only way to make tangible progress is
to approach the climate challenge as a development challenge.
 Overview xi

An investment-led approach
All economic success stories have enjoyed a sustained burst of growth, on the order of 6-8
per cent per annum, allowing them to raise living standards and close the income gap with
the developed countries. Growth, moreover, is strongly correlated with a broad set of social
indicators, including poverty reduction, which together describe a more sustainable and in-
clusive development path. But this path does not emerge spontaneously. Even after a period
of rapid growth, countries can get stuck or even fall back. Others struggle just to take off.
A rapid pace of capital accumulation, accompanied by shifts in the structure
of economic activity towards industry, is usually a critical factor behind a sustained ac-
celeration of growth. A good deal of early development policy analysis was focused on
raising the share of investment to a level that would trigger a virtuous circle of rising
productivity, increasing wages, technological upgrading and social improvements. Th e
successful versions of this “big push” concentrated on selective leading sectors whose
development would attract a further round of investment through the expansion of
strong backward and forward linkages. As described, the development policy challenge
was less about detailed planning and more about strategic support and coordination,
including a significant role for public investment in triggering growth and crowding in
private investment along a new development path.
In the 1980s and 1990s, investment-led development models had been aban-
doned in favour of market-oriented economic reforms. However, for most developing
countries, freer markets and greater exposure to global competition did not produce
the outcomes expected by the proponents of those reforms, particularly with respect to
investment performance.
A return to an investment-led approach in developing countries makes sense
once the climate challenge is properly integrated with the development challenge. Such an
approach has already begun to take shape in richer countries with the inclusion of green
investments in stimulus packages designed to create jobs in the face of a severe economic
downturn. For developing countries where the shift to new sources of energy must take
place in the context of their need to urbanize, strengthen food production and diversify
into competitive industrialization, the challenge is of an even larger magnitude.

The mitigation challenge

Reducing greenhouse gas emissions will require large and interconnected investments
across several sectors, with the aim, inter alia, of halting deforestation and land degrada-
tion, retrofitting buildings to make them more energy-efficient and redesigning trans-
portation systems. But it is an energy transition that will be at the core of an alternative
integrated strategy for meeting climate change and development goals. Energy use is re-
sponsible for 60 per cent of total greenhouse gas emissions, all stabilization scenarios indi-
cate that a huge share of emissions reductions, perhaps as much as 80 per cent, will have to
come from the reshaping of energy systems. Figure O.2 depicts the historical evolution of
the energy system and one possible future development path towards decarbonization, one
that would limit the increase in global average temperatures to about 2o C by the end of
the century. The figure illustrates the much-needed transformational change of the global
energy system. The ultimate goal of such a transition must be to improve energy efficiency
and reduce reliance on fossil fuels, especially oil and coal, and to increase reliance on re-
newable sources of energy, especially wind, solar and advanced (non-food) biofuels.
xii World Economic and Social Survey 2009

Developed countries have mature economies, in which there is adequate (and

even excessive) availability of modern energy services. They do not need to undertake a
massive expansion of their energy infrastructure. However, lifestyle changes and sizeable
investments will still be needed to turn their energy system away from the current de-
pendence on fossil energy towards a complete decarbonization by the end of the century,
or earlier. Developing countries, on the other hand, are severely handicapped in terms of
modern energy infrastructure, and will require sustained large-scale investments in this
sector to meet existing demand and promote economic development.
It follows from this that developed economies may need, and will be able to
afford, a substantial increase in the price of energy, especially fossil-based energy, in order
to provide the right market signal to potential consumers and investors. In contrast, all
developing countries face the urgent challenge of expanding the energy infrastructure
and making energy services widely available at affordable prices. The estimated number of
people lacking such access ranges between 1.6 billion and 2 billion, mainly in rural areas.
At least for the foreseeable future, developing countries will need to subsidize energy for
their middle- and lower-income groups in order to make these services affordable.
Connecting those people to energy services will cost an estimated $25 billion
per year over the next 20 years. This is a large sum for the poorest of the developing coun-
tries and is several times larger than the amount of aid spent on energy services.
A range of technological options will be relevant to the mitigation challenge,
from the diff usion of existing low-emissions technologies, through the scaling up of new
commercial technologies, to the development and diff usion of breakthrough technologies.
Some of these will be cost-saving immediately or over a short time span. However, the
production of larger amounts of clean energy in line with industrial and urban development
will require very large investment with a long gestation period.

Figure O.2
Historical evolution of, and a possible future for, the global energy system,
in the context of the relative shares of the most important energy sources, 1850-2100

100

80 Biomass (including non-commercial) Renewables

Gas
Percentage of share

60

Nuclear
Oil
40

20
Sources: Grübler, Nakicenovic
Coal
and Riahi (2007), and
Nakicenovic and Riahi(2007),
and International Institute
for Applied Systems 0
Analysis (2007). 1850 1900 1950 2000 2050 2100
 Overview xiii

To realize scale economies and the potential benefits of technological learn-

ing, “upfront” investments would need to be made in new and advanced carbon-saving
technologies, which would, after scale-up and adoption, lower the mitigation costs and
increase the mitigation potentials. Complementary investments in research and develop-
ment and related skills development would also be needed to improve the performance of
carbon-saving technologies and reduce their costs.
The potential size of the energy market in developing countries along with the
possibility of making improvements to already installed capacity serves as an indication of
how important investment opportunities could be. However, as the initial costs and risks
are likely to deter private investors, the public sector would be left with a leading role, at
least in the early stages of expansion. The current investments in the global energy system
are estimated at some $500 billion per year. The sustainable scenario depicted in figure
O.2 would require at least twice this effort during the coming decades—about $1 trillion
per year or $20 trillion by 2030.

Resilience through diversity: the adaptation challenge

For many developing countries, environmental constraints and shocks are already part of a
vicious development cycle which traps them at a low level of income, undermines their re-
source base and constrains their capacity to build resilience with respect to future shocks.
Even if policymakers can quickly effect the transition to a low-emissions growth path, un-
avoidable rising global temperatures will bring serious environmental shocks and stresses,
through spreading drought conditions, a rising sea level, ice-sheet and snow-cover melting,
and the occurrence of extreme weather events. In the coming decades, these phenomena
will threaten and destroy livelihoods around the globe, in particular the livelihoods of
already vulnerable populations, including in developed countries.
Humanitarian groups have expressed concern for some time regarding the poten-
tial linkages between low or negative economic growth rates, higher levels of unemployment
in the workforce, and stressed land and marine ecologies. A changing climate would engen-
der, in already fragile contexts, additional stress factors such as more intense hurricanes in the
Caribbean, above-average warming impacting glacier-dependent river flows in Central Asia,
and drought-induced water scarcity impacting the fragile economies of Northern Africa.
Adapting to climate change will have to be a central component of any com-
prehensive and inclusive climate agenda. Poor health of populations, lack of infrastructure,
weakly diversified economies, missing institutions and soft governance structures expose
poorer countries and communities not just to potentially catastrophic large-scale disasters
but also to a more permanent state of economic stress from higher average temperatures,
reduced water sources, more frequent flooding and intensified windstorms.
Those threats are particularly common in rural communities where more than
one third of households globally must confront the precariousness of their livelihoods. In
sub-Saharan Africa, that proportion is over 60 per cent, and in some areas, heat-related
plant stresses will contribute to reduced yields in key crops, by as much as 50 per cent.
Strategies to avoid crop failures will include diversity farming, which is potentially one
of the most important strategies for achieving food security in a changing climate, and
the utilization of new crop strains that are more weather-resistant and have higher yields.
More generally, economic policies to promote agricultural development should focus on
extending support services, particularly for smallholders, and improving infrastructure
(such as roads and storage facilities along with irrigation networks).
xiv World Economic and Social Survey 2009

Forests are a source of livelihoods for close to 25 per cent of the world’s peoples,
many of whom are under threat from climate change. Important elements of forest protec-
tion encompass not only improved climate forecasting and disease surveillance systems
but also strategies for preventing and combating forest fires, including the construction of
fire lines, controlled burning and the utilization of drought- and fire-resistant tree species,
such as teak, in tropical forest plantations. Measures aimed at assisting forests in adapting
to climate change encompass, for instance, facilitating the adaptive capacity of tree species
mainly by maximizing silvicultural genetic variation, and also management approaches
such as reduced-impact logging. More generally, investments in economic diversification
and employment creation, as well as improvement of land, soil and water management,
will be part of a more integrated strategy.
The impacts of a changing climate on health and sanitation will be just as
significant. While warming has already contributed to an additional 150,000 deaths an-
nually in low-income countries, higher temperatures will further increase the survival and
replication rates of bacterial contaminants of food and water sources, exacerbating the
impact on health. Further, increased water scarcity will worsen already inadequate sanita-
tion and hygiene standards; in Africa alone, 200 million people are already facing water
stress. In many cases, water management is made all the more difficult by the variability
in water availability, a consequence of both population increases and a changing climate, a
situation that requires increased resilience in water management systems. Although efforts
are already under way to strengthen those systems in a number of developing countries,
significant public investment will be needed to achieve sustainable results.
More than half of the world’s population now live in urban areas. City dwellers
are expected to make up three quarters of the world’s population by 2050, with almost all
the growth in the developing world. Urban environments face their own adaptation prob-
lems, linked, in particular, to the quality of social infrastructure and building. In rapidly
expanding coastal cities, for example, protection against sea-level rises and increased wind
strength is an urgent priority. A combination of poverty, population density and poor
social services makes for particularly vulnerable communities for which sudden climatic
shocks can prove devastating. As things currently stand, most of the risk to urban areas is
associated with the incapacity of local governments to, inter alia, ensure the development
and protection of infrastructure and the adequacy of disaster risk reduction and disaster
preparedness.
Combined large-scale investments, information management and collective
action have already been undertaken by countries and communities with advanced econo-
mies that are vulnerable to the threat of climatic shocks. For many developing countries,
however, the core of adaptation is still closely tied to the need to diversify their economies
away from reliance on a small number of activities, particularly those in the primary sec-
tor that are sensitive to climatic shocks and changes. The Government of Mozambique,
for example, has drawn up ambitious plans for the sustainable development of the coastal
region, including infrastructure (transportation, drainage and water supply), land-use
changes, and soft options to manage beach erosion. Such plans, which present unique
opportunities for an infusion of massive development projects, need to deal with climate
risks in an integrated manner, across seasonal, inter-annual and multi-decadal time scales.
A combination of public investment, cheap credit and access to appropriate technology
will be essential to meeting the adaptation challenge.
 Overview xv

Towards an integrated agenda

Though the number of calls for a mainstreaming of climate policy is growing, the response
cannot be one of simply grafting adaptation and mitigation goals onto the objectives of
development policy that are currently being discussed. Rather, the two big challenges of de-
velopment and climate change have to be connected through the long-term management of
economic and natural resources in a more inclusive and sustainable manner. This should be
viewed not as a quick—and certainly not as a costless—fix but rather as a multidimensional
task in which large and long-term investments will play a pivotal role in enabling economies,
at all levels of development, to switch to low-emissions, high-growth pathways. Policymak-
ers will need to confront historical legacies, contemplate alternative economic strategies and
embrace a more collaborative political discourse. Moreover, they will have to do so as the
world tries to recover from the biggest economic shock since the Great Depression.
The current shocks and the resulting crisis have provided an opportunity for
fresh thinking about the public policy agenda, and have served as a reminder that Gov-
ernments are the only agents capable of mobilizing the massive financial and political re-
sources required to confront large systemic threats. Large-scale resource mobilization will
certainly be needed at both the national and the global levels in order to achieve combined
climate and development goals. The big policy challenge lies in ensuring that these invest-
ments trigger more virtuous growth circles, through which to crowd in private investment
and initiate cumulative technological changes in dynamic growth sectors, thereby sup-
porting economic diversification and creating employment opportunities.

Public policy challenges

The big push towards cleaner, more diversified and more resilient economies will be supported
or hindered through Government policies. Because many of the required investments will be
large and complementary, price signals and regulatory measures (including building codes,
fuel efficiency standards and mandates for renewable energy use), will need to be predictable.
In the face of the initial cost disadvantages, the adoption of new cleaner technologies through
Government subsidies, feed-in tariffs and other support measures, can be facilitative.
Some developing countries have begun to develop alternative policy frame-
works through, for example, national adaptation plans. These have focused on climate-
proofing infrastructure projects, such as transport and irrigation systems, improved disaster
monitoring and management and better land-use planning; but difficulties in scaling up
projects, because of funding and institutional shortcomings, as well as the failure to adopt a
more broadly developmental approach, still need to be overcome. More lasting success will
depend on adopting smarter development policies which link adaptation more tightly to
ongoing efforts to remove existing vulnerabilities and constraints on growth and develop-
ment. Such approaches will need to use large-scale adaptation projects in both the rural and
urban sectors to create jobs, achieve economic diversification and trigger faster growth.
A missing element in the current discussion—one central to achieving a more
integrated approach—is industrial policy, consideration of which has been out of fashion in
recent years on the grounds that “picking winners” has a long history of failure, particularly
in developing countries. However, at a time when developing countries must industrialize
to meet their development goals even as they strive to achieve climate goals, it is difficult to
imagine an integrated approach which does not take industrial policy seriously. Stronger
intellectual property rights and efforts to attract foreign direct investment (FDI) are no
substitute for sound industrial policies in developing countries.
xvi World Economic and Social Survey 2009

The development of new low-emissions technologies will respond to supply-

push (such as targeted cheap credit) and demand-pull (such as a policy-induced price of
carbon) factors. The sooner these are adopted, the faster cost savings will be linked to
learning and wider diff usion. The longer the wait, the higher the required emissions reduc-
tion will be and the slower the cost buy-downs. Leapfrogging, through the import of such
technologies, holds out the possibility of more vigorous improvements in energy efficiency,
from supply to end use, expanded shares of renewables, more natural gas and less coal, and
early deployment of carbon capture and storage.
Such transformational changes in the energy system need support from re-
search, development and deployment (RD&D), removal of trade barriers, and effective
capacity-building. Centres for low-emissions technology innovation could have an impor-
tant role to play. At least in the initial stages, the centres are likely to be publicly funded,
though the precise details of the mix of donor, public and private funding would vary
across countries and over time. What combination of basic research, field trials, business
incubator services, venture capital funding, technical advice and support, and policy and
market analysis is adopted will also be very much contingent on local conditions and
challenges. In some cases, regional centres might represent the best way to benefit from
economies of scale and scope.

A New Deal?
Those organizing a more integrated policy approach to the development and climate chal-
lenges could certainly learn from the experience connected with introducing the New
Deal policies in the United States of America in response to the Depression of the 1930s.
In particular, the interconnected investments in energy, transportation, agriculture and
health laid the foundations not only for a return to full employment but also for a strong
industrial take-off in some of the most underdeveloped parts of the United States, crowd-
ing substantial private investment into new sources of job creation.
Since 1945, successful developing countries have also used a mixture of market
incentives and strong State interventions to generate rapid growth and structural changes.
Such support was often guided by an encompassing development vision that judged policy
interventions in terms of their contribution to diversifying economic activity, creating jobs
and reducing poverty.
By contrast, many developing countries have suffered from a rollback of the
role of the State during the lost decade of the 1980s. As a result, the ability of the public
sector to provide effective and innovative leadership in such a complex area as climate
change is severely strained. Those countries will need support in rebuilding the State in-
frastructure in order to be able to discharge the additional responsibilities attendant upon
achieving the objectives of the climate agenda.

Adjusting through investment

An integrated approach entails not only finding solutions in situations involving tradi-
tional market failures but also dealing with systemic threats and managing large-scale
adjustments in economic activity. The only sensible response is to mix market solutions
with other mechanisms, including public investment.
It is important to see investments in both adaptation and mitigation as part of
a larger shift to a new investment path involving a broad number of sectors and regions,
 Overview xvii

and aimed at weakening the climate constraint on global growth. If history is any guide,
industrial-scale production and distribution of cleaner energy should exhibit scale econo-
mies and trigger a range of complementary investment opportunities in different sectors of
the economy and in new technologies. Figure O.3 presents some of the major technologies
involved and how soon they might be ready for large-scale deployment. Related invest-
ments, in many developing countries, will be needed to raise agricultural productivity,
improve forest management, and ensure, along with a more reliable water supply and a
more efficient transport system, the steady expansion of green jobs.
In the short and medium run, however, mitigating and adapting to climate
change increase the cost of development. Perhaps as much as $40 billion might be needed
to make existing investments climate-proof, and the figure for ensuring resilience in the face
of future developments will be much larger. The United Nations Development Programme
(UNDP) has estimated that this would require $86 billion annually (by 2016) and failure to
act quickly on mitigation will only add to that figure. Investment in mitigation will be of a
much higher order. Estimates by McKinsey & Company, a global management consulting
firm, suggest that additional investments of up to $800 billion annually by 2030 would be
needed to meet stabilization targets. The Survey argues, however, that many of these invest-
ments will have to be front-loaded. The figure is likely to be in excess of one trillion dollars.
Financing these investments will be among the big constraints on the shift to
low-emissions economies in most developing countries, particularly where domestic mar-
kets for low-emissions technologies are small. Macroeconomic policies will need to be con-
sistently pro-investment; and institutional reforms, including the revival, recapitalization
and refocusing of development banks, will need to be adopted. However, such constraints
serve as an important reminder that this time around, any “green new deal” will need to
have a global dimension.

Figure O.3
Technology development and CO2 mitigation for power generation

Coal CCS power

3
CO2 mitigation (gigatons)

2 Fuel switching to gas

BIGCC and biomass co-combustion

Nuclear IV Nuclear III

Onshore wind
Ultra supercritical coal and IGCC
Photovoltaics
Source: International Energy
Gas CCS power
Agency (2008a).
1 Offshore wind
Concentrated solar power Abbreviations: CCS, carbon
capture and sequestration;
IGCC, integrated gasification
Biomass CCS power combined cycle; BIGCC,
Geothermal: EGS Geothermal: conventional
Ocean Fuel cells biomass integrated
gasification combined
0 cycle; EGS, enhanced
Basic science Applied R&D Demonstration Deployment Commercialization geothermal systems.
xviii World Economic and Social Survey 2009

A Global Sustainable New Deal

The search for sustainable alternatives that counter the threat of dangerous climate change
must at the same time deal with a legacy of highly uneven economic development and a
growing level of insecurity linked to interrelated crises in the supply of food, energy, water
and finance.
A Global Sustainable New Deal should seek to establish a new public policy
agenda aimed at placing countries on a different developmental pathway—one that pro-
tects the natural resource base in an equitable manner without compromising job creation
and catch-up growth. Such a goal can be achieved only if Governments of rich and poor
countries alike come together in collaborative initiatives.
Such initiatives should follow basic principles in order to maximize their con-
tributions to development goals. They could be pursued, in part, by using the resources
mobilized by the stimulus packages of developed countries, but reform of the multilateral
financial and trading systems will be needed, over the medium term, to support a more
stable global economy and promote investment-led growth in a low-emissions economy.
Over the longer term, that growth will be sustainable only if developing countries are able
to mobilize sufficient domestic resources.

Managing the Global Sustainable New Deal

In order for the combined challenges of development and climate change to be met, noth-
ing less than a fundamental transformation as regards financial and technological support
to developing countries is needed. Such a transformation would involve moving beyond
the long-standing promises of such support from developed countries, to a full-blown
strategy of how they will support the investments developing countries would have to
undertake to shift quickly to a low-emissions, high-growth path.
What also needs to change is the intergovernmental process on climate change,
whose evolution has been governed largely by principles of environmental protection. This
has meant that the consideration of development has been left to other forums and institu-
tions. A new focus on development needs to be engendered and the regime and governance
mechanisms need to build appropriate linkages and processes around sustainable develop-
ment at the international level, which would encompass:
• An investment-based approach. A low-emissions growth trajectory will not be
created through prudent macroeconomic policies and rapid market liberaliza-
tion. Instead, massive investments (from the public and private sectors) in new
infrastructure, new capacities and new institutions will be needed to meet
mitigation and adaptation challenges
• A collaborative agenda . Inherent trust among developed and developing coun-
tries is a central need in tackling a global challenge: Weak performance on
mitigation obligations by high-emitters in the North, combined with minimal
operational support for technology and finance, has resulted in a large trust
deficit. This must change, as solving the climate problem without participa-
tion of the South is no longer possible. This collaboration requires a consistent
focus on a fairer world order and a system of global governance that is open
transparent, participatory and responsible
 Overview xix

• A commitment to phasing out high-emissions growth. “Dirty” subsidies have

been estimated at $250 billion or (0.5 per cent of world gross product) in 2005.
Redirecting these to clean energy sources—but not at the expense of access to
energy services in developing countries—would boost the transition to low-
emissions high growth. Moreover, the rights of countries that depend on the
extraction of fossil fuels, which have been recognized in the United Nations
Framework Convention on Climate Change, should be an important determi-
nant of the policies chosen.

New financing mechanisms

The difficulty of access to appropriate and predictable levels of finance, at an acceptable
cost, has been a consistently binding constraint on investment and growth in poor coun-
tries. While the estimates for meeting the mitigation and adaptation challenge cover a
wide range, the figures suggested earlier will pose a major obstacle to climate progress in
many developing countries. Currently, the financing needed to meet the climate challenge
that is available to developing countries from bilateral and multilateral sources is estimated
at about $21 billion. That amount will have to rise manifold, and sooner rather than later.
This is a daunting challenge.
If private investment is to fulfil its role, predictable long-term signals will need
to be established based on the price of carbon, using a combination of taxation, emissions
trading and regulation. However, the limited evolution of carbon markets and the cur-
rent financial crisis will discourage private investment in the short and medium term at a
most critical time, since new infrastructure projects will be producing emissions for de-
cades. Resource mobilization for public investment, from both national and international
sources, needs to be pursued more vigorously, and on a much larger scale.
Funding of the large public investments required to meet the challenge, par-
ticularly with respect to mitigation, where the front-loading of investments is essential,
is unlikely to come through ODA even if donor countries live up to their commitments.
Utilization of new funding sources, such as “government green bonds” and special draw-
ing rights (SDRs) from the International Monetary Fund, needs to be considered. Global
levies or taxes on bunker fuel for air and ship transport, air travel or financial transactions
will also have a role. However, administrative obstacles and concerns about their possibly
regressive nature have still to be addressed.
It is widely understood that there is need for an enhanced financial mecha-
nism to deal with the massiveness of the scale of the transfers required for mitigation and
adaptation in developing countries. There remains considerable disagreement however, re-
garding whether new institutional arrangements, including funds, are needed, or existing
arrangements and funds, suitably reformed and scaled up, would suffice. Concerning the
governance of such a mechanism, the crucial question is who will decide what with respect
to the management and allocation of financial resources.
Funding the incremental costs of adaptation will, in most cases, be linked to
development-related funding, for example, for infrastructure investment and diversifica-
tion efforts in developing countries. The closeness of the link may partly explain why
institutions like the World Bank have set up their own climate funds. The scale of such
funding remains woefully inadequate and scaling up is an urgent challenge.
xx World Economic and Social Survey 2009

The scale of the financing needed to make the big push to a low-emissions
development pathway is several orders of magnitude greater than that available through
current financing arrangements. Financing the mitigation challenge might therefore war-
rant making more radical changes in the existing international architecture. Some possible
measures include:
• A global clean energy fund . In light of the urgency of this challenge, a new
global fund to address climate change mitigation in developing countries, es-
tablished outside the existing multilateral financing institutions and with a
governance structure acceptable to all parties to the United Nations Frame-
work Convention on Climate Change, needs to be considered. In time, exist-
ing mitigation funds could become part of this larger mechanism
• A global feed-in tariff regime. A global feed-in tariff programme could provide
guaranteed purchase prices to producers of renewable energy in developing
countries over the next two decades. Th is mechanism would lead to an auto-
matic drawdown of subsidies over time as production and incomes increase.
Delivery mechanisms would have to be carefully designed so as to ensure a
level playing field for all competing technologies and on-grid and off-grid op-
erators and benefit targeted low-income consumers. The programme should be
accompanied by provision of support to local renewable components industries
to ensure that national production capacities are spurred and countries are
able to satisfy a growing share of the increased demand for renewable energy
locally, thereby benefiting from additional job creation
• A reformed Clean Development Mechanism. The United Nations Framework
Convention on Climate Change Secretariat estimates that, by 2020, offsetting
could yield up to $40.8 billion per year, although this is still only a fraction
of estimated incremental costs in developing countries. The present deficien-
cies of the Clean Development Mechanism for facilitating large-scale resource
transfers are widely acknowledged. Much attention has focused on reforming
the Mechanism in such a way as to replace its project focus with a program-
matic and/or policy focus, in the expectation of larger impacts, shorter funding
cycles and lower transaction costs
• Forest-related financing mechanisms. Forestry accounts for about 17 per cent
of global greenhouse gas emissions. Several new financing initiatives have been
launched to help reduce emissions from deforestation and forest degradation,
including the World Bank Forest Carbon Partnership Facility and the United
Nations Collaborative Programme on Reducing Emissions from Deforestation
and Forest Degradation in Developing Countries (UN-REDD Programme).
Sustainable forest management is the right approach to dealing with mitiga-
tion in the forest sector as well as other forest sector challenges; financing
should enable not only climate change mitigation but also adaptation.

Technology transfer
Existing best-practice technologies for a low-emissions economy are already in place in
advanced economies and further breakthroughs are likely. Technology transfer is therefore
a critical international public policy issue. At the same time, developing countries will
 Overview xxi

need support in building their own technological capacity so as to ensure that they both
undergo a smooth transition to a low-emissions economy and maintain competitiveness in
an open global economy. The supporting architecture for dealing with these dimensions of
the challenge is still poorly developed and in need of urgent attention focused on:
• A climate technology programme. An operational programme, supported by
a Secretariat and various panels of experts, needs to be established, possibly
under the auspices of the Conference of the Parties to the United Nations
Framework Convention on Climate Change to examine the various dimen-
sions of the technology challenge in developing countries and, where appropri-
ate, to provide technical assistance with respect to, inter alia, energy efficiency
in buildings; greening industrial supply chains; deployment and maintenance
of renewable energy infrastructure; integrated waste management; water and
sanitation; and extension services to promote sustainable agriculture
• A global research, development and deployment fund . Current trends have
not been favourable for technology development and demonstration. Public
expenditures in countries members of the Organization for Economic Coop-
eration and Development (OECD) on energy-related research, development
and deployment have declined to some $8 billion from about $12 billion two
decades ago, while private expenditures have declined to $4.5 billion compared
with almost $8 billion a decade ago. Th is means that in the world today we are
investing barely $2 per person per year in energy-related research, development
and deployment activities. This needs to increase by a factor of 2 to 3 in or-
der to enable the transition towards new and advanced technologies in energy
systems. Given the interrelated threats of climate change and food security,
special attention may need to be given to the challenges facing agriculture in
the developing world in the context of the green revolution
• A balanced intellectual property regime for technology transfer. The parties
to the United Nations Framework Convention on Climate Change need to
agree on the role of intellectual property in the transfer of technology. There
are several flexibilities available within the framework of the Agreement on
Trade-related Aspects of Intellectual Property Rights5 such as compulsory li-
cences, exceptions to patents rights, regulating voluntary licences, and strict
application of patentability criteria. These measures may enable access to tech-
nologies to a certain degree but their use is limited to specific circumstances
and they are usually more difficult to operationalize in developing countries.
Options such as allowing developing countries to exclude critical sectors from
patenting, as well as a global technology pool for climate change, merit serious
consideration, as these options would provide certainty and predictability in
accessing technologies and further enable much-needed research and develop-
ment for local adaptation and diff usion, which would further reduce the cost
of the technologies. In addition, modalities for access to publicly funded tech-
nologies by developing-country firms need to be explored.

5 See Legal Instruments Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations,
done at Marrakesh on 15 April 1994 (GATT Secretariat publication, Sales No. GATT/1994-7).
xxii World Economic and Social Survey 2009

Trade
Serious discussion of the links between trade and climate change has been stymied by the
impasse in the Doha Round of negotiations. As Governments are becoming serious about
addressing climate change, the old trade and environment debates on how to distinguish
between legitimate environmental and health protection measures as allowed under the
rules of the World Trade Organization and disguised trade protectionism measures need
to be revived.
Trade is important because environmental technologies and know-how are
generated primarily in developed countries and transferred to developing countries
mainly through embodied technologies in imported goods and services, FDI or licens-
ing. If Governments of Annex I countries should choose to pursue border measures (for
example, border tax adjustments) to protect their energy-intensive industries based on
the carbon directly and indirectly emitted in the production of a product, it would be-
come necessary to address the unresolved issue of how to treat processes and production
methods. Because subsidies are and will continue to be used to support the develop-
ment of alternative energies, the issue of determining how to handle those subsidies and
which ones are non-actionable under the rules of the World Trade Organization will
also have to be dealt with.
Last but not least, these issues need to be resolved taking into account the
principle of common and differentiated responsibilities as embodied in the United Na-
tions Framework Convention on Climate Change and its equivalent within the frame-
work of the World Trade Organization, namely, special and differentiated treatment
for developing countries. If these issues are not resolved adequately, they may result in
protracted trade disputes.

Sha Zukang
Under-Secretary-General
for Economic and Social Aff airs
June 2009
 xxiii

Contents
Preface .................................................................................................................................................................................................................. iii

Acknowledgements ..................................................................................................................................................................................... iv

Overview ............................................................................................................................................................................................................. v

Contents .............................................................................................................................................................................................................. xxiii

Explanatory Notes ......................................................................................................................................................................................... xxviii

I. Climate change and the development challenge ........................................................................................ 1

Introduction ...................................................................................................................................................................................................... 1
Development in a warming world ...................................................................................................................................................... 3
The development challenge .............................................................................................................................................. 3
The climate challenge ............................................................................................................................................................ 4
The interdependency challenge ..................................................................................................................................... 7
From free-riding to burden-sharing ................................................................................................................................................... 8
The policy response ..................................................................................................................................................................................... 12
Scientists, dreamers and defunct economists ........................................................................................................ 12
Interrelated threats ........................................................................................................................................................................................ 15
A New Deal? ................................................................................................................................................................................. 15
No country left behind .......................................................................................................................................................... 16
Common but differentiated mitigation challenges ............................................................................................. 18
Defining low-emissions, high-growth pathways ....................................................................................................................... 19
Incremental change or a big push?................................................................................................................................ 22
Does technology hold the key?........................................................................................................................................ 22
An expanded public policy agenda .............................................................................................................................. 23
Is low-emissions, high-growth feasible? .......................................................................................................................................... 23
A low-emissions, high-growth scenario...................................................................................................................... 23
Energy efficiency and energy diversification ........................................................................................................... 25
Financing or access to markets? ....................................................................................................................................... 27
Assessing the simulation results ...................................................................................................................................... 28
Conclusion: managing crises .................................................................................................................................................................. 28
Annex ................................................................................................................................................................ 31

II. Climate mitigation and the energy challenge: a paradigm shift ............................................................... 35
Introduction ...................................................................................................................................................................................................... 35
Stabilization scenarios and mitigation options............................................................................................................................ 36
Energy and economic development ................................................................................................................................................. 40
The evolution of the energy system ............................................................................................................................. 40
Energy and growth .................................................................................................................................................................. 42
Achieving convergent economic growth and energy consumption............................................................................ 44
The energy investment push ............................................................................................................................................. 46
xxiv World Economic and Social Survey 2009

An integrated approach to the mitigation challenge ............................................................................................................. 49

Energy security ........................................................................................................................................................................... 49
Energy access............................................................................................................................................................................... 51
Capacity expansion.................................................................................................................................................................. 54
Feed-in tariffs ............................................................................................................................................................................... 56
Research and development ................................................................................................................................................ 60
Conclusion.......................................................................................................................................................................................................... 61

III. The adaptation challenge ............................................................................................................................... 63

Introduction ...................................................................................................................................................................................................... 63
Adaptation and vulnerability .................................................................................................................................................................. 64
Climate change and vulnerability ................................................................................................................................... 64
Adaptation and development........................................................................................................................................... 70
The limits of existing policy frameworks .................................................................................................................... 73
The impacts of climate change ............................................................................................................................................................. 74
Agriculture and forestry ........................................................................................................................................................ 74
Urban environments ............................................................................................................................................................... 77
Health and water security .................................................................................................................................................... 78
Meeting the challenge of adaptation ............................................................................................................................................... 80
Climate-smart development .............................................................................................................................................. 83
How to apply the integrated approach....................................................................................................................... 85
Forestry and agriculture ........................................................................................................................................................ 85
Urban environments ............................................................................................................................................................... 87
Health and water security .................................................................................................................................................... 88
International cooperation on adaptation........................................................................................................................................ 91
Conclusion.......................................................................................................................................................................................................... 94
Annex ................................................................................................................................................................ 96

IV. A state of change: development policy and the climate challenge ........................................................... 99
The role of developmental States in a warming world .......................................................................................................... 100
An investment-led strategy................................................................................................................................................. 100
From technological learning to technological leapfrogging ......................................................................... 102
Managing creative destruction......................................................................................................................................... 105
Diversification challenges .................................................................................................................................................... 106
The revival of industrial policy........................................................................................................................................... 108
Some policy steps towards a low-emissions future ................................................................................................................. 117
Energy efficiency ....................................................................................................................................................................... 118
Cleaner coal .................................................................................................................................................................................. 119
Renewables................................................................................................................................................................................... 120
Conclusion.......................................................................................................................................................................................................... 122

V. Technology transfer and the climate challenge ........................................................................................... 123

Introduction ...................................................................................................................................................................................................... 123
Technology transfer for climate change: a global public policy challenge ............................................................... 124
Intellectual property rights ...................................................................................................................................................................... 127
Incentives or obstacles........................................................................................................................................................... 127
Contents xxv

Taking advantage of flexibilities of the Agreement

on Trade-related Aspects of Intellectual Property Rights .............................................................................. 130
Modifying the Agreement on Trade-related Aspects of Intellectual Property Rights.................... 133
Further options for addressing intellectual
property rights-related issues and innovation incentives ............................................................................. 134
Technology transfer through investment ....................................................................................................................................... 136
Accessing clean technologies through foreign direct investment............................................................. 136
CDM and technology transfer ........................................................................................................................................... 137
Trade and climate-related technology transfer ........................................................................................................................... 138
Liberalization of trade in climate-related environmental goods and services .................................... 140
Embodied carbon ..................................................................................................................................................................... 141
Low-emissions energy subsidies ..................................................................................................................................... 142
International policies and measures to build capacity in developing countries .................................................... 143
Conclusion.......................................................................................................................................................................................................... 150

VI. Financing the development response to climate change ........................................................................... 151

Introduction ...................................................................................................................................................................................................... 151
Estimating financing requirements .................................................................................................................................................... 154
Mitigation costs .......................................................................................................................................................................... 154
Adaptation costs ........................................................................................................................................................................ 155
The financing challenge........................................................................................................................................................ 157
Crowding in private sector resources ................................................................................................................................................ 159
Market-based incentives for scaling up investment in developing countries ..................................... 160
Public sector financing ............................................................................................................................................................................... 169
Domestic resource mobilization ...................................................................................................................................... 169
International financing ........................................................................................................................................................... 172
Towards a global investment regime to address the climate challenge ..................................................................... 176
Elements of a global programme ................................................................................................................................... 177
A development accord .......................................................................................................................................................... 177
Additional and substantially scaled-up financing ................................................................................................. 178
Independent and participatory governance structures.................................................................................... 180
Living up to the challenge: lessons from the Marshall Plan ............................................................................ 182
Conclusion.......................................................................................................................................................................................................... 183

Bibliography ..................................................................................................................................................... 185

Boxes
I. 1 Burden-sharing proposals......................................................................................................................................................................... 10
I. 2 The limits of conventional economic models .............................................................................................................................. 13
I. 3 Carbon indebtedness .................................................................................................................................................................................. 19
I. 4 Green jobs .......................................................................................................................................................................................................... 20
II. 1 Greenhouse gas emissions mitigation in the North-eastern
United States of America: the 3 per cent solution................................................................................................................... 52
III. 1 The multiple threats to livelihoods from climate change: the Andean case............................................................. 66
III. 2 In the face of the storm: extreme vulnerability to climate change ................................................................................. 67
xxvi World Economic and Social Survey 2009

III. 3 Relocation: desperate measures? ......................................................................................................................................................... 70

III. 4 National Adaptation Programmes of Action: adaptation
strategies and mechanisms in least developed countries.................................................................................................... 82
III. 5 Putting climate change in the agenda: the Durban case ..................................................................................................... 89
III. 6 Water and river management in the context of climate change ..................................................................................... 90
III. 7 International cooperation and the national adaptation strategy in Bangladesh ................................................... 92
III. 8 Adaptation funds ........................................................................................................................................................................................... 93
IV. 1 The Tennessee Valley Authority: a successful big push.......................................................................................................... 101
IV. 2 Capacity-building for sustainable forestry ..................................................................................................................................... 104
IV. 3 Diversification of the productive system in South Africa ...................................................................................................... 107
IV. 4 Crowding in of private investments in a low-emissions, high-growth development path............................. 110
IV. 5 A big energy push in India: the role of renewables .................................................................................................................. 113
IV. 6 Brazil’s sugar cane-based ethanol industry.................................................................................................................................... 115
IV. 7 Renewable energy in China..................................................................................................................................................................... 121
V. 1 Lessons learned from the implementation of the Montreal Protocol ........................................................................... 125
V. 2 Foreign direct investment (FDI) and technology transfer in the wind sector .......................................................... 129
V. 3 Intellectual property rights and publicly funded technologies ........................................................................................ 145
V. 4 The Global Environment Facility ........................................................................................................................................................... 148
VI. 1 Sulphur trading and why it worked .................................................................................................................................................... 162
VI. 2 Financing forests and the reduction of emissions
from deforestation and forest degradation (REDD) ............................................................................................................... 164
VI. 3 Establishing a consumer financing programme
for solar photovoltaic (PV) systems in southern India........................................................................................................... 168
VI. 4 Green bonds ..................................................................................................................................................................................................... 170
VI. 5 Developing financial intermediation mechanisms
for energy efficiency projects in Brazil, China and India...................................................................................................... 172
VI. 6 Proposals for mobilizing new, additional and significant financial resources........................................................... 174

Figures
I. 1 The income gap between G7 countries and selected regions, 1980-2007 ............................................................... 4
I. 2 Increase of global mean temperature since 1850 ...................................................................................................................... 5
I. 3 Annual per capita emissions, selected regions, 1950-2005 .................................................................................................. 9
I. 4 Emissions stabilization wedges, 2000-2060 ................................................................................................................................... 20
I. 5 Growth of world income and of energy use................................................................................................................................. 26
II. 1 Alternative scenarios for CO2 emissions and equilibrium
temperature increases for a range of stabilization levels, 1940-2100 ............................................................................. 37
II. 2 Global GHG abatement cost curve beyond business-as-usual, 2030 ............................................................................ 39
II. 3 Major categories of abatement opportunities............................................................................................................................. 40
II. 4 Global primary energy requirements since 1850 ....................................................................................................................... 42
II. 5 Per capita energy consumption and human development, selected countries .................................................... 43
II. 6 Historical evolution of, and a possible future for, the global energy system,
in the context of the relative shares of the most important energy sources, 1850-2100 .................................. 47
II. 7 Energy systems investment, 2000-2030 ........................................................................................................................................... 48
II. 8 Electrical capacity expansion and capacity replacement by 2030,
developing and industrialized countries ......................................................................................................................................... 55
II. 9 Share of carbon-free in electricity generation in the A2r scenario (A) and the B1 scenario (B) ..................... 57
Contents xxvii

II. 10 Share of carbon-free in primary energy mix in the A2r scenario (A) and the B1 scenario (B) ......................... 58
III. 1 Rising temperatures and vulnerabilities in the Australasian region ................................................................................ 65
III. 2 Differential adaptive capacities to global sea-level
rise, developed and developing countries, 2000-2100 ........................................................................................................ 69
III. 3 Differentiated regional impacts at various degrees of average global temperature rise .................................. 75
IV. 1 Technology development and CO2 mitigation for power generation.......................................................................... 117
V. 1 Share of patent ownership in the areas of renewable energy and
motor vehicles abatement among selected countries, 2000-2004 ................................................................................ 128
V. 2 Commonly identified renewable energy technology needs and energy
efficiency technology needs in the building and residential subsectors, selected regions ......................... 144
VI. 1 Strategic investment and financing mechanisms for developing countries ............................................................ 153
VI. 2 Range of estimates of annual additional cost of mitigation strategies,
550 ppm and 450 ppm scenarios, world and developing countries ............................................................................. 155

Tables
I. 1 Greenhouse gas emissions (carbon dioxide, methane, perfluorocarbons,
hydrochlorofluorocarbons and sulphur hexafluoride) by sector, 2000 ........................................................................ 5
I. 2 Emission scenarios and their impact.................................................................................................................................................. 7
I. 3 Per capita emissions in 2005 and share in cumulative emissions during 1840-2005,
selected developed and developing countries and economies in transition ......................................................... 9
I. 4 Probability of exceeding the temperature increase (relative to the pre-industrial level)
at different greenhouse gas concentration stabilization levels ......................................................................................... 14
I. 5 Business-as-usual damages in 2100 .................................................................................................................................................... 17
I. 6 Energy use and total investment, selected country cases: 20-year averages taken in 1990............................ 25
I. 7 Energy use and total investment (model output: 20-year averages taken in 2030) ............................................. 26
II. 1 Increases in population, economic activity, energy
use, mobility and greenhouse gas emissions, 1800-2000 .................................................................................................. 41
II. 2 Per capita energy consumption, selected countries, 2005 .................................................................................................. 44
III. 1 Potential measures of adaptation to climate change for different sectors................................................................. 86
IV. 1 Illustrative list of industrial policies in support of production and investment,
with a special focus on energy, transport and extractive sectors.................................................................................... 112
V. 1 Innovative mechanisms to promote technology development and transfer .......................................................... 146
VI. 1 Range of estimates of global mitigation costs according to various studies............................................................ 156
VI. 2 Additional investment and financial flows needed for adaptation in 2030, by sector ....................................... 157
VI. 3 Bilateral and multilateral financing mechanisms for
mitigation and adaptation in developing countries.............................................................................................................. 158
VI. 4 Possible breakdown of climate-related ODA flows for Annex II countries to 2020 ............................................... 180
xxviii World Economic and Social Survey 2009

Explanatory notes
The following symbols have been used in the tables throughout the report:
.. Two dots indicate that data are not available or are not separately reported.
– A dash indicates that the amount is nil or negligible.
- A hyphen (-) indicates that the item is not applicable.
- A minus sign (-) indicates deficit or decrease, except as indicated.
. A full stop (.) is used to indicate decimals.
/ A slash (/) between years indicates a crop year or financial year, for example, 1990/91.
- Use of a hyphen (-) between years, for example, 1990-1991, signifies the full period involved, including the beginning and end
years.
Reference to “dollars” ($) indicates United States dollars, unless otherwise stated.
Reference to “billions” indicates one thousand million.
Reference to “tons” indicates metric tons, unless otherwise stated.
Annual rates of growth or change, unless otherwise stated, refer to annual compound rates.
Details and percentages in tables do not necessarily add to totals, because of rounding.

The following abbreviations have been used:

AAUs assigned amount units EU European Union

ACP African, Caribbean and Pacific Group of States EU ETS Emission Trading Scheme of the European Union
APEC Asia-Pacific Economic Cooperation FAO Food and Agriculture Organization of the United
BAU business-as-usual Nations

BIGCC biomass integrated gasification combined cycle FDI foreign direct investment

boe barrel of oil equivalent FFV flex-fuel vehicle

CAIT Climate Analysis Indicators Tool FIT feed-in tariff

CCS carbon capture and sequestration GATT General Agreement on Tariffs and Trade

CDIAC Carbon Dioxide Information Analysis Center GCCA Global Climate Change Alliance
(European Commission)
CDM Clean Development Mechanism
GDP gross domestic product
CERs certified emission reductions
GDRs Greenhouse Development Rights
CFCs chlorofluorocarbons
GEF Global Environment Facility
CFI Climate and Forest Initiative (Norway)
GFDRR Global Facility for Disaster Reduction
CFLs compact fluorescent lamps
and Recovery
CIF Climate Investment Fund
GHG greenhouse gas
CIS Commonwealth of Independent States
GIS geographic information system
CO2 carbon dioxide
GNP gross national product
CO2e carbon dioxide equivalent
GPM United Nations Global Policy Model
CSP Concentrating solar power (Global Environment
GPS Global Positioning System
Facility)
Gt gigatons
EPA United States Environmental Protection Agency
GtCO2 gigatons of carbon dioxide
EPPs environmentally preferable products
GtCO2e gigatons of carbon dioxide equivalent
ESTs environmentally sound technologies
GW gigawatt
ETF-IW Environmental Transformation Fund-International
Window (United Kingdom) GWh Gigawatt-hours
Explanatory notes xxix

HS Harmonized Commodity Description and Coding PV photovoltaic

System (World Customs Organization) R&D research and development
HVAC heating, ventilating and air conditioning RD&D research, development and deployment
IAEA International Atomic Energy Agency REDD reduction of emissions from deforestation and
ICI International Climate Initiative (Germany) forest degradation
IEA International Energy Agency RFPs renewable portfolio standards
IFC International Finance Corporation RGGI Regional Greenhouse Gas Initiative (United States)
IFCI International Forest Carbon Initiative (Australia) SCCF Special Climate Change Fund (Global Environment
IGCC integrated gasification combined cycle Facility)

IISD International Institute for Sustainable Development SDRs special drawing rights

ILO International Labour Organization SECCI Sustainable Energy and Climate Change Initiative
(Inter-American Development Bank)
IMF International Monetary Fund
SGP Small Grants Programme (Global Environment Facility)
IOE International Organisation of Employers
SPA Strategic Priority on Adaptation (Global Environment
IPCC Intergovernmental Panel on Climate Change
Facility)
ITUC International Trade Union Confederation
SRES Special Report on Emissions Scenarios
kg kilogram (Intergovernmental Panel on Climate Change)
km2 square kilometres tCO2e ton of carbon dioxide equivalent
kW kilowatt Three-Country Energy Efficiency Project
3CEE
kWh kilowatt-hours (Brazil, China, India)
LDCs least developed countries TRIPS Agreement on Trade-related Aspects of Intellectual
LDCF Least Developed Countries’ Fund (Global Property Rights
Environment Facility) TVA Tennessee Valley Authority
LPG liquefied petroleum gas TWe terawatts electric
LTMS long-term mitigation scenarios UNCTAD United Nations Conference on Trade and
MDGs Millennium Development Goals Development
MIT Massachusetts Institute of Technology UN/DESA Department of Economic and Social Affairs of the
United Nations Secretariat
mm millimetres
UNDP United Nations Development Programme
MOC meridional overturning circulation
UNEP United Nations Environment Programme
MW megawatt
UNFCCC United Nations Framework Convention
NAFTA North American Free Trade Agreement
on Climate Change
NAMAs nationally appropriate mitigation actions
UN/ United Nations Human Settlements Programme
NAPA National Adaptation Programme of Action
HABITAT
ODA official development assistance Office of the United Nations High Commissioner
UNHCR
OECD Organization for Economic Cooperation for Refugees
and Development United Nations Collaborative Programme on
UN-REDD
OPEC Organization of the Petroleum Exporting Countries Reducing Emissions from Deforestation and
OTA Office of Technology Assessment Forest Degradation in Developing Countries
(United States Congress) USSR Union of Soviet Socialist Republics
ppm parts per million WGP world gross product
PPMs processes or production methods WHO World Health Organization
ppmv parts per million by volume WIPO World Intellectual Property Organization
ppp purchasing power parity WMO World Meteorological Organization
PRSPs Poverty Reduction Strategy Papers WTO World Trade Organization
xxx World Economic and Social Survey 2009

The designations employed and the presentation of the material in this publication do not imply the expression of any opinion
whatsoever on the part of the United Nations Secretariat concerning the legal status of any country, territory, city or area or of its
authorities, or concerning the delimitation of its frontiers or boundaries.
The term “country” as used in the text of this report also refers, as appropriate, to territories or areas.
For analytical purposes, unless otherwise specified, the following country groupings and subgroupings have been used:

Developed economies (developed market economies): Southern Africa:

Australia, Canada, European Union, Iceland, Japan, New Angola, Botswana, Lesotho, Malawi, Mauritius,
Zealand, Norway, Switzerland, United States of America. Mozambique, Namibia, South Africa, Swaziland, Zambia,
Subgroupings of developed economies: Zimbabwe.

Major developed economies (Group of Seven): East Africa:

Canada, France, Germany, Italy, Japan, United Kingdom of Burundi, Comoros, Democratic Republic of the Congo,
Great Britain and Northern Ireland, United States of America. Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Rwanda,
Seychelles, Somalia, Sudan, Uganda, United Republic of
European Union (EU): Tanzania.
Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, West Africa:
Estonia, Finland, France, Germany, Greece, Hungary, Ireland,
Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Burkina Faso, Benin, Cape Verde, Côte d’Ivoire, Gambia,
Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania,
United Kingdom of Great Britain and Northern Ireland. Niger, Nigeria, Senegal, Sierra Leone, Togo.

EU-15: Central Africa:

Austria, Belgium, Denmark, Finland, France, Greece, Cameroon, Central African Republic, Chad, Congo,
Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Equatorial Guinea, Gabon, Sao Tome and Principe.
Spain, Sweden, United Kingdom of Great Britain and Subgroupings of Asia and the Pacific:
Northern Ireland. Western Asia:
New EU member States: Bahrain, Iraq, Israel, Jordan, Kuwait, Lebanon, Occupied
Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Palestinian Territory, Oman, Qatar, Saudi Arabia, Syrian
Lithuania, Malta, Poland, Romania, Slovakia, Slovenia. Arab Republic, Turkey, United Arab Emirates, Yemen.
Economies in transition: East and South Asia:
South-eastern Europe: All other developing economies in Asia and the Pacific
Albania, Bosnia and Herzegovina, Croatia, Montenegro, (including China, unless stated otherwise). This group is
Serbia, the former Yugoslav Republic of Macedonia. further subdivided into:

Commonwealth of Independent States (CIS): South Asia:

Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Bangladesh, Bhutan, India, Iran (Islamic Republic of ),
Kyrgyzstan, Republic of Moldova, Russian Federation, Maldives, Nepal, Pakistan, Sri Lanka.
Tajikistan, Turkmenistan, Ukraine, Uzbekistan. East Asia:
Developing economies: All other developing economies in Asia and the Pacific.
Africa, Asia and the Pacific (excluding Australia, Japan, New Subgroupings of Latin America and the Caribbean:
Zealand and the member States of CIS in Asia), Latin America South America:
and the Caribbean.
Argentina, Bolivia (Plurinational State of ), Brazil, Chile,
Subgroupings of Africa: Colombia, Ecuador, Paraguay, Peru, Uruguay, Venezuela
Northern Africa: (Bolivarian Republic of ).
Algeria, Egypt, Libyan Arab Jamahiriya, Morocco, Tunisia. Mexico and Central America:
Sub-Saharan Africa, excluding Nigeria and South Africa Costa Rica, El Salvador, Guatemala, Honduras, Mexico,
(commonly contracted to “sub-Saharan Africa”): Nicaragua, Panama.
All other African countries except Nigeria and South Caribbean:
Africa. Barbados, Cuba, Dominican Republic, Guyana, Haiti,
Jamaica, Trinidad and Tobago.
Country groupings xxxi

Least developed countries: Parties to the United Nations Framework Convention

Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina on Climate Change:
Faso, Burundi, Cambodia, Central African Republic, Chad, Annex I Parties:
Comoros, Democratic Republic of the Congo, Djibouti, Australia, Austria, Belarus, Belgium, Bulgaria, Canada,
Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea, Guinea- Croatia, Czech Republic, Denmark, Estonia, European
Bissau, Haiti, Kiribati, Lao People’s Democratic Republic, Community, Finland, France, Germany, Greece, Hungary,
Lesotho, Liberia, Madagascar, Malawi, Maldives, Mali, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania,
Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Luxembourg, Monaco, Netherlands, New Zealand, Norway,
Samoa, Sao Tome and Principe, Senegal, Sierra Leone, Poland, Portugal, Romania, Russian Federation, Slovakia,
Solomon Islands, Somalia, Sudan, Timor-Leste, Togo, Tuvalu, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine,
Uganda, United Republic of Tanzania, Vanuatu, Yemen, United Kingdom of Great Britain and Northern Ireland,
Zambia. United States of America.
Small island developing States: Annex II Parties:
American Samoa, Anguilla, Antigua and Barbuda, Aruba, Annex II parties are the parties included in Annex I that are
Bahamas, Barbados, Belize, British Virgin Islands, Cape Verde, members of the Organization for Economic Cooperation
Commonwealth of the Northern Mariana Islands, Comoros, and Development but not the parties included in Annex I
Cook Islands, Cuba, Dominica, Dominican Republic, Fiji, that are economies in transition.
French Polynesia, Grenada, Guam, Guinea-Bissau, Guyana,
Haiti, Jamaica, Kiribati, Maldives, Marshall Islands, Mauritius,
Micronesia (Federated States of ), Montserrat, Nauru,
Netherlands Antilles, New Caledonia, Niue, Palau, Papua New
Guinea, Puerto Rico, Saint Kitts and Nevis, Saint Lucia, Saint
Vincent and the Grenadines, Samoa, Sao Tome and Principe,
Seychelles, Singapore, Solomon Islands, Suriname, Timor-
Leste, Tonga, Trinidad and Tobago, Tuvalu, United States
Virgin Islands, Vanuatu.
 1

Chapter I
Climate change and the
development challenge
Introduction
We are living in the best of times and in the worst of times. Over the long sweep of its his-
tory, our world has never been more prosperous, inventive or interconnected than it is to-
day. Yet, economic insecurity has become ubiquitous (and was becoming so even before the
financial meltdown), social divisions are greater than ever, and the health of the planet has
never been so fragile. These are interrelated challenges that can be effectively addressed only
through cooperation and collective actions, at both the national and international levels.
In recent years, collective actions have been hampered by technocratic com-
placency, which privileged private means over public ends. A combination of deregulation,
at both the national and international levels, and corporate leadership skills was deemed
all that was needed to find the quickest and most efficient solutions to a wide range of
contemporary policy challenges, from health-care provision and urban renewal to pov-
erty alleviation and climate change. This mindset has been dominated by the rhetoric
of targets, partnerships, synergies, etc., which, draining policy discussion of much of its
substance, inevitably tends to ignore or gloss over the conflicts and difficult trade-offs that
accompany all big policy challenges.
Climate change will be among the biggest of those challenges over the com- An estimated 300,000
ing decades. It is, at a very profound level, an existential threat. Recent estimates suggest people are dying each
that 300,000 people are dying each year as a result of global warming and the lives of 300 year as a result of global
warming and the lives of
million more are being seriously threatened. We know a good deal more than ever before 300 million more are being
about why this is happening. The Intergovernmental Panel on Climate Change (IPCC), seriously challenged
established in 1988 by the United Nations Environmental Programme (UNEP) and the
World Meteorological Organization (WMO), has proved an invaluable source of informa-
tion and analyses concerning why and how our climate is changing and with what conse-
quences. The members of the wider scientific community have backed up their efforts with
a mountain of supportive evidence and modelling exercises. Theirs is a sobering picture of
how the stretching of our environmental fabric due to the emission of man-made green-
house gases (GHGs) has already led to serious tears and is getting closer to a snapping
point. The race to keep global temperatures within safe bounds is now a race against time.
By 2050, there needs to be a cut in global emissions, in the order of 50-80 per cent, which
is equivalent to a reduction in carbon dioxide (CO2) levels from roughly 40 gigatons (Gt)
per year (at present) to 8-20 Gt.
So far, however, increased scientific understanding and greater public aware- The failure of advanced
ness have not translated into a focused policy response. This is particularly true in today’s countries to match words
advanced industrialized countries: although it is two centuries of their carbon-fuelled with deeds in respect of
the climate challenge has
growth that lies behind the warming trend, they have failed to commit the resources and
made it difficult to convince
the ambitious political will needed to establish an alternative development pathway. At developing countries to
the same time, the international community—most recently at the thirteenth session of turn to alternative (and
the Conference of the Parties of the United Nations Framework Convention on Climate expensive) energy sources
Change,1 held in Bali, Indonesia, in December 2007—has reaffirmed that growth and

1 United Nations, Treaty Series, vol. 1771, No. 30822.

2 World Economic and Social Survey 2009

development remain the overriding objectives of the vast majority of people on this planet.
The failure of advanced countries to match words with deeds in respect of the climate chal-
lenge has made it difficult to convince developing countries to now turn to alternative (and
expensive) energy sources to meet their own (significant) development objectives.
In 2009, a new round of climate negotiations is expected to move the agenda
a big step forward. Some key questions will likely shape those negotiations, namely, How
much emissions reduction should take place, and where and by when? How much will it
cost to meet the targets and how will they be covered? How should a proper and enhanced
global adaptation response be framed in light of the significant impacts of climate change?
The present Survey does not try to provide any hard-and-fast answers to these
questions. The answers can be found only through open, inclusive and frank negotia-
tions among all the contracting parties. But even assuming that an agreement is reached,
the work of translating it into an effective programme of transformative change will be
an ongoing process which evolves through adjustments, continuous consultation and re-
sponse to persistent policy challenges. Accordingly, the Survey has chosen to assemble
agreed building blocks of a long-term solution—mitigation, adaptation, technology and
finance—in order to consider what is being asked of developing countries in terms of ad-
justments, trade-offs and challenges, and what the international community must do to
ensure that those countries are able to contribute to meeting the climate challenge without
jeopardizing their development goals.
The Survey proceeds essentially by working back from 2050, by which time
there will be another 3 billion people on this planet, the vast majority of whom will be
urban-dwellers and living in the developing world. If current trends continue, not only
will most of them still be poor and insecure but they will also be much more vulnerable to
climate-related threats posed by warmer temperatures.
Developing countries A necessary part of the solution lies in lowering the level of emissions released
pursuing catch-up growth into the atmosphere, which is feasible to the extent that the technological know-how that
and industrialization must can help build low-emissions pathways exists or will exist shortly. This shift, however, is
find alternatives to the neither inevitable nor inconsequential. In advanced countries, significant emissions re-
profligate energy model
of the past
duction has to be accompanied by a return to full employment and a search for energy
security. In developing countries, pursuing a low-emissions path must be compatible with
catch-up growth, industrialization and urban expansion.
Since the focus of this publication is to a great extent on the interrelated cli-
mate and development challenges facing policymakers in the developing world, it conse-
quently pays particular attention to the mitigation challenge linked to energy use (chap.
II). But inasmuch as building resilience with respect to climate threats is, for many poor
countries, just as, or even more, important (chap. III), the Survey seeks to avoid fostering
the erroneous notion that countries must choose between mitigation and adaptation. To
this end, it spells out the shared opportunities and synergies to be derived from invest-
ment-led responses to both these challenges, from forging truly integrated strategies and
from reviving the role of an effective developmental State (chap. IV).
A level of international The adjustments that are being asked of developing countries are unprecedent-
support and solidarity ed and will carry heavy investment costs, particularly in the initial stages of the transition.
rarely mustered outside a Those costs present the major obstacle to the development of low-emissions, high-growth
wartime setting
pathways. But if properly managed, the investments involved can provide developing coun-
is required
tries with a productive basis for mobilizing their own resources to meet the climate chal-
lenge. Still, if such a transition is to happen, it will require—so as to ensure both sufficient
technological transfers (chap. V) and sufficient access to financial resources (chap. VI)—a
level of international support and solidarity rarely mustered outside a wartime setting.
 Climate change and the development challenge 3

Development in a warming world

The development challenge
The industrial revolution beginning in the late eighteenth century inaugurated two pro-
cesses of far-reaching consequences. Through the first, a select group of countries were
enabled to embark on a modern economic growth path and thereby break the constraints
on development imposed by the immutable rhythms of the natural environment and the
localization of economic activity. New levers of wealth creation emerged around market
specialization, innovation and scale economies, and in the context of industrializing, ur-
banizing and the greater interconnection of communities. In the wake of this transforma-
tion, the income gap between the group of early starters and the rest of the world widened
rapidly, all the more so to the extent that the exploitation of resources and markets by
colonizers suppressed economic opportunities in many countries and communities across
the world for a century or more.
Through the second process, the relation between human society and the natu-
ral environment was transformed: instead of merely adapting, humans now dominated the
environment. The result has been ever increasing demands on the environment in the ser-
vice of expanding output. In particular, the traditional energy sources (biomass, water and
wind) utilized to complement manual labour and animal transport were replaced, initially
by coal and then (beginning in the early 1900s) by oil, for the purpose of powering increas-
ingly sophisticated machines and means of transport. Access to these cheaper fossil fuels
has been a critical stepping stone on all modern development pathways. However, the full
cost of exploiting carbon-based fuels, and other natural assets, has often gone unrecorded.
Over the past 50 years, developing countries have been caught up in a process
of trying to close the economic gaps opened over the previous two centuries. The process
has not been smooth, nor has success been automatic. External constraints and shocks have
persistently upset efforts in many countries, holding back growth prospects. While some
developing countries, particularly those in East Asia, have been successful (as evidenced by
their having gotten close to or, in some cases, their having surpassed the G7 countries in
terms of per capita income), they have been atypical (see figure I.1). In fact, as documented
in World Economic and Social Survey 2006 (United Nations, 2006), beginning with the
debt crisis of the late 1970s, constraints had tightened and shocks intensified, which led to a
fragmented and divergent pattern of global growth. The most notable success story through
all this has been China, whose uninterrupted growth over the past 30 years explains many
of the positive aggregate trends in social and economic performance in the developing
world over that period. Between 2002 and mid-2008, unprecedented strong growth was
registered almost everywhere, including in the least developed countries, reflecting, in part,
the growing economic interactions among developing countries themselves. However, that
phenomenon came to an abrupt end with the onset of the most severe economic crisis since
the 1930s. The heavy reliance on debt which fuelled much of that growth has proved an
unreliable substitute for sound development strategy (see United Nations, 2009).
Government leaders in many developing countries are concerned that climate
change is being used by those at the top of the development ladder—and who gorged ex-
cessively on the global carbon budget to get there—to again constrain the efforts of their
countries to climb higher. How developing countries can achieve catch-up growth and
economic convergence in a carbon-constrained world and what the advanced countries
must do to relieve their concerns have become leading questions for policymakers at the
national and international levels.
4 World Economic and Social Survey 2009

Figure I.1
The income gap between G7 countries and selected regions, 1980-2007
Difference in average income per capita
10 000

Purchasing power parity (PPP), current United States dollars

5 000
G7 income line
0

-5 000

-10 000

-15 000

-20 000 Sub-Saharan Africa-36

Latin America-5
Source: DESA/DPAD/DSP -25 000
calculations, based on WB- First tier Asiaa
WDI online database. -30 000 Second tier Asiab
a Hong Kong Special
Administration Region of China
-35 000
China; Republic of Korea, India
Singapore; Taiwan Province
of China. -40 000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
b Indonesia, Malaysia,
Philippines, Thailand.

The climate challenge

The science behind the assertion that our climate is changing for the worse, thanks to hu-
man activity, is unequivocal. The climate challenge arises from interference in the natural
warming effect of the planet: by causing an increase in the flow of greenhouse gases in the
atmosphere, human activity has led to an increase in the concentration of those gases from
a pre-industrial level of 250 parts per million (ppm) of carbon dioxide equivalent (CO2e)
to 430 ppm and is causing a major disruption in the natural climatic process of the planet.
These gases have a long gestation cycle in the atmosphere; in other words, once emitted,
they remain there for decades.
Emissions have reached Carbon is the main component of the greenhouse gases that are the leading
levels that concern the contributors to global warming. Emissions have reached levels that concern the scientific
scientific community
community principally as a result of energy use by rich countries. Today fossil energy sourc-
principally as a result
of energy use by rich es provide some 80 per cent of total energy needs. However, they are not the sole source of
countries the problem (table I.1). Globally, forest ecosystems contained 638 billion tons of carbon in
2005, with half of that amount (321 Gt) in forest biomass and deadwood. The estimated
average global rate of forest carbon depletion per year is 1.6 Gt, or about 0.25 per cent of
total forest carbon. Deforestation and forest degradation are the primary sources of carbon
emissions from some developing countries. In 2004, the forest sector accounted for the
release of approximately 8.5 gigatons of carbon dioxide equivalent (GtCO2e),2 mostly from
deforestation, which contributes 17.4 per cent of all human-generated CO2 emissions.

2 A gigaton is equal to 1 billion metric tons.

 Climate change and the development challenge 5

Table I.1
Greenhouse gas emissions (carbon dioxide, methane, perfluorocarbons,
hydrochlorofluorocarbons and sulphur hexafluoride) by sector, 2000a

Sector Megatons of CO2 Share (percentage)

Energy 24 731.2 59.4
Electricity and heat 10 296.0 24.7
Manufacturing and construction 4 426.5 10.6
Transportation 4 848.1 11.6
Other fuel combustion 3 563.3 8.6
Fugitive emissions 1 597.4 3.8
Industrial processes 1 369.4 3.3
Agriculture 5 729.3 13.8
Land-use change and forestry 7 618.6 18.3
Waste 1 360.5 3.3
International bunkers 829.4 2.0
Total 41 638.4 100.0
Source: Climate Analysis Indicators Tool (CAIT), version 6.0 (Washington, D.C., World Resources Institute, 2009).
Note: Data on nitrogen dioxide were not available.
a Including land-use change and international bunkers.

The consequences of rising emission levels are now becoming clear. Global Climate change is significantly
average surface temperature increased by almost 1o C between 1850 and 2000, with a affecting forests largely owing
to changes in temperature
noticeable acceleration in recent decades (see figure I.2). The global average sea level has
and rainfall
Figure I.2
Increase of global mean temperature since 1850

0.6 14.6
Annual mean
Smoothed series
0.4 14.4
5-95 per cent decadal error bars

0.2 14.2
Difference (o C) from 1961-1990

0.0 14.0 o C

-0.2 13.8

-0.4 13.6

-0.6 13.4

Source: Intergovernmental
-0.8 13.2 Panel on Climate Change
1860 1880 1900 1920 1940 1960 1980 2000 (2007a).
6 World Economic and Social Survey 2009

increased at an average rate of 1.8 millimetres (mm) per year over the period 1961-2003.
In the more recent period 1993-2003, this rate of increase has risen to 3.1 mm per year.
There have been large changes in the pattern of precipitation, with significant increases in
eastern parts of North and South America, Northern Europe, and northern and Central
Asia, and decreases in the Sahel, the Mediterranean, Southern Africa and parts of South
Asia. The area affected by drought has increased. Extreme weather events have increased
in number, scope and intensity. Climate change is significantly affecting forests: there have
been changes in their physiology, structure, species composition and health, largely owing
to changes in temperature and rainfall. Many tropical forests in Latin America have expe-
rienced losses in biodiversity. Increased temperatures and drought result in more frequent
outbreaks of pest infestations, more forest fires and increasing alterations in populations of
plant and animal species, severely affecting forest health and productivity.
The latest findings of the Intergovernmental Panel on Climate Change suggest
that:
For many key parameters, the climate is already moving beyond
the patterns of natural variability within which our society and
economy have developed and thrived. These parameters include
global mean surface temperature, sea-level rise, ocean and ice-sheet
dynamics, ocean acidification, and extreme climatic events. There
is a significant risk that many of the trends will accelerate, leading
to an increasing risk of abrupt or irreversible climatic shifts.3
That the situation will worsen is no longer in doubt, the only question is by
how much. Table I.2 below presents the emission scenarios identified by the Intergovern-
mental Panel on Climate Change and their likely impact on temperatures and sea level
by the end of this century.4 Generally speaking, the A1FI scenario involves the greatest
amount of emissions and hence the greatest change in climate, while the B1 scenario en-
tails the least amount of emissions and hence the smallest change in climate.
Moreover, as the Intergovernmental Panel has noted, the scenarios described in
its Special Report on Emission Scenarios (Nakicenovic and others, 2000) (SRES scenarios),
as well as most post-SRES scenarios, fail to take into account the uncertainties with re-
spect to various aspects of “climate processes and feedbacks”. These include (a) transmis-
sion of heat to lower depths of ocean, causing thermal expansion, (b) contraction of the
Greenland ice sheet, (c) contraction of the western Antarctic ice sheet, (d) reduction in
the terrestrial and ocean uptake of atmospheric CO2 as the CO2 level rises, a phenomenon
referred to as “positive carbon cycle feedback”, (e) cloud feedback, (f) slowing down or
even reversal of the meridional overturning circulation (MOC), etc. These feedbacks add
another layer of complexity (and uncertainty) to future projections; however, the Intergov-
ernmental Panel suggests that the impact of climate change will likely be more severe, or
even catastrophic.

3 Intergovernmental Panel on Climate Change, Key message, “Climatic trends”, from the International Scientific
Congress on Climate Change: Global Risks, Challenges and Decisions in Copenhagen, 10-12 March 2009.
4 Intergovernmental Panel on Climate Change broadly identified four possible economic pathways (or
“storylines”), referred to as A1 (a convergent world with fast economic growth); A2 (a non-convergent world with
slow economic growth); B1 (a convergent and more environment-friendly world); and B2 (a non-convergent
but environment-friendly world with an intermediate rate of economic growth). In addition to the above four
broad storylines, the following three sub-variants of A1 have been distinguished, depending on the energy
composition of economic growth: A1FI (relatively greater dependence on fossil fuels); A1B (a more balanced
dependence on different energy sources); A1T (a greater reliance on non-fossil energy sources).
 Climate change and the development challenge 7

Table I.2
Emission scenarios and their impact

Sea-level rise
(metres) in 2090-
Temperature change (in o C) in 2099 relative to
2090-2099 relative to 1980-1999 1980-1999
Model-based range
Greenhouse gas (excluding future
concentration in rapid dynamical
Case 2100 (ppm of CO2e) Best estimate Likely range changes in ice flow)
Constant
year 2000
concentration 0.6 0.3-0.9 ..
B1 scenario 600 1.8 1.1-2.9 0.18-0.38
A1T scenario 700 2.4 1.4-3.8 0.20-0.45
B2 scenario 800 2.4 1.4-3.8 0.20-0.43
A1B scenario 850 2.8 1.7-4.4 0.21-0.48
A2 scenario 1250 3.4 2.0-5.4 0.23-0.51
A1FI scenario 1550 4.0 2.4-6.4 0.26-0.59
Source: Intergovernmental Panel on Climate Change (2007a), table 3.1.

What seems certain is that even if the annual flow of emissions were to stabi- Even if the annual flow of
lize at today’s rate, the stock of greenhouse gas emissions in the atmosphere would reach emissions were to stabilize
double the pre-industrial level by 2050, resulting in a high probability of dangerous tem- at today’s rate, the stock of
greenhouse gas emissions
perature rises, with potentially destabilizing economic and political consequences. The would reach double the
most recent modelling exercise, using the Massachusetts Institute of Technology (MIT) pre-industrial level by 2050
Integrated Global Systems Model, a detailed computer simulation of global economic
activity and climate processes, suggests that without massive policy action, there will be a
median probability of surface warming of 5.2o C by 2100, with a 90 per cent probability
range of 3.5-7.4o C. This can be compared with a median projected increase of just 2.4o C
in an earlier (2003) exercise.5

The interdependency challenge

The climate and development challenges are inextricably linked. When the overriding If developing countries
policy priority is economic growth, expanding the reach of energy and transportation simply replicate the path
infrastructure and making them available to an increasingly urban population and indus- followed by today’s rich
countries, the impact on
trial workforce are unavoidable. So are major land-use changes. If developing countries the earth’s climate will be
simply replicate the path followed by today’s rich countries, the impact on the earth’s devastating
climate will be devastating.
At the same time, prospects for a more sustainable development are likely to
be undermined by the direct and indirect impacts of climate change on economic growth;
and the resulting diminution of the resources available to undertake actions to achieve
effective diversification and resilience will heighten vulnerability to future climate trends
and shocks. This vicious circle is already apparent in many arid and semi-arid countries
in Africa. Adverse impacts on food and water supplies as well as on health conditions are
likely to tighten growth constraints in other parts of the world.
5 See Journal of Climate, American Meteorological Society, vol. 22, No. 10 (May 2009).
8 World Economic and Social Survey 2009

An understanding of the complex ways in which economic development and

climate variables interact is still evolving. However, the cumulative and unstable nature of
that interaction poses obvious challenges for policymakers. This Survey seeks to build its
assessment of that challenge around the pivotal role of investment and to examine some
of the linkages and feedbacks that, from this starting point, can help define development
strategies in a warming world.

From free-riding to burden-sharing

The Stern Review on the Economics of Climate Change (Stern, 2007) launched by the
Government of the United Kingdom of Great Britain and Northern Ireland in October
2006 identified climate change as “the greatest market failure the world has seen” and pro-
vided the first serious attempt to model the cost of doing nothing in comparison with the
cost of adopting an alternative strategy which would hold emissions below a manageable
threshold. From this perspective, a form of “climate ethics” emerged centred around the
challenge of providing a “global public good” and the need to realign social and private
cost by making the polluters pay for the damage they had already caused and would cause
in the future if there was no change of course. The Stern report concluded that future gen-
erations could be made much better off at relatively little cost to present generations.
Difficult distributional Depicting a stable climate as a global public good allows one to make an im-
issues, rooted in a very portant rhetorical point about the systemic nature of the challenge and the need for collec-
uneven historical pattern
tive action to overcome it. On the other hand, the public good parallel is far from perfect;
of economic development,
are obscured by the global for one thing, the qualities of non-rivalled and non-excludability do not apply easily to
public good terminology the interrelated challenges of climate change and development. Problems of externalities,
of vested interests and market power, and of uncertainty certainly mar this interrelation-
ship, making the market by itself an imperfect instrument for managing these challenges.
Moreover, difficult distributional issues, rooted in a very uneven historical pattern of eco-
nomic development, are obscured by the global public good terminology.
Historically speaking, it is mainly the emissions produced by the currently
developed industrialized countries that have caused the dangerous rise in greenhouse gas
concentrations. Table I.3 presents the shares of various countries in the cumulative stock
of greenhouse gas emissions since 1840; it is estimated that the share of the cumulative
total generated by Annex I countries has been three fourths (Raupach and others, 2007).
The picture is even starker if per capita emissions are used (see figure I.3).
China’s current level of As the concept of burden-sharing is often discussed on the basis of current
per capita emissions is total emissions, the fact of historical culpability, as reflected in the wide differences in per
equivalent only to the level
capita emissions, is sometimes overlooked. Much attention has been given to several big
reached by the United
States at the time of the developing countries that have had large emissions in absolute terms in recent years, and
First World War much has been made, for example, of the fact that China has replaced the United States
as the largest greenhouse gas emitting country. However, their per capita emissions levels
remain far below those of the developed countries (and in fact, below those of many other
developing countries); indeed, China’s current level of per capita emissions today is equiva-
lent only to the level reached by the United States at the time of the First World War.
Moreover, given the dominant economic and political influence of wealthier
countries, there exists the potential for a further round of adverse spillover effects from the
actions and policies that these countries adopt in response to the climate crisis. The adop-
tion of policies in developed countries could have negative implications for international
 Climate change and the development challenge 9

Table I.3
Per capita emissions in 2005 and share in cumulative emissions during 1840-2005,
selected developed and developing countries and economies in transition

Share of global cumulative metric

tons of carbon emissions Per capita emissions in 2005
1840-2005 (percentage) (metric tons of carbon)
Developed countries
United States 27.8 5.3
France 2.7 1.7
Germany 6.7 2.6
United Kingdom 5.9 2.5
Japan 3.6 2.6
Canada 2.0 4.5
Economies in transition
Poland 1.9 2.2
Russian Federation 8.0 2.9
Developing countries
China 8.1 1.2
India 2.4 0.3
Source: UN/DESA/DPAD calculations, based on Marland, Boden and Andres (2008), Carbon Dioxide Information
Analysis Center (CDIAC) database; and UN/DESA/statistics population database.
Note: The share of the Russian Federation has been computed from data for the former Union of Soviet Socialist
Republics (USSR) and is based on the current share of the Russian Federation of emission of the Commonwealth of
Independent States (CIS).

Figure I.3
Annual per capita emissions, selected regions, 1950-2005

6.0
United States of America

5.0

4.0
Metric tons of carbon

OECD (24 countries)

3.0
Western Europe

2.0
Japan
Developing countries (96 countries)
1.0

0.0
1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Latin America China Africa India Source: See table I.3.

10 World Economic and Social Survey 2009

trade, financial flows and commodity processes, and ultimately for growth in developing
countries. Sectoral policies, with respect, for example, to biofuels, can also have serious
consequences for the incentives facing developing countries. Policies with respect to the
transfer of technology, such as those involving intellectual property rights, will likely have
a significant impact on developing countries (see chap. V).
To possibly label developing countries “free riders” for resisting commitments
imposed against this backdrop does not make much sense and in fact a much more nu-
anced framework will be needed within which to address the issue of managing the bur-
den of protecting the climate on an equitable basis. Several proposals for advancing the
discussions are currently on the table (see box I.1).

Box I.1
Burden-sharing proposals
Numerous burden-sharing mechanisms have been introduced both in the literature on climate and
development and in the global climate negotiation process. A few of the most common proposals
include:
y Equal per capita emissions rights. Every person has an equal right to the global sink for
greenhouse gases. A limit is set on world annual emissions. This limit is divided by world
population to arrive at an equal per capita right to emit. Each country is allocated a level
of emissions calculated by multiplying the per capita emissions right by the country’s
population. The limit on global emissions would be reduced over time to achieve a de-
sired stabilization trajectory (Agarwal and Narain, 1991; Narain and Riddle, 2007)
y Individual targets. This approach assigns equal emissions rights (or a “universal cap”) to
individuals in order to meet a desired stabilization trajectory. Each nation’s emissions
allocation is the sum of its actual individual emissions, for all residents with emissions
less than the cap, and its target individual emissions, for all residents with emissions
equal to or greater than the cap. In this way, high emitters in a low-emissions country
do not free-ride by de facto absorption of low emitters’ unused rights (Chakravarty and
others, 2008)
y Contraction and convergence. This plan combines equal rights to emit with grandfather-
ing (or assigning of rights based on past emissions: the higher the past emissions, the
larger the grandfathered emissions rights). Each country is allocated emission rights
based on its past emissions. Countries that exceed desired per capita global emissions
have their allocation reduced in each succeeding year, while countries that emit less
than this target receive a higher allocation each year. Over time, global emissions con-
tract while high- and low- emitting countries converge on the same target per capita
emissions (Global Commons Institute, 2008)
y One standard, two convergences. Each country is allocated a right to a total contribution
to greenhouse gas concentrations based on equal per capita cumulative allowances
targeted to meet a desired stabilization trajectory. Differentiated annual emissions
ceilings for industrialized and developing countries are adjusted each year to achieve
convergence. A relatively high ceiling (in comparison with current emissions) for de-
veloping-country emission allows these countries to increase their annual emissions
so as to achieve economic growth before having to decrease emissions to stay within
their cumulative cap. Trading of emissions rights makes it possible for all developing
countries to use their entire allowance (Gao, 2007). A few burden-sharing plans reject
the assumption that each country must pay for its own abatement and include a more
explicit discussion of who pays for abatement and where
y Greenhouse development rights. The burden of emissions reductions is shared among
countries according to their capacity to pay for reductions and their responsibility for
 Climate change and the development challenge 11

Box I.1 (cont’d)

past and current emissions. Each of these criteria is defined with respect to a devel-
opment threshold so as to explicitly safeguard the right of low-income countries to
economic growth; only individuals with incomes above this threshold have a responsi-
bility to pay for emissions abatement. Each country is assigned an emissions allocation
based on per capita rights. In addition, each country is assigned an obligation to pay for
abatement—whether at home or abroad—based on its share of cumulative emissions
starting from a base year (such as 1990) and the cumulative income of its population
with incomes above the development threshold (Baer, Athanasion and Kartha, 2007)
y Revised greenhouse development rights. Formulated by a team of researchers at Tsin-
ghua University in a report prepared by the Chinese Economists 50 Forum, the revised
greenhouse development rights builds on the work of Baer, Athanasion and Kartha
(2007) by including cumulative emissions going back to 1850, and accounting for emis-
sions based on consumption (rather than on production) within each country. The re-
sult is a greater responsibility on the part of industrialized countries for paying for emis- Source: Ackerman and
sions reductions around the world (Fan and others, 2008). Stanton (2009).

Still, in a very real sense the future of the planet rests with the efforts of the
developing world. Already, the share of rich countries in total global population is less than
one sixth and almost all of the additional 3 billion people to be added to that population
over the next four decades will reside in the developing world. Developing countries will be
central to any international action to protect “their future” (Stern, 2009, p. 13). At the same
time, developed countries will have to bear a disproportionately larger share of the initial
costs of ensuring that future, in keeping with both the cumulative history of emissions and
the differences in economic resources. By the same token, the developing countries them-
selves will have to take measurable and verifiable steps towards securing that future.
While it is impossible to escape history, in terms of the responsibility for con-
tributions to climate change, it is also prudent to remain focused on potential synergies
over the coming decades between the efforts by advanced countries to cut the stock of
existing emissions and those aimed at attenuating and eventually reversing the higher
emissions that will accompany higher growth, industrial development and urban expan-
sion in developing countries.
Developing countries’ scepticism regarding participation in international miti- The level of support
gation efforts has been driven as much by developed countries’ recent performance regard- provided to various
ing multilateral responses to climate change as by their past developmental record. For adaptation funds has up to
now remained very low and
example, the Clean Development Mechanism, established under the Kyoto Protocol to the
has not matched the scale
United Nations Framework Convention on Climate Change,6 which was supposed to be of the problem
an important link between developed countries’ emission reduction efforts and efforts of
developing countries, has failed to live up to expectations, in terms of both quantity and
quality. Similarly, the level of support provided to various funds set up to help developing
countries in respect of adaptation has up to now remained very low and has not matched
the scale of the problem (see chaps. III and VI). Lack of bold and generous leadership has
given rise to a lack of trust, which now represents a serious obstacle to mustering the inter-
national cooperation needed to deal effectively with the climate challenge.
Charles Kindleberger (1986, p. 10) observed that in a world of interdependent The urgency of the climate
nation States with widely differing access to economic resources and political power, ef- crisis certainly calls for a
renewed leadership role
fective multilateral cooperation depends on “positive leadership, backed by resources and
from those countries most
readiness to make some sacrifice in the international interest”. He also recognized that responsible
6 United Nations, Treaty Series, vol. 2303, No. 30822.
 12 World Economic and Social Survey 2009

the leadership role often goes unapplauded, particularly at home, and has a tendency to
retreat or atrophy, but that, particularly in a time of crisis, the hallmark of leadership is the
willingness to assume responsibility. The urgency of the climate crisis certainly calls for a
renewed leadership role from those countries most responsible.
Strong state capacities are International cooperation does not, however, hinge on leadership alone. Strong
needed to help shape a State capacities are needed, at all levels of development, to help shape a common and inclu-
common and inclusive vision
sive vision, to ensure that the conceding of national sovereignty in some areas is balanced by
the opportunities opened up in others, and to guarantee effective participation in the nego-
tiation and implementation of international rules, regulations and support mechanisms. In
this respect, the erosion of State capacity in recent years, particularly in developing countries,
represents an obstacle to international cooperation and has contributed to the lack of trans-
parency and democratic accountability in many multilateral institutions, particularly those
dealing with the development challenge. Correcting this is an urgent priority if real progress
on the climate issue is to occur at the required pace (for further discussion, see chap. IV).

The policy response

Scientists, dreamers and defunct economists
The consequences of The policy response to climate change is complicated by the fact that, so far, it has been a
climate change have been slow-moving process—one whose impact has certainly been less perceptible than that of
easier to ignore to the
other shocks and crises confronting policymakers in the “normal” political cycle. More-
extent that their brunt has
been borne by the poorest over, its consequences have been easier to ignore to the extent that their brunt has been
countries and communities borne by the poorest countries and communities.
Climate scientists have begun to close these gaps with a vast array of evidence
and analyses demonstrating the unprecedented historical scale and speed of greenhouse
gas increases, the signs of acceleration, the damage that has already been done to the cli-
mate, and the risks of getting locked into irreversible pathways if trends continue. This has
led some countries to adopt ambitious targets for emissions reduction, but opinion surveys
suggest that the scientific community has still some way to go towards convincing politi-
cians and the public of the urgency of the challenge (Schmidt, 2009). Along these lines,
the Secretary of Energy of the United States, Steven Chu, recently acknowledged that the
climate challenge involves a difficult compromise between scientific and political realities
—an admission that has elicited some degree of consternation.7
The environmental movement has a longer track record than other groups in re-
spect not only of having warned of the dangers of unchecked pollution and the reckless exploi-
tation of natural assets but also of having organized successful campaigns on local environ-
mental issues. The political parties, regulatory reforms and environmental ministries that have
often emerged from those campaigns have been responsible for the wider national focus on
the environmental challenge, particularly, but not exclusively, in developed countries. More-
over, this community has been on the front lines in the ideological battle against the climate
sceptics. On the other hand, it has struggled to forge its own integrated perspective on the eco-
nomic, political and scientific dimensions of the climate challenge, particularly in moving into
the international arena. Even where such a perspective has begun to emerge in richer countries,
the implications for the developing world, where rapid growth, industrialization and urbaniza-
tion remain paramount goals, have not been clearly, or convincingly, spelled out.
7 See “America’s new green guru sparks anger over climate change U-turns”, The Observer, Sunday, 24 May, 2009.
 Climate change and the development challenge 13

Economists are latecomers to the climate debate and, more generally, have Economists are latecomers
entered the fray with a less-than-honourable record on environmental issues (Dasgupta, to the climate debate and
have entered the fray with
2008).8 However, they have been quick to fashion policy options. Theirs is a language of
a less-than-honourable
risk assessment, measured trade-offs between costs and benefits, marginal price changes, record on environmental
discounting of future outcomes, etc. Their so-called integrated assessment models confer issues
an aura of quantitative rigour and precision on their discussions, in which they typically
endorse an overly cautious approach to policy, whether by demonstrating the advantages
of going slow on climate action or by offering quick solutions to “externalities” which
allow the market to reassume its central role (see box I.2). In the context of climate change,
practical policy advice has focused on the mechanics of carbon taxes or trading schemes,
and on the dangers of ambitious climate initiatives constraining future growth. Self-
regulation has become the mantra, and when policy action is proposed the framework is
predisposed to gradualism and delay (Ackerman, 2009).

Box I.2
The limits of conventional economic models
Good climate policy requires the best possible understanding of how climatic change will impact on
human lives and livelihoods, in industrialized countries and in developing countries. Unfortunately,
many climate-economics models suffer from a lack of transparency, in terms of both their policy rel-
evance and their credibility. Building a model of the climate and the economy inevitably involves nu-
merous judgement calls; debatable judgements and untestable hypotheses turn out to be of great
importance in evaluating the policy recommendations of climate-economics models, and should be
visible for purposes of debate.
A good climate-economics model would be transparent enough for policy relevance,
yet sophisticated enough to get the most important characteristics of the climate and the economy
right. Unfortunately, many existing models fall short on the first count or the second, or both: some
are very complex—often to the point of being entirely opaque to the non-specialist—while others
represent the climate and the economy incorrectly, as discussed below.
The different types of model structures provide results that inform climate and devel-
opment policy in very different ways. All have strengths and weaknesses. Many of the best-known
integrated assessment models attempt to find the “optimal” climate policy, the one that maximizes
long-term human welfare. This calculation depends on several unknowable or controversial quanti-
ties, including the numerical measurement of human welfare, the physical magnitude and monetary
value of all current and anticipated climate damages, and the relative worth of future versus present
benefits.
General equilibrium models can be extremely complex, combining very detailed climate
models with intricate models of the economy; yet, despite the detail of general equilibrium models,
the commonly used assumption of decreasing returns seriously limits their usefulness in modelling
endogenous technological change. Partial equilibrium models circumvent the problem of increasing
returns, at the price of a loss of generality. In some cases, there appears to be a problem of spurious
precision in overly elaborate models of the economy, containing, for example, projections of long-
term growth paths for dozens of economic subsectors.
Simulation models are well suited to representing uncertain parameters and to develop-
ing integrated assessment model results based on well-known scenarios of future emissions, but
their policy usefulness is limited by a lack of feedback between their climate and economic dynam-
ics. Finally, cost minimization models address policy issues without requiring calculations of human
welfare in money terms, but existing cost minimization models may be marred by a spurious preci- Source: Ackerman and
sion, a characteristic they tend to share with some general and partial equilibrium models. Stanton (2009).

8 Ackerman (2009, p. 12) notes that researchers in the field of “ecological economics” have examined the
economy as embedded in and constrained by the earth’s ecosystem but without offering a complete theory of
economics and the environment; nor have they had much influence on their colleagues in the wider domain of
economics.
14 World Economic and Social Survey 2009

The fact that, while being concerned with overall costs and benefits, integrated
assessment models generally have little to say about structural inequality or historical de-
velopment. This has been a long-standing target of criticism of conventional economic
models.9 Perhaps more surprising, however, has been the cavalier attitude of many econo-
mists towards climate risk. Helm (2008) has argued that current climate policy and targets
are being designed on the basis of current economic structures and of how marginal emis-
sions reductions can be achieved from such a starting point, but with very little attention
paid to long-term structural trends. This approach is likely to seriously underestimate
the size and cost of the challenge. Stern (2009) acknowledges this bias; but as Weitzman
(2009, p. 22) has suggested, economists still seem preprogrammed to react to an impend-
ing climate disaster by adjusting their flow instruments to control the stock accumulation
that is producing the disaster, a position he likens to “using an outboard motor to manoeu-
vre an ocean liner away from an impending collision with an iceberg”.
The risks of catastrophic The probabilities that scientists attach to the occurrence of higher temperatures
global warming merit are given in table I.4; they are of an order that is a good deal higher than what would lead
a significant planetary
individuals to take out insurance against worst-case scenarios. On this basis, Ackerman
insurance policy
(2009) has suggested that the risks of catastrophic global warming merit a significant
planetary insurance policy.
Moving the agenda In light of these various shortcomings, there is a suspicion among many poli-
demands an integrated cymakers in developing countries that none of the constituencies shaping climate policy
approach, that is to
are paying sufficient attention to the kind of adjustments that are being asked of them
say, a climate-inclusive
developmental approach with regard to meeting the climate challenge. Industrialization and urbanization are hot-
wired into the development process, hence restricting these processes, and the attendant
expansion of the energy sources that they require, is not an option. A low-emissions push
in developing countries requires not only a massive injection of renewable sources of en-
ergy in the energy mix along with technologies that help improve energy efficiency and
prevent deforestation (in affected countries) but also changes in land-use planning, the
organization of transport and water management. These requirements are sure to entail
major costs for developing countries—costs that explain their objection to the imposition
Table I.4
Probability of exceeding the temperature increase (relative to the pre-industrial level)
at different greenhouse gas concentration stabilization levels
Percentage
Stabilization level
(ppm CO2e) Increase in temperature (relative to the pre-industrial level (degrees celsius))
2 3 4 5 6 7
450 78 18 3 1 0 0
500 96 44 11 3 1 0
550 99 69 24 7 2 1
650 100 94 58 24 9 4
750 100 99 82 47 22 9
Source: Stern (2009, p. 26).
Note: The probabilities are based on the Hadley Centre Ensembles and are available from Murphy and others
(2004).

9 Ironically, conventional economic models have their intellectual roots in the natural sciences of the nineteenth
century. However, while natural scientists have moved on to exploring more complex, chaotic and unstable
systems, including the threat of dangerous climate change, economists have clung doggedly to the idea of a
harmonious system in or close to equilibrium.
 Climate change and the development challenge 15

of any forced emission commitments. Moving the climate agenda forward demands an
integrated approach, that is to say, a climate-inclusive developmental approach: treating
climate and development separately, as has largely been the case in the past decade and
even earlier, no longer can be deemed the basis of a tenable framework.

Interrelated threats
Climate change and development are closely interconnected and the feedbacks and reac-
tions, particularly through the production and use of energy, are cumulative. Economists,
as suggested earlier, have a poor record when it comes to analysing these kinds of feed-
backs and cumulative linkages. Policymakers appear predisposed to underestimate both
the scale of the threats that are being posed and the cost of removing those threats.
More recently, however, policymakers have shown signs of recognizing the
urgency of the situation, which seems to reflect a growing awareness that the international
community faces a series of interrelated threats which can no longer be effectively tackled
in isolation. A climate crunch, an energy crunch, a food crunch and, perhaps most signifi-
cantly, a credit crunch have all exposed the danger of subordinating risk management to
the self-regulating forces of the marketplace.
Since the summer of 2008, policymakers in more advanced countries have
been struggling to deal with the cumulative and interconnected shocks of a housing crisis,
excessive energy consumption and financial collapse which have rippled and intensified
throughout an increasingly fragile global economy (Klare, 2008). In some communities,
these shocks have been further compounded by weather-related disasters. However, the
challenges posed by the fact that climate change, economic insecurity and political conflict
are interlinked are even greater for developing countries and the consequences are likely to
reach well beyond their own borders, as has been made clear by the testimony of the newly
appointed United States Director of National Intelligence, Dennis Blair (2009).
Adaptation without mitigation could prove an ineffective response for many There is real concern that
developing nations, and the failure to deal with these interrelated threats will almost cer- neither the time nor the
tainly have much more widespread and damaging consequences. There is real concern that resources exist for dealing
with a multiple syndrome
neither the time nor the resources exist for dealing with a multiple syndrome encompass- encompassing intensified and
ing intensified and interrelated shocks and crises. interrelated
shocks and crises

A New Deal?
Parallels have often been drawn between the climate challenge and the interwar experience of The call has been for a
overcoming an economic crisis, defeating fascism and rebuilding ravaged economies. A Mar- global new deal capable
of responding to the
shall Plan to tackle global warming is a logical consideration (Gore, 2007; and chap. VI). The
economic and climate
call, however, particularly since the sharp downturn in the global economy starting in the sum- threats simultaneously
mer of 2008, has been for a global new deal capable of responding to the economic and climate
threats simultaneously (New Economics Foundation, 2008; United Nations Environment
Programme, 2009; United Nations Department of Economics and Social Affairs, 2009).
Historical analogies always need to be treated with a degree of caution. However,
the original New Deal, as noted in chapter IV, certainly did deal with a series of interrelated
threats, including threats to the environment, through an expanded and transformative poli-
cy agenda of a sort that needs to be revived in light of today’s threats and challenges. The scale
of the response is also worth recalling. The New Deal had committed 3 per cent of gross do-
16 World Economic and Social Survey 2009

mestic product (GDP) each year between 1933 and 1939, and a good deal more was added to
counter the threat of fascism. Moreover, once the fighting stopped, the United States, through
the Marshall Plan, committed almost 1 per cent of its GDP each year for five years to rebuild
Europe. This constituted a massive resource commitment over a 20-year period.
If the shift to low level Economists have suggested that a smaller effort will be needed to counter the
carbon development threats arising from climate change. This seems an optimistic stance. As Stern (2009, pp.
pathways is to take place
12-13) indicates, the kind of 30-year strategy that is needed to keep climate risk manage-
in a timely and orderly
fashion, the commitments able will involve long-term planning and a massive investment programme and will require
should be made sooner the kind of leadership and cooperation that helped defeat fascism and rebuild shattered
rather than later economies. Moreover, if the shift to low-emissions development pathways is to take place in
a timely and orderly fashion, the commitments should be made sooner rather than later.

No country left behind

Making an exact estimate of the economic costs of climate change is a difficult exercise
which relies heavily on the kinds of assumptions and scenarios that are used in modelling
exercises. Damage functions are difficult to specify and externalities are difficult to price.
Moreover, the costs vary with the ambitiousness of the targets. The Intergovernmental
Panel on Climate Change has presented some damage estimates using a standard eco-
nomic model. According to its Fourth Assessment Report, the damage inflicted by climate
change will entail on average a loss of 1-5 per cent of global GDP. However, the Intergov-
ernmental Panel also notes that globally aggregated figures are likely to underestimate the
damage costs because they cannot include many “non-quantifiable impacts” (Intergovern-
mental Panel on Climate Change, 2007a, p. 69).10
It would be misleading to suggest that developed countries will not face
adaptation challenges. However, the fact that they have already invested billions of
dollars in climate-related adaptation measures and have diversified economies which are
consequently more robust in the face of climatic shocks, combined with the fact that many
may even extract short-term gains from rising temperatures, could make for increased
divisiveness, on top of that already created by their carbon-fuelled past success.
The damage to developing countries from climate change is already perceptible.
Indeed, it has been estimated that for every 1o C rise in average global temperatures, annual
average growth in poor countries drops by between 2 and 3 percentage points, but with no
change in the growth performance of rich countries (Dell, Jones and Olken, 2008). Stern
(2009) describes the adverse impact from climate change on developing countries as a
“double inequity”, given that they carry little responsibility for causing the problem. Table
I.5 presents estimates of the damage under a “business-as-usual” (BAU) scenario and,
depending on assumptions regarding adaptation efforts, the probability of catastrophic
risk and sensitivity to climate change. The likely damage to developing regions (measured
as a percentage of respective GDP in 2100) is more than double that for OECD countries
excluding the United States, and more than 5 times greater than the damage to the United
States. At a further disaggregated level, the damage to Latin America and the Caribbean,
Africa and the Middle East, and India and Southeast Asia will be 7, 7.6, and 9.6 times
greater, respectively, than to the United States (Evans, 2009).
10 The Intergovernmental Panel on Climate Change also indicates that:
Peer-reviewed estimates of the social cost of carbon (net economic costs of damages from climate change
aggregated across the globe and discounted to the present) for 2005 have an average value of $12 per ton
of CO2, but the range of 100 estimates is large (from -$3/tCO2 to $95/tCO2). The range of published evidence
indicates that the net damage costs of climate change are projected to be significant and to increase over time.
 Climate change and the development challenge 17

Table I.5
Business-as-usual damages in 2100

A. Mean business-as-usual damages in 2100: “no adaptation” scenario

Annual damages as percentage of GDP in 2100
Region Economic Non-economic Catastrophic Total
United States 0.3 0.4 0.1 0.8
Other OECD 0.7 1.0 0.2 1.9
Rest of the world 1.6 2.3 0.4 4.3
World total 1.2 1.8 0.3 3.4
B. Mean business-as-usual damages in 2100: no adaptation,
increased catastrophe risk and increased damage exponent
Annual damages as percentage of GDP in 2100
Region Economic Non-economic Catastrophic Total
United States 0.4 0.5 0.6 1.5
Other OECD 0.9 1.3 1.6 3.8
Rest of the world 2.0 2.9 3.2 8.2
World total 1.6 2.3 2.6 6.4
C. Business-as-usual damages in 2100: 83rd percentile estimates (no adaptation,
increased catastrophe risk and increased damage exponent)
Annual damages as percentage of GDP in 2100
Region Economic Non-economic Catastrophic Total
United States 0.6 0.9 1.2 2.6
Other OECD 1.4 2.0 3.1 6.2
Rest of the world 3.2 4.5 6.3 13.5
World total 2.5 3.6 4.8 10.8
Source: Ackerman and others (2008), tables 2, 3, and 4.
Note: The results are based on 5000 runs of the PAGE2002 model. As the impacts are closely but not perfectly
correlated, the 83rd percentile of the total damages is slightly less than the sum of the 83rd percentiles of the
damages in the individual impact categories.

Climate change is already multiplying vulnerabilities in developing countries

by heightening livelihood risks and further weakening adaptive capacities. Rising sea
levels are considered a threat for people who live within 60 miles of a shoreline. They make
up one third of the world’s population and a large number of them live at low altitudes.
The threat to people living in small islands and low-lying territories is unequivocal, while
extended periods of drought in other areas have been generating a flow of environmental
refugees and conflict with neighbouring countries and populations. Similarly, the outbreak
of tropical diseases is expected to be larger in areas with increased incidence of heatwaves,
thus extending drought-prone areas, while the prevalence of water-related diseases is likely
to rise in areas with an increased incidence of floods (see chap. III).
The growing threats from climate change will mainly affect populations that are
already challenged by multiple vulnerabilities associated with low levels of economic and
human development. Poorer countries and communities with poor health care, lack of infra-
structure, weakly diversified economies, missing institutions and soft governance structures
18 World Economic and Social Survey 2009

may be exposed not just to potentially catastrophic large-scale disasters but also to a more
permanent state of economic stress as a result of higher average temperatures, reduced avail-
ability of water sources, more frequent flooding and intensified windstorms.
Climate change will deepen By increasing vulnerability in developing countries, climate change will deep-
inequalities, with least en inequalities, with least developed countries and small island States being the most
developed countries and
affected. As Dodman, Ayers and Huq (2009, p. 152) puts it: “The uneven distribution of
small island States being
the most affected climate change risk mirrors the existing uneven distribution of natural disaster risk—in
2007, Asia was the region hardest hit and most affected by natural disasters, accounting
for 37 per cent of reported disasters and 90 per cent of all the reported victims.” In other
words, people with limited assets and resources and with less reliable access to decent jobs
will continue to be the most affected by the adverse impacts of climate change.
The adaptation challenge is The adaptation challenge is essentially a development challenge. It will require
essentially a development significant investments, not only to climate-proof existing projects and ensure effective
challenge
responses to natural disasters, but also to diversify economic activity and address a range
of interrelated vulnerabilities that are already exposing communities to threats from quite
small changes in climate variables.
There is some confusion about whether we need mitigation or adaptation—in
fact, we need both. For a number of countries, the challenge of adaptation looms very large.
However, in many cases, adaptation and mitigation cannot be so clearly distinguished—
for example, energy conservation measures could be classified under both mitigation and
adaptation. Chapter III develops these arguments.

Common but differentiated mitigation challenges

Procrastination in respect In light of the accumulating scientific evidence, this Survey regards the 2º target for stabilizing
of the need for aggressive carbon concentrations, that is to say, a maximum ultimate temperature increase of 2o C above
climate action has to stop
pre-industrial levels, as appropriate for preventing dangerous anthropogenic interference in
immediately
the climate system. Global emission reductions of the order of 50-80 per cent by 2050 are
deemed essential. Even such estimated emission concentrations pose a risk to the climate, as
reported by the Intergovernmental Panel on Climate Change and as clearly demonstrated by
other findings in the scholarly literature; hence, procrastination in respect of the need for ag-
gressive climate action has to stop immediately.
As Stern (2009) argues, achieving the transition to a low-emissions economy
depends on when we start and the time at our disposal for exploiting the life cycles of invest-
ment in and development of new technologies. The current starting point is 430 ppm CO2e
and the longer action is delayed, the greater the costs will be, as the threshold for attaining
dangerous levels approaches. Advanced countries will need to do more and quickly (see chap.
II) both at home to reduce the stock of emissions and to support the efforts of developing
countries to decelerate the flow of emissions and to establish a viable development pathway
along which they can eventually begin to decarbonize their own economies (see box 1.3).
Researchers have used both case-study evidence and modelling exercises to better
understand the mitigation costs involved. Using the former approach, McKinsey and Com-
pany has developed a ranking of mitigation steps in accordance with their costs (for further
discussion, see chap. II). Others have identified “wedges” of alternate technologies,11 each of
which could displace a certain amount of emissions each year, thereby stabilizing emissions
11 Potential wedges come in many forms, ranging from improvements in efficiency of automobiles, appliances and
power plants, and allocation of greater shares in energy supply for nuclear energy, renewable energy and carbon
capture and storage, to enlargement of bio-carbon stocks through management of forests and soils.
 Climate change and the development challenge 19

Box I.3
Carbon indebtedness
Scientific consensus has established a non-catastrophic global warming threshold at 2° C above
pre-industrial levels. On one recent assessment (Meinshausen and others, 2009), this translates into
a 1,440 gigaton (Gt) (equivalent to 393 gigatons of carbon) limit on the amount of CO2 that can be
emitted in the atmosphere between 2000 and 2050, that is, if we want to have a 50:50 chance of stay-
ing within that threshold. To shift those odds to a 75 per cent chance of staying on track, we should
emit no more than 1 trillion tons of CO2 (273 Gt of carbon) in total. Up to 2000, 271 Gt of carbon had
already been emitted into the atmosphere,a of which 209 GtC (77 per cent of the total) had come a Climate Analysis Indicators
from Annex I countries. Tool (CAIT), version 6.0.
One scenario, associated with a 50:50 chance of staying within the 2° C threshold, implies (Washington, D.C.: World
Resources Institute, 2009).
a global reduction of 50 per cent over 1990 levels. The big question is how that happens. Under this
scenario, the emissions limit for the period 1850-2050 is 650 GtC. The sharing rule proposed by many
European countries to convince reluctant big developing countries to actively cooperate in the post-
Kyoto regime (the so-called “shared vision”) would make Annex I countries responsible for 85 per cent
of the overall emissions reduction burden. That would imply an additional emission of 85 Gt of carbon
for that group of countries in the period 2000-2050, and a total emissions of 314 GtC. In other words,
these countries would be allowed to consume 48 per cent of the available carbon budget.
This is a figure considerably higher than their share of global population. On those
grounds Annex I countries should only consume 21 per cent of the global carbon budget for the
period 1850-2050, leaving 79 per cent for non-Annex I countries. That would mean an allocation of 137
GtC for Annex I countries. As they have already used 209 GtC and expect to consume another 85 GtC
until 2050, this would mean that they would have consumed 177 GtC over and above their “fair” share.
By contrast, non-Annex I countries would have to restrict their emissions to 336 GtC over the whole
period. Pricing that debt, moreover, can give an indication of the compensation owed to developing
countries under this scenario to help finance their shift to a low-emissions, high-growth pathway.

in 2050 and leading to global reductions thereafter (Pacala and Socolow, 2004; and figure
I.4) The alternative has been to use integrated assessment-type models to determine mitiga-
tion costs. These two approaches are not mutually exclusive, however. Various estimates are
considered in subsequent chapters.
While the absolute values of required investment can appear quite high, the While the absolute values
costs of inaction are even higher. It is also clear that the lower the stabilization level cho- of required investment can
appear quite high, the costs
sen, the safer the future, but the higher the initial investment costs. As noted above, very
of inaction are even higher
broadly, even an annual cost as high as 2 per cent of GDP is small in comparison with
the potential damage from following business-as-usual pathways. Thus the benefit-to-cost
ratio is hugely in favour of urgent actions taken to mitigate climate change.

Defining low-emissions, high-growth pathways

The policy challenges along such a pathway are certain to vary across countries at different
levels of development. For advanced countries, the required shift in economic activity to
ensure substantive reductions in existing emission stocks will have to be accompanied by a
return to full employment and improved energy security. This requirement is at the core of
the “green jobs” agenda which has received a boost from recent stimulus packages devised
to address the current economic downturn (see box I.4). For many developing countries,
diversifying economic activity away from the primary sector and low value added manu-
facturing combined with efforts to eradicate poverty and ensure a more balanced integra-
tion into the global economy, remains essential policy goals.
20 World Economic and Social Survey 2009

Figure I.4
Emissions stabilization wedges, 2000-2060
Fossil fuel emissions (gigatons of carbon per year)
16

14

12

10

Source: Grubb (2004).

6
Notes: As compared to a
“business as usual” future in
which CO2 emissions double
4
from 7GtC/yr to 14GtC/yr by
about mid-century, emissions
stabilization requires a 2
“stabilization triangle ”that
grows to save 7GtC/yr by
mid-century. Each wedge 0
grows linearly from zero
today to 1 GtC/y in 2054. 2000 2010 2020 2030 2040 2050 2060

Box I.4
Green jobs
The Green Jobs Initiative was launched in June 2007 as a partnership between the United Nations En-
vironment Programmes (UNEP), the International Trade Union Confederation (ITUC), the International
Organisation of Employers (IOE) and the International Labour Organization (ILO). Its aim is to promote
the linkages between environmental sustainability and employment and labour markets.
Green jobs are defined as those that reduce the environmental impact of enterprises
and economic sectors, ultimately to levels that are sustainable. Such jobs are found in many sectors
of the economy ranging from energy supply to recycling and from agriculture and construction to
transportation. They help to cut the consumption of energy, raw materials and water through high-
efficiency strategies, to de-carbonize the economy and reduce greenhouse gas emissions, to mini-
mize or eliminate altogether all forms of waste and pollution, and to protect and restore ecosystems
and biodiversity. Green jobs can thus play a crucial role in reducing the environmental footprint of
economic activity. There is evidence both of the rapid growth of green or greener jobs and of sub-
stantial spillover or indirect employment effects: jobs in Germany’s renewables sector, for example,
rose between three- and fourfold between 1998 and 2006.
A number of observations are of particular importance in the discussion of green jobs.
First, there are many that already exist worldwide (table 1); indeed, half of all jobs in renewable energy
are in the developing world. Second, some green jobs are associated with new green industries (such
as renewable energy), and clearly some of these jobs are also new themselves, for example, that of
photovoltaic cell engineer (table 2). On the other hand, in years to come, the far more widespread
phenomenon will be the “greening” of existing jobs in what are otherwise traditional occupations.
New occupations and the greening of existing ones will in fact pose a broad challenge
to education and vocational training systems, even if the vast majority of green jobs are in the same
areas of employment that people already work in today, as demonstrated in the table below. Take,
for example, the occupation of automotive mechanic in connection with the introduction of hybrid
automobiles. This is a traditional occupation for which new skills will need to be learned. In fact, the
Source: ILO, Employment absence of adequate or rapid action on the supply side of the labour market through skill “retooling”
Strategy department. and upgrading constitutes a constraint on addressing environmental sustainability.
 Climate change and the development challenge 21

Box I.4 (cont’d)

Table 1
Employment estimates in renewable energy, selected countries and the world, 2006

Renewable Worlda Selected countries

energy source
Wind 300 000 Germany 82 100
United States 36 800
Spain 35 000
China 22 200
Denmark 21 000
India 10 000
Solar PV 170 000 China 55 000
Germany 35 000
Spain 26 449
United States 15 700
Solar thermal 624 000 China 600 000
Germany 13 300
Spain 9 142
United States 1 900
Biomass 1 174 000 Brazil 500 000
United States 312 200
China 266 000
Germany 95 400
Spain 10 349 Source: United Nations
Environment Programme,
Hydropower 39 000 Europe 20 000
International Labour
United States 19 000 Organization and others
Geothermal 25 000 United States 21 000 (2008).
Germany 4 200 a Comprising countries
Renewables: total 2 332 200 for which information was
available.

Table 2
A greener economy with familiar occupations

Strategies for green Representative jobs

economy investments
Building, retrofitting Electricians, heating/air conditioning installers, carpenters, construction equipment operators, roofers,
insulation workers, industrial truck drivers, construction managers, building inspectors
Mass transit Civil engineers, rail track layers, electricians, welders, metal fabricators, engine assemblers, production
helpers, bus drivers, first-line transportation supervisors, dispatchers
Energy-efficient Computer software engineers, electrical engineers, engineering technicians, welders, transportation
automobiles equipment painters, metal fabricators, computer-controlled machine operators, engine assemblers,
production helpers, operations managers, auto mechanics
Wind power Environmental engineers, iron workers and steelworkers, millwrights, sheet metal workers, machinists,
electrical equipment assemblers, construction equipment operators, industrial truck drivers, industrial
production managers, first-line production supervisors
Solar power Electrical engineers, electricians, industrial machinery mechanics, welders, metal fabricators, electrical
equipment assemblers, construction equipment operators, installation helpers, labourers, construction
managers
Cellulosic biofuels Chemical engineers, chemists, chemical equipment operators, chemical technicians, mixing and
blending machine operators, agricultural workers, industrial truck drivers, farm product purchasers,
agricultural and forestry supervisors, agricultural inspectors
Source: Pollin and Wicks-Lim (2008).
22 World Economic and Social Survey 2009

Incremental change or a big push?

Historical precedents appear to be few for the kind of transition envisioned through the es-
tablishment of a low-emissions development pathway. On some counts, the right approach
is to create incentives for private businesses to shift gradually from high-emitting activi-
ties and make investments in new high-risk, high-return climate-friendly technologies. A
good governance agenda that establishes a price for carbon, guarantees strong intellectual
property rights and removes distortionary subsidies for high-emitting activities will, it is
believed, provide the right investment climate (International Monetary Fund, 2008a).
A “big push” would be The nature of the challenge involved in this transition could entail, alternatively,
needed to launch a a series of large and long-lasting investments with respect to the generation and consump-
successful low level carbon
tion of energy, the use of land in the urban and rural context, the organization of transport,
development pathway and
establish a different pattern etc., which would have to be undertaken simultaneously if they were to have a significant
of integration with respect impact on climate change. This is the approach adopted in the present Survey. Price incen-
to the global economy tives by themselves are unlikely to trigger or sustain the required investments. Rather, a “big
push” is needed to launch a successful low-emissions development pathway. This revives
long-standing questions, familiar from the development literature, about the challenges fac-
ing poor countries in mobilizing investment resources and the relative roles of the public and
private sectors in leading such an effort. It also draws attention to the scale of the financing
challenge that developing countries will face in pursuing a low-emissions, high-growth path.
These issues will be discussed in greater depth in chapters II, IV and VI.

Does technology hold the key?

The dual challenge of meeting development goals, including through industrialization,
while at the same time controlling emissions and reducing carbon dependence will require
new, rapidly scalable and powerful technologies in the next 10–20 years—technologies
that transform not only the way that energy is produced, distributed and used but also
the approaches to helping vulnerable countries adapt to an unavoidable increase in global
temperatures. On some counts, a technological fi x is all that can be hoped for.
Yet, while there is broad agreement on the central role that technology will
play in meeting this dual challenge, there is less of a consensus on how to build techno-
logical know-how and capacity, particularly in the face of significant gaps between rich
and poor countries. For some, stronger protection of intellectual property rights, both
to encourage local innovators and to attract foreign direct investment (FDI), is key to
leapfrogging over old technologies onto a cleaner technological highway. Others not only
doubt the efficacy of such mechanisms in generating the required level of innovative effort
but also view them as a source of potentially significant obstacles for developing countries
(see chap. V).
In important areas of Historical experience indicates that, in important areas of technology develop-
technology development, ment, government support has extended beyond the research and development (R&D)
government support has
phase to include support to commercialization, for example, through government procure-
extended beyond the
research and development ment and such measures as loan guarantees for construction of buildings and investment
phase to include support to in equipment. These fall under the broad rubric of industrial policies. Moreover, techno-
commercialization logical progress is not independent of investment in both physical and human capital.
That a strong investment push is likely to embed new technologies serves as a reminder of
overlapping policy challenges.
 Climate change and the development challenge 23

Some question the wisdom of this approach, pointing to the costly practice
of second-guessing the market and “picking winners”, that is to say, using policies like
subsidized credit and infant-industry protection to back one industry or technology rather
than another. For others, experimentation, whether with new technologies or with older
but previously untried ones, involves learning and uncertain outcomes. Such initiatives,
whether undertaken by the private or the public sector constitute grounds for socializing
the risks involved. These issues are discussed in greater detail in chapters IV and V.

An expanded public policy agenda

If climate does indeed possess the characteristics of a global public good, stopping free-rid- The climate challenge is
ing, strengthening property rights and ensuring good collective governance would seem difficult to separate from
to be the main policy challenges stemming from that fact. However, as discussed earlier, other challenges—those
having to do with food and
such an approach would appear to frame the challenge too narrowly, in part because in
energy security and global
the case of climate, rival use is clearly involved, as are distributional issues. Achieving fast health issues
growth in developing countries and full employment in advanced countries along low-
emissions pathways will also almost certainly entail complex decisions regarding patterns
of consumption, settlement, transportation and urbanization, involving difficult choices
and trade-offs arising from the competing use of resources. Moreover, the climate chal-
lenge is difficult to separate from other challenges—those having to do with food and
energy security and global health issues.
A good many of the differences on policy matters stem from diverging views on A central question concerns
how best to meet these challenges: should there be a gradual shift away from business-as- the relative roles of the
usual scenarios or a transformative change? A central question concerns the relative roles of private and the public
sectors in undertaking the
the private and the public sectors in undertaking the investments needed for the low-emis- investments needed for
sions, high-growth path. One way in which Governments can act is by instituting a carbon the low-emissions, high-
price through either a carbon tax or a cap-and-trade policy or some combination of the two, growth path
along with strong regulations. Much of the discussion of the climate challenge in developed
countries is focused on the relative efficacy of alternative ways of establishing a carbon price.
The mix in developing countries is likely to be different, with a much larger role set aside for
public investment and targeted industrial policies. In any case, at all levels of development,
all policy instruments, ranging from price incentives, taxes and subsidies to regulation, and
encompassing fiscal, monetary and financial measures as well, should be fully used as part
of the toolkit created to meet these challenges. Moreover, once the scale, complexity and
urgency of the challenge are accepted, ensuring the requisite policy space for using the full
range of instruments and measures would seem to be a necessary determinant of success.

Is low-emissions, high-growth feasible?

A low-emissions, high-growth scenario
To assess various scenarios for the implications of an investment push given to address
the combined challenges of catch-up growth and climate change, an experimental simu-
lation was run with the Global Policy Model (GPM) developed in the Department of
Economic and Social Affairs of the United Nations Secretariat. The Global Policy Model
was developed to investigate the spillover effects of macroeconomic policy scenarios in an
interdependent world economy. The model is centred around standard macroeconomic
relations, including complete specifications and econometric estimations of the stock-flow
24 World Economic and Social Survey 2009

adjustment of real and financial assets and liabilities. An important long-run characteristic
is the assumption of endogenous productivity growth generated by economies of scale.
Under this assumption, Government policies affecting aggregate demand and market size
will have long-term growth effects. When the model hits on supply constraints, it adjusts
prices and exchange rates, along with endogenous macroeconomic policy responses (based
on past policy behaviour) and adjustments in financial markets. Supply constraints arising
from pressure exerted on natural resources and energy will trigger higher world market
prices for commodities and fuels, affecting production and consumption throughout the
system. The basic version of the model distinguishes 16 countries and country groups.12
While mainly macroeconomic in nature, the model does spell out simultane-
ously energy production and demand for country groups and an international market (a
pool) which sets the equilibrium price. Energy demand is estimated based on historical
observations, tracing changes in relation to output (income), population and the state of
technology measured in the form of relative income per capita, as well as the international
price. Energy production is assumed to be determined by domestic energy resource en-
dowments, technology and demand dynamics linked to change in the production struc-
ture, consumption patterns and relative prices of energy. The model does not specify car-
bon emissions linked to economic activity; therefore, inferences regarding climate change
scenarios are drawn from trends in energy efficiency and energy use.
The business-as-usual (BAU) scenario used as the basis for the present analysis
assumes that the world economy will recover from the financial crisis in 2010. The return
to the past pattern of growth, moreover, will lead to a continuation of the current trends in
(high-emissions) energy intensity and the economic inequality of past decades. The impli-
cation is that, in the business-as-usual scenario, the world would resume growth on a path
deemed unsustainable from both a development and an environment perspective.
The alternative, low-emissions, high-growth (LEHG) scenario, having been con-
structed as a policy-driven departure from the business-as-usual scenario, requires interna-
tional policy coordination. Three types of policy adjustment are considered as follows:
• Countries worldwide are assumed to increase public spending levels by be-
tween 1 and 5 per cent of GDP, with developed countries in the lower end of
the range and developing countries in the upper end. The investment push is
expected to trigger faster economic growth and will embrace efforts towards
energy efficiency, as well as help increase the supply of primary commodities
and food at a rate that is consistent with the growth of world income;
• The investment push and international agreements should contribute to reducing
high-emissions energy demand (reflecting, for instance, a cap-and-trade mecha-
nism) to yield lower emissions and greater energy efficiency. Such improvements
in energy efficiency are consistent with the investment patterns discussed below;
• Economic resilience of developing countries is strengthened by providing those
countries, especially the poorest among them, with full and duty-free market access
to developed-country markets, leading to greater economic diversification.

12 These include the United States of America, Western and Eastern Europe, Japan, other developed countries, East
Asian newly industrialized economies, the Commonwealth of Independent States (CIS) (here incorporating all
countries of the former USSR for reasons of historical data consistency), China, Western Asia (excluding Israel
which is grouped under “other developed” countries), India, other South Asia (Afghanistan, Bangladesh, Sri
Lanka, Nepal and Pakistan), East Asian middle-income countries (excluding the newly industrialized countries),
other East Asian low-income countries, Central America (including Mexico and the Caribbean), South America,
African middle-income countries and African low-income countries.
 Climate change and the development challenge 25

Energy efficiency and energy diversification

To assess the implications of changing course, levels of public investments in infrastructure,
diversification of economic activity and energy provision are raised by Governments in all
country groups. As discussed further in chapter IV, after possible financial ‘crowding-out’
mechanisms are accounted for, such public spending is found on balance to “crowd in”
private investment. The assumption that public sector injections have the potential to boost
energy efficiency was based on empirical evidence for a number of countries that have made
important shifts in the recent past (see table I.6). Energy efficiency is measured here as the
rate of increment in kilograms of oil equivalent per dollar unit of output in real terms. The
numbers reflect 20-year averages for 1970-1990, a period in which these countries pushed
for greater energy efficiency in response to various oil price shocks. Investment in energy-
saving led to reductions in the use of energy per unit of output of 50–200 per cent.
The first main element of the low-emissions, high-growth strategy simulated
with the global policy model is therefore injections of public investment which, for devel-
oping countries, would be at least as decisive as for the cases presented in table I.7. Such
positive shocks yield different results according to the inherited economic structure and
institutional patterns captured in the econometric specifications. The table summarizes
the outcomes as 20-year averages at the end of the simulation period in 2030.
Such results, even if challenging at first sight, are nevertheless reasonable in
the context of acknowledged success stories. Developed countries would be achieving very
high efficiency improvements, almost as high as in the best of the cases presented above,
albeit with slightly higher investment support. Meanwhile, the improvements expected for
developing countries would be considerably higher compared with their past performance,
but the impulse from investment is also significantly higher and is sustained over the long
term. Hence, the elasticities (ratio of change in investment to energy efficiency) would be
in these cases half of those in the developed world. This is a reasonable pattern. The catch-
up process in technology improvements cannot be expected to yield immediate results. In
addition, not all investments are supposed to be allocated to the energy sector and some
growth-enhancing might even require greater energy use.
To what extent these improvements in energy efficiency result in effective re- With the world economy
ductions of fossil fuel production and therefore CO2 emissions cannot be established with growing at about 5 per cent
during 2010-2030, the effective
exact precision by the Model in its current state of development. Given the Model’s as-
reduction in global energy use
sumptions, the coordinated policy scenario would reduce the global use of energy, mea- per unit of world output will be
sured in millions of tons of oil equivalent, at an annual rate of about 1 per cent between about 6 per cent

Table I.6
Energy use and total investment, selected country cases: 20-year averages taken in 1990

Efficiency: change in Stimulus: rate of growth Elasticity: ratio of impact

energy use per unit of of total investment in real of investment
output (percentage) terms (percentage) to efficiency
Switzerland -1.18 2.10 0.6
Finland -2.03 4.31 0.5
France -3.21 3.30 1.0
Sweden -5.79 2.59 2.2
Japan -1.98 4.15 0.5
United States -2.94 3.02 1.0
Sources: United Nations, Energy Statistics Yearbook, various years; and National Accounts Statistics, various years.
26 World Economic and Social Survey 2009

2010 and 2030.13 As noted in figure I.5 below, with the world economy growing at about
5 per cent during this period, the effective reduction per unit of world output will be about
6 per cent, broadly consistent with the numbers obtained for energy demand given above
(see table 1.7).
Improving energy efficiency The scenario presented here would lead to a cumulative reduction in the use
is not enough: it will need of oil and coal of about 50 billion of tons of oil equivalent between 2010 and 2030. This
to be complemented by
reduction is about three times the level of world consumption of fossil fuels in 2008.
massive investments in
renewable low-emissions Clearly, this is not sufficient to achieve the required 50-80 per cent reduction by 2050 or a
energy sources, leading
Table I.7
over time to a drastic
change in the composition
Energy use and total investment (model output: 20-year averages taken in 2030)
of energy sources
Efficiency: change in Stimulus: rate of growth Elasticity: ratio of
energy use per unit of of total investment in impact of investment
output (percentage) real terms (percentage) to efficiency
Developed countries -5.20 2.90 1.80
Japan -5.00 3.75 1.30
Europe -4.80 2.92 1.60
United States -5.40 2.54 2.10
Developing countries -5.80 6.80 0.90
China -6.40 6.45 1.00
Least developed countries -6.65 9.90 0.70
Source: United Nations, Department of Economic and Social Affairs, Global Policy Model.

Figure I.5
Growth of world income and of energy use
Percentage
7.00
Annual growth of energy production in its current composition
Rate of growth of gross world product
6.00

5.00

4.00

3.00

2.00

1.00

0.00

-1.00

Source: United Nations,

Department of Economic and -2.00
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029

Social Affairs, Global

Policy Model.

13 The aggregation into tons of oil equivalent assumes the evolution over time of the current composition of
energy production.
 Climate change and the development challenge 27

commensurate reduction of 25-40 per cent by 2030, as required. In other words, improving
energy efficiency is not enough: it will need to be complemented by massive investments
in renewable low-emissions energy sources, as assumed in the model simulations, leading
over time to a drastic change in the composition of energy sources.
Admittedly, this is an optimistic scenario and the impact of the investment
push on energy efficiency may not be as successful as the model outcome signals. Suppose,
for example, that the improvements in energy use per unit of output are in the order of
4 per cent per annum instead of 6 per cent. Still, it would be possible to reach the same
target for reduction of fossil fuel production (and thus of environmental contamination)
if, alternatively, the investment strategies were geared towards the production of non-fossil
fuels. This case will require annual increments of low emitting energy of the order of 2
per cent sustained over the long term—a requirement that is not impossible to fulfil. In
a study of various country experiences, the Department of Economic and Social Affairs
of the United Nations Secretariat and the International Atomic Energy Agency (2007)
note that, between 1980 and 2000, Brazil increased the production of biofuels and hydro-
electricity (covering about 40 per cent of the total demand for energy) at the rate of 2.25
per cent per annum. Significantly better records have been obtained in France through
its shift to nuclear energy.14 The biofuel or nuclear alternatives are not, of course, free of
causes for concern. However, other sources, like wind, solar and hydroelectric, are valid
options and are likely to become far more efficient as technologies advance.

Financing or access to markets?

There is no doubt that the low-emissions, high-growth strategy will carry high initial costs
for both developed and developing economies. The former, however, are in a better posi-
tion to advance on this path because they have the financial and technological resources;
but even if they do achieve the kind of targets proposed above, this will certainly not be
sufficient in terms of meeting global climate goals.
It will therefore be necessary to devise financing schemes through which the The success of a truly
resources needed by the developing world to start out on this path are supplied by the devel- sustainable development
strategy requires that
oped world. It seems unlikely that developed countries would continue to finance such an
developing countries take
investment push for too long. To highlight this difficulty, the global policy model produced significant steps towards
an alternative low-emissions, high-growth simulation, fully dependent on external borrow- attaining diversification
ing or aid, which is discussed in greater detail in chapter VI. Worthy of note, however, is into industry and services
the fact that such an outcome might very well leave developing countries still dependent on
commodity exports and exposed to sharp price volatility, in addition to being saddled with
the accumulation of external debt problems. The scenario also highlights how critical it is
for the success of a truly sustainable development strategy that developing countries take
significant steps towards attaining diversification into industry and services.
The scenario presented here assumes concerted action by policymakers, partic-
ularly in industrialized economies, that strongly encourages improved access of developing
countries to the markets of those economies for manufactures and services. If this is ac-
companied by an international accord that encourages steady-state growth of production
of food and primary materials and thus stable terms of trade (as is the case for agricultural
14 United Nations, Department of Economic and Social Affairs, and International Atomic Energy Agency, Energy
indicators for sustainable development: country studies on Brazil, Cuba, Lithuania, Mexico, Russian Federation,
Slovakia and Thailand (New York, Department of Economic and Social Affairs of the United Nations Secretariat,
2007).
28 World Economic and Social Survey 2009

prices in the European Union (EU) and elsewhere), their rapid expansion will benefit not
just developing countries themselves but developed countries as well.
As soon as there is a plan However, as indicated in chapter VI, the initial investment push will inevita-
in place to increase the bly require financial support extended from developed to developing countries and, most
market share of developing
particularly, to the least developed among them. As soon as there is a plan in place to
countries in manufactures
and services, the need for increase the market share of developing countries in manufactures and services, the need
external resources will for external resources will diminish sharply. Furthermore, in the absence of an external
diminish sharply debt burden, a combination of stable prices of commodities and a sustained growth of
income in both the developing and the developed world will contribute to a significantly
less dramatic set of fluctuations in domestic prices, interest rates, exchange rates, etc., thus
helping to avert sequences of stop-go adjustment-stabilization processes which have been
so damaging for long-term development over the last decades.

Assessing the simulation results

This empirical exercise aimed at assessing whether the low-emissions, high-growth path
postulated is a feasible one from an economic point of view. It clearly is. It succeeds in
achieving perceptible improvements in reducing absolute energy consumption despite
sustained rates of global economic growth, as discussed above. It also yields significantly
higher rates of growth in the developing world and it also allows the developed countries to
grow at a faster pace than under the business-as-usual scenario. The critical factor driving
these patterns is public investment-led expansion. This is on a significant scale, though not
extraordinary compared with some instances and the experience of some countries in the
past. In terms of income per capita, this scenario yields an improvement for all blocs and,
in particular, it significantly raises poorer countries to a level from which they can proceed
in the direction of a smooth and unimpeded convergence. Finally, it contributes to export
diversification, stable terms of trade and a smooth reduction of the external imbalances that
have proved to be unsustainable. The plots in the annex to this chapter summarize these
findings for the above-mentioned variables.
The potential shortcomings It is critical, however, to stress that the potential shortcomings of this scenario
of the scenario are not to be attributed to the underlying economic principles of the model simulation but
presented here are not
rather to the political processes that are required in order for such a big push to take place.
to be attributed to the
underlying economic Without serious international policy coordination, this scenario cannot work. It is to be
principles but rather to the hoped that the gravity of the crisis in which the global economy is actually immersed ow-
political processes that are ing to the lack of proactive policy intervention, and the seriousness of the environmental
required in order for a big challenge, would be sufficiently powerful to impel policymakers to commit to achieving
push to take place such a common goal as is exemplified by the low-emissions, high-growth strategy.

Conclusion: managing crises

John Maynard Keynes famously remarked that “in the long run we are all dead”. Keynes’s
existential angst was provoked by the stance of policymakers in the early 1920s who were
postponing urgently needed action to counter immediate economic hardships in the belief
that market forces would (eventually) bring the desired recovery. Similar thinking has in-
formed much economic policymaking during the past three decades. His quip takes on a
much more ominous meaning, however, in light of the combined threats to our economic
and environmental security.
 Climate change and the development challenge 29

Price shocks during 2008 in food, fuel and housing markets laid bare the world
economy’s shaky foundations—excessive debt, unregulated capital flows and rampant spec-
ulation. The cost in terms of declining asset values and government bailouts of collapsed
financial institutions has been staggering, while more widespread damage is now being felt
in the real economies of advanced, emerging and least developed countries alike.
As policymakers seek to turn their economies around, much attention has Turning the page on “casino
been given to using economic stimulus packages not just to help meet the short-term goals capitalism” and establishing
of creating jobs and securing homes but also to achieve longer-term security goals, includ- truly sustainable low-
emissions alternatives will
ing a stable climate. This is a welcome development. However, turning the page on “casino require policymakers to
capitalism” and establishing truly sustainable low-emissions alternatives will require poli- draw some hard lessons
cymakers to draw some hard lessons from recent experience. from recent experience
As pointed out in World Economic and Social Survey 2008 (United Nations,
2008), a wealth of historical experience and thoughtful reflection has demonstrated that
markets—and not only financial markets—do not regulate themselves but depend on an
array of institutions, rules, regulations and norms to correct coordination failures, moder-
ate their more destructive impulses and manage the tensions these impulses can generate.
There is now agreement that a return to robust economic health will mean breaking with
the policy agenda of the past three decades; and while a new consensus has yet to emerge,
there is no doubt that active government is back (Rudd, 2009).
The shift to a low-emissions, high-growth development path is a transformative
challenge that requires just such a break with recent policy approaches as well as a long-term
commitment to a new development path capable of generating full employment in advanced
countries and catch-up growth in poorer countries. It will involve smarter incentives, stron-
ger regulations and, above all, significant investments, including in the public sector.
The current crisis serves as a reminder that financial institutions need to get
back into the business of securing people’s savings and of building stable networks and
levels of trust between industry and banking that can support more socially productive
investment opportunities. These policy challenges are of long standing in many develop-
ing countries, where financial markets have repeatedly failed to build long-term com-
mitments. Adding in the climate challenge only reinforces the urgency of reforming the
financial system given the scale of resources that will have to mobilized over the coming
decades and the trade-offs that will have to be made if economies are to secure a low-
emissions future.
Market forces have an important role to play, but the real leadership will have Market forces have an
to build upon a strong public policy agenda and a revitalized social contract—at both the important role to play, but
national and international levels. Markets are prone to generate wrong information (risk of the real leadership will
have to build upon a strong
mis-pricing), giving rise to perverse behaviour (ranging from moral hazard and free-riding
public policy agenda and a
to outright fraud) and undesirable outcomes (excessive leverage, the proliferation of toxic revitalized social contract
products, hidden accounting practices). In a world of concentrated economic power, dis-
torted information and uncertain outcomes, systemic instability is an ever present threat
(Soros, 2008). The strengths and weaknesses of price incentives need to be kept firmly in
mind as market-based solutions are extended to meet the climate challenge. Government
action to establish a market for carbon, for example, whether through taxation or cap and
trade, needs to be guided by an understanding of the limits of price signals with respect
to meeting any large and complex challenge—whether it is achieving full employment,
engendering catch-up growth, guaranteeing financial stability or tackling the climate cri-
sis—and managing the threat of catastrophic risk.
30 World Economic and Social Survey 2009

The current financial crisis The current financial crisis has provided a reminder that Governments are the
has provided a reminder only agents capable of mobilizing the massive financial and political resources needed to
that Governments are the
confront large systemic threats. It has also served to demonstrate that policymakers can
only agents capable of
mobilizing the massive act with real urgency when faced with such threats. Th is is encouraging from both the de-
financial and political velopment and the climate angles, given that both challenges involve large resource com-
resources needed mitments over the long term, and at both the national and the global levels. Meeting these
to confront large challenges will entail not only surmounting traditional market failures which occur as a
systemic threats result of externalities and free-riding but also dealing with systemic threats and managing
large-scale adjustments in economic activity. The only sensible response is to mix market
solutions with other mechanisms, including regulations and public investment.
 Climate change and the development challenge 31

Annex
Figure A.I.1
Low-emissions, high-growth global scenario: trends in income per capita, by country groups, 1970–2030
(2005 United States dollars purchasing power parity)
Developed and newly industrialized countries Commonwealth of Independent States Western Asia
45 000 45 000 45 000
LEHG scenario
40 000 40 000 40 000
BAU scenario
35 000 35 000 35 000

30 000 30 000 30 000

25 000 25 000 25 000

20 000 20 000 20 000

15 000 15 000 15 000

10 000 10 000 10 000

5 000 5 000 5 000

0 0 0
1970 1980 1990 2000 2010 2020 2030 1970 1980 1990 2000 2010 2020 2030 1970 1980 1990 2000 2010 2020 2030

China East Asia middle income India

45 000 45 000 45 000

40 000 40 000 40 000

35 000 35 000 35 000

30 000 30 000 30 000

25 000 25 000 25 000

20 000 20 000 20 000

15 000 15 000 15 000

10 000 10 000 10 000

5 000 5 000 5 000

0 0 0
1970 1980 1990 2000 2010 2020 2030 1970 1980 1990 2000 2010 2020 2030 1970 1980 1990 2000 2010 2020 2030

Developing America Northern and South Africa Least developed countries

45 000 45 000 45 000

40 000 40 000 40 000

35 000 35 000 35 000

30 000 30 000 30 000

25 000 25 000 25 000

20 000 20 000 20 000
15 000 15 000 15 000
10 000 10 000 10 000
5 000 5 000 5 000
0 0 0
1970 1980 1990 2000 2010 2020 2030 1970 1980 1990 2000 2010 2020 2030 1970 1980 1990 2000 2010 2020 2030

Source: UN/DESA, simulations with UN Global Policy Model (see text for model assumptions).
32 World Economic and Social Survey 2009

Figure A.I.2
Low-emissions, high-growth global scenario: GDP growth by country groups, 1970-2030
(long-term income growth, 20 years moving average (percentage))

Developed and newly industrialized countries Commonwealth of Independent States Western Asia
10 10 10

9 LEHG scenario 9 9

8 BAU scenario 8
8
7
7 7
6
6 6
5
5 5
4
4 4
3
3 2 3

2 1 2

1 0 1

0 -1 0
1990 2000 2010 2020 2030 1990 2000 2010 2020 2030 1990 2000 2010 2020 2030

China East Asia middle income India

10 10 10

9 9 9

8 8 8

7 7 7

6 6 6

5 5 5

4 4 4

3 3 3

2 2 2

1 1 1

0 0 0
1990 2000 2010 2020 2030 1990 2000 2010 2020 2030 1990 2000 2010 2020 2030

Developing America Northern and South Africa Least developed countries

10 10 10

9 9 9
8 8 8

7 7 7

6 6 6

5 5 5

4 4 4

3 3 3

2 2 2

1 1 1

0 0 0
1990 2000 2010 2020 2030 1990 2000 2010 2020 2030 1990 2000 2010 2020 2030

Source: UN/DESA, simulations with UN Global Policy Model (see text for model assumptions).
 Climate change and the development challenge 33

Figure A.I.3
Low-emissions, high-growth global scenario: growth of real public spending, 1970-2030
(long-term income growth, 20 years moving average (percentage))

Developed and newly industrialized countries Commonwealth of Independent States Western Asia
14 12 14

LEHG scenario
12 10 12
BAU scenario
10 8 10

8 6 8

6 4 6

4 2 4

2 0 2

0 -2 0
1990 2000 2010 2020 2030 1990 2000 2010 2020 2030 1990 2000 2010 2020 2030

China East Asia middle income India

14 14 14

12 12 12

10 10 10

8 8 8

6 6 6

4 4 4

2 2 2

0 0 0
1990 2000 2010 2020 2030 1990 2000 2010 2020 2030 1990 2000 2010 2020 2030

Developing America Northern and South Africa Least developed countries

14 14 14

12 12 12

10 10 10

8 8 8

6 6 6

4 4 4

2 2 2

0 0 0
1990 2000 2010 2020 2030 1990 2000 2010 2020 2030 1990 2000 2010 2020 2030

Source: UN/DESA, simulations with UN Global Policy Model (see text for model assumptions).
34 World Economic and Social Survey 2009

Figure A.I.4
Low-emissions, high-growth global scenario: world market prices of
oil, primary commodities and manufactures, 1970-2030
(relative price indices, 200 = 100)
Primary commodities Oil Manufactures
3.50 3.50 3.50
Green and catch-up growth
3.00 3.00 3.00
Baseline
2.50 2.50 2.50

2.00 2.00 2.00

1.50 1.50 1.50

1.00 1.00 1.00

0.50 0.50 0.50

0.00 0.00 0.00

1970 1980 1990 2000 2010 2020 2030 1970 1980 1990 2000 2010 2020 2030 1970 1980 1990 2000 2010 2020 2030

Source: UN/DESA, simulations with UN Global Policy Model (see text for model assumptions).
Note: Commodity price indices were deflated by implicit price deflator of world gross product.
 35

Chapter II
Climate mitigation and
the energy challenge:
a paradigm shift
Introduction
A maximum temperature increase of 2o C above pre-industrial levels is the consensus target Developing countries must
established by the scientific community for stabilizing carbon concentrations at a level that achieve a sustained catch-
prevents dangerous anthropogenic interference in the climate system. At the same time, up growth rate of 6-8 per
cent per annum
developing countries need to achieve a sustained catch-up growth rate of 6-8 per cent per
annum to close the income gap with countries at the top of the development ladder. These
two broad objectives frame the mitigation challenge facing policymakers at the national
and international levels. The present chapter attempts to detail mitigation options that are
consistent with convergent economic growth in developing countries.
The preceding mitigation target translates globally (in terms of actual emissions
reduced) into a reduction from roughly 40 gigatons of carbon dioxide (GtCO2) annually at
present to 8-20 GtCO2 by 2050. This is no small undertaking and will involve significant
economic adjustments in developed and developing countries. There are certainly win-win
options linked, particularly, to energy efficiency; but, as discussed in chapter I, this is nec-
essary but not sufficient to meet stabilization targets. Large-scale and upfront investment
in the means of production of electricity along with new sources of renewable energy will
be needed, as well as related investments in transportation and construction.
What is required is a gale of “creative destruction” driven by massive invest- What is required is a gale
ments and innovative technologies. This is not inevitable but will require dedicated and of “creative destruction”
strategic policy action at all levels. The threat is that, by delaying such action, existing driven by massive
investment and innovative
investment projects will lock in older technologies for decades, leading to a ratcheting up
technologies
of the stock of emissions to dangerous levels, and requiring much more costly economic
and social adjustments in the future (Stern, 2009).
In spite of all the accumulating scientific knowledge and growing public aware- Serious and effective
ness of the climate challenge, effective mitigation action has been lacking in developed mitigation action is lacking
countries. One of the fundamental reasons for this is a persistent disconnect between in developed countries
environmental objectives and economic goals. This has begun to change with the recogni-
tion that the interrelated threats from the financial, energy and climate crises will need to
be tackled together (New Economics Foundation, 2008).
Addressing the challenge of climate change mitigation in developing countries
requires not only a change in global and national focus on climate and development policy,
but also strategic thinking in terms of the most relevant mitigation options using develop-
ment as the essential trigger: poverty reduction, rural development, energy access, industrial
expansion and infrastructure provision all need to be integrated with mitigation strategies.
The energy sector, broadly defined, accounts for 60 per cent of global emissions Energy is the pivotal issue
(table I.1) and unless significant emissions reductions are achieved from the way energy at the interface of the
is produced and consumed, it will not be possible to meet stabilization targets. Energy is, climate and development
challenges
moreover, the pivotal issue at the interface of the climate and development challenges. For
this reason, it is the focus of this chapter.
36 World Economic and Social Survey 2009

Deforestation and forest Deforestation is the other major source of greenhouse gas (GHG) emissions.
degradation in developing In 2004, the forest sector accounted for the release of approximately 8.5 gigatons (Gt)
countries are the primary
of carbon dioxide (CO2), mostly from deforestation, which contributes 17.4 per cent of
sources of carbon emissions
from these countries all human-generated CO2 emissions. Deforestation and forest degradation in developing
countries are the primary sources of carbon emissions from these countries. Deforestation
accounts for 35 per cent of carbon emissions in developing countries and 65 per cent in
least developed countries. According to estimates of the Food and Agriculture Organiza-
tion of the United Nations (FAO), on average, 13 million hectares of forest were lost each
year between 2000 and 2005. Over the same period, 5.7 million hectares were added to
forest area annually, resulting in a rate of net forest loss of 7.3 million hectares per year, a
slowdown from the rate of deforestation experienced between 1990 and 2000.
While we are focusing on the energy sector, at the same time we do not wish
to suggest that addressing mitigation options in other sectors like land-use change and
forestry, agriculture, transportation, waste and industrial processes is unimportant or ir-
relevant: these options remain equally important and for some developing countries, they
are a key focus. But unless the energy challenge is addressed, as we argue in this chapter,
we will experience neither the required mitigation in developing countries nor the catch-
up growth needed to allow the transformative change in the economies of developing
countries so crucial to their climate and development success.
The next section considers some stablization scenarios and the technological
options that will be needed to pursue them. Those options include energy efficiency and
new approaches to existing sources, as well as the utilization of new energy sources. Th is is
followed by a discussion of the links among energy, growth and development and what is
implied by ensuring income and energy convergence while meeting the climate challenge.
The following section considers the big investment push onto a low-emissions growth
path. Finally, some elements of an integrated strategy combining energy security, energy
access, expanded capacity and research and development are proposed.

Stabilization scenarios and mitigation options

The more than 20-fold The more than 20-fold growth in global CO2e emissions between 1750 and to present has
growth in global CO2 resulted in a dramatic increase of its atmospheric concentrations from a volume of about
emissions has resulted in
310 parts per million (ppm) to one of almost 430 ppm. Emissions of other radiatively ac-
a dramatic increase of its
atmospheric concentrations tive gases in the atmosphere have accompanied the increase in CO2. Methane concentra-
tions have doubled over the same period. Chlorofluorocarbons (CFCs) are a fundamental-
ly new anthropogenic addition to the atmosphere. Another indication of the complexities
involved is the fact that emissions of sulphur aerosols and particulate matter increase along
with energy consumption and emissions of greenhouse gases.1
Land-use mitigation Multi-gas emission reduction scenarios are able to meet climate targets at sub-
options could provide stantially lower costs compared with CO2-only strategies (Fisher and others, 2007) and
15-40 per cent of total
provide for a more diversified approach which offers greater flexibility in the timing of
cumulative abatement
over the century reduction programmes. Including land-use mitigation options as abatement strategies also
ensures greater flexibility and cost-effectiveness for achieving stabilization. Even if land
activities are not addressed directly in mitigation policies, consideration of land use and
land cover are crucial in climate stabilization, given their significant atmospheric inputs
1 Aerosol emissions are now regulated in most industrialized countries and are in decline. These
have actually resulted in regional cooling which has offset some of the climate warming caused
by increasing concentrations of greenhouse gases.
 Climate mitigation and the energy challenge: a paradigm shift 37

and withdrawals (through sequestration and albedo effects). Recent stabilization studies
indicate that land-use mitigation options could provide from 15-40 per cent of total cu-
mulative abatement over the century (ibid.).
The timing of emission reductions depends on the stringency of the stabiliza-
tion target. The lower the stabilization target, the sooner the peak of CO2 and CO2 equiva-
lent (CO2e) emissions.2 In the majority of the scenarios with stringent stabilization targets,
(as is the case for category I, with a stabilization level below 490 ppm CO2e) (figure II.1),
emissions are required to decline from around 2015 (at the latest by 2020), dropping to less
than 50 per cent of today’s emissions by 2050. For somewhat more stringent stabilization
levels (for example, below 450 or even 350 ppm CO2e), global emissions in the scenarios
generally peak around the same time, followed by a decline to 80 per cent or more below
1990 levels by 2050. These kind of radical emissions reductions depart fundamentally
from the current trends and will require a paradigm-changing transition of the global
energy system towards full decarbonization.
Figure II.1 displays global CO2 emissions from 1940 to 2000 and presents six
categories of stabilization scenarios from 2000 to 2100 (left-hand graph); and the corre-
sponding relationship between the stabilization targets and the likely equilibrium global
average temperature increase above pre-industrial (right-hand graph). Coloured shadings
show stabilization scenarios grouped according to different targets (stabilization categories
I to VI). The right-hand graph shows the ranges of global average temperature change above
pre-industrial, using (a) “best estimate” climate sensitivity of 3° C (black line in middle of
shaded area), (b) upper bound of likely range of climate sensitivity of 4.5° C (red line at top
of shaded area) and (c) lower bound of likely range of climate sensitivity of 2° C (blue line
at bottom of shaded area). The black broken lines in the left-hand graph portray the emis-
sions range of recent baseline scenarios published since the Special Report on Emissions
Scenarios (Nakicenovic and others, 2000). Emissions ranges of the stabilization scenarios
encompass CO2-only and multi-gas (all greenhouse gases and other radiatively active sub-
stances) scenarios and correspond to the 10th-90th percentile of the full probability distri-
bution for each.

Figure II.1
Alternative scenarios for CO2 emissions and equilibrium temperature
increases for a range of stabilization levels, 1940-2100

140 10
Equilibrium global average temperature

Historical emissions Stabilization level

increase above pre-industrial (o c)

VI: 855-1130 ppm CO2e

World CO2 emissions (GtCO2/year)

120
V: 710-855 ppm CO2e 8
IV: 590-710 ppm CO2e
100
III: 535-590 ppm CO2e
II: 490-535 ppm CO2e
80 I: 445-490 ppm CO2e 6
Post-SRES range
60
4
40

20 Source: Intergovernmental
2
0 Panel on Climate Change,
(2007c).
-20 0
Abbreviations: SRES,
40

60

80

00

20

40

60

80

00

0
0

00
28
30

40

50

60

70

80

90

Special Report on Emissions

19

19

19

20

20

20

20

20

21

10

Year GHG concentration stabilization level (ppm CO2e)

Scenarios (IPCC).

2 CO2 equivalent concentration takes into account the radiative forcing of other greenhouse gases
besides CO2 and, often, also other radiatively active substances such as sulphur aerosols and
carbon black.
38 World Economic and Social Survey 2009

Figure II.1 indicates the urgent need for fundamental changes in the global en-
ergy system, land-use patterns and also in human behaviour. Managing those changes will
require an integrated policy framework to effect a fundamental paradigm shift from current
emissions-intensive patterns of wealth creation to a future low-emissions and decarbonized
global economy. Of the utmost importance for achieving stabilization targets and keeping
down their cost will be widespread technology improvements adopted on a timely basis, in-
cluding the diff usion of new technologies, and induced changes to existing technologies.
What seems clear is that drastic CO2 reduction targets of 50-80 per cent by
2050 (compared with 1990 emission levels) will require reduction in the rate of energy
intensity and improvement in carbon intensity by a factor of 2-3 with respect to their his-
torical levels. All stabilization scenarios indicate that a huge share of emissions reductions,
in the range of 60-80 per cent, would come from changes in energy systems. It has been
found that this will require different sets of mitigation options across regions, with vary-
ing shares of renewable energy, nuclear energy, carbon capture and sequestration (CCS),
biomass and hydrogen and other advanced energy carriers.
Energy efficiency can play a catalytic role in achieving radical emissions reduc-
tions. In a way, it is a prerequisite for increasing shares of zero-carbon energy systems.
However, it would be wrong to overestimate its contribution, even in advanced economies
(Barker, Dagoumas and Rubin, 2009).
Achieving low stabilization Even efficiency gains will require some investments, though not on the scale re-
levels will require early quired to develop and diffuse new technologies and change existing technologies. Achieving
(upfront) investments
low stabilization levels will require early (upfront) large-scale investments and substantially
and substantially more
rapid diffusion and more rapid diffusion and commercialization of advanced low-emissions technologies. Such
commercialization of investments will need to be made worldwide on the required scale, implying that effective
advanced, low-emissions technology and resource transfers will need to be made to those countries lacking those
technologies means (see chaps. V and VI for further discussion).
Currently, there are several options for curbing emissions without jeopardizing
economic growth, especially in developing countries. These include a switch to renewable
energy technologies (of which the most significant is solar energy), the adoption of CCS
technologies both to curb emissions from fossil fuel plants and generally to facilitate nega-
tive emissions, the enhancement of terrestrial sinks through afforestation in conjunction
with sustainable biomass use, and investment in energy efficiency solutions.
The greenhouse gas abatement cost curve developed by McKinsey & Company
provides a useful quantitative estimate of both the costs and the actions needed to achieve
such reductions (figure II.2). The curve ranks technologies and industrial processes according
to the net costs of avoiding a ton of CO2 emissions, taking into account both the capital costs
and the operating costs of low-emissions technologies. Figure II.2 suggests opportunities for
negative cost (or win-win) emissions reductions where the upfront capital costs are more than
offset by future energy savings. Most of these savings are achieved through improved energy
efficiency. Technical abatement opportunities up to a cost of €60 per ton of CO2e include: en-
ergy efficiency, low-emissions energy supply, terrestrial carbon (forestry and agriculture) and
behavioural change (figure II.3). The first three options generate a total abatement of 38 Gt
CO2e per year in 2030 relative to annual business-as-usual emissions of 70 Gt CO2e. Abate-
ment opportunities in these three categories are spread across many sectors of the economy:
with approximate figures of 29 per cent for the energy supply sectors (electricity, petroleum
and gas); 16 per cent in the industrial sector; 22 per cent in transport, buildings and waste;
and 33 per cent in land-use sectors (forestry and agriculture). In all, developing countries have
70 per cent of the reductions opportunities, while developed countries have 30 per cent.
 Gas plant CCS retrofit
Abatement cost Coal CCS retrofit
€ per tCO2e Iron and steel CCS new build
60 Low-penetration wind Coal CCS new build
Figure II.2

Cars plug-in hybrid Power plant biomass

50 Residential electronics co-firing
Degraded forest reforestation
Residential appliances Reduced intensive
40 Nuclear agriculture conversion
Retrofit residential HVAC Pastureland afforestation High-penetration wind
30
Tillage and residue management Degraded land restoration Solar PV
Second generation biofuels
20 Insulation retrofit (residential)
Building efficiency
Cars full-hybrid new build
10
Waste recycling
0
5 10 15 20 25 30 35 38
-10 Organic soil restoration
Concentrating solar
Geothermal power (CSP) Abatement potential
-20 Grassland management GtCO2e per year
-30 Reduced pasture land conversion
Reduced slash-and-burn agriculture conversion
-40 Small hydro
First generation biofuels
-50
Rice management
Global GHG abatement cost curve beyond business-as-usual, 2030

-60 Efficiency improvements other industry

Electricity from landfill gas
-70 Clinker substitution by fly ash
-80 Cropland nutrient management
Motor systems efficiency
-90 Insulation retrofit (commercial)
Lighting: switch from incandescent to light-emitting dione (residential)
-100
Climate mitigation and the energy challenge: a paradigm shift

Source: Global GHG

technologies will play.

aggressively. It is not a
lever was to be pursued
potential of all technical

abatement measures and

estimate of the maximum

GHG abatement measures

below €60 per tCO2e if each
Note: The curve presents an
Abatement Cost Curve, v2.0.

forecast of what role different

39
40 World Economic and Social Survey 2009

Figure II.3
Major categories of abatement opportunities

Global GHG emissions

GtCO2 e per year
70
70 Business-as-usual

-14 Energy efficiency

60
Technical
Low-carbon measures
50 -12 energy supply < €60/tCO2e
(focus of
the study)
40 Terrestrial carbon
-12 (forestry,
agriculture)
30 Technical measures
Sources: Global GHG -5
€60–100 per tCO2e
Abatement Cost Curve, v2.0;
- 4 Behavioural changes
Houghton; IEA; and US EPA.
Note: The estimate of 20 23
behavioural change
abatement potential was
made after implementation 10
of all technical levers;
the potential would be
higher if modelled before
implementation of the
0
technical levers. 2005 10 15 20 25 2030

The central feature of these options is that they assume a start date of 2010—a
delay of 10 years would almost certainly mean missing the 2o C degree target. Many devel-
oping countries are already taking steps on mitigation. However, more action will be re-
quired. The policy challenge is to ensure that such action supports, rather than obstructs,
the achievement of development goals.

Energy and economic development

The evolution of the energy system
Improved water quality, In 1750, the world’s population was approximately 750 million, representing a little more
diet, sanitary conditions than a threefold increase over the population in AD 1 (Maddison, 2006). With the emer-
and medicine have all
gence of the industrial revolution, things changed radically. Table II.1 shows that in 1800,
contributed to population
growth, and all are global population was still less than 1 billion compared with over 6.5 billion today. This
correlated with increased more than sixfold increase corresponds to an annual growth rate of close to 1 per cent per
availability of energy year, and the doubling of the global population every 80 years. Th is explosive population
resources growth was a result of drastic decreases in mortality and increases in longevity. Improved
water quality, diet, sanitary conditions and medicine have all contributed, and all are cor-
related with increased availability of energy resources.
World gross product (WGP) increased more than 70-fold during the last two
centuries, corresponding to an annual increase of 2 per cent per year and a doubling every
35 years. To a large extent, this was made possible by the replacement of human and
 Climate mitigation and the energy challenge: a paradigm shift 41

Table II.1
Increases in population, economic activity, energy use,
mobility and greenhouse gas emissions, 1800-2000
Absolute size and cumulative increases
1800 2000 Factor
Population (billions) 1.0 6.0 x6
WGP (trillions of US dollars 1990) 0.5 36 x 72
Primary energy use (exajoules) 13 440 x 34
CO2 Emissions (gigatons of carbon) 0.3 6.4 x 21
Mobility (kilometres/person/day) 0.04 40 x 1 000
Source: Nakicenovic (2009).

animal workers with machines fuelled by fossil energy and the resulting release of labour
into high-productivity manufacturing activities.
This historical transition is reflected in the enormous increase in global energy
needs, by a factor of 34, during the last two centuries. Primary energy increased at half the
rate of GDP, meaning that energy intensity of the global economy has declined at the rate of
about 1 per cent per year. The CO2 emissions increased even less, indicating a pervasive his-
torical trend towards decarbonization of the global economy at about 1.3 per cent per year.
The energy intensity of economic activities has in fact declined 2-fold but the 72-
fold increase in economic activities has required ever more energy. The share of fossil energy
sources, taken together, increased (from 20 to 80 per cent) between 1850 and now, as did
the emissions of CO2 (as an unavoidable by-product of combustion). Consequently, energy-
related emissions of CO2 increased 21-fold to about 6 billion tons of carbon (6 GtC) in 2000.
Nevertheless, their increase has remained at a substantially slower pace than that of energy
requirements, indicating a strong historical trend towards decarbonization of societies.
Figure II.4 shows how drastically the composition of energy services has been
transformed through replacement of traditional (non-commercial) energy sources by fossil
fuels—first coal and later oil and natural gas.
In 1800, the world still depended on traditional biomass (mostly fuelwood and By the 1920s, coal provided
agricultural waste) as the main energy source for cooking, heating and manufacturing. almost 70 per cent of global
primary energy needs …
Human physical labour and animals were the main sources of mechanical energy, with
some, but much more humble, contributions from wind and hydraulic power. By 1850,
coal had already provided some 20 per cent of global primary energy needs; the figure
peaked to almost 70 per cent by the 1920s. Th is shift may be characterized as the first
energy transition. The coal age brought railways, steam power, steel, manufacturing and
the telegraph, to mention just some of the technologies that constituted the coal techno-
economic paradigm or the “coal cluster”.
Around 1900, motor vehicles were introduced along with petrochemicals, elec- … while today, fossil
tricity and many other technologies that constituted the “oil cluster”. It took another 70 energy sources provide
some 80 per cent of global
years for oil to replace coal as the dominant source of energy in the world. Today, the
energy needs
global energy system is much more complex, with many competing sources of energy and
many high-quality and convenient energy carriers ranging form grid-oriented forms such
as natural gas and electricity, and liquids which are mostly used in transportation, to solids
(coal and biomass) which are still used in the developing parts of the world (whose one
third of global population still do not have any, or any reliable, access to modern energy
services). Taken together, fossil energy sources provide some 80 per cent of global energy
needs, while fuelwood, hydropower and nuclear energy provide the rest.
42 World Economic and Social Survey 2009

Figure II.4
Global primary energy requirements since 1850

500
Renewable

Nuclear
Microchip
400
Primary energy (exajoules)

Commercial Nuclear
aviation energy
300 Gas

200 Oil
Television
Vacuum
Gasoline tube
Electric engine
100 Steam
engine motor
Coal

Biomass
0
Source: Nakicenovic (2009). 1850 1900 1950 2000

Energy and growth

Energy is the critical link Energy is the critical link between development and climate mitigation. Access to en-
between development and ergy services is distributed almost as unequally as income, with a fairly strong correlation
climate mitigation
between the two. Up to a point, energy consumption is strongly correlated with human
development (see figure II.5). There is, not surprisingly, a strong correlation between eco-
nomic convergence and energy convergence.
From a policy perspective, From a policy perspective, significant investments in “social overhead capital”
significant investments in such as the provision of energy services has long been singled out by development econo-
“social overhead capital”
mists, in part because of the direct welfare effects of the services provided, but also because
such as the provision
of energy services has of their potential to crowd in other productive investments (Hirschman, 1958; Canning,
long been advocated by 1998; Calderón and Servén, 2003).
development economists Returns to these investments are likely to be highest in the early development
stages when basic networks are still incomplete. In low-income countries, basic services
such as water, irrigation and transport account for most infrastructure spending, while
in middle-income countries, telecommunications, and especially electric power, become
more important. Once the social overhead capital is in place, more targeted policy incen-
tives can support further diversification and technological upgrading, thereby helping to
break remaining constraints on a virtuous growth cycle (Bateman, Ros and Taylor, 2008;
United Nations, 2006; Rodríguez, 2007). Indeed, a virtuous circle of strong investment,
rising productivity, falling costs, and expanding incomes and markets, leading to further
investments and increases in productivity, exhibits the mix of cumulative supply- and
demand-side impulses essential to sustained development. Large public investments in
social capital, such as energy services, can play a catalytic role in this (Ingram and Fay,
2008; Bindra and Hokoma, 2009).
 Climate mitigation and the energy challenge: a paradigm shift 43

Figure II.5
Per capita energy consumption and human development, selected countries

1.2

1.0 Japan
Barbados
United States of America
Human development index

Germany
0.8
Brazil Russian Federation
China
0.6
India
Pakistan
0.4

0.2

0
0 100 200 300 400 500 600
Gigajoules/year per capita Source: Banuri (2007).

Part of the aim of any big public investment push is to increase the marginal
return to private investments in new and more modern technologies by creating rents
and market opportunities for the private sector (see chap. IV). Albert Hirschman (1958)
recognized that the key to such a push was not just the speed with which cost advantages
in the targeted sectors were realized but also the links those sectors established backwards
to suppliers of inputs and forward to new activities and markets that used the goods pro-
duced by the targeted sector, and whose expansion could trigger new investment oppor-
tunities. Hirschman associated these backward and forward linkages mainly with large-
scale industrial investment, but he also recognized that the power sector had very strong
linkage potential which could trigger cumulative development prospects (see also Toman
and Jemelkova, 2003).
The importance of electrification to rural development has long been recog- Increased earnings from
nized. Major investments in rural electrification projects, mainly grid extension (United agricultural and local
industry and commerce
States Congress, Office of Technology Assessment (OTA), 1992) have been an integral
lead to greater household
part of successful growth experiences. In rapidly developing agricultural regions, electric- demand for electricity
ity helps to raise the productivity of local agro-industrial and commercial activities by
supplying motive power, refrigeration, lighting and process heating. Increased earnings
from agricultural and local industry and commerce lead, in turn, to greater household
demand for electricity. Energy availability for cheaper and better lighting can increase the
productivity of education inputs generally and lead to an augmentation effect in human
capital provision, as well as raise output by extending the length of the workday.
44 World Economic and Social Survey 2009

Achieving convergent economic

growth and energy consumption
Globally, approximately 31 million tons of oil equivalent are consumed in the form of
primary energy every day, equivalent to 55 kilowatt hours (kWh) per person per day. This
consumption is distributed very unequally (see table II.2). In countries members of the
Organization for Economic Cooperation and Development (OECD), average per capita
consumption varies between 100 and 300 kWh per day, divided roughly equally between
household and commercial consumption. In the vast majority of developing countries, av-
erage per capita consumption is under 35 kWh per day. The exceptions are the countries of

Table II.2
Per capita energy consumption, selected countries, 2005

Population Primary energy Electricity

Country or area (millions) (kWh per capita /day) (kWh per capita/day)
Australia 21.0 183.20 28.70
Canada 32.9 265.03 44.13
France 61.7 142.63 19.86
Germany 82.3 133.68 18.28
Japan 127.7 131.84 21.08
Sweden 9.1 182.76 40.21
United Kingdom 61.0 122.50 15.65
United States 302.2 246.92 34.60
Russian Federation 141.7 145.41 15.85
Brazil 189.3 35.27 5.53
Chile 16.6 56.75 7.51
Mexico 106.5 52.85 5.04
Venezuela (Bolivarian Republic of ) 27.5 70.60 8.35
Kenya 36.9 14.89 0.38
Nigeria 144.4 22.90 0.30
South Africa 47.9 84.90 11.55
Egypt 73.4 26.61 3.59
Bangladesh 149.0 5.17 0.39
India 1 131.9 15.13 1.25
China 1 318.0 41.51 5.26
Hong Kong SARa 6.9 83.48 15.10
Indonesia 231.6 24.70 1.31
Malaysia 27.2 71.78 9.67
Korea, Republic of 48.5 139.64 20.63
Philippines 88.7 16.05 1.45
Singapore 4.6 208.49 20.92
Taiwan Province of China 22.9 147.19 24.97
Thailand 65.7 49.03 5.17
Viet Nam 85.1 19.21 1.55
Sources: UN/DESA, based on primary energy data from Organization for Economic Cooperation and Development,
the electricity data from International Energy Agency (in million kWh per year); and population data from
Population Reference Bureau.
a Special Administrative Region of China.
 Climate mitigation and the energy challenge: a paradigm shift 45

the Organization of the Petroleum Exporting Countries (OPEC), the newly industrialized
countries and regions (Singapore, Republic of Korea, Hong Kong Special Administrative
Region of China and Taiwan Province of China, which approach OECD levels), and some
emerging economies (such as South Africa at 85 kWh, Malaysia at 72 kWh, and Chile at
57 kWh). Most countries from sub-Saharan Africa, and all South Asian countries con-
sume well under 20 kWh per capita per day. The differences are even wider in the case of
consumption of electricity, the pre-eminent form of modern energy service, and the very
symbol of modernity and affluence.
The threshold of 100 kWh per capita per day can be used as a convenient divid-
ing line between energy poverty and energy sufficiency. In figure II.5, this consumption
level is equivalent to 130 megajoules per capita per year, which corresponds to a human
development index of 0.9, somewhat to the left of Japan’s. Achieving this human develop-
ment target would imply a significant expansion of energy infrastructure. Here is where
the climate and energy agenda of developing countries begins to diverge from that of
developed countries.
In developed countries, there is greater scope for energy conservation and en- In developing countries,
hancement of energy efficiency, especially since most developed countries consume well energy efficiency does
not obviate the need for
over 100 kWh of energy per capita per day, and a scaling down of energy consumption
expansion of the energy
could very well be consistent with the same or higher levels of income and well-being. In infrastructure
developing countries, in contrast, while the energy efficiency agenda is still important, it
does not obviate the need for expansion of the energy infrastructure. Enhanced energy ef-
ficiency could mean the difference between the desired target indicated here, namely, 100
kWh per capita per day, and, say, 200 kWh per day or higher. Regardless, most countries
will need to expand energy services to the threshold level of 100 kWh per day in order to
meet the bulk of their human development targets.
The second reason for divergence hinges on the question of affordability. Cur- The vast majority of the
rently, the expansion in energy services in developing countries is impeded partly because population in developing
countries are too poor to
of the fact that the vast majority of the population is too poor to afford these services
be able to afford energy
without some form of subsidy. Even populations with incomes of $10 per day would not services without some
be able to spend more than, say, $1-$2 per day on energy-related expenditures (electricity, form of subsidy
cooking, heating, transport). If energy is priced higher than, say, $0.05 per kWh, they
would not be able to access adequate amounts of energy services.
This would seem to call for the creation of three complementary agendas. At
the aggregate level, it would make sense to set a minimum global target of 100 kWh per
capita per day in order to overcome energy poverty. Second, it would also make sense to
institute energy efficiency measures in order that this optimal target might correspond to
the achievement of economic and human development targets. At the most urgent level,
there would also be a need to address “energy destitution”, namely the lack of access to
modern energy services.
The faster-growing developing countries have been able to follow this trajectory
with reasonable success. However, even where the project has been successful—the outstand-
ing example is China, which has doubled energy consumption in five years—it has been
based on exploitation of the least-cost energy source, namely, coal, which is also the most
polluting energy source in the context of climate change. However, while technological alter-
natives to coal and other fossil fuels do exist, they are far more costly. If developing countries
resort to these resources at other than pilot scales, they would end up putting modern energy
services beyond the reach of the bulk of their populations for a generation or more.
46 World Economic and Social Survey 2009

That this is a daunting agenda cannot be questioned. Assuming catch-up

growth and continuing rates of urbanization and industrialization, closing the gap between
energy supply and energy demand in developing countries would require investments of
the order of trillions of dollars, even for low-cost options, such as coal, and certainly well
in excess of current energy investments in many developing countries.
Any big push into low- The bulk of energy infrastructure in developing countries has yet to be built,
emissions energy sources leaving energy services under-supplied and expensive in several parts of the developing
is likely to be associated
world, where many still rely primarily on traditional biomass fuels, namely, wood, crop
with massive investments in
developing wind, hydro wastes and animal dung, for their energy needs.
and other renewable Under these circumstances, it may be cheaper and easier to switch to a renew-
energy sources able pathway than to retool existing infrastructure. Cost and technical improvements in a
wide range of small-scale, decentralized technologies based on renewable forms of energy
now offer, in many situations, a cost-effective and sustainable approach to rural electrifica-
tion. Still, any big push into low-emissions energy sources is likely to be associated with
massive investments in developing wind, hydro and other renewable energy sources, inter-
connecting isolated areas with the main national grid. The rising demand for liquid fuels
and gases stemming from accelerated rural development might potentially be met through
the development of a modern biomass fuels industry which could simultaneously increase
farm and rural industry employment and income. Renewable energies could also generate
backward linkages, as the search for inputs that produced a lower level of carbon emissions
would provide incentives to innovate and explore new activities. The fact that there are
possible alternative strategies for economic and social development, with energy implica-
tions, underlines the need to include energy considerations in development planning.

The energy investment push

A transformational change Figure II.6 depicts the historical evolution of the energy system and one possible future
of the global energy development path towards decarbonization, as spelled out in the B1 stabilization scenario
system is needed
(see chap. I, note 4). It is an illustration of the needed transformational change of the global
energy system. New energy technologies and practices, as well as changes in lifestyles and
behaviour, are prerequisites for turning the energy system from its current dependence on
fossil energy towards a complete decarbonization by the end of the century. This particular
scenario describes a future world that stabilizes concentrations of the greenhouse gases just
above the current levels and thereby limits global average temperature change to about 2o C by
the end of the century. The climate change posited by such a scenario would be uneven across
regions, and in many regions, might significantly exceed the 2o C global average. Hence,
even a global temperature increase of 2o C can lead to considerable local vulnerabilities and
disruptions in respect of natural ecosystems, water availability and communities in coastal
areas (see chap. III). Nevertheless, a 2o C world would be spared the most severe adverse (and
perhaps also irreversible) consequences associated with higher rates of climate change. The
B1 stabilization scenario can be characterized as a transition towards sustainability that leads
to economic convergence and the fulfilment of the Millennium Development Goals in most
parts of the world while simultaneously avoiding more drastic climate changes. This is very
much in line with the scenario presented in the previous chapter.
The longer we wait to The nature of technological change and the associated deep uncertainties of its
introduce advanced
impact on the climate challenge require the adoption of innovations as early as possible in
technologies, the higher
the required emissions order to ensure lower costs and wider diff usion in the following decades. The longer the wait
reduction will be to introduce these advanced technologies, the higher the required emissions reduction will
 Climate mitigation and the energy challenge: a paradigm shift 47

Figure II.6
Historical evolution of, and a possible future for, the global energy system,
in the context of the relative shares of the most important energy sources, 1850-2100

100

80 Biomass (including non-commercial) Renewables

Gas
Percentage of share

60

Nuclear
Oil
40

20
Sources: Grübler, Nakicenovic
Coal
and Riahi (2007), Nakicenovic
and Riahi (2007), and
International Institute for
0 Applied Systems Analysis
1850 1900 1950 2000 2050 2100 (2007).

eventually be. At the same time, taking the opportunity window for achieving substantial
cost buy-downs will require research, development and deployment (RD&D) as well as
massive investments to achieve accelerated diff usion and adoption of advanced energy
technologies.
It was suggested above that there are significant global mitigation opportuni- The adoption of a pure
ties which correspond to less than €60 per ton of CO2e. This potential could be larger, carbon market strategy
especially if the price of carbon increased (Fisher and others, 2007). In mid-2008, for would require the provision
of direct subsidies to
example, the oil price reached almost $140/barrel indicating that the equivalent price of
developing countries
carbon in this range is not outside our recent experience of energy price volatility. How-
ever, it is also clear that the spike in oil prices in 2008 was part of a multifaceted devel-
opment crisis, creating balance-of-payments challenges for energy-importing developing
countries, adverse impacts on fiscal solvency, and increases in the costs of a range of basic
needs, including food, transportation and energy. Even though the spike was short-lived,
a prolonged escalation in energy prices would have been costly in developmental terms for
many countries. In this regard, the adoption of a pure carbon market strategy would re-
quire the provision of direct subsidies to developing countries in order to off set the adverse
impacts of higher energy prices. But these subsidies alone will not suffice: they will need to
be supplemented with adequate domestic measures to translate the international subsidies
into targeted subsidies aimed at poor and vulnerable groups (see also chap. VI).
Technological learning and the change that it produces are essential for reduc-
ing mitigation costs and increasing mitigation potentials (chap. V). It is true that increasing
the price of carbon (and other greenhouse gases) could trigger some of the technological,
institutional and behavioural changes required for effective emissions reduction. Given the
low mitigation costs in developing countries, least-cost mitigation efforts would channel
investment to these countries, assuming that appropriate institutional arrangements could
48 World Economic and Social Survey 2009

be made. However, these measures would have to be combined with a suite of compensa-
tory policies so as to offset the social and economic costs of the price increase.
“Upfront” investments To realize the benefits of technological learning, “upfront” investments would
would need to be made in need to be made in new and advanced carbon-saving technologies which would, after
new and advanced carbon-
scale-up and adoption, lower the mitigation costs and increase the mitigation potentials.
saving technologies
Chapter I suggests that these will initially have to be public investments.
Energy system investments are shown in figure II.7 for two scenarios, A2 and
B1. The former is similar to that depicted in “business-as-usual” scenarios, with a high in-
crease of greenhouse gas emissions leading to a global temperature change of about 4.5o C.
B1 corresponds to a more sustainable future with vigorous investment in new technologies
and lifestyle changes which result in global temperature change of less than 3o C. The total
investments are in the range of $20 trillion by 2030 and are slightly higher for the more
sustainable future of B1, owing to the build-up of capital-intensive energy systems. Ensur-
ing that a 2o C target is achieved would imply higher investment still, almost certainly
above the trillion dollars-a-year target (see chap. VI). However, in the long term, beyond
2030, the capital costs of ensuring the more sustainable future are significantly lower ow-
ing to induced technological change and learning. In other words, early upfront invest-
ments would have to be made to enable potential buy-downs along the learning curves.
This means that large upfront investments would have to be made in currently developing
countries. Indeed, again assuming that they will have the lowest costs and highest mitiga-
tion potentials, and largest opportunities for new markets, investments in the energy sec-
tor in developing countries should dominate in the coming decades.

Figure II.7
Energy systems investment, 2000-2030
Trillions of 2000 United States dollars

200 Long-term
investment
savings
175
(~40 trillion)

150

125

100

75 “Upfront” investments
(~2 trillion)
50

25

A2 B1 A2 B1
Sources: Grübler, Nakicenovic
and Riahi (2007). 2000-2030 2000-2100
 Climate mitigation and the energy challenge: a paradigm shift 49

An integrated approach to the

mitigation challenge
Energy security3
For many advanced countries, the availability of oil in the years ahead has become a
matter of some concern and controversy. The United States Department of Energy, in its
International Energy Outlook for 2008,4 predicts that the world energy industry will be
capable of supplying 103 million barrels per day of conventional oil in 2030 plus another
10 million barrels in unconventional fluids (biofuels, extra-heavy oil, oil sands, and so on),
for a total of 113 million barrels per day. On the other hand, the International Energy
Agency (IEA), in its Medium-term oil market report for 2009-2012, released in July 2008,
suggests that the industry will be capable of producing 96 million barrels per day by 2013,
but expresses considerable doubt about its capacity to raise production much above that
level because of declining output at existing fields, a disappointing record of new oilfield
discovery, and concerns about the adequacy of future investment.
Many energy experts hope that the supply of other basic fuels—natural gas, Without a radical shift in
coal, nuclear, hydropower and so on—can be expanded even beyond current growth rates energy strategy, it will be
in order to compensate for the anticipated shortfall in the availability of oil. Still, without difficult for other basic fuels
to fill the gap created by the
a radical shift in energy strategy, it will be difficult for these sources to fill the gap created
diminished availability
by the diminished availability of petroleum. Th is shift provides the opportunity to meet of petroleum
both climate and energy security goals in advanced countries.
Natural gas is the most attractive of the three fossil fuels because it emits the Natural gas is the most
least amount of climate-altering greenhouse gases. Natural gas was also developed later attractive of the fossil fuels
than oil as a commercial fuel, hence its major reservoirs have not been as fully depleted as because it emits the least
amount of climate-altering
those of oil. Nevertheless, gas is a finite commodity like petroleum, and many of the most
greenhouse gases
prolific and easily accessible fields in North America, the North Sea and western Siberia
have by now been largely depleted. Although, many new fields in eastern Siberia, the off-
shore Islamic Republic of Iran, northern Alaska and Canada, and the Arctic Ocean await
exploitation, the costs of developing these reservoirs will be substantially greater than the
costs for those now in production, and it is not clear how many of them will attract the
high levels of investment needed to bring them online. In sum, while it is reasonable to
expect some increase in the availability of natural gas in the years to come, it is unlikely to
compensate for the eventual shortfall in petroleum supplies.
Coal is the most abundant of the basic fuels. The technology for using coal to Coal releases more
produce electricity is very well developed, and its relatively low cost has made it especially carbon dioxide into the
attractive to developing nations like China and India as a source of electric power. With atmosphere per unit of
energy produced than
oil and natural gas prices projected to rise in the years ahead as demand outpaces supply,
do oil and gas
coal is expected to play an ever increasing role in the world’s energy mix as a source of fuel
for electricity generation. According to the United States Department of Energy, global
coal use will rise by 65 per cent between 2005 and 2030, an increase greater than for any
other major source of energy. However, when used in a conventional manner, coal releases
more CO2 into the atmosphere per unit of energy produced than the other two fossil fuels,
so an increase in coal use of this magnitude will result in a significant worldwide increase
in CO2 emissions, undermining global efforts to slow the rate of climate change. Hence,
3 This section draws extensively on Klare (2008).
4 DOE/EIA-0484 (2008) (Washington, D.C., Energy Information Administration, Office of Integrated
Analysis and Forecasting, U.S. Department of Energy, September 2008).
50 World Economic and Social Survey 2009

the ability of the international community to make progress in its efforts to stem CO2
emissions, will preclude a greater reliance on coal-using existing combustion technologies.
This reveals the even greater urgency of developing cleaner coal-based technologies and,
in particular, carbon capture and sequestration technologies (Ansolabehere and others,
2007); however, without the commitment of much greater resources, the commercial em-
ployment of these technologies appears quite some way away.5
Another possible substitute for oil is nuclear energy. Because nuclear energy
releases no CO2 emissions, some energy experts see it as an attractive alternative to fos-
sil fuels. Nuclear energy, however, also entails many risks and radioactive waste-related
storage problems which have kept costs exceedingly high compared with those of other
sources of energy, thereby discouraging Governments and private utilities from building
too many reactors. The tempo of reactor construction may pick up in the years ahead in
response to rising demand for CO2-free electrical power, but it is difficult to imagine a
scenario entailing enough new plants to raise nuclear power’s share of total world energy
significantly above its current level of 6 per cent.
From what can be foreseen, therefore, oil will remain the world’s leading source
of energy for the next quarter-century, even if its share moderately declines from its cur-
rent level (37 per cent).
Not enough resources are The only practical solution to energy insecurity and climate threats is the rapid
being devoted to ensuring development of alternatives derived from climate-friendly renewable sources of energy—
that renewables will
wind, solar, geothermal, advanced biofuels and so on. Th is is among the great challenges
replace non-renewable
sources of energy within that will be facing policymakers over the coming century. However, despite the fact that
any realistic time frame the importance of this task is very widely recognized, not enough resources are being de-
voted to alternative energy development so as to ensure that renewables will be capable of
replacing non-renewable sources of energy within any realistic time frame.
According to the United States Department of Energy, renewable sources of
energy will account for only about 8.5 per cent of world energy use in 2030, an insignifi-
cant increase above their 7.7 per cent share in 2005.6 No doubt these projections will be
revised upward in response to fresh efforts by the European Union (EU) and the Admin-
istration of the new President of the United States, Barack Obama, but it will take a major
investment push to lift the share of renewables by more than a few percentage points. After
the sharp fall in oil prices between September 2008 and January 2009, many Govern-
ments and utilities indicated that they would not be able to proceed with ambitious plans
to develop new renewable energy projects because of inadequate funding.7
Fully realizing the great Fully realizing the great potential of renewable sources of energy will require
potential for renewable overcoming a number of technological hurdles. Before wind and solar power can be used
sources of energy will
more widely, for example, it will be necessary to devise more efficient electrical storage
require overcoming a
number of technological devices—devices that would be able to store energy when the wind and sun were strong
hurdles and to release it at night or when the weather was cloudy or windless. More efficient trans-
mission systems are also needed to carry electricity from areas of greatest reliable wind and
sunshine to areas of greatest demand. Likewise, new methods are needed to convert waste
5 In the United Kingdom for example, the chief executive of Centrica, one of the United Kingdom’s
largest energy suppliers, has warned that coal plants fitted with carbon capture and storage
equipment are unlikely to be ready to make big cuts in the country’s emissions for two decades
(see “Carbon capture won’t work until 2030, says energy boss”, The Guardian, 26 February 2009).
6 International Energy Outlook for 2008, table A2.
7 See Clifford Kraus, “Alternative energy suddenly faces headwinds”, The New York Times, 21 October
2008; and Stephen Castle, “European nations seek to revise agreement on emission cuts,” The New
York Times, 17 October 2008.
 Climate mitigation and the energy challenge: a paradigm shift 51

plant matter into ethanol, so as to spare food crops and other valuable species. Sources of
energy like geothermal, tidal power, hydrogen, nuclear fusion and so forth will require a
more visionary approach and even greater scientific and technological advancement. These
advances, in turn, will require substantial investment which, at present, is not forthcoming
from public and private sources on a large enough scale.
As a result of all these challenges, the world is experiencing persistent energy
insecurity, which will make it very difficult to overcome recurring economic insecurity.
Only by ensuring a reliable, affordable supply of energy will it be possible to chart a stable
course for economic recovery and growth. Addressing energy insecurity and transform-
ing the global energy system must therefore constitute a major priority for any long-term
programme of economic and climate stabilization in advanced countries.
Without going into detail one can argue that, the ultimate goal of such an
effort must be to reduce the world’s reliance on fossil fuels, especially oil and coal, and
to increase reliance on renewable sources of energy, especially wind, solar and advanced
(non-food) biofuels. Such a course will simultaneously address the climate challenge. For
advanced countries this, in turn, will require action on:
• Conservation: efforts to reduce the consumption of fossil fuels, especially oil.
This means, among other things, driving less, driving slower, carpooling more
often, trading in gas-guzzling vehicles for fuel-efficient cars, expanding public
transportation, and improving the energy efficiency of homes, businesses and
electrical appliances of all types.
• Innovation: developing ever more fuel-efficient vehicles, factories, appliances,
heating systems and so forth; moving from oil-powered cars to gas/electric
hybrids, plug-in hybrids and all-electric cars; improving the efficiency and util-
ity of wind and solar power; developing advanced biofuels derived from non-
edible plants.
• Investment: greatly increased public and private investment in energy alter-
natives and public transportation. Creative financial inducements for the de-
velopment and utilization of energy alternatives, including, inter alia, green
bonds and a cap-and-trade system for carbon emissions.
Efforts along all fronts must start immediately if real progress is to be made (see
box II.1 for an example of possible measures at the regional level in the United States).

Energy access
Given the overall low level of energy consumption in developing countries, the concept of Limited access to cleaner
energy security is predictably somewhat different in those countries from that in the more energy services supplied by
modern energy carriers is an
advanced economies. Modern energy services are characterized by inequitability of access,
important contributor
notably between the poor and the affluent, as well as between rural and urban areas. In- to rising levels of poverty
deed, about 2 billion people in the world, one third of the world population, are entirely in some sub-Saharan
without access to modern energy; and about 1.6 billion are without access to electricity, African countries
while 2.4 billion cook with traditional forms of biomass. Limited access to cleaner energy
services supplied by modern energy carriers is an important contributor to rising levels
of poverty in some sub-Saharan African countries (United Nations Development Pro-
gramme, 2007a and b). The current investments in the global energy system are estimated
at some $500 billion per year (Nakicenovic, Ajanovic and Kimura, 2005). The sustainable
scenario depicted in figure II.7 would require at least twice this during the coming de-
cades. In comparison, the share required for ensuring access is relatively small.
52 World Economic and Social Survey 2009

Box II.1
Greenhouse gas emissions mitigation in the North-eastern
United States of America: the 3 per cent solution
To achieve the necessary reductions required to stabilize concentrations at 450 ppm or less requires
a long-term goal of reducing emissions by 80 per cent, and then establishing a strategy for achieving
that goal. If reductions begin by 2010, it will be possible to meet reduction goals by reducing emis-
sions by 3 per cent per year over the next 50 years. If this goal is to be reached by 2050 (in 40 years),
it will be necessary to cut by 4 per cent per year. For the 3 per cent annual reduction case, emissions
will drop in half in 23 years and by 75 per cent in 46 years and will be decreased by 80 per cent by
the start of the forty-eighth year. For a 4 per cent annual reduction rate, the 80 per cent reduction
will occur in the thirty-seventh year; postponing action will require that we reduce by even greater
amounts in later years.
Much of the focus on emissions reductions has, to date, been at the national level.
However, local and regional policies will also likely play a critical role in achieving the desired out-
come. In the case of the United States, a combination of local and national policies providing incen-
tives and forcing technology to improve by setting strong standards on everything from power
plants and buildings industry to transportation are likely to be strongly shaped by actions at the
State and local levels.
Policy initiatives in specific sectors will cause transformation to low-carbon infrastructure
and reduce the energy and emissions embedded in specific technologies that are part of our day-
to-day life. For example, building efficiency standards, appliance efficiency standards, and vehicle
emission standards impose a ceiling on inefficiency or emissions and drive the widespread adoption
of available efficient technologies. More aggressive mandated efficiency and demand reduction
measures for gas and electric utilities, as well as increasing State renewable portfolio standards so that
all North-eastern States require at least 20 per cent renewables (as does New Jersey) will further spur
the transition to low-emissions energy sources. These policies can be implemented with or without a
cap on greenhouse gases, but will be most effective in a strong cap-and-trade environment.
Institutions and small and large commercial customers have multiple options for reduc-
ing emissions of greenhouse gases. Through a combination of purchasing energy-efficient equip-
ment (appliances as well as lighting), using green building design concepts, installing renewable
energy supplies, using combined heat and power, purchasing fuel-efficient transportation fleets, and
purchasing green energy, these entities can significantly reduce their emissions of greenhouse gases,
while realizing significant economic savings and improving the quality of their workspace.
Industrial customers can rely on energy-efficient lighting, equipment and energy man-
agement principles, as well as on installing renewable energy sources and combined heat and power
applications. Many companies have effectively used a combination of efficient technologies, renew-
able technologies, process redesign, and transportation fleet improvements to realize energy cost
savings, reduce their waste stream, and improve their products and services.
State and local governments, in addition to using policy tools to move the North-east
on a low-emissions path, can pursue a number of options including direct action to reduce emis-
sions by developing and implementing a climate change action plan, purchasing renewable pow-
er, setting and achieving goals for energy efficiency, purchasing efficient equipment for State and
municipal use, purchasing efficient vehicles for State and municipal transportation needs, adopting
policies to encourage employees to reduce their vehicle miles travelled (for example, encouraging
telecommuting and subsidizing use of public transport) and providing incentives for purchase of
low-emission vehicles.
There is also the issue of embedded energy in products. For example, the embedded
energy in the manufacture and disposal of a vehicle is in the range of 5-10 per cent of the energy
that it will consume during its operating life. Ideally, the emissions associated with manufacture and
disposal would be taken care of at the auto factory or recycled steel plant. In the absence of such a
 Climate mitigation and the energy challenge: a paradigm shift 53

Box II.1 (cont’d)

requirement, an individual may choose to offset those emissions through more aggressive reductions
in some sector over which he or she has control, or to purchase certified offsets that ensure that a
zero-carbon renewable power source will be constructed.
The kind of 50-year schedule for electric power production perceived as being capable
a This provides examples of
of ensuring attainment of the requisite target is set out below:a the policies and measures
needed to deliver such
Near term (1-5 years): emission reductions. Similar
options will need to be
y Manage electric power demand by end-users. This can reduce emissions by the exercised in the building,
equivalent of 3 per cent per year for 5-20 years. Studies have found that physically industry and transport
equivalent households can range a factor of 2 in their energy used depending on sectors in order to meet
patterns of consumption. the targets.

y Replace 12 conventional electric bulbs with compact fluorescent lamps, thereby reduc-
ing a typical home electric bill by 3 per cent.

Near to intermediate term (1-15 years):

y Cap emissions on power plants under the Regional Greenhouse Gas Initiative (RGGI), or
an economy-wide cap-and-trade programme, and tighten emission limits each decade.
Note that a 10 per cent reduction is equivalent to capitalizing the annual 3 per cent
reduction for about four years.
y Purchase zero-emissions renewably generated electricity to reduce one’s electricity
emissions to zero (see below).

Intermediate term (5-25 years):

y Change laws so that distributed clean combined heat and power plants could be built
at industrial sites and on university campuses. A combined heat and power plant re-
duces CO2 emissions by more than half. This is equivalent to a 3 per cent reduction for
25-30 years.
y Replace a single coal-burning power plant with a natural gas-fired plant, thus reduc-
ing emissions in half. These efforts are equivalent to 3 per cent per year reductions for
about 25 years.
y Ramp up use of renewable energy including large- and small-scale wind power, indi-
vidual building solar power and combined heat and power.
y Begin to restructure the power grid to render it more compatible with distributed
energy.

Intermediate to long term (10-50 years);

y Replace existing power stations with low- or zero-emissions power plants such as wind,
solar or other similar sources. Replacing 18 coal plants per year nationwide is equiva-
lent to approximately a 3 per cent reduction in emissions. The average lifetime of these
plants should be 50 years or less so that all coal plants could be replaced in the next
half-century if laws required retirement of older, dirtier, less-efficient plants.
y Capture CO2 and storing it in depleted coal mines, thereby also contributing to emis-
sions reductions.
y Establish a robust “intelligent grid” that has many nodes and multiple distributed energy
sources, including, predominantly, renewables and combined heat and power. Struc- Source: Based on Moomaw
ture utility resource planning and cost-recovery policies to achieve this goal. and Johnston (2008).
54 World Economic and Social Survey 2009

A part of the vast potential future markets for energy are people who are exclud-
ed from access either because of the lack of service or because the services are unaffordable.
The actual figure for those excluded, which includes the “energy-destitute”, varies substan-
tially between 1.6 billion (International Energy Agency, 2005 and 2008b) and 2 billion
people (Nakicenovic and others, 2000; and Goldemberg and others, 2000 and 2004). Most
of those excluded live in rural areas; about 260 million are estimated to be urban-dwellers
(International Energy Agency, 2005). Provision of access over the next two decades would
create a huge energy market, increasing the potential benefits from technological learn-
ing through much larger scale economies. In addition, this would be equitable and have a
highly positive effect in respect of creating new economic activities and development.
An average connection Assuming an average connection cost for those excluded at 1,000 dollars per
cost for those excluded household (Nakicenovic, 2009) yields global investment needs of some $25 billion per year
from energy access of 1,000
over the next 20 years. This is a huge sum for the poorest of the developing countries but
dollars per household
results in global investment it is a humble one in comparison with other financial flows. It pales beside the hundreds
needs of some $25 billion of billions pledged by many Governments of the countries members of the Organization
per year for Economic Cooperation and Development to rescue the financial sector, automotive
industry and many other sectors of the economy. In comparison, the cost of bringing 2 bil-
lion into the modern energy service system would appear to be a real bargain. Still, Official
Development Assistance (ODA) spent on energy is only about $4 billion annually, which
is about 4 per cent of total ODA, estimated at about $100 billion in 2007 (Tirpak and Ad-
ams, 2007). Therefore, connecting those excluded exceeds substantially the sums that the
developed regions are prepared to invest in energy development in the rest of the world.

Capacity expansion
Going beyond the immediate needs of the energy-destitute in scenarios of future energy
development, substantial improvement of energy services is assumed. Th is renders the
developing countries, with their large share of global population, the largest future energy
markets. Figure II.8A displays the cumulative installed capacity in the A2r scenario of
all power plants in industrialized countries (the North) and the developing countries (the
South) from 2010 to 2030 (Grübler, Nakicenovic and Riahi, 2007).
Capacity expansion in the Capacity expansion in the South is expected to be double that in the North
South is expected to be over the coming decades, demonstrating how significant growing energy markets will be
double that in the North
in the developing parts of the world. Capacity replacement is much larger in the North
over the coming decades
because of its huge existing stock of power plants and their substantial ageing. In business-
as-usual scenarios with continuous reliance on fossil energy, especially coal in the United
States, China, India and the Russian Federation among others, the total new capacity to
be installed is almost 50 terawatts electric (TWe) or at least 12 times the current global
installed capacity. Even under these scenarios, developing parts of the world would expand
installed renewable capacity through 2030 equivalent to that of all power plants in the
world today and half as much again as that in additional nuclear plants. The potential
improvements of this installed capacity are truly huge in the developing countries alone,
indicating important investment opportunities for the private sector. However, in this
scenario their impact in terms of climate mitigation would be dwarfed by the expansion
of traditional fuel sources.
Figure II.8B shows that this picture changes radically in respect of zero-emis-
sions power plants in the stabilization world even if they are based on the fossil-intensive
A2r scenario. Stabilization, even with the modest goal of 670 ppm CO2e by 2100, leads to
 Climate mitigation and the energy challenge: a paradigm shift 55

Figure II.8
Electrical capacity expansion and capacity replacement by 2030,
developing and industrialized countries
A. A2r scenario
25
Fossil Nuclear Renewables
Cumulative installed capacity (terawatts electric (TWe))

Industrialized countries
20

Developing countries
15

10

0
Capacity Capacity Capacity Capacity
expansion replacement expansion replacement

B. A2r-670 scenario
25
Cumulative installed capacity (terawatts electric (TWe))

20
Industrialized countries

15 Developing countries

10

0
Capacity Capacity Capacity Capacity
expansion replacement expansion replacement
Source: Grübler, Nakicenovic and Riahi (2007).
Notes: The figure illustrates electrical capacity expansion and capacity replacement by 2030 in the developed
countries (industrialized) and in developing countries in the reference A2r scenario (panel A) and in stabilization
at 670 ppm CO2-equivalent A2r-670 scenario (panel B). Capacity expansion refers to new power plants, while
replacement capacity refers to the power plants that are built in place of those that are to be retired between now
and 2030.
56 World Economic and Social Survey 2009

substantial restructuring, especially for the new power plants that shift so as to be based
predominantly on renewable energy sources and much more nuclear power. Here (and in
stabilization versions of the B1 scenario), we assume a universal global mitigation effort.
This could be based on minimum costs and free trade in carbon and other goods and
services. Alternatively, as discussed in the previous chapter, it could be pursued through a
more proactive policy.
The total capacity additions are somewhat lower owing to additional efficiency
improvements beyond those in the baseline A2r. Nevertheless, the capacity additions and
replacements are huge, especially of renewable and nuclear power plants. About 4TWe of
capacity expansion is foreseen in the developed parts of the world, with 2TWe as capacity
replacements. In the developing regions, the corresponding installations are about 6TWe of
capacity expansion and about 0.5TWe of capacity replacement. Together, over 12TWe of re-
newable and about 10TWe of nuclear power plants would be installed, or five and half times
more than the total installed capacity of all power plants in the world. The interesting feature
is that half of all of these plants would be built in the now developing parts of the world and
most of them as new capacity expansion and not as replacements of ageing power plants.
Leapfrogging by This leads to a number of considerations. First, there is a potential risk of lock-
developing countries in in the traditional technologies if the needed new capacities are not built with the best
to the most advanced
technologies. In other words, there is a huge incentive for the capital to be attracted to
technologies would
likely lead to large the newest technologies and for there to be free access extended to those in the currently
cost reductions developing parts of the world (for further discussion, see chap. V). Second, there are real
and performance possibilities in developing countries of leapfrogging to the most advanced technologies,
improvements as the market is huge and would likely lead to large cost reductions and performance
improvements (see also chap. IV). Third, there is obvious potential for a virtuous growth
circle (which also meets the climate challenge), in which a big public investment push in
mitigation action leads to the crowding in of private investment, technological upgrading
and productivity growth. This will require strong policy intervention.
There is a strong potential Figures II.9 and II.10 illustrate the shift towards decarbonization of electricity
incentive to invest in generation and primary energy with increasing stringency of climate stabilization goals.
developing countries,
Figure II.9 exhibits this trend for A2r and B1 scenarios for electricity generation and figure
assuming appropriate
institutional and financing II.10 does the same for the total primary energy. With increasing stringency of stabiliza-
arrangements tion, there is a significant shift towards decarbonization and increasing investment in
carbon-free and carbon-saving technologies. As we have seen above, the largest growing
market for these technologies is in the now developing parts of the world (the South). This
means not only that increasing financing needs to be secured for these critical investments,
but also that most of the induced technological learning, and thus cost reductions, is likely
to occur in these regions. In other words, there is a strong potential incentive to invest
there, assuming appropriate institutional and financing arrangements.

Feed-in tariffs
A feed-in tariff (FIT) is a policy that obligates utility companies to “feed into” the grid
and purchase, at a legally mandated price (or “tariff ”), energy generated by any individual
or organization from renewable sources. Tariffs are the rates paid per kilowatt-hour for
electricity. Thus, feed-in tariffs are the tariffs or rates paid per kilowatt-hour of electricity
generation fed into, or sold to, the grid.
FITs constitute one of the array of policy options available to Governments for
inducing investments in renewable energy. The other options are (a) renewable portfolio
 Climate mitigation and the energy challenge: a paradigm shift 57

Figure II.9
Share of carbon-free in electricity generation
in the A2r scenario (A) and the B1 scenario (B)
A. Share of carbon-free in electricity generation in A2r (percentage)
100
North
90
South
80

70

60

50

40

30
2100
20
2050
10 2030

0
1430 1390 1090 970 820 670 590 520 480 450
Parts per million by volume (ppmv) of CO2

B. Share of carbon-free in electricity generation in B1 (percentage)

100

90

80

70

60

50 2100

40

30
2050
20
2030
10

0
830 670 590 520 480 450
Parts per million by volume (ppmv) of CO2

Source: Based on International Institute for Applied Systems Analysis (2007).

Note: These are shares in the developed regions (North) and developing regions (South), with the rest being the
global fossil generation. Fossil power plants with carbon capture and storage are included in the carbon-free shares
as well as nuclear and all renewable power plants. Shares are for 2030, 2050 and 2100. The bars on the extreme
left reflect the reference scenario that leads to CO2-equivalent atmospheric concentrations of 1430 ppm by 2100,
increasing for the A2r scenario (panel A) and 830 ppm for the B1 reference scenario (panel B), while the bars on the
extreme right reflect the very low stabilization scenario that leads to 450 ppm concentrations corresponding to
about 2o C warming above pre-industrial levels. In between are the intermediate stabilization levels.
58 World Economic and Social Survey 2009

Figure II.10
Share of carbon-free in primary energy mix
in the A2r scenario (A) and the B1 scenario (B)
A. Share of carbon-free in primary energy mix in A2r (percentage)
100
South
90
North
80

70

60

50

40

30
2100
20
2050
10 2030

0
1430 1390 1090 970 820 670 590 520 480 450
Parts per million by volume (ppmv) of CO2

B. Share of carbon-free in primary energy mix in B1 (percentage)

100

90

80

70

60

50 2100

40

30
2050
20
2030
10

0
830 670 590 520 480 450
Parts per million by volume (ppmv) of CO2

Source: Based on International Institute for Applied Systems Analysis (2007).

Note: See figure II.9.
 Climate mitigation and the energy challenge: a paradigm shift 59

standards (RFPs), which require utility companies to supply a mandated share of electric-
ity from renewable sources; (b) price-based mechanisms, which raise the price of carbon-
based energy, for example, through a carbon tax or a cap-and-trade system; and (c) direct
or indirect support for the renewable sector, for example, through allocation of funds for
research and development, provision of subsidized credit or land, or even direct public
involvement in renewable energy investments.
There is considerable overlap among the various policy options. For example,
other forms of support for renewables often accompany FITs. Similarly, cap-and-trade
systems are often implemented through RFPs. In some cases, like that of California, FITs
were used for implementing a RFP scheme. In practice, FITs have proved to be far more
successful at producing verifiable results (Mendonca 2007, Gipe 2009).
FITs have been used for over two decades and are now on the books in at least
45 countries or States across the world. The state of the art has also evolved over time. The
one that has received the most favourable attention is the advanced renewable tariff (ART),
deployed initially in Germany and now utilized in several other countries and regions.
In terms of history, FITs had first been developed in the United States of
America under the aegis of the Public Utility Regulatory Policies Act (PURPA), a part of
the National Energy Act of 1978, which allowed connection of renewable generators to the
grid and specified that they should be paid for the cost of generation that they avoided. In
response, different States developed contractual arrangements, called “standard offer con-
tracts”, which were offered to renewable generators. Specifically, in 1984, the California
Public Utility Commission instituted Standard Offer No. 4, which fi xed the amount to
be paid per kilowatt-hour for a long period (generally 10 years, over a 30-year contractual
period). This fi xed tariff was estimated on the basis of the long-term avoided cost of con-
ventional generation.
For this reason, Standard Offer No. 4 is often perceived as representing the first
instance of a successful FIT. It resulted in the establishment of 1,200 megawatts (MW) of
new wind generation plants by the mid to late 1980s, which have consistently contributed
about 1 per cent of California’s consumption for more than two decades. However, Stan-
dard Offer contracts were offered only up until 1984 before the collapse of oil prices.
Germany had implemented its Stromeinspeisungsgesetz (StrEG), literally, the
law on feeding in electricity to the grid, in 1991. Germany based its tariffs upon a fraction
of the retail rate (that is to say, the price at which electricity was sold to consumers), not
the wholesale rate (that is to say, the cost at which utilities purchased electricity from other
generators). In Germany, consumption taxes constitute a large fraction of the ultimate
retail price of electricity. Wind energy and solar energy were paid 90 per cent of the retail
rate and hydroelectric plants were paid 80 per cent of the retail rate.
However, these rates too were not sufficiently stable to attract adequate financ-
ing. This was corrected in Germany in 2000 by the stipulation that renewable sources of
electricity would have priority access to the grid for a host of environmental, social and
economic reasons. It also set different tariffs for different technological options (based
on the respective cost of generation plus a reasonable profit) and guaranteed them for 20
years. Many developing countries have followed this model, comprising so-called Ad-
vanced Renewable Tariffs, since it corresponds with standard practice in respect of other
private electricity plants.
In the case of residential rooftop solar photovoltaic (PV), for example Ger-
many’s 2004 law offers € 0.57/kWh (~US$ 0.75/kWh), which is a much higher figure than
that for other sources. The Canadian Province of Ontario recently revised its laws for the
 60 World Economic and Social Survey 2009

purpose of offering standard contracts differentiated by technology, size and application,

including, for example, Can$ 0.80/kWh (US$ 0.62/kWh) for residential rooftop solar PV.
In most cases, although tariffs are expressed as a percentage of the retail rate, they are in
effect based on the cost of generation plus profit.
In summary, modern policies of Advanced Renewable Tariffs require priority
access to the grid, priority purchase of generation from renewable resources, and differen-
tiated tariffs based on the cost of generation plus a reasonable profit.
In developing countries, a major problem stems from the fact that the costs of
most renewable options are far higher than the average retail price of electricity, which in
turn is held down by reason of the fact that there is a proportion of lower-income groups
that can afford electricity only at a cost under $0.06/kWh. This creates a disincentive for
producers, who fear future policy changes in case of large-scale uptake of renewable energy
generation. In this regard, a FIT option can be successful in developing countries only if
it is backed by an international guarantee, and internationally funded subsidies for low-
income consumers.

Research and development

The opportunity that crisis The kind of opportunity that a crisis gives to fundamental change can be wasted if societ-
gives to fundamental change ies choose instead to subsidize the old systems and perpetuate the old paradigms, further
can be wasted if societies
postponing the embrace of the new and at the same time creating conditions for ever
chose instead to subsidize the
old systems and perpetuate deeper crisis and depression. These risks are probably higher in the developing parts of the
the old paradigms world because of their limited financial resources and institutional capabilities for estab-
lishing effective policies and measures that lead towards a new phase of growth character-
ized by pervasive decarbonization.
Research, development Together, RD&D are vital to the improvement of performance and the lower-
and demonstration are ing of costs in the early stages of technological development. Essentially, the same applies
vital to the improvement
to technology transfer (chap. V). For example, the cost of photovoltaics produced in Japan
of performance and
the lowering of costs had halved between 1973 and 1976, but none of this improvement is evident in observed
in the early stages of prices because it occurred prior to the installation of any demonstration units, thus cu-
technological development mulative installed capacity was zero. Such RD&D expenditures are a small factor in the
cost improvements of technologies that have already advanced to the stage where they have
found commercial niche markets and are candidates for pervasive diff usion. However, in
the earlier stages, RD&D accounts for a larger share of performance improvements and
cost reductions.
Here we affirm that global decarbonization and universal access to energy
services are two important opportunities created by the current financial crisis and the
ensuing economic depression. While the depression is very disruptive and particularly
destructive for the poor, it does at least potentially sow the seeds of renewal, provided that
All of the transformational
the world is prepared to make the necessary institutional and financial investments.
changes in the energy Research and development of innovations that lead to diff usion of new and
system need to empowered advanced technologies and practices are a possible solution to the double challenge of
by vigorous research, providing development opportunities to those who are excluded and allowing for further
development and development opportunities among the more affluent. This needs to occur without risking
demonstration efforts,
irreversible changes in ecological, biophysical and biochemical systems. In the energy area,
investments, removal
of barriers, provision of this implies a shift from traditional sources, in the case of those who are excluded from
information and access, to clean fossils and modern renewable energy; and, in the more developed parts
capacity-building of the world, a shift from fossil energy sources to carbon-free and carbon-neutral energy
 Climate mitigation and the energy challenge: a paradigm shift 61

services. In all cases, this means a vigorous improvement of energy efficiencies, from sup-
ply to end use, expanding shares of renewables, more natural gas and less coal, vigorous
deployment of carbon capture and storage, and—in some cases, where it is socially accept-
able and economically viable—also nuclear energy. All of these transformational changes
in the energy system need to be empowered by vigorous RD&D efforts, investments,
removal of barriers, provision of information and capacity-building (including know-how
and know-why).
Current energy RD&D trends are unfortunately moving in the opposite di-
rection. Public expenditures in OECD countries have declined to some $8 billion from
about $12 billion two decades ago, while private expenditures have declined to $4.5 bil-
lion compared with almost $8 billion a decade ago (International Energy Agency, 2008a).
This means that today we are investing barely about $2 per person in the world per year
in energy-related RD&D activities. Many studies indicate that this needs to increase by at
least a factor of 2–3 in order to enable the transition towards new and advanced technolo-
gies in the energy systems (Bierbaum and others, 2007). However, it should be noted that
Finland, Japan and Switzerland represent important exceptions, with substantially higher
public and private energy RD&D efforts.
All told, RD&D efforts need to be tripled and energy investments at least
doubled in order to assure the timely replacement of energy technologies and infrastruc-
tures (see chaps. V and VI).

Conclusion
A more sustainable future requires large “upfront” investments. The required investments
are likely to exceed a trillion dollars per year from now to 2030, or at least twice the current
level of investments, with most of the requirements coming from developing parts of the
world. Achieving a transition towards more sustainable development paths will also require
substantial and complementary investment in energy RD&D.
The great benefit of these additional investments in a future characterized by
carbon-leaner energy systems and a more sustainable development path is that in the long
run (to 2050 and beyond), the investments would be substantially lower compared with
the business-as-usual alternatives. The reason is that the cumulative nature of technologi-
cal change translates the early investment in a carbon-leaner future into lower costs of the
energy systems in the long run, along with the co-benefits of stabilization.
This all points to the need for radical change in energy policies in order to as-
sure that the investment effort will be adequate in our common future and to promote ac-
celerated technological change in the energy system and end use. The global financial and
economic crisis offers a unique opportunity to invest in new technologies and practices
that would generate both employment and affluence as well as pave the way for a more sus-
tainable future with lower rates of climate change. The crisis of the “old” offers a historic
opportunity to sow the seeds of the “new”.
 63

Chapter III
The adaptation challenge
Introduction
The previous chapters have argued that rising living standards in developing countries
need not jeopardize efforts to stabilize global emissions, reverse the threat of dangerous
global warming or avert catastrophic environmental damage. It is clear, however, that the
development path followed by today’s rich industrialized countries can no longer serve as
a model for catch-up growth. Rather, powering industrial expansion, rapid urbanization
and population growth in the developing world will require a big push into cleaner and
more efficient technologies, above all in the production and consumption of energy. This
will require a transformative public policy agenda and a massive redirection of investment,
at both the national and international levels.
But even if policymakers can quickly undertake the transition to a low- Rising global temperatures
emissions growth path, rising global temperatures are unavoidable and will bring serious will, in the coming decades,
environmental damage, through spreading drought conditions, a rising sea level, ice-sheet threaten and destroy
economic livelihoods,
and snow-cover melting, and the occurrence of extreme weather events. These phenomena
in particular of already
will, in the coming decades, threaten and destroy economic livelihoods around the vulnerable populations
globe, in particular of already vulnerable populations, including in developed countries.
The scientific community is becoming increasingly alarmed about the potential scale of
environmental damage from what it previously considered manageable changes in global
temperatures (Adam, 2009a). The threats to livelihoods and security are, correspondingly,
likely to be all the greater.
For many developing countries, environmental constraints and shocks are al- A warming world is set
ready part of a vicious development cycle, which traps them at a low level of income, un- to become an even more
dermines their resource base and restricts their capacity to build resilience with respect to unequal world
future shocks (United Nations, 2008). The constraints and shocks are sure to become even
more challenging with global warming. Poor health-care systems, lack of infrastructure,
weakly diversified economies, missing institutions and soft governance structures expose
poorer countries and communities not just to potentially catastrophic large-scale disasters
but also to a more permanent state of economic stress from higher average temperatures,
reduced water sources, more frequent flooding and intensified windstorms. These stresses
will likely increase the risks of food and income insecurity, further exposing thereby the
inadequate levels of health care, sanitation, shelter and social infrastructures.
Adapting to climate change will have to be a central component of any compre-
hensive and inclusive climate agenda. Several funds have been set up, at the international
level, to finance adaptation measures in developing countries, but these are woefully inad-
equate for meeting the challenges involved. Scaling up these funds is the first challenge in
the adaptation agenda. There is also greater awareness among domestic policymakers of the
growing threats from climate change, as well as harder thinking about coping strategies
and adaptation programmes. Still, adaptation is seen primarily as an environmental issue
and there is a tendency to compartmentalize climate change policies and isolate them in
environmental ministries. This constitutes the second big challenge in the adaptation agen-
da (Ahmad, 2009). Adaptation has to be understood not just as a development challenge,
but as one that can be solved only with the full backing of the international community.
64 World Economic and Social Survey 2009

Increased investment, But even when adaptation measures have been linked to a development strat-
improved access to egy, the tendency has been to focus either on poverty alleviation (and thereby view the pol-
finance and strengthened
icy challenge as entailing the promotion of stronger safety nets and innovative insurance
institutional capacity are
at the heart of confronting mechanisms for vulnerable groups and sectors) or on business opportunities (by strength-
the adaptation challenge in ening climate-related markets). These actions have a role in a more integrated strategy
most developing countries but they cannot frame it. Rather, the present chapter argues that increased investment,
improved access to finance and strengthened regulations and institutional capacity are, as
in the case of the mitigation challenge, at the heart of confronting the adaptation chal-
lenge in most developing countries. Indeed, synergies between adaptation and mitigation
strategies need to be explored much more fully, as an integral part of low-emissions, high-
growth development pathways in countries vulnerable to climate change and shocks.
The next section looks at the growing climatic threats that are likely to accom-
pany a warming world, the need to address these threats from a development perspective
and the limits of existing approaches. This is followed by a more detailed examination of the
threats to rural and urban communities and the more systemic risks associated with health
and sanitation, the big challenge for policymakers stemming from the fact that these threats
are often interrelated and, more often than not, compound existing vulnerabilities in poorer
countries and communities. Some elements of a smarter and more integrated approach to the
adaptation challenge are then set out. The final section emphasizes that this challenge will
require the full support of the international community—support that, to date, has not been
forthcoming on a scale that is anywhere close to being adequate, much less effective.

Adaptation and vulnerability

Mitigation is directed at slowing the growth of future emissions of greenhouse gases and
eventually reducing their stock to a level consistent with manageable and stable tempera-
tures. Adaptation is about mobilizing resources and devising policy strategies for building
up resilience with respect to the unavoidable negative impacts of higher temperatures and
for coping with the consequences. This is not a challenge that is altogether new. Through-
out history, human societies have shown an extraordinary capacity for adapting to climatic
changes. However, the threats posed to security and livelihoods by anthropogenic global
warming, like the appropriate responses, are likely to be unprecedented.1

Climate change and vulnerability

Global warming of 4º C or Despite considerable variation in scientific estimates of the possible impacts of climate change
more is increasingly likely on environmental stability concern over catastrophic risks to the planet’s ecology and life in
and Governments need
general continues to grow. For example, Hansen and others (2008) argue that the eventual
to be prepared for the
significant impacts on their temperature increase from a doubling of atmospheric carbon dioxide (CO2) is more likely
economies and populations 1 For a discussion of the uneven socio-economic impact of global warming between the years 800
and 1300 and the threats linked to severe aridity in particular, see Fagan (2008). Drawing from the
experiences of that period, Fagan concludes:
Drought and water are probably the overwhelming important issues for this and future
centuries, times when we will have to be accustomed to making altruistic decisions that will
benefit not necessarily ourselves but generations yet unborn. This requires political and social
thinking of a kind that barely exists today, where instant gratification and the next election
seem more important than acting with a view to the long-term future. And a great deal of
long-term thinking will have to involve massive investments in the developing world, for those
most at risk (pp. 240-241).
 The adaptation challenge 65

to be 6o C, rather than the 3o C assumed by both the Intergovernmental Panel on Climate

Change (2007b) and Stern (2007). Many scientists estimate that global warming of 4o C or
more is increasingly likely in this century and that Governments need to be prepared for the
significant impacts on their economies and populations (Adam, 2009b).
The damage resulting from climate change will not be felt uniformly across
countries and communities (see chap. I). Of the additional 600 million people who could,
according to the estimates of the United Nations Development Programme (UNDP)
(2007a), become victims of malnutrition by 2080 as a result of climate change, all will be
living in what are already the poorest and most vulnerable countries. By contrast, there
will be some areas of the world that may experience benefits, for instance, with regard to
mortality rates and crop yields, provided that global temperature increases do not greatly
exceed 2o C. However, even in developed areas, the proliferation of threats brought about
by temperatures rising above 2o C could begin quite rapidly to heighten existing vulner-
abilities and to do so with greater severity than expected. Figure III.1 shows, for instance,
how various sectors and settlements in the Australasian region are affected by temperature
change. Vulnerabilities associated with water security, coastal communities and natural
ecosystems will be exposed at smaller temperature rises than will be vulnerabilities associ-
ated with infrastructure and food security.
New data on the melting of mountain glaciers and the ice sheets of the Arctic The livelihoods of hundreds
and Antarctic point to an increased likelihood of a significant rise in sea levels, as a result of millions of people
depending on glacier
of which several big cities such as New York, London, Tokyo, Dhaka, Shanghai, Mumbai
water and living in low-
and Rio de Janeiro could be under serious threat. Similarly, in the Andean cordillera, level coastal zones are at
melting of glaciers threatens the water supply and livelihoods of at least 30 million people considerable risk
(see box III.1). The livelihoods of about 500 million people depending on glacier water
and approximately 600 million people living in low-level coastal zones are at considerable

Figure III.1
Rising temperatures and vulnerabilities in the Australasian region

Water security
Coastal communities
Energy security

Major infrastructure
Health: heat-related deaths

Tourism
Agriculture and forestry

Food security
Natural ecosystems

Sustainable development

0 1 2 3 4 5 6 7
Source: UN/DESA, based on
Temperature rise (o C) Intergovernmental Panel
on Climate Change (2007c),
Coping range Adaptive capacity Vulnerability chap. 11, figure 11.4.
66 World Economic and Social Survey 2009

Box III.1
The multiple threats to livelihoods from climate change:
the Andean case
The impacts of climate change are cumulative and are closely linked to other vulnerabilities, often in
a dangerously reinforcing manner. This is clearly illustrated by the accelerated melting of mountain
glaciers, which are a critical source of livelihoods for about 500 million people worldwide and essential
contributors to regional and global biodiversity (Intergovernmental Panel on Climate Change, 2007c).
Most of the world’s tropical glaciers are located in the Andean mountains of Peru, the
Plurinational State of Bolivia and Ecuador, where melting threatens the water supply and livelihoods
of at least 30 million people. Over one fifth of the surface of 18 mountain glaciers in Peru has already
melted over the past 35 years, while most of the lower-altitude Andean glaciers are expected to
diminish substantively during the next 10-20 years.
Direct impacts of this trend are being felt in large cities in the region, which depend
on glacial run-offs for their water supply. Quito draws 50 per cent of its water supply from the glacial
basin, and La Paz, 30 per cent. The loss in volume of the glacier surface of Peru, equivalent to 7,000
million cubic metres of water (about 10 years of water supply for Lima), has meant a reduction by
12 per cent of the water flow to the country’s coastal region, which is home to 60 per cent of the
population of Peru.
As glaciers retreat, the capacity to regulate water supply through run-offs during dry
and warmer periods and to store water in the form of ice during wet and colder periods is being lost.
Notably, with the increasing scarcity of water supply, agriculture and power generation are also at
Source: “Retracting glacier risk. Without sufficient run-offs, pasture land upon which to raise livestock and continue small farm-
impacts economic outlook ing (including, for example, alpaca and sheep herding) will be insufficient. As the cultivation of native
in the tropical Andes”, tubers and other staples, for example, potatoes and quinoa, is likely to dwindle, farmers may have to
a highlight of the 2007
resort to planting costly staples that need chemical fertilizers.
World Bank report on the
impacts of climate change Moreover, most Andean countries are also dependent on the glaciers for hydroelectric
in Latin America, available power generation, which accounts for 50 per cent of the energy supply in the Plurinational State of Bo-
at http://go.worldbank.org/ livia and 70 per cent or more in Colombia, Ecuador and Peru. With rising temperatures, energy genera-
PVZHO48WT0 (accessed 20 tion will be diminished in areas where water basins depend on glaciers. This will, inter alia, increase the
April 2009). need to invest in additional power capacity and explore, as in Peru, thermal-based power options.

risk.2 The extreme case of sea-level rise puts the existence of entire countries, in particular
small island developing States, at risk (see box III.2; and Huq and others, 2007).
The number of displaced The same environmental change and shocks will have, of course, different im-
persons in developing pacts, depending on the level and sophistication of the adaptive capacities that countries
countries will be several
and communities can muster.3 When developed countries are exposed to environmental
times higher than the
number in developed shocks, they can draw on financial resources and institutional strengths that enable them
countries to bounce back and bolster their resilience with respect to future impacts (Leary and oth-
ers, 2008a). This is not the case in most developing countries. For instance, the areas of
dryland and wetland losses in developing countries resulting from the same sea-level rise
could be approximately 1.5 times larger than those in developed countries by 2100, while
the number of displaced persons in the former (4 million) will be several times higher than
that in the latter, and the protection cost will also be higher in developing countries (see
figure III.2).
2 Updated information on ice and glacier melting can be obtained from World Meteorological
Organization-International Council of Scientific Unions (2009), available at http://216.70.123.96/
images/uploads/IPY_State_of_Polar_Research_EN_web.pdf; and at http://news.bbc.co.uk/2/hi/
science/nature/7935159.stm.
3 The term “adaptive capacities” covers a range of practices which include, inter alia, readiness
to deal with climatic changes and shocks, resilience in the face of shocks, responsiveness to the
damages that do occur, and recovery once the crisis is over.
 The adaptation challenge 67

Box III.2
In the face of the storm: extreme
vulnerability to climate change
Climate change may pose the greatest threat to the world’s small island developing States and many
of the least developed countries. These countries have contributed the least to overall greenhouse gas
emissions.a However, owing to low levels of gross national income per capita, low levels of human re- a For instance, the
source development, severe structural weaknesses and a narrow resource base, they are also the most combined average annual
vulnerable to, and have the least adaptive capacity to deal with, the impact of climate change. CO2 emissions of small
Global warming contributes to a steady rise in sea level: by the end of the twenty-first island developing States and
least developed countries
century, sea levels are expected to have risen by between 0.19 and 0.58 metres (Intergovernmental amounted to less than 1.3
Panel on Climate Change, 2007c), though a number of climate models indicate that there will be per cent of the global total
geographical variations. The consequences of such a rise are potentially devastating. Indeed, while for the period 2000-2004,
sea-level rise poses a real existential threat to many cities and entire countries, which may potentially and were exceeded by
find large parts of their surface being permanently inundated and submerged, the threat is particu- those of France alone.
larly real to low-lying small island developing States which may be submerged completely. This could
result in large-scale migration (see also box III.3).
Climate change is dramatically affecting weather patterns in many areas. Evidence in-
dicates that the number of storms of category 4 or 5 has increased globally since 1970. Among small
island developing States, there has already been a noticeable increase in the number of reported
natural disasters over the past decades (see figure). In fact, small island developing States are con-
sidered to be the country group most vulnerable to the effects of climate change (Heger, Julca and
Paddison, 2009).
Another issue requiring urgent attention is the impact of global warming on exist-
ing freshwater sources. In many coral atoll countries, freshwater is available from extremely fragile
groundwater lenses that are dependent on rainfall; already less than half the population of Kiribati

Incidence of natural disasters in small island developing States, 1970-2006

45
Windstorms
40 Floods
Others
35
Frequency (number per year)

30

25

20

15

10

5
Source: UN/DESA, based
on statistics obtained from
0 EM-DAT: Emergency Events
1970

1975

1980

1985

1990

1995

2000

2005

Database, available from

http://www.emdat.be.
68 World Economic and Social Survey 2009

Box III.2 (cont’d)

has access to safe water, while less than 10 per cent of the rural population in Papua New Guinea
has access to safe water (Hoegh-Guldberg and others, 2000). Stronger and more frequent storms
will lead to contamination of those lenses with seawater, compromising water quality, while more
frequent and longer-lasting droughts will reduce the availability of water.
Least developed countries are also extremely vulnerable to the impact of climate
change. Projected changes in precipitation will exacerbate a situation already stressed by extreme
poverty and other major development challenges. Global warming will primarily affect water re-
sources, agriculture and food security, natural resource management and biodiversity, and human
health. Many least developed countries are already experiencing a major deficit in food produc-
tion; as soil moisture declines and as the risk of water stress and drought increases, the situation will
worsen owing to declining crop yields. These impacts will have a significant impact on agricultural
trade, economic growth and the achievement of development goals.
Some developed countries are already investing in adaptation; however, developing
countries—in particular small island developing States and least developed countries—have limited
technical and financial resource capacities and therefore face far greater challenges in implementing
adaptation measures. Overcoming those challenges constitutes a critical priority, given the level of
exposure and extreme vulnerability within the developing world to the potentially adverse effects
of climate change. Developing countries urgently need both to strengthen their capacities to assess
their vulnerabilities and deal with the risks of climate change and to develop adaptation strategies that
are fully integrated into development planning at the national, regional and international levels.

Many poorer countries and populations will not have the capacities to deal
with the damage triggered by warmer temperatures even below the 2º C threshold. Small
increases in sea level, the rate of ice-sheet melting, the length of droughts, and the intensity
of storms could all prove catastrophic for some countries and communities with limited
response capacity. The threats will only further intensify as climate variability becomes
the norm and hard-to-predict extreme events become more frequent. For some communi-
ties, the climate threat already seems too close and too daunting to allow for measured
responses (see box III.3).
In addition to adding new threats and intensifying existing ones, climate
change can also be expected to multiply the challenges facing vulnerable communities by
compounding interrelated threats (Intergovernmental Panel on Climate Change, 2007c).
For instance, the number of outbreaks of tropical diseases is likely to be larger in areas
experiencing an increased incidence of heatwaves, leading to the extension of drought-
prone areas, while the incidence of water-related diseases is likely to rise in areas with an
increased incidence of floods. Increased hurricane activity will also lead to an increase in
respiratory diseases (for example, influenza), in particular when emergency shelter is in-
adequate and in areas with little or no medical assistance. The well-being of people whose
main sources of livelihood are lost as a result of these threats, particularly people belonging
to vulnerable groups such as children, older persons and women, will be further jeopar-
dized by food insecurity, inadequate shelter and health deterioration.
The recent winter drought in northern China provides an example of the va-
riety of direct and indirect threats to livelihoods and the compounding effects of those
threats that can be triggered by climatic shocks. As a consequence of the absence of rain
and snow since November 2008, China’s Ministry of Water Resources reported in early
February 2009 that about 3.7 million people and 1.9 million large animals had limited
access to drinking water in northern China, while reduced soil moisture had indirectly af-
fected an estimated 9.7 million hectares of crops, representing 43 per cent of winter wheat
 The adaptation challenge 69

Figure III.2
Differential adaptive capacities to global sea-level rise, developed and developing countries, 2000-2100

Cause Consequences Cost

Developing countries
1 000 5 1 000

Area (thousands of square kilometres)

4
100 100

Billions of US dollars
People (millions)
3

Global sea-level rise IS92 scenario 10 10

0.7 2

0.6 1 1
Dryland loss 1
Wetland loss Land losses
0.5
Population displaced Protection costs
Sea level (metres)

0.1 0 0.1
0.4
2000

2040

2060

2090
2080
2050
2030
2020

2070

2100

2000

2010

2020

2030

2040

2050

2060

2070

2080

2090

2100
2010

0.3

0.2 Developed countries

1 000 5 1 000
0.1
Area (thousands of square kilometres)

0
4
2000

2010

2020

2030

2040

2050

2060

2070

2080

2090

2100

100 100

Billions of US dollars
People (millions)

10 10
2

1 Dryland loss 1
1
Wetland losses
Land losses
Population displaced Protection costs
-0.1 0 0.1
2000

2010
2020

2030

2040

2050
2060

2070

2080
2090

2100

2000

2010

2020

2030

2040

2050

2060

2070

2080

2090

2100
Source: Intergovernmental Panel on Climate Change (2007c).

sources.4 The scarcity of water resources and the reduction in crop harvesting are likely to
increase food insecurity and also add to health risks, including that posed by the greater
susceptibility of water-stressed birds to avian flu.5
4 See http://pandemicinformationnews.blogspot.com/2009/02/chinas-drought-may-make-birds-
more.html.
5 Again, compounding threats will not be limited to poorer countries. The recent collision of economic
and environmental risks in California’s Central Valley has led to a surge in unemployment rates and
food prices and in the number of large areas that are being left fallow. According to McKinley (2009):
(The United States of America’s) biggest agricultural engine, California’s sprawling Central Valley is
being battered by the recession like farmland most everywhere. But in an unlucky strike of nature,
the downturn is being deepened by a severe drought that threatens to drive up joblessness, increase
food prices and cripple farms and towns. Across the valley, towns are already seeing some of the
worst unemployment in the country, with rates three or four times the national average … With
fewer checks to cash, even check-cashing businesses have failed, as have thrift stores, ice cream
parlors and hardware stores.
70 World Economic and Social Survey 2009

Box III.3
Relocation: desperate measures?
In December 2008, the Executive Secretary of the United Nations Framework Convention on Climate
Change said in a press conference that relocation as undertaken by populations of small island devel-
oping States was “depressing” and showed that they were “giving up”. But is relocation an option only
for those who have lost faith, or is it a realistic solution which should have already been considered
by now?
At the sixtieth session of the United Nations General Assembly, in 2005, the President of
Kiribati mentioned the need for nations to seriously consider the option of relocation: the “ultimate
form of adaptation to climate change” (Loughry and McAdam, 2008). In late 2008, the President of
Maldives proposed buying land overseas to resettle the population. These small islands are aware of
their vulnerability to sea-level rise and are taking their future seriously. Other areas may not perceive
the threat as directly, but may be just as vulnerable.
Would it be possible, for instance, to simply move a coastal city inland? What would
the implications be for the surrounding communities, the peri-urban landscape and ecosystems? If
island residents are considering abandoning their lands, the concept of relocating an entire city is
not totally outlandish. However, research on recovery processes following disasters shows that even
when new housing settlements are built in new locations, people tend to return to their previous
home, even if it is “high risk”. There are a number of factors to account for this, but they are usually
related to livelihood necessities, mobility and social connections.
How does relocation relate to migration, and how might these processes conflict? Mi-
gration requires making decisions that involve risk, because people give up their livelihoods to look
for better opportunities. Some specialists predict that the magnitude of the flow of environmental
refugees as a consequence of climate change will multiply in the next decades, to as much as 75
million by 2030 (Global Humanitarian Forum, 2009), and in consequence urge nations to take preven-
tive measures and strengthen international cooperation for better management of migration flows.
In fact, the Office of the United Nations High Commissioner for Refugees (UNHCR) (2008) noted that
little thought had been given to the humanitarian consequences of climate change and cautioned
against the possibility of relocation, especially as a result of:
y Hydro-meteorological disasters (flooding, windstorms, mudslides, etc.)
y Zones designated by Governments as being too high-risk and dangerous for human
habitation
y Environmental degradation and slow-onset disaster (for example, reduction of water
availability, desertification, recurrent flooding, salinization of coastal zones, etc.)
y The case of “sinking” small island States;
y Armed conflict triggered by a decrease in essential resources (for example, water, food)
due to climate change.
Guiding Principles on Internal Displacement, which could help facilitate movement, do
exist, as well as other frameworks to support the equitable treatment of displaced persons. However,
as noted by UNHCR (2008), climate change may put a strain on these frameworks. It may be neces-
sary therefore to reconsider more formally how displaced groups, including cities, would be treated,
especially if they were undertaking relocation as a precautionary rather than as a reactive strategy
(Schipper, 2009).

Adaptation and development

As discussed in World Economic and Social Survey 2008 (United Nations, 2008), reduced
vulnerability to natural hazards is strongly correlated with income levels, and reflects
changes in economic and social structures as countries diversify away from reliance on
agricultural activities, establish stronger institutional networks and begin to build more
effective welfare States. Adaptation to actual or expected climate change and variations
 The adaptation challenge 71

and their effects will inevitably involve large investments to protect existing activities and
livelihoods and to facilitate adjustments in respect of livelihoods aimed at limiting the
potential damage, coping with the consequences and even exploiting potential opportuni-
ties (Intergovernmental Panel on Climate Change, 2007c). Such adjustments can emerge
spontaneously as individuals and communities respond to repeated shocks or incremental
changes in their surrounding environment. However—and particularly when the changes
are on a larger scale—it is deliberate policy decisions and public action, based on research
by the scientific community, assessment of previous crisis episodes and consultations with
local residents and grass-root groups that have been threatened by environmental changes,
that will constitute the basis of lasting solutions.
The burden of adjusting to the growing threats from climate change will be a Countries that are the
particularly heavy one for populations that are already challenged by multiple vulnerabili- most vulnerable to
climatic shocks often find
ties associated with low levels of economic and human development. Poorer countries and
themselves trapped in a
communities with poor health care, lack of infrastructure, weakly diversified economies, vicious circle
missing institutions and soft governance structures may be exposed not just to potentially
catastrophic large-scale disasters but also to a more permanent state of economic stress as a
result of higher average temperatures, reduced availability of water sources, more frequent
flooding and intensified windstorms. These stresses will likely increase the risks of food
and income insecurity, further exposing inadequate levels of health care, sanitation, shelter
and social infrastructures (Oxfam International, 2007). Thus, countries that are the most
vulnerable to climatic shocks often find themselves trapped in a vicious circle of economic
insecurity, persistent poverty, vulnerability to shocks and inadequate capacity to cope with
those shocks (United Nations, 2008).
For many developing countries, breaking this vicious circle is at the heart of Constraints on mobilizing
the adaptation challenge. The magnitude of the challenge is already familiar from experi- the resources needed
ence with climate-related disasters, as is the difficulty of judging how much of the result- remain binding for poor
ing impacts can be attributed to “normal” economic as opposed to “abnormal” climate countries, preventing them
from investing in effective
factors (Datt and Hoogeveen, 2003). To recognize this difficulty is at the same time to adaptation responses
underscore the interrelated nature of climatic and development-related pressures in the ad-
aptation challenge. In addition to the fact that the scale of the damage can often be much
larger than that of the resources available to provide suitable protection, what is also clear
from the experience with climate-related disasters is that the constraints on mobilizing the
resources needed remain binding for poor countries, preventing them from investing in
effective adaptation responses.
But even when developing countries have broken this vicious circle and entered a
period of more sustained growth, vulnerability to shocks, both internal and external, remains
a persistent concern for policymakers. Poor neighbourhoods in growing economies, includ-
ing in developed countries, are more at risk from shocks, including climatic shocks, because
they have fewer coping resources and are inadequately served by day-to-day services, which
are taken for granted in areas that are more affluent (Dodman, Ayers and Huq, 2009).6
In responding to the adaptation challenge, policymakers can draw usefully Local circumstances and
on experiences with adjusting to exogenous economic shocks in developing countries. capacities have a profound
influence on outcomes and
Perhaps the single most important conclusion that emerges from a careful examination of
policy responses should be
those experiences is that local circumstances and capacities have a profound influence on tailored accordingly
outcomes and that policy responses should be tailored accordingly. However, some more
general lessons can also be drawn of which three, in particular, stand out:
6 Vulnerability due to inequalities is a problem not only in developing countries, however, as became
apparent from the experience with hurricane Katrina in 2005 (see Guidry and Margolis, 2005).
72 World Economic and Social Survey 2009

• If countries are left to make the adjustment themselves, they will likely be
forced to squeeze down incomes, which would result in a prolonged and de-
stabilizing adjustment process, increasing poverty levels, damaging long-term
growth prospects and adding to further vulnerabilities
• Economies that are more diversified (both structurally and spatially) tend to
show greater resilience with respect to external shocks and recover more quick-
ly, as do economies that are strongly integrated both internally and externally
• Societies with greater equality are better able to manage shocks by distributing
the burden of adjustment and avoiding the possibly dangerous conflicts that
adjustment can trigger.
Economic development is Adapting to climate change is also very much a local challenge which will
the most reliable insurance require strategies and mechanisms that are tailored to differing circumstances and initial
against the adverse impact
adaptive capacity (Yohe and Moss, 2000). There is no one-size-fits-all strategy to deal
of climate change
with the adaptation challenge. Still, in general terms, economic development is the most
reliable insurance against the adverse impact of climate change (United Nations, 2008).
On the whole, populations that have access to adequate food, clean water, health care and
education are better prepared to deal with a variety of shocks, including those arising from
climate change. Access to adequate resources with which to invest in adaptive capacity, in-
cluding human and social capital, determines how resilient countries and communities are
likely to be in the face of climate change and variability. In addition, access to technologies
and know-how will play an important role in strengthening adaptive capacity. In respect
of all these factors, the ability of decision makers to mobilize and manage resources and
to engage in difficult trade-offs involving their use will be an essential component of the
response to the adaptation challenge.
Food security remains a There are still many developing countries that, remaining heavily dependent on
basic challenge, particularly natural resources-related activities, are likely to be seriously threatened by projected climate
where agriculture is
changes (Leary and others, 2008b). Communities and countries that primarily produce and
dominated by smallholder
production, productivity is export low value added agricultural goods and primary commodities are typically found at
low and support services the lower end of the development ladder and face some of the greatest development-related
are poorly developed risks, including small market size, heavy import dependence, low technological capacity,
etc.7 Food security remains a basic challenge, particularly where agriculture is dominated
by smallholder production, productivity is low and support services are poorly developed.
The failure to provide more stable livelihoods under these conditions remains a basic policy
challenge and one certain to be compounded by climatic changes.
However, many developing countries are undergoing the transition to more
urban and economically diversified economies and must often cope with new risks and
interrelated shocks, as is apparent in the current economic crisis. By 2030, it is estimated that
60 per cent of the world’s population will reside in urban areas, compared with 47 per cent in
2000 (United Nations Human Settlements Programme (UN-Habitat), 2008).8 Moreover,
cities matter now more than ever, as even predominantly rural nations generally derive more
than half of their gross domestic product (GDP) from industry and service enterprises, most
of which are based in urban areas (Satterthwaite, 2007). Cities also serve as hubs for the
stimulation of national and regional growth and are “key nodes of the globalization process”
7 Of the estimated 3 billion people living in rural areas in developing countries alone, 2.5 billion are
involved in agriculture.
8 Although developing countries are associated with rural landscapes, many actually boast high
urbanization rates. For instance, in Africa already two fifths of the continent’s inhabitants are
urban (United Nations, 2006).
 The adaptation challenge 73

(Sanchez-Rodriguez, Fragkias and Solecki, 2008). The policy challenges accompanying this
transition are often compounded by acute levels of insecurity and inequality, as new urban
residents oftentimes find themselves forgoing the minimal levels of protection offered in
rural communities without adequate (or often any) Government support.
Overall, in the absence of more effective adaptation strategies, the vulnerabil-
ity differentiating rich and poor countries as well as the rich and poor communities within
countries will likely deepen in the face of rising global temperatures. This is a concern for
the international community not only in its own right but also because of the fact that, in
an increasingly divided and unequal world, agreement on an international framework for
tackling climate change is likely to be all the more difficult to achieve.

The limits of existing policy frameworks

As societies begin to seek practical approaches to adaptation, it will be necessary for a more It will be necessary to
nuanced view to be adopted of the risks arising from a changing climate as they relate to de- adopt a more nuanced
velopment policy. At the same time, it will also be necessary to adopt a more nuanced view view of the development
of the development policy challenge itself and, in particular, of the links among investment, policy challenge and of the
links among investment,
diversification and growth. The extent of the building and strengthening of these links will diversification and growth
determine how well many poorer countries adapt to warming temperatures.
The economic stabilization and structural adjustment programmes implement-
ed in many developing countries over the past three decades have done little to reduce
vulnerability. Those programmes had been adopted in response to a series of large shocks
in the late 1970s and early 1980s and the debt crisis that followed. Their aim was to remove
structural and institutional impediments to growth and to create more stable and resilient
economies. The policies typically allocated a much greater role to market forces in the ad-
justment process and reduced that of the State, including capacities for providing public
services. One prominent aspect of this shifting emphasis was fiscal retrenchment and the
accompanying decline in public investment across much of the developing world. As a con-
sequence, even with greater macroeconomic stability, private investment was insufficiently
supported through improved infrastructure and basic services, thereby limiting produc-
tivity growth and economic diversification. In many instances, income-earning capacities
were not improved and sometimes even fell, through premature deindustrialization, wage
compression and the informalization of economic activity (United Nations, 2006).
Towards the end of the 1990s, a second generation of adjustment programmes
added good governance and poverty reduction to the reform agenda, in part to deal with
perceived policy slippages but also in response to the adverse impact of the earlier measures.
These efforts have placed a greater emphasis on participation and ownership in the design of
programmes, culminating in the preparation of Poverty Reduction Strategy Papers (PRSPs)
which have become the main policy vehicle for allocating bilateral grants and concession-
ary loans and for advancing debt relief. However, the PRSPs have to a very large extent left
intact the economic reforms of the first-generation adjustment programmes, have done little
to advance serious assessment of the impact of major macroeconomic and structural mea-
sures on the poor, and have failed to establish a more integrated approach to economic and
social challenges. In particular, they have continued to promote unduly restrictive macro-
economic policies to the detriment of investment-led growth and diversification strategies,
have denied the contribution of industrial and technology policies towards supporting such
strategies and have adopted a one-size-fits-all approach to integration into the international
economy (United Nations Conference on Trade and Development, 2002).
74 World Economic and Social Survey 2009

PRSPs are unlikely to provide the framework for meeting the adaptation chal-
lenges facing most developing countries in a warming world. Rather, developing countries
have to develop new policies that build robust links among investments, growth and di-
versification which will allow them to make progressive adjustments to climatic changes
and to strengthen national resilience with respect to climatic shocks.

The impacts of climate change

Some forms of damage The damage from climate change will not be felt uniformly. Some forms of damage that
from climate change will are due, for instance, to sea-level rise and the spread of drought will be gradual. Other
be inflicted gradually, while
forms of damage will be inflicted suddenly, owing to the greater incidence and intensity of
others will occur suddenly;
most of the imminent the climatic hazards that result from global warming. Some of the threats will be confined
damages to and adverse to specific sectors, while others will have a much more systemic impact. Moreover, while
impacts on livelihoods the impacts will have ramifications across all countries and regions, their intensity will
are expected to be felt in often be quite localized, with some communities and countries being much more exposed
developing regions than others. Figure III.3 indicates some of the differential regional impacts, on biodiver-
sity, infrastructure and livelihoods at different degrees of global mean annual temperature
change (relative to 1980-1999). In general, most of the imminent damages to and adverse
impacts on livelihoods are expected to be felt in developing regions, where drought (Africa)
and flooding (parts of Asia) are already a threat in that regard, including at temperatures
below 2º C, while heat spells might challenge water security in some developed regions, for
instance, in Australia and New Zealand, particularly at temperatures above 2º C.

Agriculture and forestry

Globally, more than one third of households rely on agriculture for their livelihoods; in sub-
Saharan Africa, the proportion is over 60 per cent. Moreover, in many poorer countries,
primary products are a major source of foreign-exchange earnings and provide important
inputs into fledgling manufacturing activities. While the economic weight of this sector is
expected to decline further over the coming decades, improving agricultural performance
is an essential feature of sustained economic growth, particularly at lower levels of develop-
ment, and a source of welfare gains through greater food security.
The net impact of climate change on global agricultural production remains
uncertain.9 There are regional variations of global warming, but the agriculture and for-
estry sectors in developing countries of all regions are particularly vulnerable to climatic
shifts, as even small changes in temperatures and precipitation levels as well as climatic
shocks can disrupt growth cycles and yields.
Agriculture in rich countries Significant reductions in the average yield of key staples, water and protein
stands to benefit from sources, and increased flood risks and consequent damage to assets are a few of the most
climate change …
adverse effects of climate change on developing regions and livelihoods. In contrast,
9 There is“low to medium confidence”that global agriculture production will increase for temperature
increases up to between 1 and 3° C (Intergovernmental Panel on Climate Change, 2007c). More
specifically, annual precipitation may increase in East Africa, most of Northern Europe, Canada
and the north-eastern United States of America, while seasonal precipitation will increase in, for
instance, south-eastern South America, northern Asia, East Asia, South Asia and most of South-
East Asia in summer and Central Europe in winter. Seasonal precipitation will decrease in Southern
Africa and south-western Australia in winter, while it will decrease all year round in much of the
Mediterranean, the northern Sahara and most of Central America (see Intergovernmental Panel
on Climate Change, 2007c, for more details).
 The adaptation challenge 75

Figure III.3
Differentiated regional impacts at various degrees of average global temperature rise

Global mean annual temperature change relative to 1980-1999 (o C)

0 1 2 3 4 5

10-15 per cent 25-40 per cent Sub-Saharan species

at risk of extinction
Africa Semiarid/arid areas increase by 5 to 8 per cent
75 million- 350 million-
250 million 600 million Additional people with increased water stress

2-5 per cent decrease of 5-12 per cent decrease Crop yield
wheat and maize in India of rice in China potential
Additional people
Asia Up to 2 million Up to 7 million at risk of coastal
0.1 billion-1.2 billion 0.2 billion - 1.0 billion Additional people with increased water stress

Annual bleaching of Great Barrier Reef

Australia/ 3,000-5,000 more heat-related deaths per year
New Zealand
Decreasing water security in southern and eastern Australia and parts of eastern New Zealand

+5 to +15 per cent in Northern Europe +10 to +20 per cent

Water availability
0 to -25 per cent in Southern Europe -5 to -35 per cent
Europe
+2 to +10 per cent in Northern Europe +10 to +25 per cent +10 to +30 per cent
Wheat yield potential
+3 to +4 per cent in Southern Europe -10 to +20 per cent -15 to +30 per cent
Potential extinction of about 25 per cent Potential extinction of about
central Brazilian savanna tree species 45 per cent Amazonian
Latin tree species
Many tropical glaciers disappear Many mid-latitude glaciers disappear
America
10 million-80 million 80 million-100 million Additional people with increased water stress

5-20 per cent increase 70-120 per cent increase

in crop yield forest area burned in Canada
North Decreased space heating and increased space cooling
America
About 70 per cent increase 3- to 8-fold increase in
in hazardous ozone days heatwave days in some cities

10-50 per cent Arctic

Increases in depth of tundra replaced by forest
seasonal thaw of 10-15 per cent 15-25 per cent 30-50 per cent
Polar Arctic permafrost 15-25 per cent polar
20-35 per cent reduction desert replaced by tundra
regions of Arctic permafrost area 20-35 per cent decrease
annual average Arctic
sea ice area

Increasing coastal inundation and damage to infrastructure due to sea-level rise

Small Alien species colonize mid-
and high-latitude islands
islands
Agriculture losses up to 50 per cent
GDP in high-terrain islands, up to 25
per cent GDP in low-terrain islands

Source: Intergovernmental Panel on Climate Change (2007c).

76 World Economic and Social Survey 2009

warming and a general increase in rainfall are likely to lead to increases in crop productivity
in Europe, particularly as some crops that are traditionally grown in Southern Europe
will become viable further north. Moreover, the area suitable for grain production could
potentially increase in Europe by 30–50 per cent by the end of the twenty-first century
and aggregate yields of rain-fed agriculture could increase by up to 20 per cent in North
America (Intergovernmental Panel on Climate Change, 2007c).10 However, while
agriculture in rich countries stands to benefit from climate change, it is not obvious that
the actual gains will be significant as their agricultural sectors continue to shrink and more
land is put to non-agricultural use.
… while in developing Overall, in developing countries, the impact will be more uniformly negative.
countries, the impact will In addition, the greater reliance on agriculture, and the particular vulnerability of small-
be more uniformly negative
scale producers, often occupying marginal lands, limit their ability to deal with even small
and in many African
countries, yields could drop changes and fluctuations. In many developing regions, growing seasons will shorten, areas
by up to 50 per cent suitable for agriculture will decline and land degradation will intensify. Th is will be the
case especially along the margins of semi-arid and arid areas, severely restricting agricul-
tural output (Intergovernmental Panel on Climate Change, 2007c). Moreover, heat-related
plant stresses will contribute to reduced yields in key crops, such as wheat, rice, maize and
potatoes. It is estimated that basic crop growing capacity will have dropped by 10–20 per
cent by 2080 in the 40 poorest countries (predominantly located in tropical Africa) ow-
ing to drought alone (Kotschi, 2007), while in many African countries, yields could drop
by up to 50 per cent by 2020, with small-scale farmers being the most affected. Likewise,
extreme wind and turbulence could, for instance, decrease fish productivity by 50-60 per
cent in countries like Angola, the Congo, Côte d’Ivoire, Mali, Mauritania, the Niger,
Senegal and Sierra Leone (Alcadi, Mathur and Rémy, 2009).
Scarcity of freshwater Food security and rural livelihoods are closely linked to water availability and
already threatens use (Ludi, 2009). Scarcity of freshwater already threatens livelihoods linked to agriculture
livelihoods linked to
and forestry in an estimated 40 per cent of rural areas worldwide and the heightened
agriculture and forestry in
an estimated 40 per cent of threat from climate change introduces the risk of far greater damage, thereby increasing
rural areas worldwide the likelihood of social conflict and triggering large-scale migration. There is the likeli-
hood of salinization of rivers caused by rising sea levels which further increases freshwater
stress (see annex, for estimated climate change impacts on Africa).
Moreover, where irrigation is to a large degree absent and reliance on rain-fed
crops is high, and lack of agricultural inputs such as fertilizers, herbicides and insecti-
cides is present as a factor contributing to low yields, as is the case in many developing
economies, climate change can potentially have disastrous consequences in terms of food
security. In Mali, for instance, the proportion of the population at risk for hunger could
increase from 34 to over 70 per cent by the 2050s (Butt and others, 2005).
Forests cover approximately 30 per cent of the global land surface and are a
source of livelihoods for 1.6 billion people (close to 25 per cent of the world’s population),
providing food, fuel for cooking and heating, medicine, shelter and clothing (Food and
Agriculture Organization of the United Nations, 2004). However, only an estimated 5 per
cent—largely forest plantations—of the global forest area provides more than one third
of commercial global roundwood (Intergovernmental Panel on Climate Change, 2007c),
although that share appears set to accelerate over the coming decades. In many rural sub-
Saharan African communities, non-timber forest products supply over 50 per cent of a
farmer’s cash income and provide for the health needs of more than 80 per cent of the
population (Food and Agriculture Organization of the United Nations, 2004).
10 Provided that temperature changes are not “too” high (see note 9 above).
 The adaptation challenge 77

Rising temperatures, shifting precipitation patterns and increasing emissions are

likely to have a significant and largely positive impact on forest growth. However, indirect
impacts such as the intensity of forest wildfires, invasions of insects and pathogens, and ex-
treme weather events such as high winds may be less advantageous. Overall, climate change
is expected to both increase global timber production and shift supply locations from tem-
perate to tropical zones and from the northern to the southern hemisphere. While this will
lead to an increase in the trade in forest products (Hagler, 1998), the benefits are likely to be
unevenly distributed. In terms of economic impacts, changes imposed on the structure of
forests will likely have a particular adverse impact on many of those persons who depend on
forests for their livelihoods, especially as 90 per cent of them are estimated to live in extreme
poverty (Food and Agriculture Organization of the United Nations, 2004).

Urban environments
The United Nations estimates that more than half of the world’s population already live
in urban areas; and it is expected that the proportion of city dwellers in world population
will have risen to three quarters by 2050, with almost all of the growth occurring in the
developing world. Urbanization is a major driver of climate change and climate change
will also have a significant impact on urban environments, adding a dangerous feedback
loop to growing urban stresses.
Much of the urbanization in developing countries is unplanned and poses The most obvious
massive challenges, even without taking heightened climatic threats into account. These additional threat from
climate change to coastal
include health problems linked to air pollution and high population density, problems
cities is posed by
associated with transportation and inadequate infrastructure, personal safety problems sea-level rises
linked to high levels of criminal activity and generally deficient access to and deficient
provision of social services. Climate change is likely to exaggerate all these problems.
As noted earlier, the most obvious additional threat from climate change, particularly to
coastal cities, is posed by sea-level rises (Nicholls and others, 2007). Already, 13 per cent of
the world’s urban population live in low-elevation coastal zones (defined as being less than
10 metres above sea level) and two thirds of cities with more than 5 million inhabitants
are located in such zones; and 21 of the 33 cities that are projected to have a population
of 8 million or more by 2015 will be located in vulnerable coastal zones (United Nations
Human Settlements Programme (UN-Habitat), 2007).
While the long-run challenge of sea-level rise presents a particular risk to cer-
tain areas, coping with an increased incidence of natural hazards poses a more immedi-
ate challenge. Tackling this challenge, however, requires greater understanding of what
greater climate variability means for existing infrastructure and what sort of new and ad-
ditional risks it will pose for urban-dwellers. For instance, unplanned urban settlements,
in particular slum dwellings, often materialize in high-risk areas, such as river banks and
unstable hill slopes. While the dwellers in such slums might manage to cope with occa-
sional shocks, more frequent flooding of greater magnitude would likely bring disruption,
pushing them to resettle elsewhere. Given that they were already living in an undesirable
location, chances are that they would be pushed further down the poverty ladder and that
their exposure to climate change would also likely increase (Schipper, 2009).
In the absence of any forward-planning strategy, an estimated 1 billion inhab- An estimated 1 billion urban
itants are already at risk from hydro-meteorological hazards and it is predicted that the inhabitants are at risk from
hydro-meteorological hazards
figure will have increased to 1.4 billion people by 2020 (United Nations Human Settle-
and the figure will have
ments Programme (UN-Habitat), 2007). More frequent and more intense rainfall will, for increased to 1.4 billion by 2020
78 World Economic and Social Survey 2009

instance, increase the risk from landslides and the threat from water inundation. In fact,
while poor drainage is already a serious issue in many cities, particularly in developing
countries (Satterthwaite, 2007), climate change increases the likelihood of flooding and
increases the risk of disease.
Interconnected threats are likely to intensify with rapid urbanization. Part of
that intensification will reflect increased migration from rural areas, as agricultural liveli-
hoods are hit by climate change. Such inflows will increase the pressure on urban services
and water resources, infrastructure and urban ecosystems, which will thereby in turn ex-
acerbate the vulnerability of urban settlements to direct climate change impacts. Greater
levels of inequality often characterize urban societies, which often also have weaker social
networks and informal support schemes, making them more vulnerable to shocks than so-
cieties in rural areas (Moser, Gauhurts and Gonhan, 1994; Pelling, 2003). Climate change
and urban environments are thus intrinsically linked, highlighting the importance of ad-
dressing climate change through an integrated approach to adaptation.

Health and water security

The systemic impacts of The need to adapt to difficult environmental conditions has been an omnipresent chal-
climate change on health lenge for human society faced with the interactive threats of disease, water scarcity and
and water security merit
food insecurity. Now, with warming on an accelerating trend, addressing the systemic
particular attention
impacts of climate change on health and water security merits particular attention.
The range of health risks from climate change is likely to be considerable, with
all parts of the globe affected as the unprecedented number of deaths in Europe from re-
cent heatwaves has demonstrated. However, health vulnerability is very closely linked to
other vulnerabilities, with the burden of climate-sensitive diseases overwhelmingly loaded
onto the poorest populations who also have the lowest coverage by health services. In fact,
the people most vulnerable to climate change are those who have not been well protected
by health sector interventions in the past, while the greatest influence on impacts across
different regions is not variation in the extent of climate change, but variation in the mag-
nitude of pre-existing health problems.
There are 150,000 A recent assessment by the World Health Organization (2005a) estimates
additional deaths occurring that the burden of disease incurred through the modest warming that has occurred since
annually in low-income
the 1970s is causing about 150,000 additional deaths annually in low-income countries
countries from four climate-
sensitive health outcomes from four climate-sensitive health outcomes—malnutrition, diarrhoeal disease, malaria
and flooding. These additional deaths are concentrated in already vulnerable population
groups; for instance, 90 per cent of the burden of malaria and diarrhoea, and almost all
of the burden of diseases associated with undernutrition, are borne by children aged 5
years or under (Campbell-Lendrum, 2009). Over the long term, higher temperatures will
increase the levels of ozone and other air pollutants that provoke cardiovascular and respi-
ratory diseases, and pollen and other aeroallergens that trigger asthma, with the poor and
the elderly being hardest hit (Beggs, 2004).
As many of the most important infectious diseases are highly sensitive to both
temperature and precipitation conditions, higher temperatures will increase the rates of
survival and replication of bacterial contaminants of food and water sources, which con-
tribute a large proportion of the burden of diarrhoeal disease, particularly in poor countries.
Already, per capita mortality rates from vector-borne diseases are almost 300 times greater
in developing regions than in developed ones (World Health Organization, 2006).
 The adaptation challenge 79

Warmer temperatures will also affect diseases transmitted by insects and other Higher temperatures are
vectors as temperature affects their survival and biting rates, and determines the rates of increasing the risks of
malaria among high-
reproduction of parasites within them. Higher temperatures are already increasing the
altitude populations that
risks of transmission of the most severe forms of malaria among high-altitude populations lack immunity against such
that lack immunity against such diseases (Bouma, Dye and van der Kaay, 1996; Pascual diseases
and others, 2006).
The most immediate effect of climate change on health and well-being is likely
to be a function of the availability of water. It is estimated that one quarter of the popula-
tion in Africa (about 200 million people) experience water stress (Ludi, 2009). Increasing
temperatures and more variable precipitation are expected to reduce the availability of
freshwater, making it more difficult to fulfil basic needs for drinking, cooking and wash-
ing. Meanwhile, a greater incidence of flooding stemming, inter alia, from more intense
precipitation and from sea-level rise in lower coastal zones, will cause a further contami-
nation of freshwater supplies, thereby further increasing water scarcity, as well as create
opportunities for the breeding of mosquitoes and other disease vectors as people are, for
example, forced to store water for longer periods (Nagao and others, 2003). Indeed, water
scarcity poses one of the greatest long-term threats linked to climate change: while already
more than 2 billion people live in the dry regions of the world and suffer disproportion-
ately from diseases related to contaminated or insufficient water (World Health Organi-
zation, 2005b), it is estimated that up to 7 billion people will be at risk from increasing
water stress by 2050 (Alcamo, Flörke and Märker, 2007). Moreover, with irrigation water
withdrawals accounting for almost 70 per cent of global water withdrawals (Shiklomanov
and Rodda, 2003), increased water stress will have a significant impact on health through
growing food insecurity.
Higher temperatures and more extreme heatwaves will increase mortality Higher temperatures and
rates; for instance, the effects of a 1° C increase in (average) temperature on ozone and more extreme heatwaves
will increase mortality rates
particulate levels may lead to an increase in global deaths from air pollution of over 20,000
per year (Jacobson, 2008). Short-term increases in temperature during summers and hot
seasons will also become more frequent and intense. Such short-term fluctuations will
particularly affect urban areas owing to the “heat-island effect” resulting from the high
absorption of solar radiation in urban environments, as against heat reflection from veg-
etation. This effect, which can raise temperatures by 5° C–12 °C in urban areas relative
to surrounding areas, will heighten the threat of hazards such as heatwaves (Aniello and
others, 1995; Patz and others, 2005). The extreme heat of the summer of 2003 provided a
stark reminder of the potentially devastating impacts of heatwaves: temperatures that had
been up to 30 per cent higher than the seasonal average over large parts of the European
continent are estimated to have caused an additional 70,000 deaths (Robine and others,
2008), the majority of which occurred in urban areas.
Thus, overall, a warmer and more variable climate will lead to higher levels Health effects of climate
of some air pollutants, increase transmission of diseases from poor water, poor sanitation change on the poorest
populations are expected
and poor hygiene, increase the hazards of extreme weather, damage agricultural produc-
to be overwhelmingly
tion and lead to severe water stress. While not all of the effects of climate change will be negative
harmful, the overall negative effects of climate change on health are both larger and more
strongly supported by evidence than are the possible benefits (World Health Organization,
2002; Intergovernmental Panel on Climate Change, 2007a). Moreover, the health effects
of climate change on the poorest populations, in contrast to those of the richer nations,
are expected to be overwhelmingly negative and are likely to affect developing countries
80 World Economic and Social Survey 2009

harder and faster than developed ones. In particular, as many developing nations are bur-
dened by high population densities and air pollution and still struggle to supply adequate
drainage, running water for basic sanitation and hygiene, and housing, their vulnerability
to climate-sensitive infectious diseases and health impacts is likely to continue rising.
More importantly, climate variability worsens existing poverty traps, such as those prevail-
ing in rain-fed agricultural sub-Saharan economies, as it will increase the prevalence of
malnutrition and infectious diseases.

Meeting the challenge of adaptation

Adaptation to climate Despite the imminent threat, adaptation to climate change in developed and developing
change has not been countries alike has not been mainstreamed into decision-making processes (Adger and
mainstreamed into
others, 2003; Huq and Reid, 2004). The challenge tends to be addressed by adding an
decision-making
processes “extra” layer to existing policy designs and implementation mechanisms rather than by
adjusting original designs so as to address climate change in a more integral way (O’Brien
and others, 2008). Equating adaptation measures with emergency relief and framing the
challenge in terms of requests for donor support, which is a frequent approach, has not
helped. This has given rise to an often bifurcated approach to adaptation, where efforts
either focus on responses to the impacts of climate change (coping measures) or seek to
reduce exposure through climate-proofing existing projects and activities, particularly in
the context of disaster risk management. Notwithstanding the fact that these two tracks
strive for a shared goal, there is a real danger that the underlying philosophies of coping
and proofing pull in different policy directions and that fragmented actions will end up,
at best, creating partial solution to problems, and, at worst, causing new problems or ag-
gravating existing ones (Sanchez-Rodriguez, Fragkias and Solecki, 2008). As discussed in
the World Economic and Social Survey 2008 (United Nations, 2008), there is indeed a real
danger, already apparent in the response to natural disasters, that underlying structural
causes of vulnerability and maladaptation will be missed, including a number of closely
interlinked and compounding threats to social and economic security.
Large-scale investments Recent efforts to forge a more consistent approach to the adaptation challenge
and integrated policy stress the central role of market incentives (Organization for Economic Cooperation and
efforts are likely to be
Development, 2008). These efforts usefully highlight the methodological challenge inher-
called for in response to
climate-related threats ent in evaluating the costs and benefits of adaptation, point to a role for positive incen-
tives and help expand the scope for more efficient coping and risk-reduction strategies.
However, this approach tends to perceive the challenge in terms of a series of discrete and
unconnected threats which can be addressed through incremental improvements made to
existing arrangements, thereby missing the large-scale investments and integrated policy
efforts that are likely to be called for in response to climate-related threats. Moreover,
weighing costs and benefits runs the risk of ignoring how vulnerabilities are often deeply
embedded in local conditions and histories, sensitivity to which will need to be a central
component of effective adaptation strategies.
The alternative approach perceives adaptation in terms of building resilience
with respect to climatic shocks and hazards by realizing higher levels of socio-economic
development so as to provide threatened communities and countries with the requisite
social and economic buffers. Such an approach would contribute to meeting the larger
development challenge of overcoming a series of interrelated socio-economic vulnerabilities
 The adaptation challenge 81

which can hold back growth prospects and expose communities to unmanageable shocks.
These include, inter alia, a narrow economic base, limited access to financial resources,
persistent food insecurity, and poor health conditions, which can be addressed only
through the mobilization and investment of sizeable resources.
From this perspective, well-designed adaptation measures for addressing cli- Adaptation measures for
mate threats should simultaneously meet other needs, and not be in conflict with develop- addressing climate threats
should simultaneously
ment objectives, nor should they produce conditions that increase vulnerability to climate
meet other needs and
change (Huq, 2002). For example, adaptation to climate change in agriculture should be should not be in conflict
part of broader agricultural policy efforts to raise productivity and reduce the vulnerabil- with development
ity of the sector to outside shocks. Similarly, forest conservation and reforestation policies objectives
should be an integral part of broad development and poverty reduction strategies, encom-
passing investment in economic diversification, human capital and employment creation
as well as improvement of land, soil and water management. However, the room for “win-
win” (or “no-regrets”) solutions should not be exaggerated. The cost of adaptation is likely
to be high and a majority of solutions will involve difficult choices and trade-offs which
will not be manageable through better project management or calculated technocratic
responses but will require enhanced national regulatory authority and strategic planning
processes encompassing open discussion within the entire community as well as an ac-
ceptance of the fact that negotiating and bargaining will be integral to shaping the final
outcome (Someshwar, 2008; Burton, 2008).
Such an approach is unlikely, however, to make much progress in the absence Developmental States
of more effective and inclusive institutional responses to the adaptation challenge. Th is pursuing an integrated
and strategic approach
would include closer engagement of policymakers with local communities, where the
are needed
impact will be most keenly felt and effective investments will have to be made. Still, the
scale of resources needed to bolster resilience with respect to climate change will, in most
cases, call for national resource mobilization and effective developmental States pursuing
an integrated and strategic approach. Integration of adaptation measures into their overall
planning and budgeting should start with the assessment of local vulnerabilities to exist-
ing climate threats, including their variability and extremes, and of the extent to which
existing policy and development practice has served to reduce or increase those vulner-
abilities. In many cases, such an approach will need to draw lessons from past govern-
ment failures to build a more integrated approach to the development challenge owing
to insufficient dialogue and cooperation among different ministries, as well as investing
in new capacities to deal with the specifics of the adaptation challenge. For example, me-
teorological services in many developing countries, especially least developed economies
which to a large extent do not have real agro-meteorological services (Intergovernmental
Panel on Climate Change, 2007c), would need to be improved so as to be able to provide
agriculture with more reliable forecasts.
An initial step towards achieving a more integrated approach has been taken by
some countries through National Adaptation Programmes of Action which were conceived
as a means through which least developed countries could secure financial support for
adaptation to the averse effects of climate change. The concept was negotiated during
the seventh session of the Conference of the Parties to the United Nations Framework
Convention on Climate Change,11 held at Marrakech, Morocco, from 29 October to 10
November 2001. These Programmes of Action, which are structured through a bottom-
up approach, are action-oriented and tailored to specific national circumstances; they
identify “urgent and immediate” investment projects that could significantly contribute
11 United Nations, Treaty Series, vol. 1771, No. 30822.
82 World Economic and Social Survey 2009

to adaptation and poverty alleviation (see box III.4). Broadly, the participation of
Government agencies and civil society, the consistency with national development plans,
and the focus on vulnerability assessment have been among the main strengths of National
Adaptation Programmes of Action. Yet, difficulties in scaling up projects, and funding and
institutional shortcomings (Huq and Osman-Elasha, 2009), as well as the failure to adopt
a more broadly developmental approach, need to be overcome.

Box III.4
National Adaptation Programmes of Action: adaptation
strategies and mechanisms in least developed countries
In 2001, the Conference of the Parties to the United Nations Framework Convention on Climate
Change, at its seventh session, had acknowledged that least developed countries did not have the
means to deal with problems associated with adaptation to climate change, including funding in-
vestment and the transfer of technology. Recognition of the need to “fast-track” adaptation action in
those countries led to the establishment of a work programme on least developed countries, which
included the preparation of National Adaptation Programmes of Action to identify “urgent and im-
a See document FCCC/ mediate needs” for adaptation.a Each least developed country is granted US$ 200,000 to prepare its
CP/2001/13/Add.1 and National Adaptation Programme of Action. Prioritized activities are identified in project proposals,
Corr.1, sect.II, decision which are then submitted to the Global Environment Facility (GEF).
5/CP.7, paras. 11 and 15. Although National Adaptation Programme of Action projects tend to bear a strong re-
semblance to “regular” development projects, each country does in fact propose at least one or two
activities that are revealed to be directly related to climate change and variability; sectors involved in-
clude food security, infrastructure, coastal zones and marine ecosystems, insurance, early warning and
disaster management, terrestrial ecosystems, education and capacity-building, tourism, energy, health
and water resources. In general, there is a strong emphasis on poverty reduction and food security.
Currently, 39 National Adaptation Programmes of Action have been completed and an
additional 10 are being prepared. As of April 2009, 28 countries had submitted projects for imple-
mentation to the Global Environment Facility, of which 23 were approved. Many countries note that
barriers to implementing their National Adaptation Programmes of Action are related to many of
the problems that each faces in general: insufficient institutions, lack of capacity, policy gaps and
insufficient funding. The following cases, on the other hand, highlight how National Adaptation Pro-
gramme of Action priorities also depend on local characteristics and challenges.
In Cambodia, for instance, National Adaptation Programme of Action priorities concern
waterways that are considered essential for flood mitigation and generation of fertile soil. Specifi-
cally, Cambodia’s coastal area lies in the south-west along the Gulf of Thailand, while the interior of
the country contains a large lake, the Tonle Sap, which is seasonally connected to the Mekong River
and is extremely important for providing services such as food production and flood protection. As
might be expected, one significant project proposed by Cambodia is the rehabilitation of the upper
Mekong and provincial waterways for the purpose of addressing frequent flooding. In addition to
the importance of these waterways for flood mitigation, they also provide the water used for irriga-
tion, household consumption and transportation. The project therefore aims to clear the waterways,
which have become silted, so as to reduce the risk of floods, improve aquatic resources, supply water
for irrigation and domestic use, and improve provincial water transportation.
Further, the largest project in Cambodia involves the development and improvement
of community irrigation systems to address the risk of drought, which is linked to a prolonged dry
season. As very little land in Cambodia is irrigated, this project aims to provide sufficient water for
rice farming, reduce the risk of crop failures due to water shortage, and enhance food security and
reduce poverty in the rural areas. The project entails rehabilitating 15 existing community irrigation
systems as well as constructing 15 new ones, including reservoirs, and is expected to encompass
the establishment of water-user associations and the conduct of training on the maintenance and
operation of irrigation systems.
In Eritrea sea-level rise is considered one of the main concerns related to climate change
owing to the fact that this country has an extensive coastal zone along the Red Sea. Flash floods,
 The adaptation challenge 83

Box III.4 (cont’d)

recurrent drought and an increase in climatic variability are also concerns. Eritrea’s National Adapta-
tion Programme of Action process had identified 102 possible projects, of which 5 were ultimately
prioritized. The largest project is proposed for the north-western lowland, characterized by low and
extremely variable rainfall and a high frequency of droughts, which affect livestock keeping and
rain-fed agriculture practices in degraded and arid areas. The focus is on people who had been pas-
toralists but had to turn to other means of survival when this failed. Now the crops are failing as well.
The project aims to reduce vulnerability to climate variability and drought and cope with climate
change in the long term through intensification of the agro-pastoralist system. Additional soil mois-
ture will both increase crop productivity and provide fodder for livestock. Thus, the project aims to
establish spate-irrigated cereal crop production systems, improve livestock production by improving
the rangeland, restock the population of small ruminants, provide machinery and initial agricultural
inputs and establish effective community-based institutions.
In Samoa, where nearly three quarters of the population live in the low-lying coastal
area, sea-level rise is also a concern. Climate change is expected to reduce overall annual rainfall, but
with increased occurrences of high-intensity rainfall, increased average temperature, rising sealevels
and increased tropical cyclone frequency and intensity. Development of a climate early warning sys-
tem is the most important priority project for Samoa; in terms of financing, it accounts for more than
one half of the budgeted costs of all nine proposed priority projects. This project seeks to upgrade
technical early warning systems and associated technical capabilities to monitor and warn against
climate and extreme events; and build sectoral and public capabilities to understand and use climate
and early warning hazard information. It is hoped that the project will allow improved local position
forecasting and capability; improved warning relay to remote communities, more accurate real-time
feedback and relevant local forecasts; improved three-month lead outlooks on drought probabilities
and improved input into resource management systems (water, forestry, agriculture, energy); and
improved timely warnings, monitoring and identification of flood-prone areas.

Climate-smart development
As noted above, long-term planning and anticipatory action are necessary to prevent increas- Development must become
ing vulnerability to climate change in the course of the development process. Tackling only climate-smart through its
awareness of the range of
the impacts will fail to address the long-term consequences of climate change: fragmented
development risks
actions are at best only partial solutions. Moreover, in managing climate change, it is im-
portant to avoid considering its impacts in isolation from other processes of change, such as
urbanization, economic development, and shifts in land use and resource demands.
Development policy must become climate-smart through its awareness of the
range of development risks that will emerge over the coming decades. The commitment
of resources to meet these risks should be beneficial if those resources protect the growth
path from unforeseen and large-scale shocks. Such a commitment could, however, entail
a potential cost to the extent that the resources could have been used directly in financ-
ing other productive investments. Policymakers must plan adaptation efforts accordingly,
with an eye to boosting broader development efforts. Among such adaptation efforts, spe-
cial attention could usefully be paid to:
• Vulnerable populations, whose “coping range” with respect to climate shocks is
limited. For example, consider food-poor groups in Viet Nam. Groups vulnerable
to food poverty are spread throughout the country and encompass different
occupations, ethnicities and age groups (Food and Agriculture Organization of
the United Nations, 2004). In 2002, 40 per cent of the population belonging
to ethnic minorities (mainly located in isolated upland areas of Viet Nam) lived
below the food poverty line. The risk of being affected by conditions of destitution
84 World Economic and Social Survey 2009

was thereby three times higher for these minorities than for the average rural
population of the country. In another example, some 28 per cent of people in the
Mekong and Red River Deltas (some 8.7 million people) belonging to small farm
families, including many female-headed households, are currently estimated to
be food-insecure or potentially food-insecure. The populations of both these
“groups” are likely to be affected by the adverse consequences of a changing
climate. Shifts in rainfall patterns and intensification of extreme events in the
uplands, for example, will impact agricultural livelihoods of ethnic minorities.
The livelihoods of the already vulnerable landless or small farmers in the Deltas
may be subject to additional stress arising from a changing climate, including
salinity intrusions in the summer, and potentially higher-than-historic flooding
in the monsoon season. Given the already high levels of food poverty and low
levels of resilience, the impacts of a changing climate on these groups would be
devastating and would require priority considerations in adaptation plans. An
exclusive focus on the “poorest of the poor” via programmes of cash transfers,
insurance and other safety nets (see United Nations Development Programme,
2007a, chap. 4) can be useful in the short term; but often, for relief purposes,
this approach is not likely to be sustainable unless scaled up to include wider
rural groups which can often face spells of economic insecurity and poverty.
• Synergies in responding to multiple development risks. The failure of key in-
frastructure systems typically results not from a single factor, but from a com-
bination of risks. For example, a set of factors might comprise declines in the
amount and the area of irrigation due to the manifestations of a changing
climate (such as higher levels of evapotranspiration induced by higher diurnal
temperature) and failures of the socio-polity to ensure employment, food se-
curity and, ultimately, a decent standard of living for burgeoning populations.
The two processes are apparently disconnected but when they do come togeth-
er (owing, for example, to a strong El Niño), their combined impacts devastate
socio-economic and ecological systems. The interrelation between adaptation
and mitigation also provides opportunities for unlocking investment synergies
in cases, for example, where irrigation systems expanded to meet adaptation
challenges can be used to open up new markets for low-emissions technologies
such as those developed to provide renewable energy.
• Scale economies, arising from extraordinary opportunities, such as the develop-
ment of an entire river basin or coastal zone, and long-term development deci-
sions, such as major infrastructure investments in coastal roads, hydropower
and irrigation systems. In this regard, the maritime coast of Mozambique, one
of the longest in Africa, extends over a distance of 2,400 kilometres, and is home
to about 60 per cent of the population. Key economic activities encompassing
fisheries, tourism and ports, as well as mining, oil and gas, are of immense
economic value today, and will continue to be so in the future, both to local
people and at the national level. However, competing claims (from agriculture
and manufacturing) for such resources as water and land and waste-water dis-
charge are resulting in a significant reduction in water quality and quantity in
the coastal zone, and significant impacts on the delta and mangrove forests. In
addition, intense coastal dynamics (for example, wave actions, dispersion of
sediments and strong winds and tides), combined with tropical cyclones and
 The adaptation challenge 85

heavy rains, are worsening coastal erosion.12 Current ecological and economic
stresses are likely only to increase in the future, owing to increases in population
and intensification of development. Climate change is further expected to result
in an increased incidence of destructive cyclones, especially in La Niña phases.
The Government of Mozambique has drawn up ambitious plans for the sustain-
able development of the coastal region, including infrastructure (transporta-
tion, drainage and water supply), land-use changes, and soft options to manage
beach erosion. Such plans, which present unique opportunities for an infusion
of massive development, need to deal with climate risks in an integrated man-
ner, across seasonal, inter-annual and multi-decadal time scales.
• Complementarities, achieved by piggybacking on efforts already under way,
such as the expansion of a metropolitan water supply and sewerage system.
The need to investigate and deal with the risks arising from a changing climate
to the hydropower project on the Rio Amoya in Colombia has led to the con-
sideration of an adaptation project in the Las Hermosas massif in the central
range of the Andes. Design of the 80 megawatt run-of-river generation facility
on the Rio Amoya had assumed (as has been the case in many other parts of
the world) a climate stationary with regard to stream flows, which continues
to be the most common assumption in this location and elsewhere. However, a
growing recognition of the potential negative impacts of climate change on the
surrounding high-altitude moorland biotope has led to a consideration of the
potential risks to biodiversity in the project plans. The Las Hermosas adapta-
tion project now offers an opportunity to reconsider stream flows in the com-
ing decades and formulate plans for dealing with climate-related surprises.

How to apply the integrated approach

To tackle the underlying vulnerabilities that put communities at risk in the face of climate- Adaptation strategies will
related threats due to global warming, States must ensure that climate risks are integrated have to differentiate among
the various dimensions
into national and local disaster risk-reduction plans. To be effective, adaptation strategies
of adaptation both at the
will have to differentiate among the various dimensions of adaptation at the local, regional, local, regional, national and
national and international levels as well as within different economic sectors. Table III.1 international levels and
provides examples of potential adaptation measures for different sectors following the within different economic
integrated developmental approach suggested above. sectors

Forestry and agriculture

Adaptation practices in the forestry sector are based in general upon lessons learned from
past adaptations to climate variability. Important elements of forest protection encompass
not only improved climate forecasting and disease surveillance systems but also strategies
for preventing and combating forest fires, including the construction of fire lines,
controlled burning and the utilization of drought- and fire-resistant tree species, such as
12 Urban and port expansions, along with recent tourism-related development, have increased
coastal erosion rates severalfold. At Ponta d’Ouro beach in Southern Mozambique, for instance,
the current erosion rate is between 0.95 and 1.75 metres per year, while in other parts of southern
Mozambique, the average erosion rate of the coastline between 1971-1975 and 1999-2004 has
been 0.11 and 1.10 metres per year in sheltered and exposed beaches, respectively (Government
of Mozambique, 2007).
86 World Economic and Social Survey 2009

Table III.1
Potential measures of adaptation to climate change for different sectors

Sector Adaptation measures

Urban planning Building residences closer to workplaces in order to reduce
transportation time and costs, thereby boosting productivity in a
service economy
Water Expanded rainwater harvesting
Water storage and conservation techniques
Desalinization
Increased irrigation efficiency
Agriculture Adjustment of planting dates and crop diversification
Crop relocation
Improved land management, for example, erosion control and soil
protection through tree planting
Infrastructure Improved seawalls and storm surge barriers
Creation of wetlands as a buffer against sea-level rise and flooding
Settlement Relocation
Human health Improved climate-sensitive disease surveillance and control
Improved water supply and sanitation services
Tourism Diversification of tourism attractions and revenues
Transport Realignment and relocation of transportation routes
Improved standards and planning for infrastructure in order to
cope with warming and damage
Energy Strengthening of generating facilities and grids against floods,
windstorms and heavy precipitation
Source: Adapted from table 5-1 in Dodman, Ayers and Huq (2009).

teak, in tropical forest plantations. Moreover, various measures aimed at assisting forests
in adapting to climate change are needed to enable sustainable forest management. These
would include, for instance, facilitating the adaptive capacity of tree species mainly by
maximizing silvicultural genetic variation, but also through management approaches such
as minimizing slash, reduced-impact logging and widening buffer strips and firebreaks. In
this context, adaptation measures to reduce deforestation would have to entail developing
alternative and sustainable economic activities for the communities affected (Phillips,
2009). For instance, in the Brazilian Amazon the livelihoods of approximately 27 million
people, many of them poor, mainly depend on activities linked to deforestation such as
logging. This ongoing deforestation accounts for about 8 per cent of the world’s annual
carbon emissions. Measures to be taken to adapt to climate change in both natural and
planted forests should enhance forest resilience as well as provide a range of co-benefits,
which could include biodiversity conservation, benefits for the hydrologic cycle, soil
stabilization and the maintenance of a wide range of livelihood options.
In many poorer countries, In many poorer countries, increasing productivity of the agriculture sector and
increasing productivity of reducing its vulnerability to climatic shocks are key to long-term sustainability. Maximiz-
the agriculture sector and
ing yields over good and bad years, particularly when subsistence farming is involved, by
reducing its vulnerability to
climatic shocks are key to decreasing the chance of crop failure will be an important means of adapting to climate
long-term sustainability change. This would entail reducing vulnerability as a whole rather than maximizing the
yield in an optimum year (Altieri, 1990). Strategies to decrease crop failures will include
 The adaptation challenge 87

diversity farming, which is potentially one of the most important strategies for achieving
food security in a changing climate, and the utilization of new crop strains—strains that
are more weather-resistant and have higher yields. For example, at the Njoro division in
Kenya, farmers have been trying to switch from wheat and potatoes to quick-maturing
crops such as beans and maize, while planting every time it rains inasmuch as there is no
longer a clear-cut growing season (Dodman, Ayers and Huq, 2009). Yet, it is not clear
how sustainable this strategy could be, in particular given the multiple vulnerabilities that
these types of community often face. Stressed ecosystems and possible reduction of bio-
diversity could further weaken livelihoods and multiply the adaptation challenges of the
most vulnerable, among them women, children, the sick and older persons.
In Bangladesh, whereas people traditionally grew low-yield deep-water rice
during the monsoon season, they now grow, in areas covered by flood management proj-
ects, one high-yield rice crop (aman) that is planted during the monsoon, another (boro)
that is planted in the dry season, with irrigation, and a third (aus) that is planted in the
pre-monsoon season as the predominant crop (Banerjee, 2007). Innovative approaches to
protecting agriculture in Bangladesh, which is particularly prone to natural hazards and
frequent flooding, also include dap chas (floating gardens), where crops are grown on float-
ing rafts to protect them from floods.
The interconnections of the risks arising from development and climate are The interconnections
particularly apparent when considering food security. In the Sudan, persistent and wide- of the risks arising from
development and climate
spread drought is very likely to worsen owing to climate change. On the other hand, a more
are particularly apparent
integrated approach to climate risk and livelihoods has increased resilience in some commu- when considering food
nities. Water harvesting, new crops and types of livestock, and rehabilitating rangelands, security
along with access to finance and improving farm skills, all taken together, have enhanced
capacity for adaptation and improved food security (Osman-Elasha and others, 2008).
More generally, economic policies to promote agricultural development should Economic policies designed
focus on extending support services, particularly for smallholders, and improving infrastruc- to promote agricultural
development should focus
ture (such as roads and storage facilities as well as irrigation networks). Those policies should
on extending support
address the issue of land reform and build research and technical capabilities. The establish- services, particularly
ment of strategic food reserves, including at the international level, would allow Govern- for smallholders, and
ments to reduce price volatility by releasing food in times of emergency and crisis. These re- improving infrastructure
serves would have the potential to benefit poor countries which might not have the capacity
to respond quickly to sudden scarcity, while proving more effective than other approaches in
controlling international price volatility. The need to adapt to climate change could reinforce
strategies to promote adaptive agricultural research and development, particularly in the
case of Africa, where there is a large gap between current yields and agricultural potential
(Smith, Klein and Huq, 2003). For example, a new rice variety was successfully developed
by the Government rice research station in Sierra Leone, with the technology having already
been transferred among farmers. The new rice has a higher yield and is more adapted to drier
climate conditions (Intergovernmental Panel on Climate Change, 1999).

Urban environments
Urban adaptation requires the adoption of a long-term perspective, one that addresses the
factors underlying the vulnerabilities associated with rapid urbanization. The strain on
cities in developing countries is already enormous; adding climate change to the picture
will perhaps require a paradigm shift in urban planning. Settlements often materialize in
88 World Economic and Social Survey 2009

high-risk areas, such as river banks or unstable hill slopes, in the absence of any planning
strategy or any consideration of future consequences. National policies to identify and
influence formal and informal development in these areas are essential, as is the allocation
of alternative areas for development in order to anticipate and shape the vision for the city
and provide sustainable expansion land for affordable housing. Preventing informal settle-
ments in areas that should not be developed requires governance structures and a solid
institutional basis, with city visions and master plans supported by an institutional fabric.
Such a fabric is often weak or non-existent in many developing countries.
Disaster risk reduction is an Disaster risk reduction is also an important component of adapting to climate
important component of change in the urban sector. Institutions established to address disasters are typically weak
adapting to climate change
and need to be strengthened and the traditional focus is on disaster relief. Anticipatory
in the urban sector
adaptation, in contrast, would encompass preparedness, including relief plans and aware-
ness-raising activities. Thus, abstracting from the emergency dimension of post-disaster
response, which consists largely of searching for missing persons and providing short-
term shelter and food, anticipatory adaptation in this context will need to focus on infra-
structure, land-use planning and regulatory measures. Particular emphasis will need to be
placed on temporary dwellings, such as shanty towns and slums, as well as on areas built
in vulnerable locations and in high-risk areas, such as river banks or unstable hill slopes,
while in many developing countries sewerage and drainage systems would need to be built
to reduce the risk resulting from more intense precipitation. Some approaches such as con-
structing elevated walkways to cope with flooding—an approach adopted, for example, in
Bangkok—are mere stopgap measures designed to increase pedestrian mobility in high-
traffic areas, rather than to shield people from exposure to stagnant surface water.
The goal should be to reduce vulnerabilities to the impacts that climate change
will exert on more extreme weather events and to emphasize thereby the importance of the
reduction of sensitivity and exposure to hazards. The urgency of doing this is particularly
acute, considering that often 30–50 per cent of the entire population of cities live in settle-
ments that have been developed illegally (Satterthwaite, 2007), many of which are located
in vulnerable areas.
Adaptation of urban Taking a long-term perspective means that measures must address vulnerability
areas to climate change to climate change in the context of rapid urbanization. This would include tackling, for
requires governance that
instance, urban legislation that withholds tenure and thus obstructs the consolidation of
is focused on sustainable
development and buildings, thereby contributing to the expansion of areas with shanty towns (Sanderson,
supported by appropriate 2000). At their best, plans and policies would facilitate urbanization and a process of ad-
institutions aptation. At their worst, they would create perverse incentives which encouraged develop-
ment in high-risk areas (Satterthwaite, 2007) or activities that increased vulnerability to
climate change. In particular, adaptation of urban areas to climate change requires strong
governance—governance that is focused on sustainable development and supported by ap-
propriate institutional arrangements (see box III. 5 for the case of Durban, South Africa).
As things currently stand, most of the risk to urban areas is in fact associated with the in-
capacity of local governments to, inter alia, ensure provision for infrastructure, for disaster
risk reduction and for disaster preparedness.

Health and water security

Protection from and adaptation to climate change risks are part of a basic preventive approach
to public health, not a separate or competing demand. However, while the global health
community has a wealth of experience in protecting people from climate-related hazards,
 The adaptation challenge 89

shortfalls in providing basic public-health services leave much of the global population
exposed to climate-related health risks, making it difficult for health services to look beyond
the horizon of current urgent health gaps. Thus, there is a need for both additional investment
to strengthen key functions, and forward-planning through which to build on these systems,
so as to address the changing pattern of the challenges posed by climate change.
This having been said, it should also be noted that adapting to the potential The links between poverty
impacts of climate change on health also requires a broader cross-sectoral approach, as and vulnerability to climate
change are probably
the risks that climate change poses to health are very much embedded within the wider
nowhere as evident as in
challenge of achieving genuinely sustainable development. In particular, the links between the health sector
poverty and vulnerability to climate change are probably nowhere as evident as in the
health sector, highlighting the need for pursuing further development as the overarching
strategy for adapting to climate change. Indeed, the largest determinant of vulnerability
to climate-related health risks is probably poverty.
There is therefore a general need for more proactive engagement of the health
sector with other sectors in adapting to climate change, as health is a cross-cutting issue.
For instance, as malnutrition is already the largest single contributor to disease burdens
(Ezzati and others, 2004), with the greatest risks in this regard expected to arise in Af-
rica (Parry, Rosenzweig and Livermore, 2005), adapting to climate change-related health
risks will entail tackling the impacts of climate change on agricultural yields.

Box III.5
Putting climate change in the agenda: the Durban case
In the wake of the change of Government strategy in South Africa following the fall of the apartheid
system in 1994, the Government had on its hands the massive task of including all sectors of society
in its development plans. Local government was seen as a key actor in this regard, “given its direct
interface with local communities and its pivotal role in service provision” (Roberts, 2008, p. 523).
Because of tensions stemming from differences between the development agenda and
the environment agenda, as well as from differences between short- and long-term needs and priori-
ties, the issue of climate change was squeezed between conflicting requirements. Very little internal
institutional momentum and knowledge had been developed around the issue of climate change,
in part because municipalities did not have an understanding of climate change science nor its local
relevance; and “without developing a meaningful understanding of the science, climate change and
its significance are unlikely to be effectively understood at the local government level” (ibid., p. 525).
The Durban example illustrates that certain conditions are necessary to ensure institu-
tional and individual ownership of climate change as an important issue. In this regard, the following
“institutional markers” have been suggested:
y Emergence of an identifiable political/administrative champion or champions for cli-
mate change issues
y Appearance of climate change as a significant issue in mainstream municipal plans
y Allocation of dedicated resources (human and financial) to climate change issues
y Incorporation of climate change considerations into political and administrative deci-
sion-making.
Based on how those conditions were met in Durban, it may be concluded that “reason-
able progress” has been made in mainstreaming climate change concerns at the local government
level. Capacity-building of local government personnel was “key to unlocking this process”, which
suggests that this can also “unlock endogenous resources and interest in climate change – ultimately
making the likelihood of sustainable climate protection interventions greater” (ibid, p. 536). Source: Roberts (2008).
 90 World Economic and Social Survey 2009

Improved water management can have a direct impact on development op-

portunities, because it is primarily poor water management and lack of water entitlements,
rather than physical water scarcity, that generate water-related tensions and poverty (Cas-
tillo and others, 2007). Along these lines, Bangladesh has begun a pilot project designed
to channel the mountains of silt sediment that rivers transport from far away upstream in
order to fi ll in shallow lowlands prone to flooding, or to create new land in order to pro-
tect its long, exposed coast against sea-level rise. The silt-trapping experiment has yielded
visible gains in small areas such as Beel Bhaina, a low-lying 243-hectare (600-acre) soup
bowl of land on the banks of the Hari River, about 55 miles upstream from the Bay of
Bengal. United States scientists have recommended a similar silt diversion programme:
opening Mississippi River levees south of New Orleans to allow sediment-rich water to
flow over the region’s marshes—which have been starved of silt since levee-building began
in the region hundreds of years ago. An additional advantage of this type of river water-
management project is its relative low cost (Sengupta, 2009). These projects serve as illus-
trations of how to go about improving water and river management in flood-prone areas.
Drought-prone areas require parallel kinds of measures.
The increased variability in An even greater threat to existing precarious water management systems is the
water availability is an even increased variability in water availability, a consequence of both population increases and
greater threat to existing a changing climate, which requires increased resilience in water management systems.
precarious water management
Although efforts are already under way to strengthen these systems in a number of de-
systems than poor water
management and lack of veloping countries (see box III.6), significant public investment will be needed to achieve
water entitlements sustainable results.

Box III.6
Water and river management
in the context of climate change
It is predicted that climate change will have a multiple range of impacts on water resources. Water
resources are being eroded, and it is very likely that floods and droughts will become more signifi-
cant risks in many temperate and humid regions. This will likely affect infrastructures and safety. Ap-
proximately 2.3 billion people live in river basins under water stress, where annual per capita water
availability is below 1,700 cubic metres. If current consumption patterns continue, at least 3.5 billion
people, or about 48 per cent of the world’s projected population, will live in water-stressed river
basins in 2025.
One example of how building community capacities, applying technologies that are
locally available, and undertaking small-scale measures can add up to effective large-scale and pro-
poor adaptation is provided by a pilot project undertaken to restore 1,200-year-old village water tank
systems (modest earthen dams) in the Godavari River basin in India. Through restoration of 12 tanks
serving villages of 42,000 people in the Maner River basin (the Maner is a tributary of the Godavari)
for $103,000 in cash and kind, agricultural production and profitability increased owing to more se-
cure access to water; soils enhanced with silt from the tanks; and reduced input costs. In fact, WWF
(2008) calculated that the increase in water storage capacity attained by de-silting all the village
tanks in the Maner River catchment, at a cost of US$ 635 million, would be similar to that achievable
through construction of the proposed Polavaram dam on the Godavari River. While the dam may
refill more than once per year, it would cost US$ 4 billion, displace 250,000 people and inundate key
habitats, including 60,000 hectares of forest.
Similarly, the restoration of 2,236 square kilometres of floodplains in Eastern Europe,
similar in scale to the area inundated in the 2005 and 2006 floods, is providing room to retain and
safely release floodwaters along the lower Danube River. International agreements signed between
Governments to ensure better water and river management have been a powerful driver of change
 The adaptation challenge 91

Box III.6 (cont’d)

in this project. The cost of the restoration of 37 sites is estimated at €183 million compared with dam-
ages of €396 million from the 2005 flood. This will bring in about €112 million per year from ecosys-
tem services, helping to diversify the livelihoods of local peoples. This large-scale adaptation project
reveals the value of restoring the natural resilience of the environment with respect to climate events
by retaining and releasing peak floods more safely. It will replace vulnerable monocultures with more
diverse livelihoods based on natural ecosystems, such as tourism, fishing, grazing and fibre produc-
tion, which will strengthen local economies.
In the United Republic of Tanzania, following the severe impacts on both people and
biodiversity of dry waterways in the headwaters of the Great Ruaha River beginning in the early
1990s, WWF intervened to establish local water users’ associations, and assist them in restoring native
vegetation in the catchments, protect the river banks, better manage water extractions, and enforce
water rules. As a result, better scheduling of water diversions has restored flows in many streams and
parts of the Great Ruaha River itself, while a more rigorous environmental flow assessment is under
way. The establishment of 20 community conservation banks has also reduced the reliance of many
local people on water-related primary industries by facilitating diversification of the local economy
and increasing their incomes.
In developing countries, an estimated 90 per cent of waste water is discharged directly
into rivers and streams without treatment, and it is expected that climate change will exacerbate the
impact of pollutants on livelihoods and further diminish the population of fish and other aquatic
wildlife. This has been the case for coastal lagoons in the São João region of Brazil which became
polluted with untreated sewage, causing a collapse in the fishing industry and impacting on tour-
ism. However, multi-stakeholder river basin management institutions – the Consórcio Intermunicipal
Lagos São João and its companion committee – have progressively fixed the region’s environmental
problems, facilitating an economic resurgence. A local multi-stakeholder institution approach that
practised subsidiarity has engaged a broad spectrum of the local community and empowered them
to take action to restore their environment. This has been possible partly owing to eff ective national
and State water laws which gave the basin institutions mandates and access to adequate funding
sources. The basin institutions have taken an iterative adaptive management approach to addressing
environmental problems and by achieving substantial early successes, have increased community
confidence and further support for new interventions. Waste-water discharge has been cut by 75
per cent, reducing the prospect that warmer temperatures will exacerbate pollution impacts. At the
same time, wetlands are being restored, thereby increasing the likelihood that species and ecosys-
tems will survive severe climatic events.
By linking local, national and international stakeholders in tackling specific water man-
agement-related issues, the adaptation mechanisms used have strengthened the capacities of local
people and organizations to improve governance, diversify the local economy, increase resilience Source: Based on
and institute adaptive management practices. As mentioned above, these projects tend to be rela- information provided and
tively inexpensive, in contrast with some inflexible and large infrastructures which can be costly, projects supported by WWF,
available at http://www.wwf.
displace people, limit villages’ self-determination, impose constraints on scaling up implementation,
org.uk/.
and cause adverse environmental impacts.

International cooperation on adaptation

International cooperation on adaptation is essential for a number of reasons. First, the A development challenge
heaviest impact of human-induced climate change will be on small island developing can be properly met
only through large-scale
States and the poorest countries in the world, including many African nations. These are
investments and strategic
the countries that have contributed least to the problem of global warming. Second, the policies that draw on the
vulnerability of these, and other developing countries with respect to climate change is help of the international
reflected in the difficulty experienced by many of them in mobilizing the resources needed community
to reduce their exposure, to build up resilience and to make a rapid recovery after disasters
92 World Economic and Social Survey 2009

strike. This is a development challenge that can be properly met only through large-scale
investments and strategic policies that strengthen economic and social capacities at the
local and national levels and that can draw on the help of the international community
in order that those countries may cope and recover when disaster strikes (see box III.7 on
international cooperation). Third, finding the right response to adaptation can point the
way to developing more integrated responses to other shocks that threaten peace, security
and well-being.
Increased destabilization Setting aside their responsibility for the heightened threats from climate
and violence resulting change, the fact remains that developed countries themselves stand to benefit from helping
from climate-induced developing countries adapt. The wider consequences of climate impacts, such as increased
conflict have the potential
to jeopardize national and
destabilization and violence resulting from climate-induced conflict, have the potential
international security to jeopardize national and international security (German Advisory Council on Global
Change (WBGU), 2008; Schwartz and Randall, 2003). Moreover, the rising level of
global inequality that could result from climatic shocks is in neither the economic interest
(given the lost export and investment opportunities that this would entail) nor the political
interest (given the threat to global cooperation) of rich countries seeking to forge a global
framework for better managing climate change. Developing countries, in turn, should
give priority to formulating plans for adaptation and take advantage of expertise made
available by adaptation funding to establish more integrated and transparent strategies,
which would include close consultation with and the participation of their citizens most
immediately affected by rising temperatures and climatic shocks.

Box III.7
International cooperation and the
national adaptation strategy in Bangladesh
The effective early warning system of Bangladesh has already saved tens of thousands of lives. When
cyclone Sidr, one of the strongest storms ever to develop in the Bay of Bengal, hit Bangladesh in No-
vember 2007, improved early warning technology had already reported the direction and intensity
of Sidr 72 hours before. This was made possible by a network headed by the World Meteorological
Organization (WMO) global cyclone observatory which fed key data to its regional outpost at India’s
Meteorological Office in New Delhi.
The message had been relayed to authorities in Dhaka, who passed it on to the local
Red Crescent office. Some 40,000 trained volunteers, who then disseminated the information to the
15 districts most likely to be affected, cycled around the country, using megaphones to order resi-
dents into the 1,800 cyclone shelters and 440 flood shelters available. When Sidr hit, 2 million were
under shelter.
A cyclone of similar magnitude had killed over 190,000 people in 1991; from Sidr, the
estimated death toll was in the range of 5,000-10,000.
The system operates in conjunction with a broader action programme supported by
donors including the United States of America and the European Union, which since 1991 has sup-
ported disaster preparedness and improved post-disaster relief and reconstruction. Under this pro-
gramme, early warning and evacuation systems are integrated with infrastructure such as cyclone
walls to protect Bangladesh from storm surges.
The Bangladesh Centre for Advanced Studies has also been a pioneer in preparing as-
sessments of vulnerability to climate change, while the Bangladesh University of Engineering and
Technology has analysed greenhouse gas emissions from different sectors and devised policies and
measures designed to ensure better adaptation to climate change in the future.
Yet, Bangladesh has very few financial resources of its own for supporting the required
scientific research, with almost the entire budget for the universities and research institutes spent on
Source: Based on Huq and salaries and running costs, leaving the little, if any, research work to be supported by international
Ayers (2008); and Huq (2001).
donors.
 The adaptation challenge 93

Scientists confirm that the time frame for acting to curb global greenhouse gas The gap, in terms of sheer
emissions and reduce the probability of catastrophic events is no more than decades and size, between the resources
necessary for adaptation
possibly years (Pachauri, 2008). Estimates of the cost of adaptation are still quite tentative
and those actually
and incomplete. The risk, however, lies in underestimating the scale of the challenge, which mobilized and available
becomes even greater given the slow pace to date of the efforts undertaken to mitigate global is enormous
warming.
Currently, there are three main flows of adaptation funds (see box III.8):
North-South flows, channelled through multilateral adaptation funds and official devel-
opment assistance (ODA); domestic flows from which developing countries generate and
use adaptation funds; and South-South flows. The Global Environment Facility (GEF), an
intergovernmental organization launched in 1991, has been entrusted with managing the
multilateral adaptation funds sponsored by the United Nations Framework Convention
on Climate Change (see also chap. VI). The World Bank has also developed the Climate
Investment Funds, which were set up to promote innovative approaches to mitigation and
adaptation, including increasing resilience among the most vulnerable communities. Even
so, the difference between the sheer size of resources necessary for adaptation, in the range
of $50 billion–$100 billion per year and the amount actually mobilized and available
(about $154 million) is enormous.
A key issue with respect to adaptation funding is its relation to ODA. The diffi-
culty in scaling up aid is a real cause for concern, given the urgency of the adaptation chal-
lenge in many countries. The current bilateral instruments are unlikely to match up to the
adaptation challenge: more innovative (and predictable) sources of funding will be needed
(Müller, 2008). The principles set out in the United Nations Framework Convention on
Climate Change, which distinguish between development and adaptation financing, insist
on the need for additional funds above the commitments made to meet traditional devel-
opment challenges. This rightly highlights the responsibility of rich countries for funding
adaptation challenges; however, it runs the risk of ignoring the interconnected nature
of these two sets of challenges, of sidestepping the long-standing debate on the adverse
impact on aid effectiveness of excessive and cross conditionalities, and of leading to a pro-
liferation of funding mechanisms and facilities that would, if history is any guide, likely
reduce the effectiveness of international support (see chap. VI for further discussion).

Box III.8
Adaptation funds
A number of funds have so far been established to provide support for the adaptation challenge.
They are described directly below:
y The Global Environment Facility (GEF) manages a number of funds: Strategic Priority on
Adaptation (SPA)—GEF Trust Fund, Least Developed Countries’ Fund (LDCF)—United
Nations Framework Convention on Climate Change, and the Special Climate Change
Fund (SCCF)—United Nations Framework Convention on Climate Change, with a total
pledge of about $320 million, of which about $249 million is in disbursal
y Recently, the World Bank Group, in partnership with the three regional development
banks (the Asian Development Bank, the African Development Bank and the Inter-
American Development Bank), received pledges of about $6.1 billion for the Climate
Investment Funds. Of this amount, less than $1 billion is earmarked for adaptation
y The Cool Earth Partnership of the Government of Japan has committed about $10 bil-
94 World Economic and Social Survey 2009

Box III.8 (cont’d)

lion over the next five years to tackle climate change. Although the bulk of assistance
($8 billion) is earmarked for mitigation, adaptation and improved access to clean energy
have been allocated $2 billion
y The Environmental Transformation Fund—International Window (ETF-IW) of the United
Kingdom of Great Britain and Northern Ireland, which will amount to about 800 million
pounds over 2008-2011, has been set up to help developing countries tackle climate
change. A large proportion of the proposed funding of ETF-IW has been allocated to the
World Bank-administered Climate Investment Funds
y The Global Initiative on Forests and Climate of Australia is a $200 million five-year initia-
tive that aims to facilitate significant and cost-effective reductions in greenhouse gas
emissions in developing countries
y The objectives of the European Union Global Climate Change Alliance are to help de-
veloping countries integrate development strategies and climate change, help countries
participate in global climate change activities that contribute to poverty reduction, and
provide technical and financial support that targets five priority areas and related actions:
(a) adaptation to climate change, (b) reducing emissions from deforestation, (c) enhancing
the participation of poor countries in the Clean Development Mechanism, (d) promoting
disaster risk reduction and (e) integrating climate change into poverty reduction efforts.
The amounts pledged include €60 million (from the European Commission) for the period
2008–2010, €40 million from the Tenth European Development Fund, intra-ACP (African,
Caribbean and Pacific Group of States), for regional action, with an additional €180 million
for disaster risk reduction. Sweden pledged an additional €5.5 million in 2008
y The United Nations Development Programme MDG Achievement Fund—Environment
and Climate Change thematic window (2007c) has as its objective to help reduce pov-
erty and vulnerability in eligible countries by supporting interventions that improve en-
vironmental management and service delivery at the national and local levels, increase
access to new financing mechanisms and enhance capacity to adapt to climate change.
Spain has pledged US$ 90 million. Almost $86 million has already been committed to
date, in 17 programmes with a duration of three years
y The Adaptation Fund was established under the Kyoto Protocola to the United
a United Nations, Treaty
Nations Framework Convention on Climate Change,b to be financed mainly with a
Series, vol. 1771, No. 30822.
share of proceeds from Clean Development Mechanism project activities. Convention
b Ibid., vol. 2303, No.30822. estimates of potential available funding for the period 2008-2012 are in the range of
$80 million-$300 million per year. The Conference of the Parties serving as the meeting
of the Parties to the Kyoto Protocol at its third session, held in Bali, Indonesia, from 3 to
15 December 2007, decided that the operating entity of the Adaptation Fund should
c See FCCC/KP/CMP/
2007/9/Add.1, decision be the Adaptation Fund Board, comprising 16 members and 16 alternate members,
1/CMP.3, paras. 3, 6 and 7. serviced by a Secretariat and a Trustee,c and invited the World Bank to serve as the
d Ibid., para. 23. trustee of the Adaptation Fund on an interim basis.d

Conclusion
The adaptation challenge from warming temperatures is one that all countries must face
in the coming decades, even if rapid progress is made towards a lower-emissions global
economy. However, for some, the threat to livelihoods is already very real and, in some
extreme cases, approaches catastrophic levels.
The adjustments required to adapt to climate change cannot be assessed in iso-
lation or undertaken incrementally. Rather, they are closely interconnected with other risks
and vulnerabilities that accompany the development process and will be heavily constrained
by local institutional and technological conditions. Successful adaptation hinges critically
on faster and more equitable growth, even as failure to adapt threatens those goals.
 The adaptation challenge 95

This chapter has argued that, in many cases, the response will involve a sizeable
investment of resources to make countries and communities more resilient and to address
vulnerabilities that can turn even small climatic shocks into long-term development disas-
ters. This excludes a one-size-fits-all policy response. The right approach is an integrated
national strategy which will require mobilization of domestic resources and the guidance
of an effective developmental State.
Meeting such challenges will require a break with recent policy approaches
which have given undue attention to market forces and competition. Adaptation, like
mitigation, is a public policy challenge, the complexity of which will require using a broad
array of strategies to build resilience.
The chapter has suggested that a smarter approach will build adaptation re-
sponses into ongoing development challenges by paying particular attention to vulnerable
populations, by making use of large public works and taking advantage of scale econo-
mies, by addressing the issue of the thresholds below which current systems consistently
fail and by exploiting investment complementarities.
Even so, many countries for whom the challenge is simply too big cannot be
expected to meet it by themselves. Hence, it was agreed in Bali that finance and technical
assistance would be available to help developing countries meet the adaptation challenge.
So far, that assistance has been woefully inadequate and poorly organized. Improvements
in this regard are likely to be a prerequisite for making real headway towards putting those
countries on more sustainable development paths.
 96

Annex
Sectoral impacts of climate change in Africa

Agro, fisheries, livestock Ecosystems Water resources Human health Settlements, infrastructure,
farming and aquaculture industry
By 2100, Northern African Endangered species, including In Northern Africa, six climate By 2050 and continuing In Northern Africa, potential
agricultural losses might manatees and marine turtles, models show a likely increase into 2080, a large part of flood risks may arise by 2080
represent 0.4–1.3 per cent of could be at risk, along with in the number of people who the western Sahel will likely across a range of scenarios of
GDP migratory birds (Democratic could experience water stress become unsuitable for malaria the Intergovernmental Panel on
In Egypt, climate change could Republic of the Congo, Ghana by 2055 transmissiona Climate Change Special Report
decrease production of many and Seychelles) In the Ouergha watershed in By the 2080s, areas in the on Emissions Scenarios (SRES)
crops (ranging from -11 per In Central Africa, mangroves Morocco and for the period Angola highlands currently (2000)b and climate change
cent for rice to -28 per cent for could colonize coastal lagoons 2000-2020, a 1° C increase in having low rates of malaria projections
soybeans) by 2050, compared because of sea-level rise temperature could reduce transmission could also become In Western Africa, rise in sea
with their production under By 2099, enhanced sand dune run-off by 10 per cent, assuming highly suitable for transmission. level will significantly impact
current climate conditions activity/mobilization (Angola) that precipitation levels remain In general, the highlands of coastal megacities because of
In the Gulf of Guinea, sea- constant eastern Africa are likely to the concentration of the poor in
Lake Tanganyika: aquatic losses become more suitable for potentially hazardous areas
level rise may breach and of about 20 per cent, with In Egypt, water used in 2000 was
destroy low-barrier beaches estimated at about 70 km3, far malaria transmission. In Western Africa, potential flood
30 per cent decrease in fish
that limit coastal lagoons, yields. Climate change may in excess of available resources. In Central Africa (for example, risks may arise by 2080 across
while precipitation changes further reduce lake productivity More than 70 per cent of in the Congo area), places of a range of SRES scenariosb and
World Economic and Social Survey 2009

could affect discharges of the (Democratic Republic of the cultivated area depends on interest, including wildlife areas climate change projections
rivers feeding them (affecting Congo) low-efficiency surface irrigation and parks, may attract fewer In Western Africa, flood risks
lagoonal fisheries and systems, which cause high tourists under marked climate and water pollution-related
aquaculture) There are indications that, by water losses, decline in land changes
2020, the ice cap on Mount diseases in low-lying regions
Coastal agriculture (palm oil productivity, waterlogging and Based on parasite survey data, (coastal areas), as well as coral
Kilimanjaro (United Republic of salinity problems. Unsustainable
and coconuts in Benin and Côte Tanzania) could disappear for it is expected that previously reef bleaching, could negatively
d’Ivoire; shallots in Ghana) is agricultural practices malaria-free highland areas impact tourism
the first time in 11,000 years and improper irrigation
at risk of inundation and soil in Ethiopia, Kenya, Rwanda Indian Ocean islands could
salinization Disappearance of low-lying management affect the quality and Burundi could experience
corals and losses of biodiversity be endangered by potential
of the country’s water resources. modest incursions of the disease
In Guinea, between 130 and are expected (Djibouti) changes in location, frequency
Reductions in irrigation water by the 2050s, with conditions for
235 square kilometres (km2) of and intensity of cyclones
In Eastern Africa, proliferation quality have, in their turn, transmission becoming highly
rice fields (17 per cent and 30 harmful effects on irrigated soils Eastern African coasts could be
per cent of the existing rice field of algae and dinoflagellates suitable by the 2080s. By this
could increase the number and crops affected by potential changes
area) could be lost owing to period, areas currently with low
of people affected by toxins in the frequency and intensity
permanent flooding by 2050 In Egypt, sea-level rise could rates of malaria transmission
(such as ciguatera) owing to of El Niño-Southern Oscillation
impact on the Nile Delta and in central Somalia could also
By 2100, Western African consumption of marine food events and coral bleaching
people living in the Delta and become highly suitable
agricultural losses might sources (Comoros) other coastal areas. Temperature In Eritrea, a one-metre rise in
represent 2–4 per cent of GDP In Eastern Africa, the probability
Losses of nyala and zebra rises will likely reduce sea level could cause damage
that sea-level rise could increase
With a rise in annual global (Malawi) productivity of major crops and of over US$ 250 million with the
flooding, particularly on the
temperature (for example, increase water requirements, submergence of infrastructure
By 2099, enhanced sand dune coasts of Eastern Africa, may
1.5° C–2.0° C), fisheries in north- thereby decreasing crop and economic installations in
activity/mobilization (Zambia have implications for health
western Africa will be adversely water-use efficiency. A general Massawa, one of the country’s
impacted and northern South Africa) two port cities
increase in irrigation demand is
Table III.1 (cont’d)
Agro, fisheries, livestock Ecosystems Water resources Human health Settlements, infrastructure,
farming and aquaculture industry
In Cameroon, a 15 per cent In Eastern Africa, aquatic losses expected. A projected decline Rift Valley fever epidemics, In Eastern Africa, flood risks
increase in rainfall by 2100 of about 20 per cent, with 30 in precipitation and projected evident during the 1997-1998 El and water pollution-related
would likely decrease the per cent decrease in fish yields population of between 115 Niño event in Eastern Africa and diseases in low-lying regions
penetration of saltwater in in Lake Tanganyika. Climate million and 179 million by 2050 associated with flooding, could (coastal areas), as well as coral
Wouri estuary, while an 11 change may further reduce lake will increase water stress in all increase with a higher frequency reef bleaching, could negatively
per cent decrease in rainfall productivity (Burundi, United sectors, while a high degree of of El Niño events impact tourism
would extend the reach of Republic of Tanzania, Zambia) uncertainty about the flow of Using 16 climate-change Potential flood risks may arise
saltwater up to 70 km upstream In South Africa, expected the Nile is expected scenarios, by 2100, changes in by 2080 across a range of SRES
(affecting lagoonal fisheries and changes in estuaries as a result In Eastern and Western temperature and precipitation scenariosb and climate change
aquaculture) of reductions in river run-off Africa, more people will likely could alter the geographical projections
In Kenya, losses of mangoes, and inundation of salt marshes experience a reduction rather distribution of malaria in
cashew nuts and coconuts following sea-level rise than an increase in water stressa Zimbabwe, with previously
could cost almost US$ 500 In South Africa, losses of Rainfall is likely to increase in unsuitable areas of dense
million for a sea-level rise of one 51–61 per cent of Fynbos and some parts of Eastern Africa, human population becoming
metre Succulent Karoo Biomes by 2050 resulting in various hydrologic suitable for transmission. Strong
Agriculture and the growing outcomes southward expansion of the
Kruger Park study estimates
transmission zone will probably
seasons in parts of the Ethiopian 66 per cent of nyala and zebra In Southern Africa, six climate
continue into South Africa
highlands may lengthen under could be lost (South Africa) models show a likely increase
climate change, owing to a in the number of people who In general, areas of Southern
In Southern Africa, projected
combination of increased could experience water stress Africa are likely to become more
losses of over 50 per cent of
temperature and rainfall by 2055 suitable for malaria transmission
some bird species by 2050. Also,
changes
six bird species are estimated to In Southern Africa, almost all
Southern Africa will likely lose substantial portions of their countries except South Africa
experience notable reductions range will probably experience a
in maize production under significant reduction in stream
In Southern Africa, there
possible increased El Niño- flow. For South Africa, the
would be complex impacts on
Southern Oscillation conditions stream flow increase under the
grasslands, including the role
In South Africa, crop net of fire high-emissions scenarios is
revenues will likely fall by as modest, at under 10 per cent
much as 90 per cent by 2100, In terms of precipitation, six
with small-scale farmers most
The adaptation challenge

General Circulation Models

severely affected and a composite ensemble of
Agriculture and the African precipitation models
growing season in parts of for the period 2070-2099
Southern Africa, for example, identify, for example, that
Mozambique, may lengthen parts of Southern Africa would
under climate change owing experience significant losses
to a combination of increased of run-off, with some areas
temperature and rainfall being particularly impacted (for
changesa example, parts of South Africa)
Source: Synthesis based on information provided by Intergovernmental Panel on Climate Change (2007c).
97

a Expected benefits.
b The A1 scenario assumes a world of very rapid economic growth, a global population that peaks in mid-century, and the rapid introduction of new and more efficient technologies; the B1
scenario describes a convergent world, with the same global population as A1, but with more rapid changes in economic structures towards a service and information economy.
 99

Chapter IV
A state of change:
development policy and the
climate challenge
The previous chapters have suggested that there are alternative climate-friendly develop-
ment pathways that steer clear of the carbon-intensive technologies that have driven the
modern growth process. The present chapter considers the policies that might be necessary
at the national level to support what amounts to a new industrial revolution in developing
countries.
Economic and technological revolutions that occurred during the course of the
last two centuries have opened up opportunities for “latecomers” to kick-start a process
of rapid growth and development. However, many countries and communities were
unable to utilize, or were prevented from utilizing, those opportunities. At the same time,
the economic gains to “first movers” have often been cumulative, resulting in a highly
divergent pattern of global economic development characterized by rising gaps in incomes,
technological capacity and energy use.
Those precedents are a concern for developing countries which fear being Developing countries fear
locked out of the latest stage of economic development, while being asked simultaneously being locked out of the
to forgo the cheaper technological options that are currently available to them. Moreover, latest stage of economic
development, while being
the latest technological revolution is unfolding at a time of profound economic and finan- asked simultaneously
cial stress in the global economy, which is certain to hit the poorest and most vulnerable to forgo the cheaper
countries and communities the hardest, making it all the more difficult for them to adjust technological options
to a new economic and technological paradigm. available to them
Recently, the Commission on Growth and Development (World Bank, 2008) A big push could be
argued that a conceptual impasse has been reached in the debate centred around the ques- the bridge connecting
tion “how can we cut carbon emissions to safe levels by midcentury while also accommo- economic development
and reduced emissions but
dating the growth of developing countries?” Removing this impasse is fundamental and
would require the presence
urgent. In this chapter, it is argued that implementing a big push, understood as a blend of a strong and dynamic
of pro-investment macroeconomic and industrial policies, built around a transformative developmental State and
low-emissions growth path, could be the bridge connecting economic development and sufficient policy space
reduced emissions. Management of the integrated development strategy needed to achieve
this would require, however, the presence of a strong and dynamic developmental State
and sufficient policy space to allow that State to adapt climate measures to local needs and
sensitivities.
The next section looks at some of the traditional functions of the developmental
State and how those relate to the climate challenge. That is followed by a discussion of
industrial policy and its role in an investment-led strategy for meeting the climate and
development challenges. The final section looks at some specific measures with respect to
energy efficiency, cleaner coal and renewables through whose implementation policymakers in
developing countries might begin the transition to a low-emissions, high-growth strategy.
100 World Economic and Social Survey 2009

The role of developmental

States in a warming world
An investment-led strategy
All economic success stories have enjoyed a sustained burst of growth, allowing them to
raise living standards and close the income gap existing between them and more devel-
oped countries. Such growth, moreover, is often (though not always) correlated with a
broad set of social indicators, including poverty reduction, which together describe a more
inclusive development path. This path does not emerge spontaneously, however, and even
after a period of rapid growth, countries can get stuck or fall back.
Successful development A rapid pace of capital accumulation, accompanied by shifts in the structure
strategies have been less of economic activity towards high-productivity sectors, is usually a critical factor behind a
about detailed planning sustained acceleration of growth (United Nations, 2006). An important part of the early
and more about strategic
support and coordination,
development policy debate focused on how to quickly raise the share of investment in na-
including a significant tional income to a level that would trigger a virtuous circle of rising productivity, increas-
role for public investment ing wages, technological upgrading and social improvements. The required investments
in triggering growth are often closely connected, depend on the reaching of a minimum scale to be efficient and
and crowding in private may become profitable only over a long period of time. The presence of scale economies,
investment
complementarities, threshold effects and other “externalities”, as well as the heightened
uncertainty they inject into any investment decision, limits the role that market forces by
themselves can play in realizing the desired investment path (DeLong, 2005). Infrastruc-
ture development, in general, and energy supply, in particular, have always been a critical
elements in this story (see chap. II) and, as discussed in previous chapters, the importance
of the latter has grown in the context of meeting the climate challenge.
Successful versions of this “big push” concentrated on selective leading sec-
tors whose development would attract a further round of investment through the dynamic
cumulative effect of decreasing costs and the expansion of strong backward and forward
linkages (Hirschman, 1958). In this regard, the development strategy was less about de-
tailed planning and more about strategic support and coordination, including a significant
role for public investment in triggering growth and crowding in private investment along a
new development pathway. A given rate of capital accumulation can, of course, depending
on its nature and composition, as well as on the efficiency with which production capacity
is utilized, generate different rates of output growth. Policies will have a significant bearing
on the outcome. The steady rise in the minimum scale of investments needed to launch and
maintain an industrialization drive has intensified this challenge over the years.
A developmental State can In most cases, a developmental State helped promote the goals of long-term
promote the goals of long- growth and structural change by increasing the supply of investible resources and social-
term growth and structural izing long-term investment risk. State-sponsored accumulation involved, variously, the
change by increasing
the supply of investible
coordinated effort to shift resources into high-productivity activities, the provision of pre-
resources and socializing dictable and affordable credit through a managed financial system, and pro-investment
long-term investment risk macroeconomic policies, as well as direct public investment in some key sectors (Kohli,
2004). The East Asian economies have often been held up as exemplary embodiments of
the developmental State (although they have exhibited a good deal of variation), but there
are many other such examples (see box IV.1).1
1 There is no simple definition of the developmental State. For a useful discussion of contrasting
roles of the State in the development process, see Cypher and Dietz (2004), chap. 7. They note
(ibid., p. 228) that “development States … have the discretionary power to adopt several roles,
depending on the needs and demands of society in general and the specific needs of sectors of
the economy. Autonomy allows the developmental state to switch roles in specific sectors, as
conditions dictate”. (See also Chang and Rowthorn, 1995; Kozul-Wright and Rayment, 2007, pp.
243-252; and World Bank, 1993).
 A state of change: development policy and the climate challenge 101

Box IV.1
The Tennessee Valley Authority: a successful big push
The post-war economic rebound of the American South, which followed large public capital in-
vestments during the New Deal and the Second World War, is a successful example of a big push.
By triggering an increase in the rates of return to private investment, the infusion of public capital
through the Tennessee Valley Authority (TVA) provided a major impetus for the rapid post-war in-
dustrialization of the Southern economy. Both econometric analysis and survey data from firms that
moved South in the years immediately following the War strongly support the notion that big-push
dynamics were at work (Bateman, Ros and Taylor, 2008).
TVA had been established on 18 May 1933 by an Act of the United States Congress
as part of the New Deal, intended by the President of the United States of America, Franklin D.
Roosevelt, to lift the United States out of the depths of the Great Depression. It was conceived both
as a development agency, mandated to raise living standards in the Tennessee River Valley, and as a
construction and management agency mandated to build and operate dams and structures along
the Tennessee River, whose drainage basin over seven States covers some 40,900 square miles (or
105,930 square kilometres). TVA was to function as, in Roosevelt’s words, “a corporation clothed with
the power of government but possessed of the flexibility and initiative of a private enterprise”.
Over the 12-year period spanning its inception in 1933 and the end of the Second
World War in 1945, TVA established its institutional framework, built broad-based local support for
its programmes, and constructed a physical infrastructure that would serve as the backbone for its
accomplishments. This infrastructure included a vast system of multi-purpose dams and reservoirs
designed to harness the potential of the Tennessee River and an extensive transmission system cre-
ated to provide cheap electricity throughout the region. Early and intense efforts to improve agricul-
ture, land use and forestry practices helped to restore and maintain a healthy environmental base,
while access to small-scale credit and technical assistance programmes provided the citizens of the
Valley with the tools they needed to improve their own lives. It was during those early years that the
Tennessee Valley Authority established what may have become its greatest legacy: the integration of
a healthy natural resource base, a strong infrastructure, and human capacity to foster the social and
economic development of a region.
The need for TVA arose from the dire social and economic conditions in the Tennessee
Valley in the 1930s. Although rich in natural resources, the region was largely rural and undeveloped,
poverty-stricken and characterized by degraded environmental conditions. Per capita income was
one of the lowest in the United States, few people had running water or electricity, and poor sanitary
conditions resulted in some of the highest rates of disease and infant mortality in the country. In
some areas near the Tennessee River, 1 out of every 3 people had malaria. Illiteracy rates were high
and the quality of education was poor. Severe erosion, extensive deforestation and exhausted mines
were indicative of a deteriorating environment. Additionally, the navigation potential of the Tennes-
see River remained untapped owing to hazardous shoals, while the heavy rainfall and steep slopes
in the region subjected many areas to repeated and serious flooding. The people of the Tennessee
Valley were trapped in a cycle of poverty. The natural resource base of the economy had been dete-
riorating, which led to widespread poverty and further misuse of the region’s resources. The social
problems in the Valley could be addressed only by improving the economy, which would depend on
a healthy resource base, including land, water and forests.
As the Great Depression of the 1930s deepened and conditions in the Tennessee Valley
worsened, Roosevelt sought to create an innovative programme that would revitalize the economy
and boost morale. The creation of TVA represented a “bold experiment” aimed at accomplishing the
unified development of a river basin. Flood control, navigation and power generation were not ends
in themselves, but the means to advance social and economic development.
The vitality of the TVA as an institution was bolstered by its early, tangible and largely
positive impact on the lives of the people of the Tennessee Valley. Two major dam construction
projects were initiated in the agency’s first year of operation. Over the next 12 years, bolstered by the
need to support the war effort, progress was remarkable: the navigation channel on the Tennessee
102 World Economic and Social Survey 2009

Box IV.1 (cont’d)

River was completed; 26 dams were incorporated into the TVA water control system; and TVA
became the largest power producer in the United States. Additionally, farm production levels tripled
owing to successful efforts to reduce soil erosion, improve farm practices and introduce fertilizers.
Although controversies arose over relocations required during dam building, the Valley residents
Sources: Bateman, Ros and were put back to work and the overall standard of living improved. TVA won the support of citizens
Taylor (2008), and Miller and and local governments and gained a national reputation for its work in the area of water resources,
Reidinger (1998). land management, forestry, agriculture and energy production.

An investment-led approach to the climate challenge is taking shape in a num-

ber of developed countries, and some developing countries, with the inclusion of green
investments in stimulus packages designed to create jobs in the face of a severe economic
downturn and shift resources into “green jobs” (see box I.4).
In the developing However, in the developing world, the adjustments accompanying the shift to
world, the adjustments a low-emissions development pathway are likely to be much more significant, constituting,
accompanying a shift
in effect, a new industrial revolution. What can, should and almost certainly will make
to a low-emissions
development pathway are this twenty-first-century revolution different from its predecessors at its core will be its
likely to constitute another highly efficient use of low-emissions and, in due course, carbon-free energy sources. It is
industrial revolution important to see these investments in mitigation as part of a larger shift to a new invest-
ment path involving a broad number of sectors and regions and aimed at weakening the
climate constraint on global growth. Related investments will be needed to raise agricul-
tural productivity, improve forest management, and ensure a more reliable water supply
and a more efficient transport system as well as the steady expansion of green jobs.

From technological learning to technological leapfrogging

Without constant While economic growth depends on a fast pace of investment accumulation, it is sus-
innovation and learning, tained by ongoing structural and technological changes which underpin productivity and
the economy remains
income growth. Without constant innovation and learning, the economy remains locked
locked into production
methods that use less into production methods that use less advanced technology and fails to diversify into
advanced technology and more dynamic activities. Given that improved technological knowledge is often embod-
fails to diversify into more ied in capital goods, a fast pace of capital formation and technological progress are often
dynamic activities strongly complementary (Salter, 1969).2 A pro-investment macroeconomic policy is there-
fore necessary to strengthen technological development (United Nations, 2006). Still, the
tendency of private firms to underinvest in technological knowledge and innovation is
a well-established fact, with the danger of locking countries into a weaker growth path.
For countries that are not yet at the technological frontier, catching up has involved a

2 The complementarities between technological progress and capital accumulation in the case of
strong productivity growth in the United States were pointed out by Baumol, Batey Blackman and
Wolff (1991), p. 164:
(E)ven if technological innovation is the undisputed star in the scenario (which is by no
means certain), substantial capital accumulation very likely would have been required to
put the inventions into practice and to effect their widespread employment. If, moreover,
saving and investment play a primary role on their own, it becomes all the more important
to explore the nature of that role, recognizing that because of unavoidable interactions
between rates of innovation and investment, any attempt to separate the two may prove to
be artificial, if not ultimately unworkable.
 A state of change: development policy and the climate challenge 103

good deal of active policy support for building technological capacity, including import-
ing technologies from abroad, and learning how to use them most effectively.3
Because major innovations involve the co-evolution of technologies and the in-
stitutions that support them, there is a tendency to favour incumbents (“lock-in”), making
it hard for new technologies to enter (“lock-out”). The removing or reforming of regulatory
and institutional barriers that generally favour incumbent technologies aims at creating a
level playing field for newcomers. A developmental State can play a directly supportive role
by removing barriers and easing entry for a new technology through its procurement poli-
cies and its use of subsidies; and it can also provide temporary support to those adversely
impacted by the resulting shifts in activity.
Government support for tertiary education, publicly funded research, develop-
ment and deployment (RD&D) and subsidized research undertaken in the private sector,
as well as industry-level training, are instruments that have been extensively used. In re-
cent years, such efforts have been focused on establishing a national system of innovation,
including a much stronger partnership between public and private institutions promot-
ing technological development; however, serious financial and institutional obstacles to
building such a system have been identified in many developing countries (Nelson, 2007;
United Nations Conference on Trade and Development, 2007).
As cleaner technologies and diversification will be a critical part of establishing As cleaner technologies
a new low-emissions growth path, a process of innovation and learning has to be ignited and diversification will be a
alongside efforts to raise the pace of capital formation. Given the scope of the challenge, critical part of establishing
a new low-emissions
this process will have to involve traditional sectors such as agriculture and forestry (box
growth path, a process of
IV.2), as well as more advanced sectors linked to mitigation challenges. Th is transfor- innovation and learning
mation will build, moreover, on the technologies of the previous revolution, namely, in- has to be ignited alongside
formation and communications technologies, whose potential to support the smart and efforts to raise the pace of
efficient production, distribution and use of energy in all its forms is vast and still far capital formation
from exhausted. Additionally, those technologies offer many organizational, managerial,
marketing and research-oriented capabilities which will be particularly useful in fostering
productivity growth and finding new markets. If history is any guide, market forces by
themselves are unlikely to make the required adjustments.
An attractive concept in the field of sustainable energy development is that of Developing countries
energy leapfrogging (see Gallagher, 2006), whose thrust is that developing countries can could avoid the resource-
avoid the resource-intensive pattern of economic and energy development by “leapfrog- intensive pattern of
economic and energy
ging” to the most advanced technologies available, rather than by following the path of
development by
conventional energy development that was travelled by industrialized countries. The as- leapfrogging to the most
sumption is that if the advanced, cleaner technologies exist, they can be transferred to, advanced technologies
and be widely deployed within, developing countries. The leapfrogging concept has gained available
ground among policymakers, scholars and students and even, to some extent, in the pri-
vate sector (see, for example, Goldemberg, 1998; Unruh, 2000; and Murphy, 2001).
The potential for leapfrogging is inherent in both new production processes
and new products. Often, there is synergy between the two, as between the use of renew-
able energy sources and energy-efficient products. For example, switching to a compact
fluorescent light bulb makes it economical to supply power from a solar photovoltaic pan-
el. The resulting lighting system is much more satisfactory than its inefficient alternatives:
candles, kerosene or the combination of incandescent lights and an unreliable existing
electric grid (Goldemberg, 1998).

3 Learning by doing and using have been highlighted by economists (Rosenberg, 1982).
104 World Economic and Social Survey 2009

Box IV.2
Capacity-building for sustainable forestry
During the past several years, efforts have been made to include avoided deforestation and
sustainable forestry in international climate change mitigation agreements. (Deforestation alone
contributes to about 17 per cent of global CO2 emissions.) However, inclusion of these activities in
emissions accounting requires developing methodologies to monitor, evaluate and verify avoided
emissions. Capacity-building needs to include capacity to formulate policies and manage and
monitor projects.
Establishing the procedures for designing, reporting and monitoring forestry projects for
carbon sequestration that are often complex and require in-depth knowledge constitutes a means of
mitigating risks of leakage, non-permanence and uncertainties. Extensive capacity-building is needed
if developing countries are to design and implement such projects successfully. The typical ex post
approach of payment on delivery of carbon credits may prevent necessary upfront capacity-building
measures from being implemented and is a threat to the permanence and quality of forestry projects,
which generally require major investments in the planning and implementation phase.
In specific terms, it is likely that a broad implementation of reduced emissions from de-
forestation and forest degradation (REDD) projects will require training in technical skills such as geo-
graphic information system (GIS)-mapping, the use of Global Positioning System (GPS) technology
and remote sensing. REDD initiatives aiming at simultaneous sustainable development benefits will
require extensive capacity-building on a local level in sustainable forest management, agroforestry,
sustainable logging and alternative income-generation.
On a national level, there is a need for assistance in establishing baseline scenarios for
deforestation and setting up national systems for monitoring, assessing and verifying emissions
(Food and Agriculture Organization of the United Nations, 2008). Many developing countries will also
need assistance in strengthening the institutional capacity for planning, creating policy frameworks
and enforcing policies and laws. Countries need to create a regulatory framework, to ensure not only
climate benefits, but also a fair implementation of REDD practices and sustainable forestry which
does not compromise the livelihoods of local and indigenous communities.
Mechanisms and institutional capacity are needed to ensure effective participation in
programme planning as well as implementation. Contrary to what is often argued, reducing defores-
tation and forest degradation does not automatically lead to sustainable development in a broader
sense. Sustainable development benefits must be taken into account in the planning and project
development phase as well as in the shaping of policy frameworks and mechanisms. Otherwise,
there is a risk that REDD initiatives will yield carbon benefits at the expense of local and indigenous
communities.

Leapfrogging to new However, leapfrogging to such new energy technologies, while it has the poten-
energy technologies has tial to yield important savings over the long run, faces significant obstacles. These might be
the potential to yield
on the supply side, for instance, owing to the presence of barriers to accessing the required
important savings over
the long run, but faces technology, whether because of obstacles to importing the technology from abroad, as is
significant obstacles the case for most developing countries (see chap. V), or because of a lack of the technologi-
cal expertise needed to link technology to local conditions. Obstacles may also exist on
the demand side, if a limited market size prevents economies of scale and a rapid running
down of costs to make new technologies locally competitive within an acceptable time
frame. Thus, there is a role for Governments, including at a local level, to build markets for
new technologies, for example, by providing low-cost loans to households and businesses,
providing information about new technologies, etc.
The need for a significant Still, as noted in chapter II, the need for a significant scaling up of adaptation
scaling up of adaptation
capacity in most countries cannot be understated. In order to take advantage of these op-
capacity in most countries
cannot be understated portunities, it will be necessary to invest in training institutes and schools and expand the
 A state of change: development policy and the climate challenge 105

availability of basic education, as a foundation for further training, as well as vocational

and technical training (United Nations Environment Programme, International Labour
Organization, and others, 2008).
The “hardware” training, or training in core skills, may be more important
for least developed countries that need to reach the threshold of a skilled labour force in
order to be able to absorb technology, whereas higher-income developing countries may
be more in need of “software” skills, including in business promotion and networking
(United Nations, United Nations Framework Convention on Climate Change, 2003).
For small economies, for example the small island developing States, regional cooperation
can be crucial as a means to achieve economies of scale in capacity-building. Information
technologies also open up new possibilities for remote training.

Managing creative destruction

Development is a continuing process of adjustment and transformation. Changes in the The developmental State
economic system require innovations in the framework of incentives and regulations to provides a coherent vision
of the future and manages
ensure that adjustments are smooth. It also requires that institutions be established for
the challenges engendered
purposes of consultation, discussion and participation so as to ensure that those who lose by change
out as a result of such changes do not upset the process. The capacity of the developmental
State to provide a coherent vision of the future and to manage the challenges engendered
by change, including overcoming vested interests and supporting those losing out, is a key
feature of successful development experiences (Evans, 1995).
Meeting the climate challenge will entail significant adjustments, including
the phasing out of “dirty” technologies. In particular, it will entail the need not only to
find substitutes in the move away from old energy systems, including replacing them with
renewable energy sources in many countries, but also to avoid the installation of new
facilities that lock industries and countries into high-emitting technologies for years to
come, owing to high sunk costs.4 Managing such adjustments will be critical to achieving
the smooth transition to a low-emissions, high-growth development pathway.
The magnitude of the necessary adjustment constitutes a non-marginal change
which is unlikely to emerge from the play of market forces alone. Indeed, old technologies
are still cheaper and we can expect their price to remain low for the foreseeable future,
even if international agreements designed to resolve this issue are put in place as fast as is
politically possible. More importantly, old technologies are readily available for replica-
tion and installation. While some green technologies are already cost-competitive, others
remain costly and still others need to be developed.
Governments can fundamentally shape energy demand through land-use, ur-
ban and regional planning, that is to say, through careful spatial planning of different
types of economic activities so as to minimize demand for energy, maximize opportunities
for cogeneration, and allow for the efficient development of mass transit systems as well as
non-motorized forms of transport.
Thus, tackling climate change requires a strong set of legislative/regulatory Tackling climate change
incentives to prevent the players from becoming directly or indirectly sidetracked by or necessarily involves a
significant degree of
locked into carbon-intensive options. This necessarily involves a significant degree of
coordination among
coordination among different spheres of government. It also means that an integrated different spheres of
development strategy would have to include a perspective on energy and on the energy- government

4 Individuals can also be locked in through consumption of high carbon intensive durable goods.
106 World Economic and Social Survey 2009

intensity of the production structure, a vision of urban development and transportation,

and a perspective on natural resource use and natural resource intensity of production.
This integrated strategy can be launched through a collaborative effort by a developmental
State and the private sector to generate a big push that increases the scale of economic
activity, thereby eliminating the poverty trap which affects many poor countries, as well
as many regions in otherwise prospering developing countries.

Diversification challenges
For many developing As discussed in the previous chapter, for many developing countries, adaptation to un-
countries, adaptation to
avoidable shocks from global warming is the central policy challenge. Some of the smarter
unavoidable shocks from
global warming is the policy choices for addressing this challenge were discussed in the previous chapter, includ-
central policy challenge ing a more integrated approach to adaptation and mitigation issues.
Agriculture, as one of the most climate-sensitive sectors in many developing
countries, is in need of such policies. Th is will require knowledge encompassing new tech-
nologies such as sustainable irrigation methods and crop selection and diversification. It is
important that a proactive approach be taken in order to prevent production losses and a
further aggravation of the food crisis and poverty in rural areas, especially in Africa.5
Agriculture is an area where At present, however, agriculture is the main emitter of nitrous oxides and
emission reductions can be methane (both with high global warming potential) and contributes about 14 per cent of
achieved relatively cheaply
global greenhouse gas emissions (a share roughly comparable to that for the road trans-
port and forestry sectors) (McKinsey & Company, 2009). At the same time, agriculture
is an area where emission reductions can be achieved relatively cheaply (Enkvist, Nauclér
and Rosander, 2007). The mitigation potential of agriculture is large; on one estimate,
by 2030, agricultural emissions at a business-as-usual level could be more than halved
through a combination of abatement measures yielding reductions below $10 per ton of
CO2 equivalent (tCO2e), with many measures having negative costs because of productiv-
ity benefits (ibid.). Low-cost measures include improving soil quality (for example, restor-
ing degraded lands) and cropland and grazing land management (for example, reducing
fertilizer use, reducing tillage and eliminating burning of crop residues in the field) (Bel-
larby and others, 2008). Thus, sustainable agriculture can meet climate change mitigation
goals as well as the Millennium Development Goals. However, taking advantage of this
mitigation and carbon sink potential will require capacity-building programmes, with
investments in technical training, provision of extension services, and programmes for
sharing good practices.
The sustainable production Like the improvement of land management and agricultural practices, the
of biofuels from biomass sustainable production of biofuels from biomass is another important means of mitigat-
can be an important means
ing climate change and generating income in the agricultural sector. However, this will
of mitigating climate
change and generating require further research on sustainable production methods and the impacts of biofuel
income in the production on food production, along with extensive farmer and farm worker training. If
agricultural sector the biofuel industry grows, it will require not only a large unskilled labour force, but also
skilled labour (Peskett and others, 2007). Consequently, it is important that training be
available in the technical and managerial skills needed in the nascent biofuel processing
industries, including skills required for the operation and maintenance of biofuel plants.
A combination of large-scale investments, information management and col-
lective action have already been undertaken by countries and communities in the advanced

5 On the need for a green revolution in Africa linked to the climate challenge, see Sachs (2008).
 A state of change: development policy and the climate challenge 107

world to protect themselves against climatic shocks. For many developing countries, on
the other hand, the real core of the adaptation challenge is still closely tied up with the
need to diversify their economies so as to be able to move away from reliance on a small
number of activities, particularly those in the primary sector that are sensitive to climatic
shocks and changes, and to shift to new energy sources and to sectors that are less energy-
intensive (see box IV.3).
The appropriate strategy is necessarily context-specific. It depends, among oth-
er factors, on the level of development, technological capacities, the size of the economy,
the natural resource base, government capacities and established State-business relations.
It involves not only manufacturing production but also a viable exploitation of the oppor-
tunities provided by the resource endowments of a specific country and the development
of modern services.

Box IV.3
Diversification of the productive system in South Africa
Historically, low electricity prices have been seen as central to South Africa’s competitiveness. The use
of cheap and abundant coal in the primary energy mix has provided relatively low-cost electricity,
and little incentive for greater energy efficiency. Industrial development has, to a significant extent,
been built around energy-intensive sectors. These sectors are sensitive to changes in energy prices,
so that particular attention needs to be given to them in the move to a low-emissions economy.
While current Government policy has embraced sustainable development goals, the country contin-
ues to provide significant incentives for investment in energy-intensive industries. These industries
are still an important source of employment, investment and income.
Continuing this approach carries a high risk that the economy will be “locked into”
energy-intensive industries, when environmental, economic and social pressures may push South
Africa in the opposite direction. Significant investment in energy-intensive industries in the 1990s
has had just that effect, and in fact several new megaprojects (including a new aluminium smelter)
are now in the planning stage.
An active industrial policy is required to target sectors that are less energy-intensive and
enable South Africa’s economy to diversify, move away from the country’s mineral-energy complex
and shift to capital and intermediate goods. This would indeed represent a major shift and could
take decades to complete. However, given the lock-in effect, decisions taken today will be critical in
changing the trajectory of South Africa’s energy development path. “Bending the curve” requires a
long-term perspective, but it also involves policy changes in the immediate future.
There is political agreement that, under South Africa’s climate policy, emissions will
have to peak, plateau and decline. The most effective and affordable short-term strategy for reduc-
ing greenhouse gases emissions is an energy-efficiency programme. Multiple studies demonstrate
that significant savings can be achieved at no overall cost to the economy and, often, significant
benefits can be provided. The next strategy would be to change the fuel mix, notably, to reduce the
three-quarters share of coal in the total primary energy supply. In the medium term, reduced-carbon
and non-carbon energy supplies, such as natural gas, hydroelectricity (imported from the region)
and solar thermal technologies could be introduced into the energy system. These measures can
together achieve significant reductions in greenhouse gas emissions in relation to business-as-usual
development; but further action will be required to reduce emissions through more aggressive pur-
suit of the above programmes, possibly with the help of international funding.
Renewable energy options in South Africa have been considered both in terms of
electricity-generating renewable technologies (a combination of biomass, solar thermal technolo-
gies and wind energy) and a biofuels industry. The electricity target is in line with the State’s target
108 World Economic and Social Survey 2009

Box IV.3 (cont’d)

of achieving 10,000 gigawatt-hours (GWh) of generated electricity by 2014, but current thinking in
Government is that three quarters of this target will eventually be met through biofuels. Investing
in more labour-intensive technologies such as renewables would create more “green jobs”. Other,
more ambitious renewable energy interventions are possible, particularly one involving a massive
effort to develop solar energy technologies, since South Africa has excellent solar resources, but this
would again depend on the electricity price. Current evidence indicates that solar water heating
(for domestic, commercial and potentially industrial applications) is economically viable, even given
current low prices. Developing the potential of solar energy in South Africa would probably require
a massive State-driven research project and an investment programme similar to the synthetic fuels
programme of the 1960s and 1970s. Other supply-side options that require further investigation in-
clude new coal technologies and unconventional coal technologies such as fluidized-bed combus-
tion, and others, as well as carbon capture and storage combined with coal gasification. There are
currently no reliable estimates for the cost of these programmes, especially given the lack of oil or gas
wells in South Africa, a factor that introduces significant technical complications with respect to CO2
storage. As mentioned above, there are also plans to develop a biofuels industry in South Africa, but
on a relatively small scale, leading to the replacement of only about 8 per cent of conventional liquid
fuels by 2025, a limit based on the factors of price and available arable land and water resources.
To achieve the desired transformation, five possible components need to be consid-
ered. The first is adjustment of State incentives (including industrial incentive programmes and spe-
cial dispensations on low electricity prices) so as not to attract further energy-intensive investments
on terms that would severely restrict future mitigation options, and shift those incentives to lower-
emissions industries. Second, South Africa might focus its mitigation efforts on non energy intensive
sections of the economy, assuming that their international competitiveness would suffer less. Third,
there is an urgent need to tackle the challenge posed by the energy-intensive sectors through a
combination of reviewing the existing policy framework, promoting specific energy-intensity tar-
gets, conducting international negotiations on the best location for such industries, and carrying out
diversification within these sectors. The fourth component is utilization of economic instruments,
such as carbon taxes or domestic emissions trading, which would be expected to affect the energy-
intensive sectors most strongly. Fifth, the focus of industrial policy and investment strategy could
shift to less energy- and emissions-intensive sectors of the economy. The aim of these strategies
Source: Winkler and would be to protect South Africa’s competitive advantage in the short and medium terms, while
Marquand (2009). building other competitive advantages in the long term.

The revival of industrial policy

There is no “one size fits Following a period during which policy options in many developing countries were con-
all” policy solution to the fined to a narrow band of universal market-friendly measures, there is growing recognition
development challenge.
that there is no “one size fits all” policy solution to the development challenge. Th is is
This is even more the case
when that challenge is even more the case when that challenge is combined with the climate challenge. Efforts to
combined with the climate roll back the State in recent years have seriously debilitated public sector capacity in some
challenge countries and left an institutional hiatus which needs, with some urgency, to be filled. The
initial level of institutional capacity needed to start raising investment in poor countries is
often exaggerated, however (Sachs and others, 2004).
Stronger and more reliable Governments have a long history of improving the efficiency of the market
civil service capacities and system by correcting for market failure, especially in non-competitive markets, and of ac-
public institutions will
celerating growth by providing missing inputs and promoting collaboration among private
be needed so that more
integrated climate and enterprises and the public sector in the areas of long-term investment, research and de-
development strategies velopment, education and training, etc. Still, government is no less fallible than markets,
can be devised and specific and the unpredictability of government action can be no less of an obstacle to long-term
policies implemented investment than market failure. More secure property rights are part of ensuring such
 A state of change: development policy and the climate challenge 109

predictability. However, stronger and more reliable civil service capacities and public insti-
tutions will also be needed so that more integrated climate and development strategies can
be devised and specific policies implemented (Ahmad, 2009).
As large up-front investments will be needed in both mitigation and adap-
tation, State-sponsored accumulation will require a coordinated effort to mobilize the
required resources, from both domestic and external resources, and to channel them into
high-productivity and highly energy-efficient activities. It is essential that the autonomy
of financial markets be reduced to the point where macroeconomic policy instruments
can be deployed to support a development mandate dedicated to productive investment,
structural change and rapid growth.
Fiscal and monetary policies should give priority to increasing public spending,
including investments in renewable energy, cleaner energy processes, education, health
and infrastructure. This will also entail using subsidized credits, credit guarantees, tax
breaks, accelerated depreciation allowances, etc., to boost profits in private firms in the
desired sectors. The effects of such policies will be greater if commercial banks make loans
more easily available for such investments. However, as discussed in chapter VI, develop-
ment banks may have a larger role to play in some countries.
As discussed in previous chapters, a big investment push is likely to be aimed
at a limited range of industries and sectors and to begin with a prominent role for public
investment. There has been much warning of the threat of public investment crowding
out private investment. Crowding out, strictly speaking, refers to the variety of channels
whereby additional government spending may have little or even a negative effect on total
output because of its adverse effects on interest-rate sensitive components of private expen-
diture. Neither theory nor empirical evidence provides a basis for clear-cut conclusions
in these respects. (Everhart and Sumlinski, 2001, table 2.2). Our own big-push scenario
allows for considerable crowding in (see box IV.4 and chap. I).
Pro-investment macroeconomic policies are not sufficient by themselves to Contrary to common
trigger the shift to a low-emissions, high-growth development pathway, especially one perception, many countries,
and, notably, the more
where investment is targeted at specific industries with the greatest potential to advance
advanced ones, have
towards the green economy. Contrary to common perception, many countries, and, no- maintained industrial
tably, the more advanced ones, have maintained industrial policies of some type in recent policies of some type in
years. Successful industrial policies have some key ingredients in common: (a) targeted recent years
incentives; (b) regulation; (c) coordination of investment decisions; and (d) control mecha-
nisms. These elements can be implemented through diverse instruments, according to the
particular characteristics of the sector and country. In many developing countries, these
measures have been narrowly targeted at attracting foreign direct investment (FDI).
This implies that many developing countries have the experience and instru- Many developing countries
ments required to target and tailor industrial/productive policies towards a big push in have the experience and
instruments required to
clean energy and towards diversification in support of greater economic resilience. Vari-
target and tailor industrial/
ous factors explain why some countries have been more successful than others in using productive policies towards
these policies. In particular, the subsidies and rents that these measures inevitably create a big push in clean energy
are made available on condition of enhanced performance, linked, for example, to tech- and towards diversification
nological upgrading, and limits are set for how long they can be used. These and other in support of greater
lessons will certainly need to be absorbed as industrial policies are implemented to meet economic resilience
the climate challenge.6
6 Policymakers in more advanced countries are beginning to rethink these policy options in the
context, for example, of the need to transform the automotive sector in light of the climate
challenge (see Rothschild, 2009).
110 World Economic and Social Survey 2009

Box IV.4
Crowding in of private investments in a
low-emissions, high-growth development path
As demonstrated by the analysis provided in chapter I, simple continuation of past growth patterns
would fail to generate sustained high growth for developing countries and would also fail to generate
the energy saving and emission reduction needed to avert potentially catastrophic consequences for
a In the model, aggregate the world as a whole. To effect a change in course towards a low-emissions, catch-up development
public expenditures pathway, high, upfront public investments are needed. A big push of public investment, along with
are adjusted, but—in other measures, is expected to “crowd in” the private investments that are also needed to achieve the
conjunction with the second desired structural change. However, as the mobilization of large amounts of public resources would
policy component—these be needed, it could well be that the measures would induce some private investors to direct their
may be seen to have been
allocated for achieving
spending towards the greening of the economy, while discouraging others from investing, inasmuch
greater energy efficiency as interest rates might rise and available savings in financial markets might be “crowded out” by pub-
and low-emissions lic sector demand for such resources. The prospect of possibly substantial increases in public debts
energy production in the could further erode private investor confidence in respect of making long-term investments.
developed countries and Existing global models used for the economic analysis of climate change typically do
for a combination of public not capture these financial dimensions. The greatest difficulty lies in modelling investment and finan-
investment projects for
cial behaviour adequately in a context of great uncertainty and over long periods of time, as required
low-emissions energy,
adaptation and general by climate change analysis. The United Nations Global Policy Model (GPM) has been designed to
developmental infrastructure analyse global macroeconomic interactions, but inasmuch as it encompasses the global production
in the developing countries. and use of different sources of energy, it contains the elements needed to analyse the global financial
The size of the fiscal stimulus implications of a big energy and technology push aimed at addressing climate change. The Global
varies by needs, with greater Policy Model considers the channels through which a public investment push could crowd in private
spending increases for the
investment (namely, growth and targeted incentives) and crowd out private resources (namely, inter-
poorer countries, especially
the least developed est rates and changes in market confidence and expectations along with shifts in levels of public
countries, which have debt, inflation, the value of private assets and other financial variables).
greater infrastructural deficits The figure shows the results of simulations with the Global Policy Model in a scenario
and adaptation needs. with three types of policy adjustment: (a) one where countries worldwide are assumed to increase
public spending levels by between 1 and 5 per cent of GDP;a (b) one where high-emission energy
b The constraint is set to
induce a reduction in the demand is constrained (reflecting, for instance, a cap-and-trade mechanism) to yield lower emis-
use of fossil-fuel energy by at sions and greater energy efficiency;b and (c) one where economic resilience of developing countries
least 4 per cent per year. is strengthened by providing them, especially the poorest countries, with full and duty-free market
access to developed-country markets, leading to greater economic diversification.c
c The first policy component
(public investments in
The policy changes would yield faster growth (2.5 per cent per year in developed coun-
infrastructure, energy and tries and 6 per cent per year in developing countries), allowing for growth in private incomes and
human capital) is also consumption spending and promoting private investments. By the model’s parameter estimates,d
expected to support trading these positive effects of the public investment-led strategy towards achieving low-emissions econo-
capacity and economic mies outweigh the crowding out effects through the financial channels. By 2030, the level of private
diversification. In addition, investment would be 1-4 per cent higher than in the business-as-usual scenario. The crowding-in
greater commodity price
effect would be stronger in the least developed countries, where the fiscal stimuli are greater. Rising
stability would support
long-term investments private incomes would also help increase the tax base, but not enough to prevent public debt ratios
towards diversification. In from increasing to relatively high levels. Over the longer run, public indebtedness would stabilize
the model, this is achieved in the developed countries, but at levels of over 100 per cent of gross domestic product (GDP) (see
by triggering supply and the three right-hand graphs), which many Governments may consider too high for comfort. By 2030,
demand adjustments public indebtedness in developing countries would also have risen significantly (by 26 percentage
under international trade
points of GDP over the baseline scenario). In virtue of the assumed international coordination of
agreements.
these strategies, the model suggests that, even at these levels of public indebtedness, continued
d Please note that all economic growth, energy saving and trade impulses would continue to crowd in private invest-
behavioural relations of ment. Nonetheless, public debts cannot rise infinitely. Complementary measures will need to be con-
the model were estimated sidered to prevent public indebtedness from becoming explosive. For developed countries, these
econometrically, yielding
robust and plausible
would need to be sought in the form of new taxes (such as a carbon tax), while developing countries
parameter values (see might utilize both fiscal measures and alternative non-debt creating financing support (for example,
Cripps, Izurieta and Vos through a foreign direct investment stimulus in some cases or foreign aid in the case of the poorest
(forthcoming)). countries). The various financing options are discussed further in chapter VI.
 A state of change: development policy and the climate challenge 111

Box IV.4 (cont’d)

Public spending, private investment and public indebtedness in a low-emissions, high-growth scenario,
developed and developing countries, 2010-2030
A. Public spending and private investment B. Public debt ratios
(billions of constant PPP dollars of 2000) (percentage of GDP)
Developed countries Developed countries
3 500 130
Total public spending Low-emissions, high-growth scenario
3 000 Private investment Business as usual
110
2 500

90
2 000

1 500 70

1 000
50
500

0 30
2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030
Developing countries Developing countries
3 500 130

3 000
110
2 500

90
2 000

1 500 70

1 000
50
500

0 30
2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030
Developing countries, excluding major surplus countriesa Developing countries, excluding major surplus countriesa
3 500 130

3 000
110
2 500
90
2 000

1 500 70

1 000
50
500

0 30
2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030
2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Source: UN/DESA, based on simulations with the United Nations Global Policy Model.
a Namely, China, major oil exporters in Western Asia, and newly industrialized countries of East Asia.
112 World Economic and Social Survey 2009

Table IV.1 presents a selection of policies focused on specific sectors such as

energy, transport and extractive industries. Currently, many countries still have policies
favouring high-emissions sectors like hydrocarbons. A logical, though not easy, first step
would be to reorient support from these sectors towards renewable and/or cleaner energy
sources.
Developing countries operate today in a global policy environment that is quite
different from the one of two or three decades ago.7 In particular, there has been a ten-
dency to discipline national economic policies through multilateral, regional or bilateral
agreements. These disciplines impose restrictions on the ability of developing countries
to conduct certain types of industrial policies. Rodrik (2007) presents a comprehensive
Table IV.1
Illustrative list of industrial policies in support of production and investment,
with a special focus on energy, transport and extractive sectors

Loans for Tax

fixed assets Credit incentives
Loans for and/or Loans to programmes Horizontal to
working investment Equity specific for particular tax Tax incentives to particular
capital projects investment sectors regions incentives specifc sectors regions
Argentina X X X X Mining, forestry
Brazil X X X Oil, gas, X X
shipping,
power
Chile X X X X Forestry, oil, nuclear X
China X X X X X X
Colombia X X X X X X
Ecuador X X X Mining
El Salvador X X Mining
Ghana X X X X X
Honduras X X Transport
India X X X X X Infrastructure, power, X
transport
Malaysia X X Shipping X X
Mexico X X X X X X Forestry,
transportation
Nicaragua X X
Nigeria X X X X Oil, gas, energy X
Panama X X Forestry
Paraguay X X X X
Peru X X Mining, oil X
Thailand X X X Utilities, infrastructure, X
environment
Uganda X X Forestry X X
Uruguay X X X Hydrocarbons,
shipping, forestry
Venezuela (Bolivarian X X X Hydrocarbons
Republic of )
Source: Rodrik (2007), table 4.2.

7 Adapted from Rodrik (2007), p. 122. Chapter V widens the analysis of trade rules pertinent to
climate change.
 A state of change: development policy and the climate challenge 113

summary of the specific rules under the different international agreements.8 Direct export There remains much scope for
subsidies9 are now illegal (for all but least developed countries), as are domestic content coherent industrial policies,
especially if countries do not
requirements on enterprises that are linked to trade, quantitative restrictions on imports,
give up their policy autonomy
and patent laws that fall short of international standards. However, there remains much any further by signing bilateral
scope for coherent industrial policies, especially if countries do not give up their policy au- agreements or adhering to
tonomy any further by signing bilateral agreements or adhering to restrictive international restrictive international codes
codes (see box IV. 5).

Box IV.5
A big energy push in India: the role of renewables
Continued catch-up growth in India will depend, in no small part, on large-scale investments in its
energy sector. With economic growth targeted at 7-8 per cent, energy requirements are expected to
grow at 5.6-6.4 per cent annually, representing a fourfold increase over the next 25 years. Electricity
generation, heavily dependent on coal, will be the primary source of emissions growth.
As part of its efforts to address high energy demand and the potentially adverse envi-
ronmental effects of intense energy use, India has enacted legislation and pursued policies to im-
prove the availability of alternative energy sources. Laws and policies aimed at promoting renewable
energy in the electricity sectors include:
y The Electricity Act of 2003, which mandates the promotion of cogeneration and gen-
eration of electricity through renewable sources of energy. This is achieved by providing
suitable measures for connectivity with the grid, for the sale of electricity, and for pur-
chase of electricity from these sources, specifying a percentage of total consumption
of electricity in the area of a distribution licensee. The Act mandates that newly created
State electricity regulatory commissions fix a minimum percentage of power procure-
ment from renewable energy. Already, about half of the States of India have set, or are
in the process of setting, renewable power obligations. The State electricity regulatory
commissions have also provided preferential tariffs and energy transmission regulations
for renewable power generators
y The National Electricity Policy of 2005, through which authority is granted to each State
legislator to create a renewable energy portfolio standard for transmission and distribu-
tion companies serving their jurisdictions
y The Renewable Energy Plan 2012, which targets achieving a 10 per cent share for re-
newable energy in incremental power capacity. This should lead to an additional grid-
connected 10,000 megawatts (MW) of renewable energy.
Other initiatives include the installment of 1 million household solar water heating sys-
tems; electrification by renewable mini-grids for 24,000 villages that are currently without electricity;
the deployment of 5 million solar lanterns and 2 million solar home lighting systems; and the estab-
lishment of an additional 3 million small biogas plants.
The central Government also provides financial and fiscal incentives to allow renewable
energy to become competitive with other sources of conventional energy in India. These policies
feature, inter alia, income tax holidays, accelerated depreciation of investments in renewable energy
technologies, duty-free import of renewable energy equipment, concessional rates on customs and
excise duties on the import of capital equipment, capital subsidies and concessionary financing from
India’s Renewable Energy Development Agency, requirements for energy purchases by distribution
companies, and exemptions from electricity taxes and sales taxes.

8 Table 4.3 of Rodrik (2007) shows how restrictions are defined under each institution or agreement
and under what conditions they apply.
9 Least developed countries and developing countries with less than US$ 1,000 per capita gross
national product (GNP) are exempted from rules on subsidies under the Agreement on Subsidies
and Countervailing Measures.
114 World Economic and Social Survey 2009

Box IV.5 (cont’d)

These initiatives have helped India become the country with the most developed and
diversified renewable energy market in South Asia. The annual turnover of the renewable energy
industry in India is approximately $500 million, with a total renewable energy investment of about $1
billion. India uses up 3,500 MW of total installed capacity from renewable sources. This is just a frac-
tion of the estimated total economic potential of 100,000 MW.
Nonetheless, renewables still account for only less than 1 per cent of all electricity currently
produced in the country. This is because many renewable technologies, such as wind turbines, operate
intermittently and cannot function at 100 per cent capacity. The wind-energy industry has been boom-
ing in India over the past few years. According to the World Market Update 2006, India had the third larg-
est increase in annual capacity in the world, with 1,840 MW in new capacity. The cumulative installed MW
capacity for wind power in India is projected to grow from 6,228 MW in 2006 to 18,028 MW in 2011, which
reflects a compound annual growth rate of approximately 25 per cent. In order to support the growth
of the domestic wind industry, the Ministry of New and Renewable Energy of the Government of India
has encouraged State Governments to implement national policy guidelines for wind development. In
addition, new initiatives are being undertaken by the Ministry to reassess India’s wind power potential,
which is currently estimated to be 45,000 MW, or one third of total energy consumption.
While India has made much progress in developing its production of renewable energy,
there are several causes for concern regarding factors that may limit the full use of the country’s re-
newable energy potential. A first concern is whether the growth of the sector will be lasting under
the present policy framework. The currently generous Government subsidies provide a windfall to
producers, but such subsidies may be difficult to sustain over time as the market for renewables
expands. Second, there are constraints on the technologies that are being applied. The production
of wind energy is already hitting capacity constraints, as existing turbines have limited potential. In
some cases, there is no incentive to replace them with more efficient turbines as producers have
been guaranteed a pre-established return, requiring taxpayers to make up the difference if actual
returns fall short. Third, State-administered auctions have stalled the development of the country’s
potential to generate hydroelectric power, as they have given rise to speculative purchases of rights
to a site by developers, rather than purchases for long-term investment. Finally, considerable confu-
sion persists at the State level regarding how to implement the renewable energy portfolio standard,
as required by the Electricity Act. As a consequence, different standards apply across States. In some
States, the renewable energy portfolio standard is comparatively higher; in other States, there are
carve-outs for specific types of renewable energy; and in most States, there are price differentials in
respect of the power purchase tariffs that each distribution licensee must adhere to when meeting
its renewable energy portfolio standard.
All of these factors lead to confusion and sometimes to litigation, as some distributors
are balking at the power purchase tariff terms and price levels. Although State-to-State differentials
Sources: Gibbs (2008); and in power policy and renewable energy potential are important, some standardization, at least in re-
Tufts University, Fletcher spect of setting the power purchase price, would be helpful (United States Agency for International
School (2008). Development, 2007).

The example of the ethanol industry in Brazil demonstrates how critical Gov-
ernment support can be, particularly during the early phase of development and deploy-
ment of a new technology, and how it may need to be sustained until it has taken firm root
in the marketplace (box IV.6). The Government of Brazil, at both the federal and the State
levels, had an essential role to play in providing incentives to scale up production and in
setting up a clear institutional framework. This role included setting technical standards,
supporting the technologies involved in ethanol production and use, providing financial
advantages, and ensuring appropriate market conditions.
The introduction of Replacing old technologies, like gasoline in the case of Brazil, with renew-
renewable sources able sources entails the challenge of making complementary investments along the supply
entails the challenge of
chain. In the particular case of gasoline, consumers are reluctant to buy cars using a new
making complementary
investments along the fuel that may be difficult to find. Service station owners are not interested in investing
supply chain in a parallel fuel distribution system, since the number of potential users is usually very
 A state of change: development policy and the climate challenge 115

Box IV.6
Brazil’s sugar cane-based ethanol industry
Brazil’s ethanol industry was established in the 1930s. With more sugar than it could use, the Gov-
a The price paid to
ernment determined that sugar cane should be utilized for ethanol production and made ethanol,
producers in 1980 was
added to gasoline, a mandatory automobile fuel. Following the international oil crisis in 1973, the in- $700 for 1,000 litres. By
dustry made significant progress. The Government launched the National Alcohol Programme (Pro- 2004, it had reached $200
Álcool) in 1975 to increase production yields, modernize and expand distilleries, and establish new per 1,000 litres, becoming
production plants. Although ethanol production initially had been heavily subsidized,a over time all economically competitive
subsidies were eliminated. In 2008, ethanol was sold roughly at between 50 and 60 per cent of the with gasoline based on
international prices for oil
price of gasoline at the pump, owing to sharp reductions in production costs.
(equivalent to US$ 40 per
Policies that were key to Brazil’s success in substituting fossil fuel consumption for etha- barrel).
nol use include the following: (a) obligating the State-owned oil company, Petrobras, to purchase a
guaranteed amount of ethanol; (b) providing economic incentives to agro-industrial enterprises to
produce ethanol, including loans with low, subsidized interest rates (this policy applied from 1980 to
b This was possible because
1985); (c) incentives to consumers by guaranteeing a price of ethanol at the pump at 59 per cent of the Government had been
the price of gasoline;b (d) requiring the automobile industry to produce cars able to run partially or in charge of setting the
totally on biofuels; (e) allowing renewable energy-based independent producers of electric power gasoline price at that time.
to compete with traditional public utility firms in the electricity market at large; (f) stimulating and
supporting private ownership of sugar mills, which helped increase competition and efficiency; and
(g) stimulating rural activities based on biomass energy to increase employment in rural areas.
The Sugar cane Technology Centre, a privately funded research institute in São Paulo,
was key to improving ethanol production technology, having invested about $20 million per year in
research at the peak of the programme. Researchers at the Centre and other institutions also found
ways to use sugar cane fibre residue, known as bagasse, to produce energy, building on existing
methods of burning bagasse to power steam turbines for electricity generation and using the re-
maining heat from the turbines for the distillation process. They developed cauldrons operating at
greater pressure so that more energy could be produced, allowing many ethanol plants to become
self-powered. This contributed significantly to keeping ethanol production costs low.
Thanks to steady productivity improvements, the cost of producing ethanol declined
by an annual average of 3.8 per cent from 1980 to 1985 and of 5.7 per cent from 1985 to 2005. As
cumulative experience increased, the cost per unit of energy declined and is now one third of its
initial value (see figure).

Producers’ price of ethanol compared with gasoline prices in Brazil

200
1980

180 Ethanol price in Brazil

Long-term trend (ethanol prices)
160 Rotterdam regular gasoline price
Price per barrel of oil equivalent
(2004 United States dollars)

140
120
1980

100
80
60 1990
199
2000 2005

40
20
0
0 200 400 600 800 1000
Cumulative production of ethanol (millions of barrels of oil equivalent) Source: Nakicenovic (2009).
116 World Economic and Social Survey 2009

Box IV.6 (cont’d)

In 2009, Brazil has been the second biggest producer of ethanol in the world (20 billion
c The 2008/09 harvest year litres) after the United States (24 billion litres).c Close to 80 per cent of this is for the domestic market;
saw a record crop estimated the fuel used in 45 per cent of vehicles in Brazil is ethanol. Part of the demand is due to the success of
at 562 million tons of sugar flex-fuel vehicles (FFV) released in 2003, which can run on gasoline, ethanol or a mixture of both. Flex-
cane and nearly 27 billion fuel cars renewed consumer interest in ethanol and intensified demand for this biofuel. Flex-fuel ve-
litres of ethanol processed hicles accounted for 26 per cent of the light vehicle fleet in 2008, and the figure is estimated to reach
in 400 plants nationwide
50 per cent by 2012. According to Brazil’s National Association of Automotive Vehicle Manufacturers
(Brazilian Sugar Cane
Industry Association (UNICA) (ANFAVEA), 85 per cent of cars—some 4 million vehicles—sold in Brazil today are flex-fuel. Research-
and Institute for International ers at the Delphi Technology Centre in São Paulo have developed a fuel system for motorcycles that
Trade Negotiations of Brazil can also use ethanol–gasoline blends in any proportion. The first ethanol-powered bus, developed
(ICONE), 2009). at the University of São Paulo, has been undergoing road tests since December 2007 to assess its
economic viability. Brazil’s aviation company, EmBRAER, has had an ethanol-fuelled agriculture mono-
Sources: Goldemberg (2008); plane in use since 2004.
Goldemberg and others The Government’s reasons for supporting biofuels have expanded to include concerns
(2004); Moreira (2006); about greenhouse gas emissions and climate change, rural employment and equity issues, and local
Almeida (2007); Food and
Agriculture Organization of
air pollution. The use of ethanol as a replacement for gasoline has led to an overall reduction of 9.2
the United Nations (2008); million tons of carbon per year in carbon emissions in Brazil (10 per cent of the total). Evaluations of
Nakicenovic (2009); United ethanol’s impact on air quality found that E-10 (gasohol, a fuel mixture of 10 per cent ethanol and 90
Nations, Department of per cent gasoline) reduced carbon monoxide, a precursor for ozone formation, by more than 25 per
Economic and Social Affairs cent. When used as an additive, ethanol also displaces highly toxic and volatile components of gaso-
(2008); and Brazilian Sugar line (such as lead, benzene, toluene and xylene).
Cane Industry Association
(UNICA) and Institute
Brazil is now offering its expertise to other countries, especially developing countries
for International Trade that could produce biofuels but still depend on oil. In 2008, Brazil signed agreements with countries in
Negotiations of Brazil Africa, the Caribbean and other parts of Latin America. Most of these agreements involve the transfer
(ICONE), 2009. of Brazil’s ethanol production technology.

small. This is why government policies to spur investment and drive demand for selected
technologies are so important (Goldemberg, 1998).
Additionally, in most countries, government is the single largest individual
consumer (see Bhandarkar and Alvarez-Rivero (2008), p. 391). Thus, government procure-
ment policies, including methods such as tendering and holding of reverse auctions, can
constitute an important instrument. As a major purchaser of electricity and vehicles, Gov-
ernments could provide a significant boost to low-emissions options through the appropri-
ate procurement bidding specifications. Such green procurement could extend as well to
new construction of government buildings, ranging from offices to schools and hospitals.
The balance between Specific industrial policies will vary depending on the particular country, with
acquiring technologies some placing a greater reliance on technologies acquired from abroad through trade and
from abroad and
foreign investment, and others exerting greater effort on behalf of local technology devel-
developing local
technology may well shift opment. The balance between the two types of policies may well shift over time as a coun-
over time try familiarizes itself with imported technologies and acquires the capability to replicate,
adapt and improve them.
For some developing countries with strong technological capabilities there may
be even scope for pushing the technological frontier outwards. Thus far, there are relatively
few examples of developing countries that have established and maintained a strong lead
in technologies of global significance, with large markets even in developed countries.
This is changing, however, as a number of middle-income developing countries acquire
stronger technological capabilities and establish innovation systems.
 A state of change: development policy and the climate challenge 117

Some policy steps towards a low-emissions future

In developing countries, there is a need for policies that foster “strategic deployment” of
new technologies, in view of the advantages to be gained by building up new industries and
accelerating movement down the learning (hence, cost) curves (Grubb, 2004). Strategic de-
ployment generally requires a range of incentives, regulation and direct public investment.
Figure IV.1 presents some of the major technologies involved and how soon
they might be ready for large-scale deployment. These technologies include:
• Advanced technologies (such as gasification) for generating electricity from
coal and biomass: a suite of technologies whose accelerated deployment will
bring higher efficiency, reduced emissions and compatibility with carbon diox-
ide capture and storage technologies
• Advanced low-energy building technologies, for markets that are impeded
by numerous barriers associated with the construction industry and rental
markets
• More advanced primary renewables, notably solar PV, for which potential scale
economies remain large, and wind energy, which is a significant contributor to
emission reductions, and for which onshore deployment involves local learning
and, requires related industrial innovation.
A range of government subsidies to producers or users of new technology can A range of government
be so designed as to speed technology deployment through the offer of financial rewards subsidies to producers or
in contrast with the regulatory sanctions typically associated with enforcing standards (see users of new technology can
be so designed as to speed
chap. II). Subsidies can take a variety of forms. More specifically: technology deployment
through the offer of financial
rewards in contrast with the
Figure IV.1 regulatory sanctions
Technology development and CO2 mitigation for power generation typically associated with
enforcing standards

Coal CCS power

3
CO2 mitigation (gigatons)

2 Fuel switching to gas

BIGCC and biomass co-combustion

Nuclear IV Nuclear III

Onshore wind
Ultra supercritical coal and IGCC
Photovoltaics
Gas CCS power
1 Source: International Energy
Offshore wind Agency (2008a).
Concentrated solar power
Abbreviations: CCS, carbon
capture and sequestration; IGCC,
Biomass CCS power integrated gasification combined
Geothermal: EGS Geothermal: conventional
Ocean Fuel cells cycle; BIGCC, biomass integrated
gasification combined
0 cycle; EGS, enhanced
Basic science Applied R&D Demonstration Deployment Commercialization geothermal systems.
118 World Economic and Social Survey 2009

• Investment tax credits to firms that bring a new technology to market can
lower the upfront investment costs of producing a new type of equipment, and
can be tied either to costs or to the production level. These policies work to
increase the supply of a new technology on the market
• Production tax credits are subsidies granted for a particular type of electricity
generation on a per-unit-of-production basis, making renewables such as wind
more competitive with respect to higher-emissions production methods
• To increase demand for a new technology, tax credits or rebates can be granted
to purchasers as well as producers, reducing the cost differences between old
and new technologies and making the lower-emitting or more efficient new
products relatively more attractive. For example, many States offer tax rebates
to consumers who purchase high-efficiency appliances
• Loan guarantees also subsidize industry by shifting the risk of failure or de-
fault to the government and lowering the costs of capital for private firms
below what would be available on the open market for an unproved but prom-
ising technology
• Limiting legal liability to the users of a new technology constitutes another
implicit subsidy from government, insulating parties from possible economic
damages. This approach may be relevant for carbon-capture-and-sequestration
technology, where a release of geologically sequestered CO2 could potential-
ly undo climate benefits and cause additional harm, giving rise to litigation
against the technology developer.

Energy efficiency
There is a potential for As discussed elsewhere in the Survey, there is a potential for emissions gains from improv-
considerable emissions ing energy efficiency at the industry and household levels. The building sector, transport
gains from improving and industry appear to offer sizeable opportunities for low-cost improvements; but there
energy efficiency at the
are also potential, if less well researched, gains to be reaped in agriculture (Ürge-Vorsatz
industry and household
levels and Metz, 2009). There are also other potential benefits to be derived from creating jobs
in new business activities.
In South Africa, for example, interventions consist primarily of improved
building design and improved heating, ventilating and air conditioning (HVAC) efficiency
(Winkler, 2006, pp. 161–163 and 176). A “cleaner and more efficient residential energy sce-
nario” involves energy-efficient housing shells, efficiency interventions such as deployment
of compact fluorescent lamps (CFLs) and geyser insulation blankets, and a number of fuel-
switching options, including installation of solar water heating, replacement of other fuels
with liquefied petroleum gas (LPG) for cooking, and replacement of paraffin with electric-
ity for lighting, linked to substantial increases in the residential electrification rate. Despite
the promotion of win-win gains, however, widespread implementation requires some initial
investments and efforts to overcome key informational, institutional, social, financial and
technical barriers through “significant policy intervention” (Winkler, 2006, p. 160).
There are a range of incentive measures that aim at reducing initial costs associated
with increasing energy efficiency, including subsidies or grants for energy efficiency investments,
tax relief for purchase of energy-efficient equipment, subsidies for energy audits, and loans or
guarantee funds for energy efficiency projects (Peck and Chipman, 2008). Tax incentives, guar-
antees and other financing measures can help investors overcome the possible constraints on
paying the upfront cost of efficiency improvements (Tufts University, Fletcher School, 2008).
 A state of change: development policy and the climate challenge 119

Cleaner coal10
Coal is an abundant, low-cost energy resource, but it is also carbon-intensive and pollut-
ing. Coal meets just over one quarter of the world’s demand for primary energy. In terms
of its consumption, coal, instead of being replaced by other sources, is expected to expand
rapidly in the years to come. Coal emissions are projected to grow worldwide by 65 per
cent from 2005 to 2030 (see chap. II).
Globally, two market imperfections currently limit the uptake of cleaner Globally, it costs less to
coal technologies: it costs less to pollute than to control pollution; and barriers such as pollute than to control
high development costs slow technological change. Accelerating deployment will require pollution; and barriers such
as high development costs
changes at the national and international levels. Commercial deployment of cleaner coal
slow technological change
technologies requires investment certainty through stable policies which recognize the
costs and risks of long-term capital investment in pollution control, ultra-supercritical,
integrated gasification combined cycle (IGCC) and carbon capture and sequestration
(CCS) technologies.
Experience worldwide shows that deployment of clean coal technologies must Deployment of clean
encompass the entire coal supply chain, and that parallel progress is needed in technical coal technologies must
and non-technical areas for coal to remain an acceptable component in a country’s energy encompass the entire coal
supply chain
mix. A modern coal-fired power plant cannot be considered in isolation from the coal
mines, transport infrastructure and coal markets that supply it. This again underscores the
importance of integrated policy responses.
One major challenge will be to develop and deploy systems for CO2 capture
and storage, a critical technology for coal’s long-term future, but one that has not yet been
demonstrated on a commercial scale at any coal-fired power plant. Such demonstrations
are 5-10 years away in advanced economies. However, this may be an opportunity for
some developing countries, and China is already participating in R&D initiatives that aim
at accelerating progress.
More broadly, China has an unprecedented opportunity to become a major China has an
player in the global market for cleaner, more efficient coal technologies. It has already de- unprecedented
veloped some unique technologies, which it would be sensible for other countries to adopt, opportunity to become a
major player in the global
and it will certainly create more. It should work with other Governments to create a global
market for cleaner, more
market for clean energy technologies, and allow its manufacturing industry to respond efficient coal technologies
with commercially relevant products, for local markets and for export.
China will need to decide for itself how to proceed, but its actions, more than
those of any other country, will shape the global approach to the cleaner use of coal which
is urgently needed in order to avert the worst effects of climate change. Hence, the three
priorities for international engagement with China are:
• Government-industry partnerships to develop and demonstrate low-emissions,
cleaner coal technologies
• Technology transfer and deployment of cleaner coal technologies through
commercial arrangements that respond to the market demand created in
China and elsewhere
• Negotiations leading to successful international accords which create national,
regional and global markets for clean, low-emissions technologies.
New technologies such as direct coal liquefaction, in whose development
China is already a pioneer, and algae-based technologies for reducing emissions will require
greater research efforts.
10 The present section is based on International Energy Agency (2009).
120 World Economic and Social Survey 2009

Greater efforts in R&D are needed globally; however additional spending

alone simply is not an adequate response to the challenges faced by the energy industry as
a whole. China has shown a willingness to participate in international partnerships and
joint ventures in many fields aimed at researching, developing and demonstrating new
technologies. In the case of cleaner coal, such active participation can speed progress to-
wards those technologies that are most appropriate for commercial markets within China
and elsewhere.

Renewables
Strategic deployment of new technologies brings advantages by building up new industries
and accelerating movement down experience curves. Strategic deployment policies build
market scale and thereby bring down the cost of technologies (Grubb, 2004). At the same
time, strategic deployment generally requires regulation which fosters adoption of tech-
nologies that would otherwise be uneconomical; in this way, the benefits of learning by
doing and other scale economies are secured.
Even with the expansion of coal consumption in China and India, its growth
does not match that of renewables which is doubling every two to five years. For example,
India, where wind capacity is twice as large as nuclear capacity, is now the fourth largest
windmill installer in the world. Hence, perhaps coal is the fuel of the past and the present,
and alternatives and efficiency are the fuels of the future.
To make a subsidy What form is ideal for incentives depends on the technology being deployed.
programme cost-effective, The market for solar energy products such as photovoltaic panels, solar water heating, and
care should be given to
solar power concentrators encompasses a spectrum of scales ranging from industrial power
eliminating free riders and
reducing transaction costs generation to smaller commercial-scale and domestic installations. Wind power, on the
other hand, is almost entirely produced at industrial scale by large companies. Because
wind farms are financed by large corporations with access to financial markets, the wind
industry has preferred the long-term payback of production tax credits, which provide a
return on every kilowatt produced, as a means of making their power more competitive
on the market. The biggest concern for smaller-scale solar installations, however, is not the
long-term return to the power generated (much of the return is in reduced bills for small
producers, not in profits from selling the produced energy), but rather the initial high
cost of installing a system. In this case, an investment tax credit is a better instrument for
the industry, allowing for a lowering of the price that producers of solar products have to
charge their customers for the equipment. To make a subsidy programme cost-effective,
care should be given to eliminating free riders (those companies that would have upgraded
their equipment even without a subsidy) and reducing transaction costs.
Other policies that have been used to promote renewables include:
• Feed-in tariffs, as adopted particularly in continental Europe but also in parts
of North America and China (see box IV.7 and chap. II), which mandate a
specific (premium) price to be paid for electricity generated from renewable
sources such as wind and solar energy
• Renewable obligations, known in North America as portfolio standards, which
require utilities to source a certain percentage of their electricity from renew-
able sources generally through systems of tradable certificates (see box II.1)
• Other technology or fuel mandates, such as Brazil’s long-standing requirement
that cars run entirely or partly on ethanol (see box IV.6), a requirement that
has also been established in China (see box IV.7).
 A state of change: development policy and the climate challenge 121

China now ranks among the top countries in respect of the number of its patents
for renewable energy technologies. The Government of China had to implement diverse policies
to overcome such barriers to renewable energy development as: (a) the high cost of developing
renewable energy; (b) the difficulty of connecting renewable energy to the grid; (c) institutional
impediments; (d) the lack of international investment; (e) a weak legal and regulatory frame-
work; and (f) an uncertain level of future demand and thus of prices for renewable energy.

Box IV.7
Renewable energy in China
China’s power supply has not kept pace with energy demand, despite an annual growth rate of 8 per
cent in installed capacity over the last two decades. When energy shortages in 1986 reached 17 per
cent of annual power consumption, China had begun instituting reforms in its energy sector, focusing
on reducing energy intensity and developing renewable energy. Since the drafting of China’s version
of Agenda 21 in 1994, renewable energy technologies have received increased attention. Guidelines
on renewable energy development were included in the eleventh Five-year Plan (2006-2010). China’s
Renewable Energy Industries Association, established through the United Nations Development Pro-
gramme (UNDP) and the Global Environment Facility (GEF), brought together national and interna-
tional investors in this field. Despite legal and structural reforms in the energy industry undertaken
over two decades, it is estimated that environmental pollution still costs China as much as $64 billion
or 3 per cent of gross domestic product (GDP), in 2004, according to the Green GDP Accounting re-
search project (Zhang, 2007).
The new Renewable Energy Promotion Law (the Renewables Law) became effective
from January 2006. It entails the first comprehensive policy to promote renewable energy in China
and provides the legal basis for all activities related to renewable energy. The law targets a substantial
increase in the share of renewables in total energy consumption.
The relevant provisions of the Renewables Law are: (a) a mandated market share: the
aim is to raise the share of renewable energy goals in gross energy consumption to 5 per cent by
2010 and to 10 per cent by 2020; (b) a competitive bidding process on the basis of Government-
approved concessions; (c) the stipulation that power grids must purchase electricity from qualified
grid-connected renewable facilities; (d) application of a feed-in tariff entailing fixed-term, differential
but favourable pricing for grid-connected renewable energy; and (e) price setting in the renewable
energy sector based on what is required for both the development and utilization of required tech-
nologies and the provision of an economical and reasonable service.
The Government of China has implemented supplementary policy initiatives to support
the implementation of the law. These include, among others, subsidies to assist renewable energy re-
search and development; favourable accounting rules for capitalization of research and development
costs within high-tech institutions; use of income tax revenues to support the local development
of renewable energy development; and grants and preferential loans for small and medium-sized
technical enterprises supporting energy efficiency and renewable energy. Furthermore, through the
National Township Electrification Programme, 20 megawatts (MW) of solar photovoltaic (PV) energy
sources, 840 kilowatts (kW) from wind sources and 200 MW from small hydropower plants were in-
stalled to power 1,000 villages through renewable energy. The Sunlight Programme, which is to be
completed in 2010, implements large-scale grid-connected PV projects, PV/hybrid village power dem-
onstration systems, and home-PV projects for remote areas. The Brightness Programme was instituted
with the support of multilateral assistance to install several solar and wind systems in north-western
China. In addition, the “Ride the Wind” Programme, a bilateral cooperation programme established
to install wind turbines in various parts of China, involves joint ventures of Chinese and international
renewable technology manufacturers aimed at aiding the development of renewable energy for use
by local manufacturing industries. Finally, the Government has issued mandates for blending biofuels
with vehicle fuels. In addition, China’s eleventh Five-year Plan targets the reduction of energy intensity Source: Tufts University,
by 20 per cent between 2006 and 2010. Fletcher School (2008).
122 World Economic and Social Survey 2009

Conclusion
Most developing countries are reluctant to accept binding emissions targets. Their con-
cerns are rooted in fundamental development challenges and reflected in the United Na-
tions Framework Convention on Climate Change.11 Under the Convention, countries are
recognized to have “common but differentiated responsibilities” (sixth preambular para.).
While developed countries are to “take the lead in combating climate change” (article 3,
para. 1), for developing countries, “economic and social development and poverty eradica-
tion are the first and overriding priorities” (article 4, para. 7). Developing countries believe
that developed countries have yet to demonstrate their leadership in tackling the climate
challenge and that being held to specific emission levels regardless of the economic conse-
quences would be tantamount to putting a cap on their growth and fostering the perpetu-
ation of unacceptable levels of poverty and inequality.
Developing countries Establishing low-emissions, high-growth development pathways will be key to
require the presence meeting the climate challenge, reducing global inequality and tackling extreme poverty.
of strong and dynamic
If history is any guide, it is unlikely that market forces, by themselves, would be able to
developmental States
capable of providing a establish such pathways and serve as guides through the transition. This chapter has ar-
coherent vision of the gued that developing countries require the presence of strong and dynamic developmental
future, of managing the States capable of providing a coherent vision of the future, of managing the conflicts that
conflicts that arise from arise from change and of establishing the kind of integrated strategy that will be needed.
change and of drawing Such States have managed successful transitions in the past by mobilizing resources and
up the kind of integrated
strategy that will be
providing missing inputs for productive activities, socializing investment risk, removing
needed barriers, and providing temporary support to those adversely impacted by the shifts in
activities. This has involved a blend of pro-investment macroeconomic and industrial
policies. Fiscal and monetary policies have given priority to increasing public spending,
including investments in energy, education, health and infrastructure. Subsidized credits,
credit guarantees, tax breaks, accelerated depreciation allowances, etc., have been used to
boost profits in private firms in targeted sectors.
A new generation of All these elements will certainly be needed if the new generation of develop-
development strategies ment strategies aimed at low emissions and high growth are to be successful. Such strate-
requires a vision for
gies would have to develop a clear vision for energy production and for the energy-intensity
energy production, for the
energy-intensity of the of the production structure, for urban development and transportation, and for natural
production structure, for resource use and natural resource intensity of production.
urban development and An integrated strategy will involve a collaborative effort between a develop-
transportation, and for mental State and the private sector. This will necessarily be context-specific. It will depend,
natural resource use and among other factors, on the level of development, technological capacities, the size of the
natural resource intensity
of production
economy, the natural resource base, government capacities and established State-business
relations. Initial steps can be taken through fostering energy efficiency, implementing
cleaner coal processes and developing renewable energy sources. Yet, mitigation efforts, no
matter how necessary, will not be sufficient to protect developing countries from the threats
posed by climate change. The best defence against such threats remains the diversifica-
tion of economic structures to enable them to shift from a reliance on a small number of
activities, particularly those in the primary sector that are sensitive to climatic shocks and
changes.

11 United Nations, Treaty Series, vol. 1771, No. 30822.

 123

Chapter V
Technology transfer
and the climate challenge
Introduction
In previous chapters, it has been argued that a big investment push to transform energy
production and use and to diversify into activities less vulnerable to climatic shocks is the
basis for an integrated response to climate and development challenges. That push is to be
spearheaded by public investments but it will be sustained only by crowding private inves-
tors into an expanding green economy. It must also be accompanied by the technological
advances needed to meet mitigation and adaptation challenges. Those advances will entail
diff using existing low-emissions technologies, scaling up new, commercially ready tech-
nologies and advancing new breakthrough technologies.
A rapid pace of capital formation is often accompanied by an accelerated pace of
technological upgrading and learning. However, noting the familiar market failures which
tend to slow or halt technological progress, chapter IV suggested that a strong public policy
agenda mixing price incentives, regulation and interventionist measures, particularly within
industrial policy, would also be required to ensure a continuous process of technological
learning and upgrading. It also suggested that a developmental State would be needed to
promote such an agenda in most developing countries. When the required technologies are
not available domestically but have to be imported from abroad and adapted to local circum-
stances and conditions, that agenda becomes more complicated, in large part because the
balance between owners and users of technology is tilted even more in favour of the former.
Technology flows through several well-known channels, the most important The countries most
being trade, foreign direct investment (FDI) and cross-border technology licensing. Sci- responsible for climate
entific and technical knowledge also flows internationally through research publications, change, or at least their
corporations, are set to
research collaboration and the movement of skilled personnel. Acceleration of the flows
profit further through the
of climate-friendly technology raises many of the same issues and challenges facing any transfer of technologies to
other sort of technology. What differentiates those technologies from many—but not countries that bear little
all—others is the urgency and scale of the transfers likely to be needed to meet the cli- or no responsibility for the
mate challenge. But there is also an underlying ethical challenge posed by climate-friendly problem
technologies, given that the countries most responsible for climate change, or at least their
corporations, are set to profit through the transfer of technologies to countries that bear
little or no responsibility for the problem.
Implementation of the appropriate measures for facilitating the transfer of clean The transfer of clean
technologies and building the local capacity to use them effectively in developing countries technologies and building
will require much greater collaboration among countries. Such collaboration could help the local capacity to
use them effectively in
bring technologies more quickly to their commercialization stage and encourage further
developing countries
breakthroughs in cutting-edge low-emissions technologies. However, in many developing will require much greater
countries where the key challenge is diff using existing low-emissions technologies, inter- collaboration among
national support is needed for research, development and deployment (RD&D), the re- countries
moval of trade barriers, access to affordable financing, and effective capacity-building. Any
concerted international effort to promote access to low-emissions technologies should not,
moreover, suppress the ability of the developing countries themselves to produce such tech-
nologies and to become competitive on international markets.
 124 World Economic and Social Survey 2009

South-South climate The present chapter is concerned with the international transfer and diff usion
technology flows could play of technologies for climate change mitigation and adaptation.1 The focus is on the “North-
a significant role in that
South” transfer of technologies, which would allow developing countries to undertake
transition, given the advances
that have been made in some cost-effective actions consistent with and capable, ideally, of reinforcing their wider eco-
developing countries in areas nomic and social development. It identifies some of the main barriers obstructing such
such as biofuels and renewable transfer and diff usion and proposes measures for removing or overcoming them. In re-
energy sponse to the limited technological flows to date, resulting partly from the slow pace in
blazing low-emissions development pathways and partly from the failure to fulfil promises
made in international agreements, the chapter is largely concerned with how to anticipate
possible future challenges. It suggests, given the scale and urgency of the climate chal-
lenge, that the international community must give much more serious attention to the
kind of architecture needed to ensure greater transfers of technology so as to speed the
transition to low-emissions development pathways. South-South climate technology flows
could also play a significant role in that transition given the advances that have been made
in some developing countries in areas such as biofuels and renewable energy. How to fa-
cilitate such flows will also require greater consideration in subsequent discussions of the
technology transfer challenge.

Technology transfer for climate change:

a global public policy challenge
There is agreement that technology transfer will be fundamental to enabling an effective
implementation of the United Nations Framework Convention on Climate Change 2 beyond
2012. As early as 1972, the United Nations Conference on the Human Environment in
1972 (United Nations, 1972) had included explicit language emphasizing the importance
of technology transfer for the achievement of environmental and developmental goals.
Language that referred to technology transfer also appeared in the 1987 Montreal Protocol
on Substances that Deplete the Ozone Layer3 (see box V.1) and the Basel Convention on
the Control of Transboundary Movements of Hazardous Wastes and their Disposal.4
The United Nations Conference on Environment and Development, held in Rio
de Janeiro in 1992, gave a new urgency to the transfer of environmentally sound technologies
(ESTs) for climate change mitigation. Developments subsequent to the adoption of the Unit-
ed Nations Framework Convention on Climate Change related to technology transfer have
included the adoption of the Buenos Aires Plan of Action by the Conference of the Parties
to the United Nations Framework Convention on Climate Change at its fourth session, held
at Buenos Aires from 2 to 14 November 1998.5 The Conference of the Parties requested that
developed countries “take all practicable steps to promote, facilitate and finance” the transfer
of environmentally sound technologies to developing countries and their access thereto.6 In
particular, the Plan of Action envisions an “enabling environment … to stimulate private
sector investment” in the transfer of environmentally sound technologies.7
1 These are a subset of environmentally sound technologies (ESTs) that are climate-related.
2 United Nations, Treaty Series, vol. 1771, No. 30822.
3 Ibid., vol. 1552, No. 26369.
4 Ibid., vol. 1673, No. 28911.
5 FCCC/CP/1998/16/Add.1, sect. I, decision 1/CP.4. The Plan of Action was adopted as specified in
decisions 2/CP. 4-8/CP.4.
6 Ibid., decision 4/CP.4, para. 3 (a).
7 Ibid., para. 7 (d).
 Technology transfer and the climate challenge 125

Box V.1
Lessons learned from the
implementation of the Montreal Protocol
The Montreal Protocol on Substances that Deplete the Ozone Layera was agreed in 1987 and entered a United Nations, Treaty
into force on 1 January 1989. The Protocol was a response to the fact that scientists had showed that Series, vol. 1552, No. 26369.
some man-made substances were contributing to the depletion of the Earth’s ozone layer, which
protects life from damaging ultraviolet radiation. The Protocol is considered one of the most suc-
cessful global environmental agreements and stimulated the development and worldwide transfer
of technologies to protect the stratospheric ozone layer.
The Protocol requires that Parties eliminate emissions of most ozone depleting sub-
stances. Environmentally safe substitutes and related technologies have been used to achieve this
objective. Since many of these technologies are widely available only in a relatively few countries and
since the global market has been slow to bring these technologies to some parts of the world, de-
liberated and active international technology transfer programmes have been needed to eliminate
emissions of ozone depleting substances (Strelneck and Linquiti, 1995).
The Multilateral Fund for the implementation of the Montreal Protocol was established
by the London Amendment to the Montreal Protocol in 1990 to assist developing-country parties to
the Protocol, whose annual per capita consumption and production of ozone depleting substances
is less than 0.3 kilogram (kg), in complying with the control measures of the Protocol. The Fund covers
the incremental costs associated with technology transfer, including the costs of on-site engineer-
ing, equipment purchase and installation, training, and start-up. Capacity-building projects, such as
the establishment of national ozone offices and regional ozone network offices, are also eligible for
funding (Andersen, Madhava Sarma and Taddonio, 2007). As of April 2008, the contributions made to
the Multilateral Fund by some 49 developed countries (including countries with economies in transi-
tion) totalled over US$ 2.3 billion.
Lessons have been derived from implementation of the Montreal Protocol which may
be of interest to those involved in the climate change process (Andersen, Madhava Sarma and Tad-
donio, 2007). The lessons relevant to technology transfer include: the need for developing vision-
ary technology assessments; empowering the financial mechanism to be a proactive instrument for
technology transfer; developing and implementing training programmes; and using regulations and
policies to promote technology transfer.

In order to operationalize the relevant provisions of the Framework Conven-

tion on technology, the intergovernmental process, through the Conference of the Parties
to the United Nations Framework Convention on Climate Change at its seventh session,
held at Marrakech, Morocco, from 29 October to 10 November 2001, agreed on a tech-
nology transfer framework, 8 comprising the following set of key themes and areas for
meaningful and effective actions:
• Technology needs and needs assessment : a set of country-driven activities that
identify and determine the mitigation and adaptation technology priorities,
particularly of developing countries
• Technology information: this component defines the means, including hard-
ware, software and networking, to facilitate the flow of information between
different stakeholders to enhance the development and transfer of environ-
mentally sound technologies
• Enabling environments: this component focuses on government actions, inter
alia, fair trade policies, removal of technical, legal and administrative barri-
ers to technology transfer, sound economic policy, regulatory frameworks and
8 FCCC/CP/2001/13/Add. 1 and Corr. 1, decision 4/CP.7, annex.
126 World Economic and Social Survey 2009

transparency, all of which are essential to creating an enabling environment

conducive to public and private sector technology transfer
• Capacity-building : a process that seeks to build, develop, strengthen, enhance
and improve existing scientific and technical skills, capabilities and institu-
tions, particularly in developing countries, to enable them to access, adapt,
manage and develop environmentally sound technologies
• Mechanisms for technology transfer : facilitators of the support of financial,
institutional and methodological activities: (a) to enhance the coordination of
the full range of stakeholders in different countries and regions; (b) to engage
them in cooperative efforts through technology cooperation and partnerships
(public/public, private/public and private/private); and (c) to facilitate the de-
velopment of projects and programmes to support such ends.
An expert group on technology transfer was subsequently established as an
institutional arrangement to facilitate the implementation of the technology transfer
framework,9 and enhanced action was agreed on technology development and transfer to
support action on mitigation and adaptation under the Bali Action Plan.10
The discussion on promoting technology transfer to tackle the climate challenge
has evolved in parallel with, but somewhat independently from, the recent discussion on the
best ways to transfer technology to meet development goals. Essentially, the former focuses
on how quickly the technological knowledge required to tackle the climate challenge can
be put to widespread use in the economy, whether in that of developed or of developing
countries, through learning and adaptation. The resulting agenda implicitly acknowledges
the need to address various market failures that can hamper the spread of technological
knowledge. In recent years, the development challenge has focused unduly on protecting
the international position of the creators and owners of technology by linking intellectual
property rights to multilateral trade rules such as the Agreement on Trade-related Aspects
of Intellectual Property Rights (TRIPS) (World Trade Organization, 1994), and the
Agreement on Trade-related Investment Measures, (ibid.), and through bilateral negotia-
tions.11 This puts greater emphasis on the importance of innovation. Protecting the owners
of knowledge is also often taken as a measure of how committed countries are to good
governance and an indication of whether or not their investment climate might be attrac-
tive to foreign firms, whose presence is seen as the surest guarantor of ways to access more
advanced technologies (Maskus, 2000).
However, neither perspective appears to comprehend the urgency of the tech-
nological challenge or its links to the idea of a big push onto a new low-emissions growth
path, particularly by developing countries. In fact, as discussed in chapter II, RD&D
spending on some of the key technologies needed to support this transition appears to be
moving in the wrong direction. Reversing this trend will be essential for building momen-
tum towards a low-emissions future. Such action will likely have to draw on a variety of
mechanisms at the international level and will ultimately require determined leadership
that puts collective security before narrow commercial interest.

9 Ibid., decision 4/CP.7, para. 2.

10 FCCC/CP/2007/6/Add. 1, decision 1/CP.13, para. 1 (d).
11 See Littleton (2008) for a complete review.
 Technology transfer and the climate challenge 127

Intellectual property rights

Incentives or obstacles
The obligation to respect intellectual property rights raises the cost of accessing technol-
ogy. Whether this will constitute an important barrier to technology transfer will depend,
inter alia, on whether the particular technology that is patented has cost-effective substi-
tutes or alternatives, and on the degree of competition in the industry, which can affect
the price of and the terms for licensing. Moreover, the technology covered by an individual
patent may provide only a partial capability for exploiting an innovation; total capability
might in fact depend on technologies protected by multiple patents or a combination of
patented technologies and other forms of knowledge. Forms of legal protection of property
rights such as patents and copyrights constitute only one means of protecting a technologi-
cal advantage. Trade secrets and firm-specific know-how, including knowledge embodied
in skilled personnel, can also be important.
There is vigorous debate over whether intellectual property rights, on balance,
help or hinder technology transfer. The evidence is inconclusive and there is also variation
by industry, where characteristics like market dynamism, technological sophistication, im-
portance of RD&D, and ease of imitation and market entry come into play. There is also
variation according to level of economic development. In high-income countries, stronger
patent rights have been associated with higher levels of productivity, RD&D expenditures,
trade flows, FDI and sophistication of the technologies transferred. However, even among
these countries, there is considerable variation, and it is unclear if intellectual property
rights are a cause or an effect of these outcomes. On the other hand, weak intellectual
property rights in the least developed countries tend to be associated with low levels of
RD&D, FDI inflows, etc. (Blyde and Acea, 2003; Smith, 2001).12 However, cause and ef-
fect are again difficult to distinguish and even when technology is transferred to the least
developed countries, the principal constraint on its wider use tends to be limited absorp-
tion capacity (United Nations Conference on Trade and Development, 2007).
Given that stronger protection of intellectual property rights raises the costs of A more graduated
obtaining technologies, it has generally been accepted that low-income developing coun- approach is likely to be
tries should be exempt from strong intellectual property rights-related obligations and that supportive of large-scale
technology transfer only
the strength of those obligations should only rise with levels of development (Hoekman,
if it is accompanied by
Maskus and Saggi, 2004). However, given that the current regime is unduly biased to- complementary measures
wards the owners rather than towards the users of technology, a more graduated approach with respect to financing,
is likely to be supportive of large-scale technology transfer only if it is accompanied by RD&D and technical
complementary measures with respect to financing, RD&D and technical cooperation, cooperation
which has not been the case in recent years.
The potential trade-off between intellectual property right protection and
technology development and transfer is a very important issue in the context of climate
change. As is clear from figure V.1, the distribution of patent ownership of climate-related
technologies is very heavily skewed in favour of advanced economies. However, to date,
Barton (2007) finds mixed evidence of the importance of intellectual property rights in
technology transfer. Based on the examination of three sectors (photovoltaics (PV), wind
and biofuels), he concludes that, rather than basic technologies, what are usually patented
are specific improvements or features. What matters more are other market distortions.
12 However, at least one investigator finds positive correlations between strong protection of
intellectual property rights and economic growth—among low- but not among middle-income
countries (Falvey, Foster and Greenaway, 2006).
128 World Economic and Social Survey 2009

Figure V.1
Share of patent ownership in the areas of renewable energy
and motor vehicles abatement among selected countries, 2000-2004
Renewable energy (percentage)
China 1.9

Netherlands 2.4

Canada 3

France 3.4

Australia 3.8

Denmark 4.7

United Kingdom 5.8

United States 17.7

Japan 17.8

Germany 18.5

European Union 44.8

0 5 10 15 20 25 30 35 40 45 50

Motor vehicle abatement (percentage)

China 0.6

Canada 0.9

Austria 1.2

Italy 1.3

Sweden 2.2

United Kingdom 4.4

France 5.6

United States 15.7

Japan 28.9

Germany 32.8

European Union 50.3

Source: Organization for
Economic Cooperation and
Development (2007). 0 10 20 30 40 50 60
 Technology transfer and the climate challenge 129

In the photovoltaics sector, the developing nations are facing a loose oligopoly with many
entrants. Thus, developing countries like India and China, for example, have been able to
enter and compete in the industry. In respect of biofuel technologies, intellectual property
rights do not appear to be barring developing countries from accessing the current-gen-
eration technologies, as shown by the developments in many countries, including Brazil,
Malaysia, South Africa and Thailand.
A much harder question to answer is what lies ahead. To the extent that de-
veloping countries make a big investment push to establish a low-emissions development
pathway, the market for new technologies can be expected to expand rapidly. Unantici-
pated obstacles to the transfer of technologies could slow that transition, particularly the
emergence of new sectors linked to these technologies, or necessitate large shifts of re-
sources to already advanced economies through technology payments.
The most significant barriers and distortions are likely to be associated with the
market power of a small number of producers located in advanced economies. The wind
sector appears to be the most concentrated of the three renewable energy sectors examined
in the Barton study and a tight control over intellectual property may act to deter technol-
ogy transfer. Even so, some developing nations have been able to build wind farms with
equipment from the global market without incurring unduly steep intellectual property
costs. The challenge for these developing countries is to enter the global market for wind
turbines. The existing industry leaders are strong and they are hesitant to share cutting-
edge technology out of fear of creating new competitors (see box V.2). Two developing

Box V.2
Foreign direct investment (FDI) and
technology transfer in the wind sector
A recent study of wind power in China examined foreign and domestic companies involved in China’s
wind turbine industry and compared the extent of technology transfer in four case studies. These four
cases exhibited three types of ownership models, which greatly impacted the extent of technology
transfer: (a) limited joint ventures, where all materials and technology are developed and owned by
the foreign company but manufactured with Chinese labour and materials (for example, NEG Micon/
Vestas and GE Wind); (b) joint ventures, where a foreign company develops the technology, which is
then owned by a Chinese company and components are made with Chinese labour and materials
(for example, Xi’an-Nordex); and (c) Chinese-owned, where a Chinese company develops and owns
the technology and oversees the production of the materials (for example, Goldwind-China).
The study found that, regardless of the ownership model, very few foreign companies
have transferred wind power technology. Foreign-owned companies have not challenged the local
content requirement because they have been able to do well in the market and retain control of their
intellectual property.
In response, the Government of China is considering the implementation of local intel-
lectual property requirements for wind power in an attempt to push international companies to
transfer more technology. Such stipulations on intellectual property requirements could be con-
tested by international companies under the rules of the World Trade Organization or by simply
limiting new FDI in this sector.
The Government has also been trying, with some success, to promote strong inde-
pendent Chinese wind power companies. Among Chinese wind power enterprises, several manu-
facturers produce equipment that is up to 30 per cent cheaper than that produced by their foreign
counterparts, but generally such equipment is not as advanced in design. For example, Chinese firms
rely on 600-750-kilowatt (KW) capacity turbines, while General Electric offers 1.5-megawatts (MW)
and Vestas provides 2-MW turbines. The manufacturing capacity of China is changing fast, with the
nation on track to exceed the 30-gigawatt (GW) target by 2020. Source: Lewis, 2006.
130 World Economic and Social Survey 2009

nations with significant bargaining advantages in their own right, namely, China and
India, have succeeded in building important firms over the past decade. Whether other
developing countries will be able to replicate that success is uncertain.
Multilateral actions to accelerate technology transfer among countries can be
of several sorts: those that exploit existing flexibilities of the Agreement on Trade-related
Aspects of Intellectual Property Rights, those that require a modification of that Agree-
ment and other disciplines in the framework of the World Trade Organization, and those
that are not necessarily linked to the multilateral trade framework, including initiatives
to foster technology-related absorptive capacity and innovation in developing countries
through international cooperation.

Taking advantage of flexibilities of the Agreement on

Trade-related Aspects of Intellectual Property Rights
Several flexibilities within the TRIPS Agreement could be exploited, ranging from limit-
ing patentability to making use of compulsory licensing or even expanding its use with a
view to serving regional markets.

Limiting patentability
Patentability refers to the boundaries established to determine what inventions can be
patented. Article 27 of the Agreement on Trade-related Aspects of Intellectual Property
Rights states that “patents shall be available for any inventions … in all fields of technology,
provided that they are new, involve an inventive step and are capable of industrial
application”. These relatively loose criteria for patentability leave some space for the
formulation by the individual country of its own policy, including limiting patentability.
Further defining the criteria and thereby limiting patentability can have a positive impact
on technology transfer and innovation by reducing possible conflict with existing patents
(Oliva, 2008).
Certain technologies Based on the stated goals and guiding principles of the Agreement on Trade-
could be excluded from related Aspects of Intellectual Property Rights regarding technology transfer, certain tech-
patentability, especially
nologies could be excluded from patentability, especially those that are deemed necessary
those that are deemed
necessary to tackle climate to tackle climate change and/or are subject to anti-competitive measures, while remain-
change and/or are subject ing consistent with the principles of the Agreement (Littleton, 2008). Examples of such
to anti-competitive exclusion already exist within the Convention on Biological Diversity13 and the Interna-
measures tional Treaty on Plant Genetic Resources for Food and Agriculture14 (Littleton, 2008). As
the ongoing negotiations within the World Intellectual Property Organization (WIPO)
of a substantive patent law treaty would eliminate this opportunity (World Intellectual
Property Organization, 2008), its impact on climate-related technology transfer should be
carefully examined before those negotiations are completed.
Exempting climate-friendly technologies from patenting is one way to reduce
costs. The rationale for such a proposal lies in the seriousness of the climate change issue
and the threat that it poses, particularly to developing countries. Variants of the proposal
include: exemption of climate-friendly technologies and products from patenting;

13 United Nations, Treaty Series, vol. 1760, No. 30619.

14 Food and Agriculture Organization of the United Nations, Report of the Conference of FAO, Thirty-
first Session, Rome, 2-13 November 2001 (C 2001/REP), appendix D.
 Technology transfer and the climate challenge 131

exemption from patenting in developing countries only; allowing developing countries to

exclude patents for climate-friendly technologies and products, if they so choose; granting
of voluntary licenses on request, free of royalty; and of granting of voluntary licences
automatically, with compensation given to the owner of the technology.15
These options could perhaps be applied on a graduated basis to countries at
different levels of development, the first three to low-income developing countries and the
last two to middle- and high-income developing countries. The size of the country could
be another criterion for choosing the appropriate type of flexibility.16 For small a country,
acquiring a licence for climate-related technology may not be profitable even if it is a mid-
dle- or high-income developing country, unless it is able to use the licence to tap export
markets. In that case, the royalty could be reduced or eliminated and/or the exhaustion of
patent rights could be extended from a domestic to a whole region.

Compulsory licensing
Even when a technology has been patented, articles 30 and 31 of the Agreement on Trade-
related Aspects of Intellectual Property Rights offer opportunities for allowing unauthor-
ized, automatic use of a patented technology without the consent of the patent-holder
through compulsory licensing under certain circumstances. For article 30 to be used to
obtain compulsory licensing, countries would have to claim that mitigating or adapting to
climate change qualified as entailing the “legitimate interests of third parties”, as required
by the article. A second exception allows unauthorized use by a country when “necessary
for the protection of its essential security interests” (article 73 (b)) or “the maintenance of
international peace and security” (article 73 (c)). Whether this condition could be invoked
would depend on the existence of a threat of climate catastrophe.
Article 31 of the Agreement sets out the other conditions for allowing compul-
sory licensing of a patented product. There are two major criteria to be met by a member of
the World Trade Organization in order for it to qualify for an exception under article 31.
First, reasonable efforts must be made to gain appropriate authorization from the holder
of the intellectual property rights in question (article 31 (b)). Th is negotiation requirement
may be waived when the member determines (using its own judgement) that a “national
emergency” or “other circumstances of extreme urgency” demand unauthorized use with-
out delay. The holder of the intellectual property rights must still be notified “as soon as
reasonably practicable”.
Discussions leading to the recognition of public health related exceptions
showed some flexibility in interpreting what constitutes “exigent circumstances”,17 open-
ing the door to potential use of these exceptions in the climate change context.18 Climate
change is increasingly perceived as a public-health “emergency” which would justify com-
pulsory licensing exceptions under article 31 (Th ird World Network, 2008). Indeed, the
United States Environmental Protection Agency (EPA) had been ordered by the Supreme
Court to rule if carbon dioxide (CO2) was a pollutant that endangered public health and
15 The last two options entail exceptions to patent rights rather than limiting of patentability.
16 However, all developing countries rightly point out that the new technologies are needed to
counter a global threat that was created by today’s advanced countries.
17 Defined as an emergency situation requiring swift action to prevent imminent danger to life or
serious damage to property, or to forestall the imminent escape of a suspect, or destruction of
evidence.
18 See, for example, the Declaration on the TRIPS Agreement and public health (World Trade
Organization, 2001), para. 5 (c).
132 World Economic and Social Survey 2009

welfare, in which case it would be obligated to regulate it under the 1990 Clean Air Act.
On 20 March 2009, the Agency issued an “endangerment finding”.19
Second, sales of protected assets must be predominantly in the domestic mar-
ket for the entity granted the exception (article 31 (f)). Thus, exceptions related to climate
change would have to be sought by firms in various developing countries to ensure an
effective and rapid diff usion of the technology. Limiting the technology to one (small or
poor) country, however, might prevent the capture of economies of scale which would
make the technology cost-effective. Recognition of this fact in the case of the public-
health exception was reflected in the temporary waiving of the domestic market require-
ment in countries with insufficient domestic production.20
The General Council of the World Trade Organization has adopted an amend-
ment of the TRIPS Agreement21 by which the above-mentioned domestic-market restriction
would be waived for developing countries for certain pharmaceuticals so as to enable the ex-
port of those products to regional markets.22 (As the amendment has not yet been ratified by
two thirds of the membership, it has not entered into force.) This waiver could conceivably
be extended to climate-friendly technologies, particularly in light of what is stated in para-
graph 5 (b) of the Declaration on the TRIPS Agreement and public health, namely, that “(e)
each member has the right to grant compulsory licences and the freedom to determine the
grounds upon which such licences are granted”. Such an amendment would certainly meet
with strong resistance from owners of technologies in countries members of the Organiza-
tion for Economic Cooperation and Development (OECD), who could lose potential rents.
However, and even ignoring the health parallel, it can be argued that if such technologies
do not currently reach developing countries, then the loss of rent occasioned by giving them
compulsory access would be limited (Hoekman, Maskus and Saggi, 2004).
A regional approach can also be beneficial in respect of the rules of exhaustion,
which refers to the expiration of patent protection of a specific item once it has been sold
(Littleton, 2008). Article 6 of the Agreement on Trade-related Aspects of Intellectual Prop-
erty Rights leaves the determination of these rules to each member. In general, exhaustion
can be universal or territorial. According to the rule of universal exhaustion, the patent-
holder cannot limit the distribution of the item once it has been sold. This opens the way for
parallel importing and the possibility for others to compete with the patent-holder in other
countries. The rule of territorial exhaustion, usually preferred by patent-holders, limits the
right to sell the item without authorization from the patent-holder and thus no parallel im-
porting can take place without the patent-holder’s consent. These different systems provide
different incentives for technology transfer and innovation. While parallel imports increase
competition and can lead to lower prices and greater accessibility of technology, they may
discourage innovation by limiting patent-holders’ profits. Regional exhaustion could be an
attractive compromise solution. Here, parallel importing would be allowed only when the
product was sold within the region at issue. By creating geographical buffer zones for patent
protection, yet at the same time allowing for parallel importing, regional exhaustion might
properly balance technology transfer with incentives to innovate (Littleton, 2008).

19 Bryan Walsh, “EPA calls CO2 a danger—at last”, Time, 23 March 2009.
20 See the decision of the General Council of the World Trade Organization of 30 August 2003 on
the implementation of paragraph 6 of the Doha Declaration on the TRIPS Agreement and public
health (World Trade Organization, 2003), para. 2 (a) (ii).
21 See the decision of the General Council of 6 December 2005 on the amendment of the TRIPS
Agreement (WT/L/641).
22 Ibid., attachment, annex, para. 3.
 Technology transfer and the climate challenge 133

Modifying the Agreement on Trade-related

Aspects of Intellectual Property Rights23
Climate-related technology exceptions could be sought along the lines established to se- Climate-related technology
cure exceptions for essential medicines, as described above. A new “Declaration on TRIPS exceptions could be sought
and climate change” might clarify existing flexibilities and offer new incentives for transfer along the lines established
to secure exceptions for
of environmentally sound technologies. In particular, exceptions for least developed coun-
essential medicines
tries and small island developing States could be pursued, given that, in these countries,
trade and investment flows appear to be not as responsive to protection of intellectual
property rights and the dangers posed by climate change are particularly acute.24 As sug-
gested earlier, such a modification would have to take into account the uncertain and ever
changing nature of the climate change problem and address adaptation as well as mitiga-
tion technologies.
Strong, integrated pro-competition provisions would also promote technology
transfer. The class of restrictive business conditions considered in article 40 of the Agree-
ment on Trade-related Aspects of Intellectual Property Rights could be expanded, and
compulsory licensing under article 31 could be facilitated for environmentally sound tech-
nologies. As noted by Matsushita, Schönbaum and Mavroidis (2006), “many developing
countries take the view that compulsory licensing should be required if the public interest
is injured due to an abuse of patent monopoly”. With their growing clout in the World
Trade Organization, these members could redefine and expand the concept of “abuse”
in this context beyond licensing restrictions to include other intellectual property rights-
related practices which erect barriers to climate-friendly technology transfer (Hutchison,
forthcoming).25 Developed countries could also take the lead here by mandating compul-
sory licensing for climate-related intellectual property rights held domestically, a strategy
that has yet to be tried out.26 Pro-competition provisions would, however, meet with
strong resistance from intellectual property right holders who exert great influence with
several members of the World Trade Organization.
Procedures for challenging patents could be made less cumbersome so as to
lower costs for developing countries (Stiglitz, 2008). Creation of a straightforward pre-
patent opposition process could further reduce costs and prevent abuses.
Licensing guidelines might be promulgated that provide for fi xed, moderate
fees for environmentally sound technology patent licensees. In cases where the protected
asset clearly has environmental benefits, the intellectual property right holder would bear
the burden of proof in demonstrating why compulsory licensing would be unwarranted
(Scherer, 1984; Stiglitz, 2008). A tiered application fee system for intellectual property
rights could waive payments for patent-holders who authorize transfer of climate-friendly
technologies to developing countries (Barton and Maskus, 2006; Maskus, 2004).
If the granting of full licences is an unrealistic option, then temporary licences
could be granted along the lines established for conferral of plant breeders’ exemptions
and farmers’ privileges under the International Treaty on Plant Genetic Resources for
23 The present section draws on Littleton (2008).
24 However, many developing countries insist that the issue is, again, not their ability to pay, but
ensuring that those responsible for the climate problem carry the burden.
25 On the other hand, excessive fear of increased competition might, on balance, hinder technology
transfer.
26 For example, the United States of America could mandate that climate-friendly technology patent-
holders license their technologies abroad under specified terms. Admittedly, agreement on this
proposal would be quite difficult to achieve, for political reasons.
134 World Economic and Social Survey 2009

Food and Agriculture.27 For example, intellectual property right holders could provide
developing-country users with technologies for a limited period, with the expectation of
receiving payment once the technology was “tropicalized”, that is to say, adapted to local
requirements. This proposal would work with climate-change adaptation technologies as
well as with mitigation technologies.
Mechanisms through Mechanisms through which to evaluate progress on technology transfer could
which to evaluate progress benefit from being strengthened. Such mechanisms might be TRIPS Agreement-based or
on technology transfer
might involve multiple World Trade Organization Agreements (Maskus, 2004). The prob-
could benefit from being
strengthened lems with current evaluation are the result of both: non-transparency and lack of a viable
enforcement mechanism. In the absence of formal enforcement, “naming and shaming”
would at least provide some measure of accountability.
There are, of course, great political difficulties involved in modifying any
World Trade Organization Agreement. Technology transfer measures can often disadvan-
tage intellectual property right holders, who have great political influence in developed
countries. Moreover, despite the acknowledgment of development goals, it is equal treat-
ment of nations that is at the heart of the TRIPS Agreement. However, equal treatment
of technologies may not be as crucial, as evidenced by the progress in respect of essential
medicines. Global action to address climate change is certainly not a zero-sum game, and
any World Trade Organization member hoping for modification of the TRIPS Agreement
in this area will need to stress common interests in advancing the global public good of a
stable climate. Still, issues of fairness will also need to be addressed in any reform effort.

Further options for addressing intellectual property

rights-related issues and innovation incentives
The institutional role of the World Trade Organization in the area of climate change has
“barely begun to be thought through” (Evans and Steven, 2009, p. 32). However, mixing
trade disciplines with climate concerns raises serious issues, particularly for developing
countries. A few other proposals for facilitating technology access and diff usion, which may
or may not be integrated in a World Trade Organization framework, are provided here:

Open-source information access and

increased sharing of public RD&D results
Difficulty of access to information on available technologies is a constraint on technol-
ogy transfer and adoption. One proposed solution is to establish an information access
agreement. As far back as 1992, there were calls for an information clearing house of
climate-friendly technologies (see, for example, chap. 34 of Agenda 21 (United Nations,
1992)). Some efforts have been made by UNFCCC in supporting its technology transfer
framework and in undertaking technology needs assessments. However, such efforts need
to be expanded and better integrated with wider development challenges.
The Multilateral System of Access and Benefit-Sharing of the International
Treaty on Plant Genetic Resources for Food and Agriculture could be a model for an
agreement on access to climate-friendly technologies (Halewood and Nnadozie, 2008).
Along these lines, Barton and Maskus (2006) have proposed a formal agreement on access
27 Breeders’ exemptions allow breeders to use protected varieties of plants to create new varieties
through experimentation. Farmers’ privileges permit farmers to save and reuse protected seed
varieties for subsequent harvests.
 Technology transfer and the climate challenge 135

to basic science and technology “to ensure widespread access to essential scientific results
and to enhance the transfer of basic technological information to the developing world at
reasonable cost”. As a World Trade Organization agreement, this instrument could take
advantage of the dispute settlement mechanisms and other institutional structures.
Establishing such an agreement would encounter some difficulties. For one
thing, drawing an acceptable line between “basic” and “applied” research would be a chal-
lenge. So as to favour climate-friendly technologies, the notion of what is “basic” could be
construed more broadly in the context of global public goods (Barton and Maskus, 2006).
In borderline cases, guidelines concerning which research results were confidential and
which could be made public would need to be established.

Dedicated funding mechanisms

Governments can subsidize technology development and transfer, either individually or in Governments can subsidize
concert. Subsidies, tax breaks and other fiscal incentives of individual countries constitute technology development
the most straightforward method of funding. They can direct the focus of private firms and transfer, either
individually or in concert
towards particular sectors like those encompassing climate change-related technologies by
reducing the risk level of RD&D projects (Stiglitz, 2008). However, the financial impact
of individual Governments is limited. Moreover, such expenditures are exploitable by “free
riders” on the global level (Barton and Maskus, 2006).
A coordinated international funding mechanism would help solve the free- A coordinated international
rider problem. Possibilities in this regard include a trust fund encouraging RD&D di- funding mechanism would
rectly in developing countries (Roffe, 2002), a patent acquisition fund established to help solve the free-rider
problem
buy intellectual property rights from patent-holders (United Nations, Department of
Economic and Social Affairs, 2008) and a fund that covers the difference in cost between
the environmentally sound technologies and the business-as-usual technology for devel-
oping-country firms (like the Multilateral Fund for the Implementation of the Montreal
Protocol, see box V.I).
A technology prize system could circumvent intellectual property rights-related
problems. Within such a system, the performance characteristics of a desired technology
would be defined, a contest would be announced for its development, and a prize would be
awarded to the successful innovator in exchange for the intellectual property rights. Prizes
help to both reduce wasteful spending on marketing and lower incentives for anti-compet-
itive behaviour (Stiglitz, 2008). Prizes, like advance purchase funds/agreements, work best
with a specific, clearly-defined objective (such as a vaccine for a specific disease).

Technology development and transfer mechanisms

At the international level, such a mechanism could be established under the auspices of At the international level,
the Conference of the Parties to the United Nations Framework Convention on Climate a technology transfer
mechanism could be
Change, supported by a secretariat and various expert panels set up to examine the various
established under the
dimensions of the technology challenge in developing countries and, where appropriate, auspices of the Conference
to provide technical assistance on the range of technology options available for mitigating of the Parties to the
and adapting to climate change. This model has been successfully employed within the United Nations Framework
institutional structure of the Montreal Protocol on Substances that Deplete the Ozone Convention on
Layer and could be adapted to the climate change context. Climate Change
At regional and national levels, centres dedicated to low-emissions technology
innovation and diffusion could be created and linked to and through the international
136 World Economic and Social Survey 2009

mechanism. They would have an important role to play in making technologies accessible
and affordable in developing countries. At least in the initial stages, these centres are likely to
be publicly funded, though the precise mix of donor, public and private funding would vary
across countries and over time. What particular mixture of basic research, field trials, business
incubator services, venture capital funding, technical advice and support, and policy and
market analysis is adopted will be very much contingent on local conditions and challenges.

Technology transfer through investment

Accessing clean technologies
through foreign direct investment
Many descriptions of foreign direct investment (FDI) emphasize that it is the exploitation
of firm-specific advantages, including intellectual property and leading technologies, that
allows large corporations to undertake risky and costly activities outside their immediate
domestic and regional locations. Hosting such firms has been seen as one way for develop-
ing countries to close the technological gap between them and more advanced countries.
In recent years, the policies devised by developing countries to attract those firms have un-
dergone a shift from providing the firm with a protected local market to liberalizing coun-
try rules on FDI and trade, including through the creation of export processing zones. The
expectation was that this would help break not only the technological constraint but also
the foreign-exchange constraint on growth. The results have often been disappointing,
particularly in cases where FDI has been a substitute for local domestic capacity-building
efforts (United Nations, 2006).
FDI tends to be a lag While technology may be physically transferred from the home to the host
variable in the growth country through FDI, the question remains what sort of linkages the transfer creates
process: even when it does
with the rest of the host economy. How large are the technology spillovers and do they, as
materialize, active policies
are needed to ensure that Hirschman (1971) asked almost 40 years ago, act as “a spur to the expansion of missing lo-
there are valuable spillovers cal inputs” or do they actually “harm the quality of local factors of production”? Answering
into the local economy these questions in greater detail would require a long detour extending beyond the remit of
this Survey. However, worth noting in what is an already extensive literature are two broad
findings which will have a bearing on the role of FDI along any new low-emissions pathway.
First, FDI tends to be a lag variable in the growth process; that is to say, it is attracted by
various factors such as market size, presence of suppliers, human capital, etc., which are the
result of a successful development push. Second, even when it does materialize, active poli-
cies are needed to ensure that there are valuable spillovers into the local economy.28
Those spillovers can occur in a number of ways: through the movement of
skilled personnel between a multinational subsidiary or joint venture and other fi rms,
through technology imitation by competitors, and through technology sharing with sup-
pliers, customers or business partners.
Strong intellectual property right protection is not necessary for extensive foreign
investment to occur, as the case of China clearly demonstrates. The country’s large market and
rapid growth have compelled foreign companies to invest, even at the risk of losing control
of proprietary technologies. Countries with “weak” intellectual property right regimes, for
example, the Republic of Korea, Taiwan Province of China and Brazil in the pre-TRIPS
Agreement era have been among the major technology borrowers (Correa, 2005, p. 228).
28 On the links between FDI and development, see Kozul-Wright and Rayment (2007, chap.4).
 Technology transfer and the climate challenge 137

Recent research on FDI as a vehicle for technology transfer (Todo and Miyamoto, Technology or knowledge
2006; O’Connor and Lunati, 2008) has pointed to a few conditions that influence the extent transfer through FDI is not
of technology, or knowledge, spillovers. Todo and Miyamoto used industry panel data from automatic, but depends
on complementary
Indonesia to examine knowledge spillovers between subsidiaries of Japanese multinational
investments by both
corporations and Indonesian firms. They concluded that the spillovers were significant only foreign and local firms
when the Japanese subsidiaries had invested in RD&D themselves; otherwise, the spillovers
were negligible. Other studies found that the RD&D undertaken by local firms also affected
the extent to which knowledge spillovers from foreign-invested firms occurred. Miyamoto
(2008) found a significant positive relationship in Indonesia between the training invest-
ments of local firms and the extent of knowledge spillovers from foreign ones. All of these
findings lead to the conclusion that technology or knowledge transfer through FDI is not
automatic, but depends on complementary investments by both foreign and local firms.
There has been little research undertaken to date on the role of FDI spillovers in The Government of China
supporting a transformative low-emissions growth path. However, the case of wind technol- will need to consider a
ogy in China suggests that hosting FDI is, by itself, no guarantee (see box V.2). A recent more comprehensive and
integrated policy approach,
study of China’s automotive industry (Gallagher, 2006) is also instructive in this regard. The
one that seeks to bolster
transportation sector is part of an interconnected bloc of related sectors that are expected to local learning
lead China to the next stage of industrial development. The sector has grown particularly
rapidly since the early 1980s, thanks in part to joint ventures with foreign automobile com-
panies producing largely for the growing domestic market. This growth has, in turn, contrib-
uted in recent years to China’s very rapid growth in oil imports. Until 2000, the sector had
been subject to few regulations and standards on emissions. Since then, stricter regulations
have been introduced in an effort to force foreign firms to transfer cleaner technologies.
However, the evidence suggests that, while these firms have introduced more modern pollu-
tion control technologies, they have been reluctant to introduce cutting-edge technology and
the overall impact of their efforts has been dwarfed by the scale effect of rising car ownership.
The study concludes that market incentives are, by themselves, unlikely to help China jump
to the next stage in terms of cleaner vehicles, such as fuel-cell vehicles, given prohibitive
prices and the control exerted over intellectual property by foreign firms. The study showed
that the current producers of hybrid vehicles, for example, have been unwilling to transfer
hybrid-vehicle technologies for production inside China. Rather, the Government will need
to consider a more comprehensive and integrated policy approach, one that seeks to bolster
local learning in the automotive sector through support for RD&D and engineering train-
ing, including through overseas study, and efforts to foster demand for cleaner automobiles
in response to higher prices and tighter regulations. While these measures can provide clear
signals to private investors, both domestic and foreign, to move towards cleaner technologies,
wider national planning initiatives to improve and expand public infrastructure will also be
needed to ensure that the transportation system evolves in line with climate objectives.

CDM and technology transfer

The market-driven Clean Development Mechanism (CDM) was established under the
Kyoto Protocol to the United Nations Framework Convention on Climate Change29 to
help developed countries meet their emission targets, by encouraging fi rms in the private
sector to contribute to emission reduction efforts and through investments in developing
countries. Although they do not necessarily entail FDI, many of these projects involve

29 United Nations, Treaty Series, vol. 2303, No. 30822.

138 World Economic and Social Survey 2009

transnational corporations from the advanced countries. It was expected that such private
sector transfers would assist in the transfer of environmentally sound technologies to de-
veloping countries.
A few studies have tried to determine to what extent technology transfer is ac-
tually occurring through the Clean Development Mechanism process. Most recently, the
United Nations Framework Convention on Climate Change Registration and Issuance
Unit CDM/SDM (Seres and Haites, 2008) issued its own report on the Clean Develop-
ment Mechanism and technology transfer. Based on documentation for 3,296 registered
and proposed CDM projects, it found that roughly 36 per cent of the projects, which ac-
counted for 59 per cent of the estimated annual emission reductions, claimed to involve
technology transfer, indicating that projects claiming technology transfer were, on average,
substantially larger than those that made no technology transfer claim. It also found that
about 30 per cent of unilateral projects, 40 per cent of projects with foreign participants
and 30 per cent of small-scale projects claimed technology transfer, as compared with 36
per cent of all projects. The study found that the technology transferred originated mainly
from Japan, Germany, the United States of America, France, and the United Kingdom of
Great Britain and Northern Ireland, which accounted for over 70 per cent.
One reason for the high Studies find wide variation across countries in the reported technology transfer
rates of technology transfer associated with CDM projects. Dechezleprêtre, Glachant and Ménière (2009) focused on
in Mexico and Brazil is
four countries accounting for about three fourths of all CDM projects: Brazil, China, In-
that in those countries,
foreign companies have a dia and Mexico. While 68 per cent of projects in Mexico included an international trans-
significant involvement in fer of technology, the rates for India, Brazil and China were 12 per cent, 40 per cent and 59
CDM projects, which is less per cent, respectively. One reason for the high rates of technology transfer in Mexico and
the case in China and India Brazil is that in those countries foreign companies have a significant involvement in CDM
projects, which is less the case in China and India. Seres and Haites (2008) observed
that such cross-country variation could also be attributable to trade policy, with some
countries imposing significantly higher tariffs on imported equipment than others. This
factor’s being a handicap to technology deployment clearly depends on whether domestic
technological capabilities are effective substitutes. Technology transfer in a specific type of
CDM project generally declines over time, suggesting a progressively greater reliance on
local knowledge and equipment.
So far, the operation of the Clean Development Mechanism has been on much
too limited a scale and has been too heavily concentrated in a few developing countries to
allow it to initiate and sustain the kind of big push towards cleaner technologies recom-
mended in this Survey. Moves towards the creation of a simplified Clean Development
Mechanism, including sectoral or technological benchmarks, might make it more effective
in raising technological standards in the longer run. However, this is likely to take time.

Trade and climate-related technology transfer

As a consequence of the fact that Governments are becoming more serious about addressing
climate change, there has been a revival of the North-South trade and environment debates
on how to distinguish between legitimate environmental and health protection measures,
as allowed in the World Trade Organization, and disguised trade protectionism measures.
Despite the establishment of a World Trade Organization Committee on Trade and En-
vironment in 1994 to address contentious trade and environment issues, such as how to
speed up the transfer of environmentally sound technologies while remaining World Trade
 Technology transfer and the climate challenge 139

Organization-compliant, not much progress has been made. The few clarifications pro-
vided have emerged instead from World Trade Organization dispute panels considering
whether importing countries could ban import of tuna and shrimps from countries that
did not use devices to avoid by-catches of dolphins and endangered turtles. More of these
trade disputes are to be expected, given the absence of prior agreements on how to handle
the measures being proposed to account for the carbon-intensity of traded goods and on
subsidies to encourage the development of lower-carbon energy sources.
We review these issues below as well as some proposals that have been put forth
with regard to speeding up the transfer of climate-related technologies in ways that take into
account the principle of common and differentiated responsibilities as embodied in the Unit-
ed Nations Framework Convention on Climate Change and its equivalent within the frame-
work of the World Trade Organization, namely, the principle of special and differentiated
treatment for developing countries. Nations agreed upon these principles based on the
understanding that they reflected the differences in capabilities and in the responsibility for
the cumulative greenhouse gas emissions causing climate change. There was also recognition
of the fact that developing countries aspired to attain higher levels of economic development
and social well-being for their citizens.
For instance, under the Kyoto Protocol, developing countries do not have The level and extent of
binding greenhouse gas reduction commitments although they must collect data and developing countries’
undertake mitigation and adaptation measures. The level and extent of developing mitigation actions
will depend in turn on
countries’ mitigation actions will depend in turn on promised financial, technological and
promised financial,
capacity-building support from developed countries. technological and capacity-
Trade-related actions that have been proposed include faster liberalization of building support from
trade in climate-related environmental goods and services, making the intellectual prop- developed countries
erty rights regime more lenient with respect to climate-related environmental goods and
services, and revisiting the Agreements on Subsidies and Countervailing Measures, con-
tained in the Marrakesh Agreement (World Trade Organization, 1994), to allow subsidies
that foster investments in low-emissions technologies.
The potential benefits of trade liberalization to the environment, including
climate change, and development have been highlighted since the adoption of Agenda 21
(United Nations, 1992). Principle 12 of the Rio Declaration on Environment and Devel-
opment (ibid.) states that Governments should “promote a supportive and open interna-
tional economic system that would lead to economic growth and sustainable development
in all countries, to better address the problems of environmental degradation”. Trade is
important because imported capital goods and services provide an additional channel to
access environmental technologies and know-how generated in developed countries, other
than FDI or licensing.
Trade liberalization on its own is not sufficient, however, for effective Trade liberalization on
technology transfer. Indeed, despite unprecedented market liberalization, and several its own is not sufficient,
however, for effective
commitments to the transfer of technology in both the United Nations Framework
technology transfer
Convention on Climate Change and the Kyoto Protocol thereto, as well as within the
World Trade Organization, evidence of technology transfer is slim. It was thought that
early liberalization of environmental goods and services would contribute to environmental
goals by lowering prices of environmental goods and services relative to their non-
environmental or mainstream counterparts, thus facilitating and promoting more
environmentally sustainable production and consumption. To support climate actions,
the World Bank (2008a) proposed accelerated liberalization of products, technologies and
services used in Clean Development Mechanism projects to reduce equipment and other
 140 World Economic and Social Survey 2009

costs. Liberalization of environmental goods and services has been slowed owing not only
to the failure to conclude the Doha Round but also to the lack of a definition of what
constitutes environmental goods and services and the different views held by the North
and the South regarding which tariffs should be lowered more quickly.

Liberalization of trade in climate-related

environmental goods and services
As a general rule, developing countries rely much more on tariffs to generate revenues than
do developed countries, which have the institutions in place to collect income and sales, or
value-added, taxes. Significant reduction of these tariffs means lower revenues for invest-
ment in social and infrastructure development.
With respect to With respect to liberalization of environmental goods and services, the goals
liberalization of are different for developing and developed countries. The former want access to adaptation
environmental goods and
technologies while protecting their nascent environmental goods and services industries
services, the goals are
different for developing so as to eventually become competitors in these emerging industries. Developed coun-
and developed countries tries that have comparative advantages in capital- and technology-intensive environmental
goods and services propose early liberalization of those goods. Another obstacle to agree-
ing on a definition of a list of “eligible” environmental goods and services or climate-
related technologies hinges on the lack of specificity with which goods and services are
tracked for customs and duty purposes. They are tracked through the World Customs Or-
ganization Harmonized Commodity Description and Coding System (HS) and have been
harmonized to only a six-digit level. Because the six-digit level is still highly aggregated, it
lumps together goods that serve for both environmental and non-environmental use, such
as “pumps for liquid”, which are often used in manufacturing wind turbines but also in
other industrial processes. Liberalizing these goods under this HS code would result in a
relinquishment of tariff revenues from all such pumps as well as expose local enterprises,
often small and medium-sized, to international competition.
Developed countries have been Thus, developing countries fear that the negotiations on environmental goods
slow to meet their obligations and services are yet another attempt at prying open their markets. Meanwhile, they ob-
in respect of the technology
serve that developed countries have been slow to meet their obligations in respect of the
transfer, capacity-building, and
financial assistance required to technology transfer, capacity-building and financial assistance required to allow develop-
allow developing countries to ing countries to acquire needed climate-related technologies.
acquire needed climate-related Developing countries would certainly retain more policy space if they were not
technologies required to lower the tariffs on “environmental goods” to low levels or zero in compliance
Developing countries with binding World Trade Organization commitments. They would then have the option
would have more policy to develop their own industries and products while maintaining tariffs that were appro-
space if they were not priate to this objective, or to liberalize the applied tariffs on certain environment-related
required to lower the tariffs products. This is important because, increasingly, World Trade Organization tariff s re-
on “environmental goods” ductions are bound; in other words, they cannot be raised again once lowered.30 Without
to low levels or zero
proper safeguards, the acceleration of liberalization of tariffs on environmental goods and
services would reduce the policy options available to developing countries for promoting
local production along their low-emissions development pathway (Khor, forthcoming).

30 During the Uruguay Round of multilateral trade negotiations, developing countries increased the
proportion of imports whose tariff rates were “bound” (committed and difficult to increase) from
21 per cent to 73 per cent. Data available at the World Trade Organization website, http://www.
wto.org/english/theWTO_e/whatis_e/tif_e/agrm2_e.htm (accessed 13 May 2009).
 Technology transfer and the climate challenge 141

The second definitional issue concerns traditional environmental goods and

services such as water treatment, waste collection technologies, etc., versus environmen-
tally preferable products (EPPs). The initial list of environmental goods and services pro-
posed by the developed countries mirrored the list of Asia-Pacific Economic Cooperation
(APEC) and included typically capital- and technology-intensive products. Environmen-
tally preferable products, instead of providing an end-of-pipe solution to pollution, reduce
pollution during the production process or during the use phase of a product. Well-known
examples are organic foods and coffee, and goods whose manufacture emits less or which
are more energy-efficient in use, such as hybrid cars. The debate over environmentally pref-
erable products in the World Trade Organization is at heart a debate about whether (and
how) the World Trade Organization can distinguish between otherwise similar products
based on their processes or production methods (PPMs).
The most favoured nation and national treatment principles now embodied in
the World Trade Organization prevent discrimination among “like products” originating
from different trading partners, as well as between a country’s own and like foreign prod-
ucts. Developing countries, fearing that developed nations could use processes or production
methods as the basis for non-tariff barriers (by imposing high process-related environmental
standards hard to achieve by developing countries), have always taken the position that if the
end products have the same physical characteristics, then they are “like products” regardless
of how they were produced. However, recent dispute panel findings over the shrimp import
and turtle by-catch issue mentioned above seem to indicate that, as long as measures to
protect the environment (the endangered turtle species in this case) are non-discriminatory
between domestic and international producers, or among international producers, they are
World Trade Organization-compliant under article XX of the General Agreement on Tariffs
and Trade (GATT), which allows exceptions to World Trade Organization trade rules to
protect human, animal or plant life or health. Latin American countries recently proposed
including sustainable agricultural products on the list of environmental goods and services,
clearly an opening towards environmentally preferable products.31
Given the lack of progress at the multilateral level, the International Institute
for Sustainable Development (Cosbey, 2008) has suggested that efforts might be pursued
in bilateral and regional trade agreements and/or through plurilateral agreements similar
to the World Trade Organization procurement agreements, whereby members could opt
for voluntary agreements which come into effect only when enough countries have joined.
Other proposals have insisted that the technologies be demand-driven, whereby devel-
oping countries would assess their adaptation and mitigation needs and/or development
goals and put the technologies concerned on the list.

Embodied carbon
The contentious environmentally preferable products, or processes and production meth-
od-related, issue has been revived in the talks on border adjustments which would apply
different tariffs to goods entering a country or bloc based on the carbon emitted in their
production processes, or the carbon embodied in them. Lawyers disagree among them-
selves over the details, but they all seem to conclude that most border carbon adjustments
would be hard to implement in such a way as to be compliant with current World Trade
Organization rules.
31 This proposal, as well as the proposal of Brazil to include bioethanol, was resisted by the OECD
countries.
 142 World Economic and Social Survey 2009

As developed countries are putting in place policies to tackle climate change,

their energy- and carbon-intensive industries fear having to compete with producers that do
not face higher energy prices in non-Annex I countries. Developed-country Governments
may also fear so-called carbon leakage—the relocation of such industries to non-regulated
countries, with associated economic costs and no environmental benefit. A number of
developed countries are thus proposing border adjustments that would “correct” for the
differential in carbon emitted in the production of imported goods. If all developed coun-
tries join a regime of binding quantitative emission targets, then these measures would be
directed largely at developing countries, notably the major emitters. The intention is to
encourage them to become part of a regime of binding targets as well.
Developing countries will eventually have in any case to make significant cuts
in their emissions from business-as-usual trajectories if the probability of catastrophic
climate change is to be limited. However, for reasons outlined in earlier chapters, they
cannot be expected to do so on the same terms or in the same time frame as developed
countries, or without financial and technological support from developed countries.
Using stronger measures as Using stronger measures as a stick to induce developing countries to take on
a stick to induce developing binding commitments is likely only to erode trust between North and South, especially as
countries to take on binding
commitments is likely only
developed countries have yet to make the firm offer of a carrot of substantial financial and
to erode trust between technological support to developing countries.
North and South Not only may border adjustments be unnecessary, they are also unlikely to
achieve their goal (Cosbey, 2008). They may not be necessary because only a few energy-
Not only may border
adjustments be unnecessary,
intensive sectors (steel, aluminium, paper, chemicals and cement) would be affected, and
they are also unlikely these are only responsible for a small proportion of economic activity in the developed world.
to achieve their goal In the United Kingdom, for example, their share of gross domestic product (GDP) is only
0.5 per cent (ibid.). Border adjustments may not reach their goal because they are likely only
to reroute trade through countries with strong climate measures. China’s export of carbon-
intensive goods to the United States, as a proportion of China’s GDP, for instance, is not
getting close to even 1 per cent. Also, if the border measures cover only basic materials (such
as aluminium), they hurt the domestic producers that use this input in their processes. If
they covered manufactured goods (such as aluminium-frame bicycles), it would become very
difficult to estimate border adjustments. As described above, if they are to be in compliance
with the non-discrimination principle of the World Trade Organization and the principle of
common and differentiated responsibilities under the United Nations Framework Conven-
tion on Climate Change, they will be extremely difficult to design.
Without the appropriate The need for financial and technological support to developing countries is
incentives and support, lower made even more urgent inasmuch as, when developed countries put in place measures to
fossil fuel prices are likely
discourage the use of fossil fuels, their decreased demand for those fuels will exert down-
to increase consumption of
these carbon-intensive fuels in ward pressure on world coal and oil prices. Without the appropriate incentives and sup-
developing countries without port, lower fossil fuel prices are likely to increase consumption of these carbon-intensive
comparable domestic policies fuels in developing countries without comparable domestic policies (Fortunato, 2009;
Cosbey, 2008).

Low-emissions energy subsidies

The push to decarbonize In addition to the issue of embodied carbon, subsidies to support lower-carbon energy
economies will require sources may also raise questions of World Trade Organization compliance. The energy sec-
Government incentives (as well
tor produces two thirds of the greenhouse gas emissions that cause climate change. Policies
as regulations)
to curb climate change focus on taxing or capping CO2 emissions from fossil fuels and/
 Technology transfer and the climate challenge 143

or on providing subsidies to alternative energy sources. However, the push to decarbonize

economies will require Government incentives (as well as regulations) and it is therefore
imperative that countries clarify which subsidies would be World Trade Organization-
compliant. This issue may be easier to resolve than the above issues of environmentally
preferable products and liberalization of environmental goods and services because there is
a precedent: There had been an exception for environmental subsidies under the Agreement
on Subsidies and Countervailing Measures which lapsed in 1999 and could be revived to
allow climate-related subsidies that do not injure competitors in other countries.
If the non-actionability of these subsidies could be renewed, both developed
and developing countries would be allowed to subsidize general research (assistance for
research activities by firms or higher education or research establishments on a contract
basis with firms) on climate mitigation and adaptation, without fear of trade sanctions
(Hoekman, Maskus and Saggi, 2004).
With regard to carbon trading systems, it is unclear whether free allocation
of emissions allowances would be considered subsidies under the Agreement on Subsidies
and Countervailing Measures, as there is no body of jurisprudence on this point (Huf-
bauer and Kim, 2009). It is worth noting that under the Agreement on Subsidies and
Countervailing Measures, countervailing duties could not be applied on countries that
failed to take actions on climate change. A lack of action does not constitute “a subsidy”
under the Agreement.32
The multilateral investment agreement, the Agreement on Trade-related Invest-
ment Measures, has few obligations. However, the 2,500 bilateral investment agreements
and the bilateral investment chapters in regional trade agreements contain strong measures.
In the North American Free Trade Agreement (NAFTA), the expropriation was so broad
and led to so many arbitrations that the United States, Canada and Mexico agreed to clarify
and limit the definition of which investors could claim expropriation under the Chapter
concerned. These arbitrations have, in some cases, had a chilling effect on countries consid-
ering stronger regulations. The fear is that investors could claim that the new regulations
constituted unfair and inequitable treatment. Clarification on which climate-related invest-
ments could constitute indirect expropriation would be warranted in order to give countries
the policy space within which to put in place appropriate regulations without the fear of
having to pay excessive compensation to foreign companies.

International policies and measures to

build capacity in developing countries
Technology absorption requires investment in both physical and human capital. The faster The global nature and urgency
the pace of capital formation, the greater the likelihood of such absorption. However, as of the climate challenge imply
that the rapid dissemination
discussed in chapter IV, promoting local technological learning and capacities will be
of appropriate technological
critical to the successful use of technological knowledge in meeting the climate challenge. options will require
As figure V.2 suggests, technology needs will differ from region to region. But, in all international collaboration
cases, active government policy will be a component of successful outcomes (see chap. IV).
Moreover, the global nature and urgency of the climate challenge imply that the rapid dis-
semination of appropriate technological options will require international collaboration.
32 Previous experience indicates that successful efficiency efforts can lead to the “rebound effect”
whereby overall consumption increases. Measures will have to address the absolute consumption
of energy.
144 World Economic and Social Survey 2009

Figure V.2
Commonly identified renewable energy technology needs and energy efficiency
technology needs in the building and residential subsectors, selected regions
A. Commonly identified renewable energy technology needs, selected regions
18

Africa
16
Asia
Number of technologies identified
14 Europe
Latin America and the Caribbean
12

10

0
Solar PV
(grid. off-grid)

Biomass

Mini- and/
micro-hydro

Wind (installations
and/or assessments)

Hydro

Solar thermal

Geothermal

Unspecified RET

MSW (generation and

treatment of MSW)

Unspecified
hybrids
B. Commonly identified energy efficiency technology needs in the building and residential subsectors, selected regions
16
Africa
14 Asia
Europe
12
Number of technologies identified

Latin America and the Caribbean

10

0
Lights

Solar water heaters

Stoves/owens

Solar dryers

Solar coolers

Heaters

Air conditioning

Unspecified appliances
and techniques

Solar home system

Refrigerators

Solar water pumps

Wind water pumping

Source: United Nations, United Nations Framework Convention on Climate Change (2006).
Abbreviations: PV, photovoltaic; MSW, municipal solid waste; RET, renewable energy technology.
 Technology transfer and the climate challenge 145

This is particularly true in the area of RD&D, where developing countries lag Publicly funded research
significantly and risk falling further behind as new technologies emerge. Important ex- holds out the best hope
of developing greater
amples of technologies that will be critical to a new development pathway include carbon
coordination among
capture and sequestration (CCS), low-emissions biofuels, and breakthroughs in renewable the myriad research
energy sources such as solar panels. Moreover, developing countries also need access to institutions, in the private
best practices with respect to adaptation technologies, in the areas of agriculture, disaster sector, the non-profit sector
management and urban planning. These technologies are often closely interrelated and link and academia
the climate threat to other threats, such as food and energy security. Consequently, devel-
opments in all these areas are best addressed through a structured global programme and
funding (Stern, 2009, p. 173). Publicly funded research holds out the best hope of develop-
ing greater coordination among the myriad research institutions, in the private sector, the
non-profit sector and academia, that are already working to meet these challenges and is
moreover more likely to ensure the widest dissemination of the results (box V.3). Transpar-
ent and readily accessible research is all the more important because regulatory and legal
frameworks, such as standard-setting, are likely to emerge on the basis of these results.
Particularly with respect to cutting-edge technologies, well-educated engineers Mechanisms to retain and
and managers are essential.33 Enhanced education and sustained training programmes bring back trained labour
include wage flexibility,
are needed in the areas of technical, administrative, financial, regulatory and legal skills
repatriation grants,
(United Nations, United Nations Framework Convention on Climate Change, 2003). In and incentives to start
addition to making improvements in domestic education, developing countries, in order to technology firms

Box V.3
Intellectual property rights and publicly funded technologies
The issue of publicly owned technology transfer was addressed at the United Nations Conference
on Environmental Development, held in Rio de Janeiro in 1992. Agenda 21a (chap. 34, para. 34.18 a United Nations (1992)
(a)) states that Governments and international organizations should promote the “Formulation of
policies and programmes for the effective transfer of environmentally sound technologies that are
publicly owned or in the public domain”. Implementation of this provision has been very weak.
Developed-country Governments sponsor a range of research and development (R&D)
activities geared towards developing climate technologies. For example, in 2001 Governments with-
in the European Union (EU) spent almost 350 million euros for R&D in renewable energy, more than
half of the total expenditure (EU Directorate-General for Research, 2006). Public sector spending is
equally important in the United States of America. For example, for the wind, biofuels and photo-
voltaic sector, the United States Department of Energy spent approximately USA 356 million (2008
budget) (Barton, 2007, p. 7).
Sathaye, Jolt and De La Rue du Can (2005) surveyed Government-sponsored R&D in
the United States, Canada, the United Kingdom of Great Britain and Northern Ireland, the Republic
of Korea and other countries members of the Organization for Economic Cooperation and Develop-
ment (OECD) and found that it is a common practice for Governments to grant ownership of intel-
lectual property rights (patents, copyrights, trademarks, etc.) to the recipient research institutions.
In the United States, for example, Government-sponsored research usually ends up being patented
(Barton, 2007, p. 8).
Given the role that Governments play as the main driver of R&D for climate technologies,
it will be necessary for modalities for the transfer of publicly funded climate technologies to develop-
ing countries to be explored. OECD countries, which tend to hold ownership of most of the technol-
ogy needed for mitigation and abatement, are in a strategic position to influence technology flows
directly through their influence on the private sector or on public institutes which receive funding for
their R&D and thus should be more active in transferring technologies to developing countries.

33 One advantage of traditional knowledge and technology, on the other hand, stems from the fact
that sufficient human capital is probably already in place in developing countries.
146 World Economic and Social Survey 2009

guard against a “brain drain”, can offer incentives to students. Mechanisms to retain and
bring back trained labour include wage flexibility, repatriation grants, and incentives to
start technology firms. Developed countries, for their part, should subsidize offshore train-
ing, conference attendance and, in some cases, temporary employment for graduates from
developing countries. Grant proposals for research on environmentally sound technolo-
gies involving developing-country teams could also receive special consideration (Maskus,
2004). Capacity-building might also be pursued through cooperation agreements that in-
creasingly accompany regional trade agreements among OECD countries. These would
help developing countries conduct an assessment of the obstacles to their low-emissions
energy development. Aid-for-trade programmes should also be tapped in this regard.
What is clearly required is a massive international effort (United Nations, De-
partment of Economic and Social Affairs, 2009). Table V.1 presents various innovative
mechanisms to promote technology development and transfer. Three closely related initia-
tives could plant the seeds of greater international collaboration in developing the skills
and technologies needed to tackle climate change:
Table V.1
Innovative mechanisms to promote technology development and transfer

Mechanism Rationale Issues to consider

Publicly supported centres for technology Green revolution model of technology Suitable for mitigation or only for
development and transfer diffusion: makes technologies available to adaptation technologies
developing countries without intellectual
property right protection
Technology funding mechanism to enable Resultant intellectual property rights could Is there sufficient incentive for participation
participation of developing countries in be shared; patent buyouts could make by developed-country private sector
international R&D projects privately owned technologies available to technology leaders?
developing countries
Patent pools to streamline licensing of Developing-country licensees will not have What are the incentives to patent-holders?
inventions needed to exploit a given to deal with multiple patent-holders Would government regulation be needed?
technology
Global R&D alliance for research on key Model of research on neglected tropical Is such an approach suited to mitigation
adaptation technologies diseases technologies?
Global clean technology venture capital Fund located with a multilateral financing Will new technology ventures be
fund institution which will also have the rights to viable commercially if they do not own
intellectual property intellectual property?
Eco-Patent Commons for environmentally Approach initiated by the private sector Voluntary, private incentives appear weak.
sustainable technologies to make certain environmentally sound What about those companies without a
technologies available royalty-free on a patent to contribute?
“give-one, take-one” model
Blue Skies proposal of European Patent Complex new technologies based on Appears to address concerns similar to
Office: differentiated patent system with cumulative innovation processes need to those addressed by the patent pools
climate change technologies based on a be treated differently from, for example, proposal: more specifics needed on
licensing of rights pharmaceuticals implications for technology access
More favourable tax treatment in More proactive, technology-push approach May face domestic political constraints
developed countries for private sector R&D by developed-country Governments
performed in developing countries
Technology prizes Reward innovation without awarding Requires a well-specified research objective
intellectual property rights to innovators
Source: United Nations, Department of Economic and Social Affairs (2008).
 Technology transfer and the climate challenge 147

• A multilateral technology fund to support an international programme on the

diff usion of climate technology and to strengthen and coordinate regional and
national RD&D efforts in developing countries. Such a fund could be housed
in the secretariat of the United Nations Framework Convention on Climate
Change and draw on the existing network of scholars and scientists within
the Intergovernmental Panel on Climate Change (IPCC) in the design of its
programmes. Financing such a programme can draw lessons from the experi-
ence with the Global Environment Facility (GEF) (see box V.4 and chapter
VI). The steady decline in public RD&D in the energy sector is an indica-
tion of the urgency of establishing such a fund. A comprehensive programme
would need to focus on the full range of technological challenges at the basic
science, applied RD&D, demonstration, deployment and commercialization
stages of developing cleaner technologies. However, coordinated funding for
the development, demonstration and deployment of critical technologies such
as carbon capture and sequestration and the next generation of biofuels, in
which developing countries have a particular interest, would have to be high
up in the agenda. Given the public nature of RD&D, it would be essential to
ensure dedicated and predictable financing for such a fund, using the kinds
of instruments discussed in the chapter VI. Such a fund could act as a focal
point for the coordination of ongoing research in climate technologies at the
international and national levels and among public, private and non-profit or-
ganizations, while ensuring open access to all available research in line with
the urgency of the challenge.
• A human skills transfer programme. A scaled-up human capacity development
effort could complement the fund and would consist of a temporary (perhaps
only a virtual) movement of skilled unemployed/underemployed workers from
developed countries (engineers, technicians, primary education teachers, experts
in sustainable agriculture, and qualified blue- and white-collar workers) into
developing countries to provide workforce and vocational “train the trainers”-
type training. An innovative means of accomplishing this would be “reverse
outsourcing”, that is to say, programmes utilizing the Internet and other
communications technologies, through which long-distance training services
in critical areas would be provided by developed countries to developing ones.
During a recession, many highly skilled technicians, teachers and professionals
are laid off. Even if only 5 or 10 per cent of them participated in a technology
transfer corps organized through the development cooperation agencies for
periods ranging from six months to two years, significant skills and know-how
transfer could be effected. This would be a win-win solution for developing
countries requiring more help and for cash-constrained developed countries
obliged, nonetheless, to pay unemployment insurance.
• A public technology pool. The results of fully funded public research on climate
technologies should not be the basis of private patents: it should be made avail-
able at low or no cost to all countries. A technical secretariat would be needed
to monitor, collect and disseminate such research, to act as a clearing house for
existing publicly funded technologies and to actively promote access to those
technologies, particularly for developing countries. Such a body could work
alongside the Global Technology Fund to ensure the widest dissemination of
future research sponsored by that Fund.
148 World Economic and Social Survey 2009

Box V.4
The Global Environment Facility
Technology transfer is seen as playing a critical role in the global response to the challenges of
climate change. Indeed, promotion of and cooperation in the transfer of environmentally sound
technologies derive from a commitment embodied in the United Nations Framework Conven-
tion on Climate Change. In order to pursue these goals, the Convention proposed the creation
of a financial mechanism. The Global Environment Facility (GEF) serves as that mechanism for
the Convention.
Over the past 17 years, the Global Environment Facility has been financing proj-
ects to promote the transfer of environmentally sound technologies under the guidance of the
Conference of the Parties to the Convention. During this period, about $2.5 billion for climate
change projects has been allocated, which leveraged approximately $15 billion in co-financing.
Most financing is in the form of grants to developing countries and countries with economies
in transition. Through its Small Grants Programme, the Facility has also made more than 10,000
small grants directly to non-governmental and community organizations.
Some examples of environmentally sound technologies supported by the Global
Environment Facility are described below.
Energy-efficient lighting and appliances
The Global Environment Facility has built a portfolio promoting energy-efficient appliances and
technologies in developing countries. GEF-supported interventions typically focus on institut-
ing energy-efficiency standards and labels, consumer education, and testing and certification
of appliances. In countries where there is substantial manufacturing capacity, the Facility has
also supported enterprises in developing new energy-efficient appliance models and in acquir-
ing technical information and knowledge from more advanced countries.
In Tunisia, for example, 10 out of 12 local appliance manufacturers are offering
more energy-efficient models. In China, the GEF project to promote energy-efficient refrigera-
tors adopted a two-pronged approach comprising technology push and market pull. Technol-
ogy push is achieved through technical assistance to refrigerator and compressor manufactur-
ers, technology upgrades, and designer training programmes, while market pull is achieved
through the promulgation of energy-efficiency standards.
Since the mid-1990s, the Global Environment Facility has supported the dissemi-
nation of efficient lighting technologies in more than two dozen countries. The Facility has also
launched a global efficient lighting initiative, approved by the GEF Council in 2007, to acceler-
ate the phase-out of inefficient lighting through the United Nations Environment Programme
(UNEP) and the United Nations Development Programme (UNDP); at the same time, support is
being extended to more countries and programmes at the national level.
Industrial energy-efficiency technologies
The Global Environment Facility has funded more than 30 projects in the industrial sector to pro-
mote technology upgrading and the adoption and diffusion of energy-efficient technologies.
Some projects focus on the development of market mechanisms such as energy service com-
panies, the creation of dedicated financing instruments, and technical assistance to stimulate
investments in new technologies. Other projects are designed to identify one or more subsec-
tors where specific technologies can be promoted. The range of industries includes construc-
tion materials (brick, cement and glass), steel, coke-making, foundry, paper, ceramics, textiles,
food and beverage, tea, rubber and wood. A number of projects also promote energy-efficient
equipment such as boilers, motors and pumps, as well as cogeneration in the industrial sector.
In some projects, the Facility has promoted South-South technology transfer; one such project
has entailed the transfer of energy-efficient brick kiln technology from China to Bangladesh.
 Technology transfer and the climate challenge 149

Box V.4 (cont’d)

High-efficiency boilers
The China Efficient Industrial Boilers project had received a $32.8 million grant from the Global
Environment Facility to (a) upgrade existing boiler models by introducing advanced combustion
systems and auxiliary equipment from developed countries; (b) adopt new high-efficiency boiler
models by introducing modern manufacturing techniques and boiler designs; and (c) provide
technical assistance and training for boiler producers and consumers. Completed in 2004, the
project successfully supported international technology transfer of boiler technologies which
benefited nine boiler manufacturers and nine boiler auxiliary equipment makers. With GEF
support, the manufacturers in China acquired advanced efficient boiler technologies, built
prototypes, and began commercial production. Through technical assistance, the project also
led to the revision and formulation of national and sector standards, while strengthening the
technical capacity of China’s boiler sector.
Solar water heaters
Although solar water heater technology is sometimes perceived to be simple, such a perception
can in fact be misleading. The quality of the fittings, of the solar collectors and of the installation
has substantial impact on satisfactory operation. Accordingly, inexpensive materials, poor work-
manship and shoddy installation have often resulted in non-functional units and abandonment
of installations. GEF experience has shown that knowledgeable staff and the observance of
high standards are critical to the successful dissemination of this technology.
In Morocco, for example, early solar water heaters had tended to be of low quality.
As a result, they fell into disuse and the market languished. Through a Global Environment Facil-
ity project, the older non-functioning installations were repaired, new higher-quality standards
were adopted, and technicians and staff were trained to ensure that future installations would
be of satisfactory quality. In addition, to encourage production and sale of the higher-quality
units, a subsidy was offered to early adopters of water heaters who met the new standard.
These initiatives revived the market, which is now growing rapidly, along with the industry as
a whole.
Waste to energy
A number of projects have supported utilization of methane from municipal waste, in the form
of either solid wastes in landfills or liquid biological wastes. Many of these projects have quali-
fied for Global Environment Facility support as both renewable energy projects and short-term
response measures because of their cost-effectiveness. The Facility played a role in helping
increase the uptake of these technologies; now its support is no longer needed, as the projects
are eligible for funding and highly profitable when implemented under the Clean Development
Mechanism.
The India biomethanation project, whose implementation had been proposed
in the early 1990s, was designed to exploit India’s endogenous capacity to adapt and replicate
biogas technology for industrial wastes. A pre-existing challenge had arisen from the fact that
biological waste from agroprocessing and related industries deposited substantial quantities of
methane and other pollutants into nearby waters. The intent of the project was to produce the
methane in a controlled environment, and then capture and use it to produce energy.
Concentrating solar power
The Global Environment Facility, together with India, Mexico, Morocco and Egypt, developed a
portfolio of four concentrating solar power demonstration plants. The projects built (typically
30 megawatt) solar fields as part of hybrid gas-turbine plants. Successful hybridization of the
gas-turbine and solar power plants would enable the projects to dispatch power at will, thereby
making them more economically attractive.
150 World Economic and Social Survey 2009

Conclusion
A rapid pace of investment will not be sufficient to meet the climate challenge unless it
is accompanied by a technological transformation, with increased capacity to produce,
operate and deploy climate-friendly technologies. However, for many developing countries,
the cost of accessing those technologies could prove prohibitive. Although developed
countries have committed themselves to leading the change towards cleaner technologies
and ensuring that developing countries are not left behind, neither commitment has been
fulfilled. Innovative transfer of both technologies and know-how will be required to meet
climate change objectives in the context of both mitigation and adaptation.
This chapter has identified possible obstacles to the transfer of technology that
could arise internationally with respect to intellectual property rights, corporate behaviour
and trading rules. To date, these factors have not proved prohibitive. However, they are
likely to take on greater significance if developing countries embark on a big push towards
a low-emissions, high-growth development pathway. Anticipating those obstacles and de-
vising ways around them constitute an urgent task of the international community. Th is
would require consensus, since it might entail the amendment of World Trade Organiza-
tion rules and special climate waivers based on the urgency of the rapidly evolving climate
situation. It will also require careful attention to the implications of the World Trade Or-
ganization principles of non-discrimination and United Nations Framework Convention
on Climate Change principles, especially that of common and differentiated responsibili-
ties and capabilities. This has to be based on ability and historical obligations. Since any
post-2012 agreement is likely to retain these principles, the challenge will be to ensure the
coherence and compatibility of their applications.
 151

Chapter VI
Financing the development
response to climate change
Introduction
There is no way round the need for large-scale investments to meet the climate challenge,
in both developed and developing countries. Developed countries have begun to make the
required adjustments focusing, in particular, on energy efficiency. However, and despite
their expressions of concern and commitment, the pace has been slow. In 2008 and 2009,
the inclusion of green investments in stimulus packages in response to the global finan-
cial crisis has raised expectations that a more sustained effort is now under way in those
countries. Still, their policymakers need to think on a much larger scale when it comes to
emission cuts.
Developing countries can be expected to follow the lead of the developed coun- Large-scale investments
tries only if the latter’s response is consistent with long-standing growth and development will need to be front-loaded
objectives. The present Survey has suggested that the key to its being so lies in the adoption
of an investment-led and integrated approach. In particular, large-scale investments will
need to be front-loaded to ensure the achievement of a “big push” into the generation of
low-emissions energy sources and the mitigation of and adaptation to climatic threats and
shocks. These investments, however, will involve significant initial costs and carry a high
degree of uncertainty.
The economic debate within the global discussion of climate policy has been The kind of investment
dominated by assessments of market-based mechanisms such as cap and trade and carbon path to be followed to
meet the climate challenge
taxation, both aiming at changing price incentives so that investments in energy efficiency
will require heavy reliance
and renewables become more attractive. Private investment will, of course, have a predom- on regulation and large-
inant role in any low-emissions economic future and there is little doubt that establishing a scale public investments
realistic price for carbon will have to be part of any policy agenda. The question, however, in order for the necessary
is whether such mechanisms can induce the required shifts in production and consump- transformative shift to take
tion patterns and mobilize the large-scale investments needed to avert the catastrophic risk place
that climate change poses, as well as ensure that the adjustments take place in a fair and or-
derly manner. This seems doubtful. It is generally recognized that price mechanisms are an
unreliable guide in cases where the investments to be undertaken are on a very large scale
and where returns are not immediately visible, are unpredictable and are dependent on a
series of complementary investment efforts and policy initiatives (DeLong, 2005). This is
all the more true today, where the marriage of the climate and development challenges is
taking place against the backdrop of systemic financial market failure and where carbon
markets are exhibiting a degree of price volatility which is not compatible with long-term
investment planning (Nell, Semmler and Rezai, 2009).
While market mechanisms should be assigned their role in a more comprehen-
sive package of measures, the kind of investment path to be followed to meet the climate
challenge will require heavy reliance on regulation and large-scale public investments in
order for the necessary transformative shift to take place.
Historically, public investment, financed both by tax revenues and by long-
term borrowing, has played a transformative role in shaping development pathways,
152 World Economic and Social Survey 2009

including in today’s most advanced economies (Rohatyn, 2009). In many cases, external
financial support has been critical. Achievement of the transition to a low-emissions, high-
growth path in developing countries will also require massive public investment in most
cases, funded to a large extent through external resources, particularly in the early stages.
Together with achievement of non-marginal changes in the cost of carbon emissions, the
aim of such investments will be to crowd in profitable investment opportunities for the
private sector along the new development pathway.
Given the great uncertainties regarding the precise costs and the effectiveness
of the types of measures mentioned so far, it is not easy to define an appropriate financing
framework for climate change. Depending on what target is used for stabilizing green-
house gas (GHG) concentrations and what assumptions are made about the effectiveness
of the measures, estimates of the annual cost of mitigation range from as little as 0.2 per
cent to as much as 2 per cent of world gross product (WGP) by 2030. In all cases, however,
doing nothing would lead to much higher economic losses. Adaptation costs are particu-
larly uncertain, with upper-bound estimates for additional annual investments set at about
$170 billion by 2030. On this order of magnitude, addressing climate change seems quite
affordable. However, most of these estimates seem to understate the scale of adjustments
that will need to be taken. They appear to have taken into account neither the larger global
macroeconomic setting in which it is presumed that a new investment path will take shape
and, in particular, the constraints many developing countries face in raising investment
levels, nor whether those investments have the potential to trigger a high-growth pathway
along which countries can meet long-standing development goals.
The key issues with The key issues with regard to finding the right financing framework are, first,
regard to finding the right what measures will be most effective in both mobilizing the required amount of resources
financing framework are,
and steering investments in the desired direction; and second, how the costs should be
first, what measures will
be most effective in both distributed across nations and population groups. The first issue may be framed along the
mobilizing the required lines suggested by figure VI.1, which depicts various mechanisms for covering the esti-
amount of resources and mated costs of the climate challenge and their evolution over time. Figure VI.I.A, derived
steering investments in from a World Bank study (World Bank, 2009), depicts a rapidly growing role, albeit tenta-
the desired direction; and tive for market-based mechanisms, complemented by a more measured increase in mul-
second, how the costs
should be distributed
tilateral funding. Together, market-based mechanisms and multilateral funding would
quickly establish the right climate for private investment. Based on the analysis in the
previous chapters, this Survey would suggest a somewhat different structure. As depicted
in figure VI.1.B, the required reductions in greenhouse gas emissions will require large-
scale upfront investments to generate a non-marginal push in the desired direction, led by
public investments and strong shifts in incentives to crowd in private investments.
The present chapter begins by assessing the likely scale of resources needed
to achieve low-emissions, high-growth pathways, and to make vulnerable countries and
communities more resilient with respect to climate change and shocks. It then considers
how those resources could be mobilized and, in particular, both the advantages and the
limitations of cap-and-trade mechanisms and carbon taxes as financing vehicles in the ini-
tial stages of shifting to the new pathway. A wide mix of financial mechanisms will likely
be required, including through domestic resource mobilization. The chapter concludes
with a consideration of the elements of an alternative global investment regime, initially
dependent on significant public sector involvement and a prominent role for a multilateral
financing mechanism.
 Financing the development response to climate change 153

Figure VI.1
Strategic investment and financing mechanisms for developing countries

A. Predominantly market-based approach

Investment Financing needs

Catalytic climate Multilateral, mostly

finance… developed-country funding

Adaptation

Mitigation
Cap and trade
Market-based
instruments

Carbon offsets and other

performance-based schemes

CDM
…to leverage
development Developing-country funding
investments
Post 2012 2020 2030 2040 2050

B. Predominantly public investment-led approach

Catalytic climate
finance…

Adaptation
Developing-country funding

Mitigation
Developed-country
funding and multilateral

Market-based mechanisms
…to leverage
development Cap and trade, carbon offsets
investments CDM
Post 2012 2020 2030 2040 2050

Sources: World Bank (2009), for figure VI.1A; and United Nations, Department of Economic and Social Affairs, for figure VI.1B.
154 World Economic and Social Survey 2009

Estimating financing requirements

The longer the response to The parties to the United Nations Framework Convention on Climate Change1 agreed (ar-
climate change is delayed, ticle 4.3) that developed countries would have to provide financial resources to developing
the more damaging will
countries to meet “agreed full incremental costs” of implementing mitigation and adapta-
be the threats to lives and
livelihoods, and the greater tion activities as well as related activities encompassing, inter alia, climate research, train-
will be the resources ing and management of sinks. These, it should be noted, are not voluntary commitments
required to respond to but treaty obligations. However, estimates of those global costs vary widely depending
those threats upon the assumptions made about the required emissions target, and the complex feed-
back linkages between economic and climatic conditions, among other factors (see chap.
I). What is certain is that the longer the response to climate change is delayed, the more
damaging will be the threats to lives and livelihoods, and the greater will be the resources
required to respond to those threats. In this respect, Stern (2009, p. 12) correctly argues
that the “ratchet effect” linked to the growing stock of greenhouse gases in the atmosphere,
coupled with long investment lifetimes, implies that “decisions, plans and incentive struc-
tures we make and create in the coming months and years will have a profound effect on
the future of the planet” (see also chap. II). It is also important to recognize that there will
not be a single mix of decisions, plans and incentives across all countries and, in particular,
there will likely be some sharp differences between developed and developing economies,
given the higher mitigation and adaptation costs facing the latter.

Mitigation costs
Figure VI.2 and table VI.1 present some recent estimates of mitigation costs. Given the
uncertainties and unknowns in these costing exercises, it is not surprising to find the range
varying from as little as 0.2 to about 2 per cent of WGP, or between $180 billion and $1.2
trillion per annum (by 2030). The range of estimates depends on methodologies used as
well as on whether the target of stabilization of greenhouse gas concentrations is set at 450
parts per million (ppm) or 550 ppm. In all cases, the costs are considerably higher under
a business-as-usual scenario, in which case permanent losses of projected WGP could be
as high as 20 percent.
United Nations, United Nations Framework Convention on Climate Change
(2008, table 4) provides a near lower-bound estimate of $200 billion-$210 billion in addi-
tional investment and financial flows globally in 2030 for mitigation efforts that cut CO2
emissions by 25 per cent below 2000 levels by 2030. The McKinsey study estimates that
the figure could rise to as high as $800 billion for the 450 ppm target, more than half of
which would be in developing countries.2 Stern’s latest estimate calls for an even bigger
push, as he puts the additional cost at between $600 billion and $1.2 trillion depending on
whether the target is, respectively, 550 ppm or 450 ppm (figure VI.2 and Stern 2009).
More than half of the More than half of the incremental costs of greenhouse gas abatement are ex-
incremental costs of pected to fall on developing countries, whose energy investments over the coming decades
greenhouse gas abatement
are projected to grow much faster than those of developed countries (see chap. II). Among
are expected to fall on
developing countries the incremental costs are those associated with investments in: renewable energy, which at

1 United Nations, Treaty Series, vol. 1771, No. 30822.

2 However, operating and maintenance costs are not included in these figures. Actual costs for
mitigation efforts might therefore be even higher. The International Energy Agency (2008b)
has, for example, estimated that owing to higher capital costs for energy supply facilities, total
additional investment needed in 2030 to reduce energy-related CO2 emissions alone would be
about 170 per cent higher than in earlier estimates.
 Financing the development response to climate change 155

Figure VI.2
Range of estimates of annual additional cost of mitigation strategies,
550 ppm and 450 ppm scenarios, world and developing countries
Billions of United States dollars per year
1 400
Stern 2009
1 200 International Energy
Agency perspectives
McKinsey
1 000
United Nations Framework
Convention on Climate Change
800 International Energy
Agency outlook
600

400

200 Sources: Stern (2009);

International Energy Agency
(2008a and b); United Nations,
0 United Nations Framework
550 ppm 450 ppm 550 ppm 450 ppm Convention on Climate
Change (2008); and McKinsey
World Developing countries & Company (2009).

current prices remains a more costly source of electricity than coal or other fossil-fuel al-
ternatives; more efficient and other lower-emitting coal-based power plants, including in-
tegrated gasification combined cycles and supercritical coal power plants; carbon capture
and storage; and more energy-efficient boilers, furnaces and other industrial equipment.
However, from a development perspective, it is very difficult to separate these incremental
investments from the bigger investment challenge of meeting growing energy demand in
developing countries, as well as interrelated demands on the transportation system and in
urban expansion, improved irrigation and water management to strengthen the productiv-
ity of the rural economy, and so forth.

Adaptation costs
Estimates of adaptation costs have focused on the additional amount of investment needed
to reduce the impact of anticipated future damages caused by weather events, in terms
mainly of measures to increase resilience and reduce the impact of disasters. In addition,
adaptation costs may also include coping and relief expenditures when damages actually
occur. However, because these costs depend on the probability and severity of climatic
threats, whose impact is closely linked to other vulnerabilities, it can be difficult to deter-
mine where traditional development expenditures end and new adaptation expenditures
begin (see chap. IV; McGray and others, 2007; and Bapna and McGray, 2009).
Estimating the costs of adaptation with precision is even more difficult, not only
because adaptation measures will be widespread and heterogeneous, but also because these
measures need to be embedded in broader development strategies, as discussed in chapter
III. The United Nations Framework Convention on Climate Change secretariat estimates
that additional annual investment and financial flows needed worldwide would be in the
156 World Economic and Social Survey 2009

Table VI.1
Range of estimates of global mitigation costs according to various studies

Estimate Estimate
Study (percentage of WGP) (US dollars) Main characteristics
Intergovernmental 0.2-0.6 per cent • Estimates the global mac-
Panel on Climate (median of WGP roeconomic cost n 2030
Change (2007d) reduction); 0.6-3 per for least-cost trajectories
cent (minimum and towards given long-term
maximum estimate of stabilization levels
WGP reduction) • Lower stabilization levels
imply higher GDP reduc-
tions
Stern (2006 and 2009) Annual investment • 500 ppm: 1,200 • Compares investment costs
costs: 1 per cent of billion/year of mitigation with the cost
WGP, revised upwards • 500 ppm: 600 of inaction in order to assess
to 2 per cent; costs billion/year the cost-benefit of acting
of inaction: 5-20 against climate change
per cent of WGP • Aggregates several previ-
reduction by 2050
ous studies in a model to
estimate the costs; does not
provide new estimates
• Methodology and model
assumptions are the target
of criticisms
Vattenfall (2007) 0.6-1.4 per cent of • More accurate method-
WGP by 2030 ology for assessing the
cost-benefit of a group of
policies and interventions
to mitigate climate change
McKinsey (2009) Annual investment • 450 ppm: 680 • Disaggregates the abate-
costs: 1.3 per cent of billion/year ment potential and costs
forecasted WGP in by economic sector and
2030 geographical region
• Presents accurate sensitiv-
ity analysis with respect to
different core parameters
• Presents different abate-
ment opportunities and
assesses the potential
contribution of each one
Sources: United Nations Development Programme (2007a); United Nations, United Nations Framework Convention
on Climate Change (2008); Intergovernmental Panel on Climate Change (2007d); Stern (2006); Vattenfall (2007);
and McKinsey & Company (2009).

order of $49 billion-$171 billion by 2030 (see table VI.2). Its adaptation scenario covers five
sectors, with the largest element of uncertainty in this estimate lying in the cost of adapting
infrastructure, which may range between $8 billion and $130 billion. Other sources have
produced similar estimates for adaptation. Human Development Report 2007/2008 (United
Nations Development Programme, 2007a) estimates that annual adaptation investment
needs would reach $86 billion by 2015, while recent calculations of the World Bank (2009)
put annual adaptation costs in the range of $10 billion-$40 billion by 2030.
 Financing the development response to climate change 157

Table VI.2.
Additional investment and financial flows needed
for adaptation in 2030, by sector

Global cost (billions Proportion needed in

Areas/adaptation of 2005 United States developing countries
Sector measures considered dollars) (percentage)
Agriculture, forestry Production and 14 50
and fisheries processing, research
and development,
extension activities
Water supply Water supply 11 80
infrastructure
Human health Treating increased cases 5 100
of diarrhoeal disease,
malnutrition and
malaria
Coastal zones Beach nourishment and 11 45
dykes
Infrastructure New infrastructure 8–130 25
Total 49–171 34–57
Source: United Nations, United Nations Framework Convention on Climate Change (2008, table 5).

The financing challenge

The estimated additional investments needed for adaptation and mitigation to address Investments in adaptation
climate change are large in absolute terms. Still, it is often pointed out that these are only a and mitigation are often
closely interrelated
small fraction of world output (in the order of 1 and 2 per cent of WGP) and of estimated
total global investment (2.5-5.0 per cent) in 2030. There is, however, a growing recogni-
tion that many of these investments need to be front-loaded, both to effectuate the urgent
shift to a low-emissions economy and to minimize the damage from unavoidable changes
in the climate. Front-loading implies much more pressure on the financial system in mo-
bilizing the required resources. Moreover, as suggested in earlier chapters, these additional
investments in adaptation and mitigation are often closely interrelated and will make sense
only in combination with complementary investments designed to meet wider develop-
ment objectives, such as developing infrastructure, raising agricultural productivity and
diversifying economic activity.
Despite the recent proliferation of climate-related funds, the amount currently The amount available
promised and expected to be available for meeting the climate challenge in the near term, for meeting the climate
challenge, from bilateral
from bilateral and multilateral sources, is woefully inadequate. Current dedicated climate
and multilateral sources,
resources have been estimated at about $21 billion and are very heavily skewed towards is woefully inadequate
mitigation (table VI.3). The total amount of climate financing will be a large multiple of
that figure, and on some estimates could be 9-10 times the 2008 levels of official develop-
ment assistance (ODA).
The difficulty involved in reaching even those levels of ODA suggests that
global financing for climate change will require a much more determined effort on the
part of advanced countries to provide bold leadership on the climate issue and bolster
international cooperation. But it will also require an effort on the part of developing coun-
tries to mobilize a larger share of their resources for cleaner investments along a new,
sustainable growth path.
158 World Economic and Social Survey 2009

Table VI.3.
Bilateral and multilateral financing mechanisms for mitigation and adaptation in developing countries

Total
(millions of United
States dollars:
exchange rates of
Name November 2008) Use Details
Under the United Nations Framework Convention on Climate Change
GEF-4a 1 030 M Time frame: 2006-2010; $352 million already committed as
of December 2008
Sustainable Forest Management 154 M Special programme under GEF-4 for land use, land-use
change and forestry
Strategic Priority on Adaptation (SPA) 50 A Pilot programme on adaptation of the GEF Trust Fund; all
resources have been allocated
Special Climate Change Fund (SCCF 90 A Include pledges as of December 2008; $68 million has
Adaptation) been allocated to 15 projects as of November 2008;
operated by GEF
Least Developed Countries’ Fund 172 A Include pledges as of December 2008; $91.8 million has
been received as of November 2008; operated by GEF
Adaptation Fund 400-1 500 A Time frame: 2008-2012; as of October 2008, $91.3 million
was available (4 million certified emission reductions
(CERs) at €17.5 per CER)
Bilateral
Cool Earth Partnership (Japan) 10 000 A, M Provides grants and loans; time frame: 2008-2012; up to $2
billion to improve access to clean energy, and US$ 8 billion
for preferential interest rate loans for mitigation projects
Climate and Forest Initiative (CFI) (Norway) 2 250 M Provides grants; time frame: 2008-2012; pledged US$ 102
million to the Amazon Fund
International Window of the 1 182 A, M Provides grants and loans; time frame: 2008-2010; most of
Environmental Transformation Fund (ETF- the funds will be allocated trough the World Bank Climate
IW) (United Kingdom) Investment Funds
Amazon Fund (Brazil) 1 000 M So far, only Norway has pledged, in the amount of US$
102; donations to be administered by the National
Development Bank of Brazil
International Climate Initiative (ICI) 764 A, M Provides grants; funding for the initiative will be generated
(Germany) from auctioning 10 per cent of its allowances from the
Emission Trading Scheme of the European Union (EU ETS);
it has earmarked up to €120 million for the next five years
International Forest Carbon Initiative (IFCI) 129 M Provides grants; time frame 2007-2011; as of November
(Australia) 2008, US$ 50 million was allocated
United Nations Development 90 A, M Provides grants; time frame: 2007-2010; Spain has pledged
Programme-Spain MDG Achievement €528 to the Fund and US$ 90 million has been allocated
Fund - Environment and Climate Change for the Environment and Climate Change thematic
thematic window window
Global Climate Change Alliance (GCCA) 76 A, M Provides grants; time frame: 2007-2011; targets most
(European Commission) vulnerable countries (least developed countries and small
islands)
 Financing the development response to climate change 159

Table VI.3 (cont’d)

Total
(millions of United
States dollars:
exchange rates of
Name November 2008) Use Details
Multilateral
Forest Carbon Partnership Facility (World 300 M Provides grants and loans; time frame 2008-2020
Bank)
Global Facility for Disaster Reduction and 84 A Provides grants; time frame 2007-2010; targets high-risk
Recovery (GFDRR) low- and middle-income countries to mainstream disaster
reduction in development strategies
United Nations Collaborative Programme 35 M Provides grants; administered by the UNDP; Norway,
on Reducing Emissions from Deforestation through its Climate and Forest Initiative, is the first donor,
and Forest Degradation in Developing with US$ 12 million
Countries (UN-REDD)
Climate Investment Funds: 6 340 Time frame: 2009-2012; administered by the World Bank
• Clean Technology Fund 4 334 M Provides grants and loans; funded by the United States,
to be administered by the World Bank ($2 billion); the
United Kingdom and Japan have pledged the additional
resources
• Strategic Climate Fund 2 006 A, M Provides grants and loans, including the Forest Investment
Programme ($58 million) and the Scaling up Renewable
Energy in Low Income Countries Programme ($70 million),
for mitigation; and the Pilot Programme for Climate
Resilience ($240 million), for adaptation
Sustainable Energy and Climate Change 29 A, M Provides grants and loans; the fund backs major
Initiative (SECCI) investments in the development of biofuels, renewable
energy, energy efficiency, and a wide range of sustainable
energy options
Sources: Adapted and updated from Porter and others (2008); and United Nations, United Nations Framework Convention on Climate Change (2008).
Abbreviations: A, Adaptation; M, Mitigation.
a Fourth replenishment of the Global Environment Facility.

The purpose of a sustained injection of external financing in amounts large A big push from official
enough to give a big push onto a low-emissions development path is to simultaneously sources of finance would
begin to raise domestic
accelerate and sustain growth in developing countries at levels higher than in the past.
sources of finance for
As discussed in earlier chapters, this initial big push from official sources of finance, in investment in both the
combination with various policy mixes, including price incentives, regulation and targeted public and private sectors
industrial policies, would begin to raise domestic sources of finance for investment in both
the public and the private sectors. The evolving mix of public and private investment will
no doubt vary among countries, but for many developing countries, and possibly for some
developed countries, public investment will have to take the lead, along with stronger
regulations, before large-scale private investment begins to materialize.

Crowding in private sector resources

A clear-cut objective for policymakers addressing the climate challenge is to reveal the hidden
costs in choosing high-emissions over low-emissions technology. In the case of adaptation,
incentives will likely involve the sharing of costs among consumers, private operators and
Governments (Organization for Economic Cooperation and Development, 2008, p. 124).
160 World Economic and Social Survey 2009

Insurance markets offer a possible option and various innovative instruments have been in-
troduced in recent years. However, these instruments still operate on a very limited scale,
even in more advanced countries, and tend to be a particularly expensive option in developing
countries where coverage is very limited (Barnett and Mahul, 2007; United Nations, 2008).
Voluntary standards do not Some companies have started to implement voluntary emission caps and a
bite unless accompanied growing number of consumers are adjusting their consumption patterns in order to lower
by regulation footprint levels. Absent more aggressive government intervention, it is unlikely that these
trends will be quantitatively sufficient and timely enough to make a significant impact on
greenhouse gas emissions. Voluntary emissions standards may hurt relative competitiveness
and increase production costs in the short term, reducing incentives to adopt more stringent
standards. The experience of the State of California is perhaps the exception to the rule that
voluntary standards will not bite. California’s emission standards and reduction targets,
obtained by negotiating with private companies, have raised awareness among consumers
and producers: average per capita consumption of energy in California is 50 per cent of the
United States average. In cooperation with 20 other States, California has also established
targets for the use of alternative energy. The California Renewables Portfolio Standard re-
quires the use of 20 per cent renewable energy by 2010. However, these voluntary efforts are
in the context of a State with a strong regulatory record on environmental standards.
The present section reviews a range of mechanisms considered thus far that fall
broadly in the category of market-based measures, as their main focus is on changing the
price of carbon to draw resource allocation away from emission-intensive forms of energy.
Several of these mechanisms are also expected to mobilize resources necessary for financ-
ing other investments in greater energy efficiency and use of renewable energy, including
related public investments.

Market-based incentives for scaling up

investment in developing countries
Mitigating climate change Much of the economic policy debate on climate change has been dominated by the search
using prices is focused for market-based solutions to problems of acknowledged market failure. Mitigating cli-
on creating economic
mate change using prices is focused on creating economic incentives for consumers and
incentives for consumers
and producers to drive producers to drive greenhouse gas emission reductions, by internalizing externalities so
greenhouse gas emission that agents account and pay for their level of emissions, and to do so as efficiently as pos-
reductions sible, assuming that all investment opportunities for cutting emissions that cost less than
the established price for carbon will be seized.
There are two main groups of instruments for achieving this aim: (a) establish-
ing a price of greenhouse gas emissions, using capital markets to value specific activities
and, for adaptation purposes, to price risks through insurance premiums; and (b) impos-
ing taxes, fees and levies on inputs, final products or activities/services. These instruments
will no doubt have a role to play in any mix of policy initiatives created to meet the climate
challenge. The real question is whether they can acquire the kind of global reach that ap-
pears to be necessary if they are to play a lead role in meeting that challenge.

Cap and trade

Pricing greenhouse gas emissions as a pillar of mitigation policy emerged in the early
1990s with the United Nations Framework Convention on Climate Change and took on
greater prominence with the legally binding targets to reduce greenhouse emissions set by
 Financing the development response to climate change 161

the Kyoto Protocol to the United Nations Framework Convention on Climate Change.3
The Protocol (adopted by the Conference of the Parties to the Convention in December
1997) set differentiated targets for industrialized countries, while setting up an emissions
trading scheme to meet those targets. A financing mechanism for projects in developing
countries, the Clean Development Mechanism (CDM), was launched at the same time.
These mechanisms are essentially designed around a cap-and-trade programme,
where Governments set an overall emissions cap and then issue tradable permits to firms
which allow them to emit a specified quantity of greenhouse gases. Those that can reduce their
emissions more cheaply can sell their allowances. Doing so is expected to promote competi-
tion, thereby reducing long-term costs. While the current volume of carbon trading at a little
over $100 billion is still quite small, compared, for instance, with that on financial derivatives
markets, according to some it could become the “world’s biggest commodity market” and
prospectively the world’s biggest market overall within a decade (Lohmann, 2008). The trad-
ing of emission certificates as financial assets and speculative investments can generate a high
volatility in the price of carbon. A recent assessment of the European Union (EU) experience
with emissions trading found that (between September 2005 and March 2008) the price of
carbon was more volatile than stock market indices, with a standard deviation on the return
on the emissions price 10 times higher than the return on equity (Nell, Semmler and Rezai,
2009). Volume instability and price volatility may not provide adequate incentives for long-
term investment decisions as a response to climate change on the part of market participants.
On some counts, trading is necessary to advance the serious regulation needed
to establish a price for carbon. It is also recognized that the cap-and-trade scheme cannot
begin on a global scale, as the trading of permits will initially be confined to developed
countries, with developing countries pulled in indirectly through the Clean Development
Mechanism by the funding of emissions-reducing projects prior to their participation.
Between 2004 and 2007, the Clean Development Mechanism implemented 700
projects with a total value of $6 billion for developing countries, albeit with almost 4 out of
5 projects concentrated in just four countries: Brazil, China, India and Mexico (United Na-
tions, United Nations Framework Convention on Climate Change, 2007b, and chap. V). The
United Nations Framework Convention on Climate Change secretariat, (United Nations,
United Nations Framework Convention on Climate Change, 2008) has estimated that the
mitigation potential in 2020 in developing countries will be approximately 7 gigatons of CO2
equivalent (Gt CO2e) and that most of the potential projects will be available at a cost of less
than $25 per ton of CO2e. Total demand for credits for certified emission reductions (CERs)
in 2020 is estimated at between 0.5 and 1.7 Gt CO2e, which could represent $10 billion-$34
billion in additional investments in developing countries (New Carbon Finance, 2008; IDE-
ACarbon, 2008; Point Carbon, 2008). Moreover, if permits for developed countries are auc-
tioned, this will provide additional financing for mitigation efforts in developing countries.
However, there are serious limitations to the scaling up of this mechanism to
generate in a timely manner the required resources for developing countries (Griffith-Jones
and others, 2009). The need for effective regulation and monitoring of innovative financial
instruments may raise administrative costs and act to deter some, particularly developing,
countries. Significantly, the largest carbon market, the Emission Trading Scheme (EU
ETS) of the EU, was created by government regulation. Significant investments in train-
ing and education are also likely to be required. The success of the sulphur trading scheme
in the United States of America certainly appears to have depended on these supportive
conditions being in place (see box VI.1).

3 United Nations, Treaty Series, vol. 2303, No. 30822.

162 World Economic and Social Survey 2009

Box VI.1
Sulphur trading and why it worked
Market mechanisms do not work in a vacuum: they are shaped by many factors. The United States
system of sulphur emissions trading, the inspiration for many cap-and-trade proposals, is often cred-
ited with having triggered a dramatic reduction in the costs of pollution control. The Clean Air Act
Amendments of 1990 had established the system, setting a cap on sulphur emissions at about half
of the 1980 emissions and distributing allowances to businesses, roughly in proportion to past emis-
sions. All large stationary sources of sulphur emissions, primarily coal-burning power plants, were
included. The trading system was phased in from 1995 to 2000, with costs of controlling sulphur far
below the levels that had been anticipated in advance.
However, this result cannot be attributed to trading alone: the low cost made itself
apparent quite early, at a time when the volume of emissions trading was quite small. Several other
events also played important parts in driving down the costs. Just before trading began, a sharp
reduction in railroad freight rates made it affordable to bring low-sulphur coal from Wyoming, re-
placing high-sulphur coal from the closer Appalachian coalfields, to Midwestern power plants. Some
State regulations required even greater sulphur reduction than that stipulated by the national law, so
it took no extra effort for power plants in those States to comply with the new national standard. At
the same time, prices were declining for scrubbers, the pollution control devices that remove sulphur
emissions. In this context, the emissions trading system may have made some contribution to lower-
ing costs, but it operated on a field tilted in its favour. Without all the helpful coincidences, sulphur
emissions trading would have looked much less successful.
If the United States sulphur emissions trading experience is the model for the carbon
market mechanism, then the most important question about market incentives may be, What other
initiatives are needed to complement the market and again tilt the field in favour of success? It is
not hard to identify the areas—energy efficiency, and low-carbon and no-carbon energy sources—
where investment in research and development are needed. This is not just a matter of costs, but
also of opportunities—to create new industries and jobs and to launch a promising new path of
Source: Ackerman (2009). technological development.

While in theory carbon trading sets an absolute limit on a pollutant, the Kyoto
Protocol permits developed countries to substitute reductions in their own greenhouse gas
emissions by financing projects that reduce emissions in other countries.
The cap-and-trade system From a development perspective, the danger of cap and trade is that it allows
has been designed to richer countries to continue their emitting according to unchanged patterns of consump-
conform to the policy tion and production. This approach arguably takes the attention of these countries away
experience, institutional
capacity and economic
from the more urgent efforts of tackling climate mitigation at home, even as it closes de-
conditions of rich countries veloping countries off from relatively cheap options of future emissions reductions (Banuri
and Opschoor, 2007). In this respect, it is important to recognize that the cap-and-trade
system has been designed to conform to the policy experience, institutional capacity and
economic conditions of rich countries. By default, this provides significant advantages to
them, as the essential baseline is the current emissions of the high-emitting countries.
Emissions trading and International negotiations are likely to address some of the weaknesses of cap
the Clean Development and trade as an approach to climate financing and will probably establish targets by sectors
Mechanism have not been
with standardized benchmarks (see, for example, the Harvard Project on International
particularly effective in
encouraging a transition Climate Agreements (2008)). However, even though financial flows and participation
away from fossil energy levels have grown since their inception, emissions trading and the Clean Development
Mechanism have not been particularly effective in encouraging a transition away from fos-
sil energy. To date, the EU scheme has not been effective in reducing emissions among the
main traders (Capoor and Ambrosi, 2008; WWF, 2007). Moreover, advocates of cap and
trade tend to ignore the long history of successful State regulation of environmental issues
 Financing the development response to climate change 163

which unfolded in the absence of trading schemes, including contemporary successes in

conventional pollution regulation (Lohmann, 2006).
Perhaps the more sensible, forward-looking view is to recognize that carbon
markets will continue to expand but that the pace and scale will not be sufficient to help
developing countries break the financial constraint on proceeding along a low-emissions
development pathway.

Carbon taxes
By increasing the cost of emissions to private parties in a more predictable manner than
cap and trade, carbon taxes provide the opportunity to both raise public revenues and
mitigate climate damage by increasing the cost of emissions to private parties. Their pos-
sible advantage lies in the more predictable price impact and the ease of design and admin-
istration. On the other hand, they can provoke political resistance.4 In mature economies,
properly designed carbon taxes could play an important role. In developing countries,
their role is likely to be more limited. Hence, proposals by, for example, the International
Monetary Fund (IMF) (2008b), for a global tax on carbon as the best means of mitigating
climate externalities need to be treated with caution.
Estimates by the United Nations Development Programme (2007a) put the po- While carbon taxes appear
tential revenue at $265 billion if a $20 tax per ton of CO2 is charged in countries members to have contributed to
energy efficiency, they
of the Organization for Economic Cooperation and Development (OECD) at current emis-
have hardly been sufficient
sion levels. Many OECD countries already have carbon taxes aimed mainly at financing to counter the threat of
their domestic budgets (Organization for Economic Cooperation and Development, 1997), warming temperatures
rather than at financing low-emissions development or other public goods. EU also applies
differential taxes on energy to products, such as natural gas compared with diesel or petrol,
when they are used as motor or heating fuel. It is worth noting that, while these taxes ap-
pear to have contributed to energy efficiency, they have hardly been sufficient to counter the
threat of warming temperatures.
Other schemes have been proposed to specifically finance climate change ac-
tivities. A proposal similar to France’s solidarity tax, which is intended to finance access
to HIV/AIDS treatment in low-income countries, maintains that a $7 levy per passenger
on international flights could result in $14 billion per year (United Nations Development
Programme, 2007a; UNITAID, 2007). Because air fuel is often tax-exempt, such a levy
actually reduces the implicit subsidy for air travel relative to other modes of transporta-
tion. Reducing subsidies to fossil fuels could help lower emissions and provide incentives
for the transition towards a low-emissions economy. Subsidies to oil fuels—the difference
between the end-user price and the price in a competitive market—have been estimated at
$300 billion per year or 0.7 per cent of WGP (United Nations Environment Programme,
International Labour Organization, and others, 2008). But, particularly in developing
countries, raising the price of essential goods (energy as well as food and water) could
render them unaffordable by lower income groups. Not only would this be regressive, it
would also be socially unacceptable and environmentally unpredictable.
A related mechanism entails imposing fees and levies for activities/services
whose benefits are not adequately captured by market prices. Owing to their specificity,
ecosystem services cannot be traded as easily as liquid financial assets. As an alternative,
several methodologies have been created to assess market value of these services and charge
4 On the political resistance to both cap-and-trade and carbon tax proposals in the United States, see
John M. Broder “From a theory to a consensus on emissions”, The New York Times, 16 May 2009.
164 World Economic and Social Survey 2009

the potential beneficiaries, using a “pay as you use the service” approach involving using
shadow prices (Costanza and others, 1997). The idea of preserving ecosystems through
the use of the services they provide is at the core of the strategies to reduce emissions from
deforestation (see box VI.2).

Box VI.2
Financing forests and the reduction of emissions from
deforestation and forest degradation (REDD)
In addition to providing multiple services and goods, forests can play a key role in tackling climate
change. Forestry, as defined by the Intergovernmental Panel on Climate Change, accounts for about
17.4 per cent of global greenhouse gas emissions, and is therefore the third largest source of an-
thropogenic greenhouse gas emissions after energy supply and industrial activity. Loss of tropical
forest results annually in emissions that are comparable to the total annual CO2 emissions from the
United States of America or China. Emissions from deforestation alone could increase atmospheric
carbon stock by about 30 parts per million (ppm) by 2100. In order to stabilize the current CO2e level
of 433 ppm at a targeted 445-490 ppm, forests will need to form a central part of any global climate
change deal.
The Stern Review, among other studies, considers curbing deforestation a highly cost-
effective and relatively quick way of reducing greenhouse gas emissions. The resources required to
halve emissions from the forest sector by 2030 could lie between $17 billion and $33 billion per year
if forests are included in global carbon trading. If the international community does nothing to bring
deforestation to a halt, the global economic cost of climate change caused by the degradation and
losses of forests could reach $1 trillion per year by 2100. This is additional to the cost of the impact of
industrial emissions.
At present, only a very small share of the existing investment in the forest sector is
allocated to addressing climate change and less than 25 per cent of that share is invested in devel-
oping countries and economies in transition. Fortunately, the importance of limiting deforestation
and forest degradation has been recognized by climate change negotiators, as reflected in the final
outcome of the thirteen session of the Conference of the Parties to the United Nations Framework
a See, for example, FCCC/ Convention on Climate Change, held in Bali, Indonesia, from 3-15 December 2007.a
CP/2007/6/Add.1, decision To fully realize the potential of reducing emissions from deforestation and forest deg-
2/CP.13. radation (REDD), several new financing initiatives have been launched. By far the most significant is
Norway’s commitment to provide $600 million annually towards efforts to reduce carbon emissions
from deforestation and forest degradation in developing countries. Other donors, including Austra-
lia, Finland, Spain, Japan, Switzerland, the United Kingdom of Great Britain and Northern Ireland and
the United States of America, have contributed or have signalled their intent to contribute funds to
climate change and forests programmes.
The World Bank has established the Forest Carbon Partnership Facility to help reduce
emissions from deforestation and degradation and to help build capacity for REDD activities in 25
pilot developing countries. The target capitalization is at least $300 million. The World Bank is also
currently developing the Forest Investment Programme to support REDD-related efforts of develop-
ing countries, providing upfront bridge financing for readiness reforms and investments identified
through national REDD strategies. The targeted level of funding for the proposed Forest Investment
Programme is $500 million.
The Food and Agriculture Organization of the United Nations, the United Nations De-
velopment Programme and the United Nations Environment Programme have jointly launched the
Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation in De-
veloping Countries (UN-REDD), including a portfolio of $52 million (to be financed by Norway), to
provide assistance in REDD capacity-building to pilot developing countries. The immediate goal is
to assess whether carefully designed payment structures and capacity support can create incentives
for emission reductions while maintaining and improving the other ecosystem services that forests
provide. To be successful, this initiative warrants the wider participation of United Nations bodies
involved in climate change and forests.
 Financing the development response to climate change 165

Box VI.2 (cont’d)

Development of a REDD mechanism must be based on sound methodologies for es-
timating and monitoring changes in forest cover and associated carbon stocks and greenhouse gas
emissions, incremental changes due to sustainable management of forests, and reduction of emis-
sions due to deforestation and forest degradation. The methodological challenge has proved to be
much more difficult for emissions due to forest degradation than for emissions due to deforestation.
There are also policy issues that have to be taken into account in the REDD negotiations such as the
rights of stakeholders, in particular indigenous peoples, and the opportunity costs of other land uses
and forest management systems (see box IV.2).
REDD negotiators should also ensure that the final outcome does not disadvantage
countries that have already taken steps to eliminate or reduce deforestation and to manage their
forests sustainably, or countries where forests are sustainably managed. The final outcome of the
REDD programme should ensure that forest-related climate change options support sustainable de-
velopment in both forest-rich and forest-poor countries. It should tackle drivers of deforestation that
lie outside the forest sector, and support transparent, inclusive and accountable forest governance. Source: UN/DESA, United
It is also crucial to recognize the comprehensiveness of sustainable forest management, which goes Nations Forum on Forests
beyond emissions and carbon potentials of forests. Secretariat.

However, the level both of the knowledge required to set an efficient tax and
of the capacity needed to administer it are generally quite high and may not yet be achiev-
able by many developing countries. Moreover, as indicated, estimates of damages caused
by carbon emissions vary hugely, because of the different assumptions made in order to
value inter-temporal trade-offs or non-monetary damages, or to account for incomplete
information and uncertainty (Schroeder, 2008).
Any global carbon tax would require multilateral cooperation to harmonize
tax systems so as to facilitate a joint decision on the level and incidence of the tax and on
how to allocate the revenues. Without a robust international framework, differentiated
taxes may serve discriminatory political or trade objectives instead of furthering climate
change mitigation (as in the case, for example, of United States subsidies to ethanol and
barriers to Brazil’s ethanol exports). The idea, moreover, of stripping national authorities of
their powers in this regard has met with stubborn resistance in a number of countries.
An unavoidable feature of a uniform global carbon tax, even if it were to be
introduced gradually, would be the taxation of developing countries at several times the
rate of industrialized countries, measured as a proportion of GDP. Th is would impose a
disproportionate burden of adjustment on developing countries, although per capita emis-
sions in developing countries are low compared with those in industrialized ones.
Moreover, carbon pricing will affect the level and distribution of real household
income, both directly through a household’s use of fossil fuels and indirectly through the
prices of other commodities. A carbon tax has been found to place a disproportionately
heavy burden on low-income groups in some contexts, by raising not only the direct cost
of energy but all final prices for goods in which that energy has been used. In such cases,
lower-income households would pay disproportionately more in environmental compliance
costs. In order to avoid undesired distributional effects, one option would be to introduce
differentiated pricing (and hence taxation) by, for example, increasing prices commensurate Carbon taxation would therefore
with the amount of energy used; alternatively, compensatory mechanisms in the form of in the first instance need to be
subsidies for lower-income groups could be put in place. an instrument for providing
Carbon taxation would therefore need to be in the first instance an instrument incentives towards mitigation in
advanced countries and a source
for providing incentives towards mitigation in advanced countries and a source of financ- of financing of climate-related
ing of climate-related programmes of action, including in developing countries. Poten- programmes of action, including
tially, this could yield significant resources to cover international funding requirements. in developing countries
166 World Economic and Social Survey 2009

With a carbon price of $50 per ton of CO2, renewable energy like onshore wind would be
roughly competitive with dirty coal; and with oil prices at $150 a barrel, wind would be
competitive with coal and gas, in the absence of a carbon price (Stern, 2009, p. 43). Even
without a market-determined carbon price, taxing greenhouse gas emitting sources of
energy would help make renewable sources economically more attractive. A tax of $50 per
ton, through which many renewables would become economically viable, could mobilize
$500 billion in resources annually and suffice to cover part of the mitigation costs accord-
ing to the higher estimates reported in figure VI.2.5 Carbon taxes will not provide an
unlimited source of funding and will drop off as greenhouse gas emissions are effectively
reduced to low levels, but in the initial stages, they may play an important role in sourcing
a substantial part of the investment costs of the big push that needs to be accomplished in
the coming decades.

Sources of “green” investment

Foreign direct investment, Equity markets could provide another mechanism for mobilizing private financing for in-
portfolio investment, vestments in green technologies and low-emissions energy sources and infrastructure and
microfinance and public-
for transfers of resources to developing countries. Incentives structures would need to shift
private partnerships could
be promoted to scale so as to favour such investments, which could be achieved if reduction targets are clear and
up private financing for sufficiently aggressive to produce a price of carbon high enough to raise the profitability of
climate change mitigation alternative, low-emissions investments or if there were fiscal incentives and public invest-
and adaptation ments to raise the rate of return on “green” investments equally. Foreign direct investment
(FDI), portfolio investment, microfinance and public-private partnerships could be pro-
moted to scale up private financing for climate change mitigation and adaptation.
Foreign direct investment can be a relatively stable source of financing, with
advantages in terms of transferring technology and standards which could allow for leap-
frogging into some cleaner sectors such as renewable energy. Some of the big emitting
sectors, such as road transport, metals, mining chemical, timber, cement, etc., are domi-
nated by large international firms. Their investments and practices will likely have a big
influence on the timing of alternative development pathways (Goldman Sachs, 2008).
Moreover, given the advances in clean technologies made by some developing countries
in, for example, wind technology, South-South FDI may be an important component of
a new development pathway. However, given that FDI tends to lag rather than lead eco-
nomic growth, it is unlikely to play a significant role in the early stages of a shift onto such
a development pathway, particularly given the initial high degree of uncertainty and the
absence of the domestic inputs and complementary investments that large international
firms, particularly in high-technology activities, need in order to operate efficiently. More-
over, as discussed in the previous chapters, its contribution will depend on effective policy
action by the Government of the host country.
Portfolio investments may be mobilized through venture capital funds as well
as “green” funds and stocks and could appeal to those investors willing to allocate their
investments to options that might generate less return but would have potential in terms of
mitigation and socially responsible business practices. However, the funds made available
through this channel to developing countries so far have been both limited and skewed
in favour of one or two countries. Without other conditioning factors, the amount of re-
sources that can be raised is likely to remain quite small. First, without a sufficient rise in
5 As there is a strong likelihood, of course, that developed countries would need some of the revenues
to offset the costs of their own adjustment to a low emissions future, the idea that all the revenue
raised would go to investment in mitigation, let alone to developing countries, needs to be qualified.
 Financing the development response to climate change 167

the price of carbon and government intervention through regulatory measures and fiscal
incentives, the private sector will not find these instruments sufficiently attractive based on
the standard risk-return calculus. For example, the value of equity investments in biofuels
has recently fallen as a result of lower energy demand and oil prices. Second, in order for
this to become an important vehicle for investment in developing countries, the supply of
climate-accountable financial instruments has to increase significantly. Currently, almost
all investment opportunities are concentrated in developed countries.
Nonetheless, some private equity investment firms that are focused on climate Some private equity
change mitigation are beginning to perceive clean infrastructure, primarily renewable en- investment firms that
are focused on climate
ergy, as offering viable financing opportunities.6 This is taking place on a limited scale,
change mitigation are
however, even in fast-growing developing countries (like China, India and Brazil), as they beginning to perceive clean
are all still faced with deficiencies in terms of an infrastructure adequate enough to sup- infrastructure, primarily
port production and distribution of renewable energy. Although China is likely the largest renewable energy, as
market for this type of private financial flow, there remain challenges to private investment offering viable financing
because of national policies requiring links with firms based in China. Nevertheless, an in- opportunities
creasing number of investment banks are beginning to see increasing opportunities, most
likely because of renewable energy quotas and feed-in tariff s rewarding investment in this
area, and investors are beginning to act on these prospects. Again, this trend underscores
the need for rapid action in policy creation; private investors, particularly in this market,
may take significant time to respond to incentives.
Microfinance could be another vehicle for mobilizing local private resources for Scaling up microfinance
investments in sustainable development. Over the past three decades, microfinance has for long-term investment
in productive activities and
grown dramatically. According to recent estimates, there were more than 7,000 microcredit
sustainable development
institutions in 2006, serving about 80 million people in about 65 countries, including some will require support
developed ones. Microfinance has expanded beyond merely encompassing programmes of through a broader
credit provisioning so as to now include schemes of microsavings and microinsurance. Some development strategy
of these schemes already have a climate dimension. Given the close links between poverty
reduction and climate vulnerability, scaling up microfinance has been considered a pos-
sible source of finance for climate adaptation (Hammill, Matthew and McCarter, 2008).
The Grameen Bank has already begun to extend loans for clean energy products, such as
solar home systems, with spin-offs to microenterprises, while further opportunites exist in
cleaner cooking products, biofuels and low-emissions agriculture (Rippey, 2009). However,
scaling up microfinance for long-term investment in productive activities and sustainable
development will require support through a broader development strategy, including in-
vestments in infrastructure and human capital (United Nations, 2008).
Public-private partnerships and guarantees can provide meaningful support to
stimulating private financing in projects for increasing energy efficiency and renewable
energy in developing countries. Partnerships have assumed growing importance in recent
years as a vehicle for infrastructure projects and delivery of health services (Nikolic and
Maikisch, 2006). They have also been used to bolster technological development, including
in the field of clean energy (Sagar, Bremner and Grubb, 2008). However, there are doubts
about their cost-effectiveness and whether they represent the best way to deliver at scale.
Guarantees can take various forms. A consumer financing programme for solar
photovoltaic systems in southern India is a good example of a case where Government-
guaranteed credits helped overcome lack of access of consumers to what was needed to
allow them to make the necessary upfront investments for using the solar energy (see
box VI.3). Lack of knowledge or experience may also create barriers to investments in
6 For example, Climate Change Capital, a London-based investment private equity firm, is currently
working on launching a China-based clean infrastructure fund.
168 World Economic and Social Survey 2009

Box VI.3
Establishing a consumer financing
programme for solar photovoltaic (PV)
systems in southern India
The low rate of access to electricity, and shortages even when electricity is available, have led house-
holds of India to look to alternative power supply systems such as inverters, diesel generators and, in
some rare cases, solar photovoltaic (PV) systems. Though India has one of the most comprehensive
renewable energy development programmes among the developing countries (see chap. IV), sev-
eral barriers have prevented the wider adoption of solar home systems which could provide clean
energy for lighting. In particular, a combination of insufficient credit and lack of awareness about
solar home systems among potential customers has restricted market development. The United Na-
tions Environment Programme (UNEP) in collaboration with local stakeholders has established a pro-
gramme to increase access by rural households to credit to allow them to buy solar home systems.
The objective was to help India’s banking partners develop lending portfolios specifically targeted
at financing solar home systems in poorly served regions of southern India, including, in particular,
poor households in rural and semi-urban areas, which bear the brunt of power shortages and have
limited access to expensive alternatives. The project was initiated in 2002 and completed in 2007.
An important step in the course of the project was consultation with stakeholders,
particularly potential bank partners and vendors. After consultations, an interest rate subsidy was
decided on as the financial mechanism of the project. By providing loans with an interest rate buy-
down, the project addressed the “high upfront cost” and the high credit cost, which were the barriers
identified by stakeholders. The project was also expected to help increase awareness and confidence
in solar home systems technology, bring down the financing costs of the technology in India, and
widen the market.
The project was formally launched by the partner banks in 2003: in April by the Canara
Bank and in June by the Syndicate Bank. Four solar vendors had met the qualification criteria and
could send their customers either to Canara or to Syndicate Bank branches for solar home systems
financing. Prior to the launching of the project, only about 1,400 solar home systems had been fi-
nanced in Karnataka. The project plan had set an ambitious target of 18,000 over the project lifetime.
By the time the project ended in May 2007, more than 19,000 loans had been financed, through more
than 2,000 participating bank branches, the fastest growth having been in rural areas, in part owing
to the increasing participation of the nine Grameen banks.
A properly designed programme, involving stakeholders both during the design and
execution stages, can help develop markets for renewable energy, as is evident from the success of
India’s solar project. Continuous monitoring and involvement of stakeholders at all stages of execu-
tion were the key to the success of the programme. The longer-term success of any such programme
Source: UNEP, Risø Centre. is dependent, however, on in its ability to transit smoothly to the commercial market.

renewable energy. The International Finance Corporation (IFC), the private sector arm
of the World Bank Group has been particularly innovative in this area. By establishing
partnerships with banks in developing countries, IFC helps local financial institutions
identify which of their clients could implement energy efficiency programmes. When
a loan is given, training is provided on how to structure those programmes to further
encourage investments, IFC also issues a partial risk guarantee against default. In practice,
default rates are significantly lower for energy efficiency projects than for those in other
sectors.7 The guarantees and training thus seem to have been conducive to an efficient
use of IFC resources, helping the private sector overcome its initial reluctance to invest in
energy efficiency and renewable energy sectors in developing countries.

7 Information based on consultations with IFC staff.

 Financing the development response to climate change 169

Public sector financing

As noted elsewhere (United Nations, 2006, chap. IV), in many developing countries the To accelerate private
markets for long-term financing, such as bond markets, are weakly developed. This typi- investment in mitigation,
policymakers and public
cally limits both Governments and private investors with respect to mobilizing enough
authorities will need to
long-term finance to be able to undertake the large-scale investments necessary for eco- apply incentives through
nomic and social development. Such investment costs may be too large for Governments regulatory frameworks,
to finance from yearly tax revenue, while the lack of a bond market limits the capacity for subsidies, guarantees
domestic public borrowing for these purposes. Private investors, in turn, will anticipate and financing of the
returns below social returns in the investments concerned (Stiglitz, 1994). incremental costs of
switching technology,
Economy-wide externalities are particularly prominent in certain key sectors, among other policy
such as infrastructure, which are characterized by lumpy investments, long gestation lags, instruments
higher risks and lower profits. In any economy where private businesses have a predomi-
nant role, market signals and private financial institutions can result in the avoidance of
these sectors by investors, thereby slowing long-term growth and development. Correcting
this kind of market failure provides a role for policymakers in ensuring an adequate flow
of credit at favourable costs to frontline technologies and sectors with potentially large
social returns (Chandrasekar, 2008). The investment challenge associated with climate
change is no different. To accelerate private investment in mitigation, policymakers and
public authorities will need to apply incentives through regulatory frameworks, subsidies,
guarantees, and financing of the incremental costs of switching technology, among other
policy instruments.
Still, large upfront investment costs pose a significant obstacle for many devel-
oping countries. The resources committed to date to meet the climate challenge, and the
limits of relying on market mechanisms, suggest that the developed countries have yet to
take seriously the kind of adjustment that they are expecting from developing countries.

Domestic resource mobilization

According to the logic of a big push, increased public investment creates a matching in- According to the logic
creased amount of new saving, instead of drawing on existing saving. At the same time, of a big push, increased
public investment creates
that higher level of saving creates demand for new financial instruments, including the
a matching increased
funding of public sector investments. However, this does not occur automatically and amount of new saving,
financing gaps have to be filled. Governments must, at the same time, consider how their instead of drawing on
fiscal space can be expanded and refocused in order to meet their climate objectives with- existing saving
out jeopardizing other goals. This is true of developed and developing countries alike, but
the challenge is particularly significant in the latter.
In developing countries, on average, the tax revenue collected as a proportion of
GDP is only two thirds of the proportion in richer countries, and the larger share is in the
form of indirect taxes, as opposed to direct taxes on incomes, profit and capital gains. Tax
administration is often weak and subject to evasion and abuse.8 In identifying the resources
needed to move towards a low-emissions growth pattern, developing countries, in particu-
lar, should undertake fiscal reforms that enable a shift away from a reliance on trade, and
other indirect taxes, with a view to increasing progressivity and expanding the fiscal space.
On the expenditure side, many Governments are being advised, on climate
change-related grounds, to reconsider energy subsidies for low-income households. While
the fiscal benefit of removing energy subsidies for low-income households clearly exists,
8 For a further discussion of these issues, see Spiegel (2008) and di John (2007).
170 World Economic and Social Survey 2009

both the climate impact and the single-minded focus on this subsidy are questionable.
Faced with higher energy prices, low-income households have been known to substitute
unpriced energy sources, such as firewood, which has a negative impact on the environ-
ment and their own productivity and standard of living.
A vector of subsidies, tariffs In the designing of a low-emissions financing strategy, there will have to be
and taxes will have to be deployed a vector of subsidies, tariff s and taxes, of which energy subsidies for the poor
deployed, of which energy
should constitute only a part. Simply emphasizing the removal of energy subsidies could
subsidies for the poor
should constitute undermine equity objectives and thus set back structural transformation and development.
only a part On the revenue side, equity considerations will also have to play a key role in generating
the needed financing for low-emissions energy investment, and progressive approaches to
taxation and fees will need to be a key element in the climate financing strategy.
The issuance of “green A number of developing countries have witnessed the growth of markets for
bonds” to fund the climate Government bonds in recent years. In light of the financial crisis and the calls for reforming
challenge, could be an
the financial system, issuance of “green bonds” to fund the climate challenge could be an
additional financing tool,
along the lines of war additional financing tool, along the lines of war bonds, in some emerging economies and a
bonds, in some safer haven for the rising level of personal savings in a more regulated financial system (see
emerging economies box VI.4 and New Economics Foundation, 2008). Government guarantees and tax breaks
could also be used to channel savings into investments that reduce carbon use, including
infrastructural investment, as is the case in the United States municipal bonds market.

Box VI.4
Green bonds
The need for capital to finance projects targeted at either mitigation of or adaptation to climate
change is immense. Securing finance for investments in such areas which have the inherent charac-
teristics of public goods is less clearcut, however. In particular, given the volume of funds required,
as well as the need for sustaining such investments over longer periods of time, relying on public
coffers may not be a sufficient or feasible option if this implies either a diversion of expenditure from
other items or a significant increase in taxation. An obvious solution is to tap capital markets and to
entice members of the private sector into willingly investing their savings in such projects by issuing
debt securities that are backed by a larger public entity.
Demand for securities that specifically support low-carbon activities or foster adapta-
tion to climate change is likely to be significant; in contrast to common debt securities, such green
bonds (also called “climate bonds” or “environment bonds”) could also yield a feel-good dividend
generated by the support of environmentally friendly projects. Interest in green bonds appears to
be increasing at all levels.
While still small compared with that of the United States of America, the international
market for sub-sovereign bond issuances has deepened over the last decade, with greater overall
volume, larger issues and longer maturities (Platz, 2009). Several municipalities and cities have already
issued green bonds on a small scale and Governments have now sprung on board. For instance, $2
billion worth of AAA-rated bonds were issued in the United States in 2004 to finance reclaiming of
contaminated industrial and commercial land, to encourage energy conservation and to promote
use of renewable energy sources. Similarly, a bond issue worth $530 million was approved in Malaysia
in 2006 to finance planting of trees on 375,000 hectares of land.
International institutions have also recognized the merits of green bonds: the European
Investment Bank issued climate awareness bonds worth more than €1 billion in 2007 to fund renew-
able energy projects; and the World Bank, in partnership with Skandinaviska Enskilda Banken (SEB) in
Sweden, issued green bonds worth $300 million (SEK 2.325 billion) in 2008.
The idea of offering debt securities that appeal to an investor’s conscience is not a
new one: a number of countries issued war bonds to finance military operations during the Second
World War. Moreover, history shows that such instruments are able to leverage significant amounts of
 Financing the development response to climate change 171

Box VI.4 (cont’d)

private finance: at the end of the War, war bonds had, for instance, been purchased by every second
American; they were responsible for the raising of more than $185 billion at the time, equivalent in
inflation-adjusted terms to more than $2 trillion today. For many countries, including the United
States and Germany, municipal bonds have played an important role in financing essential services,
in particular water supply systems. Historical experience suggests that certain supply (issuer)-side and
demand (investor)-side factors are critical for the development of the sub-sovereign debt market. On
the demand side, these factors include the presence of financial intermediaries and investors with
suitable long-term portfolio needs, issuer familiarity and confidence with respect to similar securities,
the ability to trade debt issuances on secondary markets and low credit and market risk. Supply-side
features comprise improved capacity of municipalities to manage and support debt, low issuance
costs, suitable regulatory and legal environments and, in some cases, credit enhancements such
as guarantees or pooled financing schemes. Thus, in countries that fulfil most of these conditions,
green bonds would appear to be a potential source of significant funding for public entities engaged
in tackling the global warming challenge.

The scale on which “green” debt instruments can be issued depends in part on
the sophistication of domestic financial markets and the overall debt burden of the coun-
try. Expansion of a market for such funds is ultimately contingent on the national Govern-
ment’s ability to raise tax revenues and to set the rate of return on domestic investment.
Equity and development considerations are important in respect of relaxing constraints
on both. Progressive taxation will ensure greater government revenues as income grows,
including from the growing class of bond owners, who are likely to be in upper income
brackets. State intervention in establishing rates of return on domestic investment involves
capping income from capital in exchange for less risky and less volatile income streams.
The capacity of national Governments to influence average domestic returns on invest-
ments critically depends on their ability and willingness to manage capital flows. By im-
posing taxes and restrictions on capital and controlling flows in and out of their borders,
Governments will restore their ability to exercise an independent monetary policy, and to
influence interest rates in a manner appropriate for stimulating long-term investment.
Public sector development banks provide an alternative funding channel for In the absence of effective
long-term investment in many developing countries. The record of these institutions in regulatory, policy and
institutional frameworks,
generating long-term financing is uneven, although they have had a particularly impor-
the record of the private
tant role to play in infrastructure development. Success stories suggest that these banks sector when it was left with
are most successful when they also encourage the development of complementary private providing the required
financial institutions, are assiduous in monitoring the recipients of their own funds and financing, particularly
avoid excessive public sector risks and badly targeted interest-rate subsidies (United Na- to essential utilities and
tions, 2005, pp. 24-25). These institutions have been neglected in recent years in favour services such as energy, has
not been a satisfactory one
of private capital markets and public-private partnerships. However, in the absence of
effective regulatory, policy and institutional frameworks, the record of the private sector
when it was left with providing the required financing, particularly to essential utilities
and services such as energy, has not been a satisfactory one. In many cases, reforming and
recapitalizing development banks will be important for a successful transition to low-
emission development pathways. Brazil, China and India have gained some experience in
using both development banks and special lending windows of commercial banks under-
written by Government guarantees (see box VI.5).
172 World Economic and Social Survey 2009

Box VI.5
Developing financial intermediation mechanisms for
energy efficiency projects in Brazil, China and India
The potential high returns accruing from energy efficiency projects have been demonstrated; and
if the proper delivery mechanisms can be developed, large profit-making investment should be-
come available. However, the sustainable mechanisms that can help overcome many of the barriers
inhibiting investment in energy efficiency are still in their infancy and their effectiveness has not
been proved. The objective of the Three-Country Energy Efficiency Project (the 3CEE project) was to
achieve major increases in energy efficiency investments by the domestic financial sectors in Brazil,
China and India by addressing those barriers through a set of activities, and to identify viable financial
mechanisms targeting the banking sector and energy service companies in each country. Initiated in
November 2002, the project was completed in May 2007.
The activities included technical assistance, training, and applied research covering the
following four areas of country interest: development of commercial banking windows for energy
efficiency projects; support for energy service companies; guarantee funds for energy efficiency; and
equity funding for energy service companies/energy efficiency projects.
Other important project activities included multiple international cross-country ex-
change workshops and dissemination to allow practitioners from each of the three countries to learn
from each other and to tackle jointly the practical problems that each faced in overcoming barriers
to increased efficiency investment.
Technical analysis was one of the major activities across various components and sig-
nificant work was completed in all three countries in this area. In Brazil, venture capital, private eq-
uity capital, and shared risk in energy efficiency project work finally led to approval by the Brazilian
Development Bank (BNDES) of a new risk-sharing credit line for energy efficiency projects in May
2006, with the participation of several local banks. Support to energy service companies through
the project increased their capacity to implement energy efficiency projects through performance
contracting. The Energy Sector Management Assistance Programme is providing support for the
implementation of the scheme.
In India, new appraisal methodologies and financial structures for energy efficiency proj-
ects were developed and training programmes for bankers were conducted. Five of India’s banks (the
State Bank of India, Canara Bank, Union Bank, the Bank of Baroda and the Bank of India) had launched
new schemes for energy efficiency lending by the time the project was completed in 2007.
In China, emphasis was given to developing larger energy efficiency schemes at indi-
vidual banks which have received strong support from Chinese stakeholders. A large World Bank
pipeline project was developed, focusing on promoting the direct bank financing of medium and
large-sized energy efficiency projects, whose chief goal is to establish sustainable energy efficiency
lending businesses in China’s banks. Two of China’s domestic banks were selected to act as finan-
cial institutions. Capacity-building of energy service companies was carried out through training
programmes conducted by the China Energy Management Company Association, the association
of energy service companies. The project also catalysed the outreach to local banks and financial
stakeholders, supplementing the efforts under the World Bank/Global Environment Facility Energy
Source: UNEP, Risø Centre. Conservation II Project guarantee fund in China.

International financing
International support International support is indispensable for effective financing of public investment to meet
is indispensable for mitigation and adaptation goals. The urgency of increased support arises against a back-
effective financing of
drop of persistent weaknesses in the architecture of development finance at both the bi-
public investment to meet
mitigation and lateral and multilateral levels. The financial mechanisms uniquely designed to manage the
adaptation goals climate challenge under the United Nations Framework Convention on Climate Change
include a number of grant-based adaptation funds operating under the administrative
 Financing the development response to climate change 173

auspices of the Global Environment Facility (GEF). These rely on a mixture of voluntary
contributions and resources from a 2 per cent levy on transactions under the Clean Devel-
opment Mechanism. The Global Environment Facility is particularly important because
it is able to fund more risky projects and has demonstrated its competence in working in
countries that may not attract foreign investors either through the Clean Development
Mechanism or directly. Since its inception in 1991, the Facility has allocated more than
$3 billion for projects and has co-financed an additional $14 billion. A second channel en-
compasses funds and programmes arising from the loans and grants of bilateral agencies,
the largest of which is Japan’s Cool Earth Partnership, established in 2008, which aims
to allocate $10 billion in funds over five years. The third channel comprises existing mul-
tilateral development institutions, which not only include a variety of mechanisms with
a climate-related component but have also set up several specific funds to provide loans,
grants and concessional funding, the largest of which are the recently established Climate
Investment Funds of the World Bank, a $6 billion multilateral initiative announced at the
July 2008 G8 meeting.
As summarized in table VI.3, this emerging climate architecture is as unnec- The emerging climate
essarily complex as it is massively underfunded. The array of funds and funding mecha- architecture is as
unnecessarily complex as it
nisms lack adequate coordination, leaving many gaps and overlaps. Even though there is
is massively underfunded
still great uncertainty about the level of required transfers for developing countries, there
is little doubt that the funding gap is the single largest constraint on progress in climate
negotiations. Moreover, even assuming that donor countries met the target of 0.7 per cent
of gross national product (GNP) for ODA, and developing countries agreed that the addi-
tional resources, of between $160 billion-$200 billion, could be used for climate purposes,
the funding shortfall from ODA would still be in the order of hundreds of billions of dol-
lars per year (Müller, 2008, p. 7).
The key to any scaling-up exercise resides in finding more predictable multi- The key to any scaling-
lateral sources of finance. These could come, in part, from the sale of emissions permits or up exercise resides in
finding more predictable
increased carbon taxes in donor countries; more innovative sources of finance, however,
multilateral sources of
will likely be needed. An innovative source of finance framework is a wide-ranging initia- finance; a hallmark of
tive to pilot and implement a variety of new and predictable financing mechanisms and this approach is global
to mobilize countries of widely varying situations for the common purpose of achieving solidarity
internationally agreed development goals. A hallmark of this approach is global solidarity,
with sources of finance coordinated internationally but implemented at a national level.
Unlike traditional development financing approaches, which still depend on the political
goodwill of rich countries, albeit with a greater emphasis in recent years on “partnerships”
in the use of resources, the innovative sources of finance framework entails joint design
and decision-making by developing and developed countries for the purpose of raising the
resources required to meet a common goal.
The amounts raised to date have not been significant in comparison with
ODA flows and so far have been mainly directed at meeting global health objectives.
However, a number of proposals raise the possibility of much larger funding possibilities
(see box VI.6). Starting with the proposal to use special drawing rights (SDRs) for
development purposes, as contained in paragraph 44 of the 2002 Monterrey Consensus
of the International Conference on Financing for Development, there have been a wide
range of creative ideas emerging. The proposal on special drawing rights already embeds
the feature of cooperation on the revenue-raising side of development finance, since all
member countries of IMF would have to contribute their currencies under this mechanism.
174 World Economic and Social Survey 2009

Box VI.6
Proposals for mobilizing new, additional
and significant financial resources
Between the thirteenth session of the Conference of the Parties to the United Nations Frame-
work Convention on Climate Change, held in Bali, Indonesia, from 3 to 15 December 2007, and
the fourteenth session of the Conference of the Parties, held in Poznan, Poland, from 1 to 12
December 2008, a number of financing proposals have been advanced by the parties. The
major ones are briefly summarized below, along with some others not advanced by the parties
themselves. They relate principally to the means of mobilization of financial resources, but some
of them also address the issue of the institutional architecture and governance structure of a
financing mechanism.
Developing countries emphasize the central role of public finances and the im-
portance of predictability of resource flows. Developed countries generally support the use of
existing institutions to channel any additional funds and stress the important role to be played
by the private sector in financing through foreign direct investment (FDI) (Santarius and others,
2009). Some of the main alternative proposals for financial resource mobilization are:
• Enhanced Clean Development Mechanism (offsetting). The deficiencies of the Clean
Development Mechanism at present for facilitating large-scale resource transfers
are widely acknowledged. Much attention has been focused on reforming the
Clean Development Mechanism so as to replace its project focus with a program-
matic and/or policy focus, with the expectation of larger impacts, shorter funding
cycles and lower transaction costs. The United Nations Framework Convention on
Climate Change secretariat estimates that, by 2020, offsetting could yield up to
$40.8 billion per year, still only a fraction of estimated incremental costs in devel-
oping countries
• Compulsory leveraged offsetting. One proposal (Pendleton and Retallack, 2009)
a The American Clean suggests that the Annex I emissions to be covered by developing-country Clean
Energy and Security Act of Development Mechanism projects should be offset not ton for ton but in a ratio,
2009 contains a provision for example, of 2:1 or higher.a Thus, a developed-country emitter wishing to use
of this sort, whereby a ton
the Clean Development Mechanism to cover one ton of its own unmitigated emis-
of domestic CO2 emissions
could be offset against sions would need to invest in two or more tons of emission reductions in devel-
only four fifths of a ton oping countries. This proposal has the virtue of simplicity, essentially utilizing the
of developing-country existing Clean Development Mechanism framework but applying a compulsory
emissions. This means that to leverage ratio to the Mechanism’s transactions. Also, depending on the leverage
cover the full ton, a United ratio chosen, the proposal could generate significant financial transfers. Thus, an
States emitter would need
Annex I reduction target of 40 per cent below 1990 levels by 2020 and a 2:1 lever-
to buy 1.25 tons of credit
from the Clean Development age ratio could generate $130 billion per year in Clean Development Mechanism
Mechanism, representing a financing
leverage of 1.25:1.
• Mandatory assessment. The Group of 77 and China have proposed that Annex I
parties contribute from 0.5 to 1.0 per cent of their gross national income to climate
change financing in non-Annex I countries, to be channelled through a multilat-
eral climate technology fund under the authority of the United Nations Frame-
work Convention on Climate Change. This would generate approximately $150
billion-$300 billion per year at pre-crisis income levels of major Organization for
Economic Cooperation and Development (OECD) economies
• Assessed contributions based on the criterion of fairness and the polluter pays prin-
ciple. Mexico has proposed the creation of a multilateral climate change fund, to
which all countries would contribute, on the basis of greenhouse gas emissions,
 Financing the development response to climate change 175

Box VI.6 (cont’d)

population and gross domestic product, in accordance with the principle of com-
mon but differentiated responsibilities and respective capabilities. The fund would
be used to finance both mitigation and adaptation
• Revenue from a global auction of a portion of assigned amount units (AAUs). Norway
has proposed withholding 2 per cent of permits from national quota allocations
(assigned amount units (AAUs)) of all parties and auctioning them directly, or rais-
ing revenue through a tax on the issuance of assigned amount units. The por-
tion to be auctioned could be adjusted to achieve a revenue target. By Norway’s
estimate, given recent carbon market prices and price expectations, a 2 per cent
auction could generate revenues of $15 billion-$25 billion per year
• Crediting nationally appropriate mitigation actions (NAMAs). The Republic of Korea
has proposed a system of credits for nationally appropriate mitigation actions, so
that developing countries could borrow against anticipated future carbon credit
sales in order to finance early action. Crediting nationally appropriate mitigation
actions would help finance already planned low-carbon strategies in developing
countries (Pendleton and Retallack, 2009)
• Global carbon levy: Switzerland has proposed a $2 per ton global carbon dioxide
levy on all fossil fuel emissions, with exemptions for least developed countries,
with a portion of revenues allocated to a multilateral adaptation fund and another
portion channelled into each country’s national climate change fund. The estimat-
ed revenue raised would be $48.5 billion, dependent on the price of fossil fuels.
The incidence of such a levy needs to be carefully considered, as it could well be
regressive
• Other levy-based proposals. Brazil has advanced a proposal with some similarity to
Switzerland’s, with a 10 per cent petroleum and coal tax used to finance a global
fund to be used for technology transfer, adaptation and compensation for for-
est preservation. Such a tax, at current prices, would generate an estimated $130
billion in revenue. The least developed countries have proposed an international
levy on aviation to the tune of $4 billion-$10 billion and a levy on bunker fuels for
shipping and aviation to the tune of $4 billion-15 billion (Pendleton and Redallack,
2009)
• Unrelated levies. Various proposals have been made for raising revenues for cli-
mate change action from sources not closely linked to greenhouse gas emissions,
for example, financial transactions, assets in tax havens, etc. These proposals are
marred by what is perceived to be the arbitrariness of their choice of source and by
the fact that the worthy competing causes that could benefit from such financing
are indeed numerous.

Subsequent proposals have explored the possibility of using special drawing rights
for development financing as well as liquidity provisioning (Aryeetey, 2003; Soros,
2002). International levies collected on air travel or financial transactions also
overcome the traditional dependence of multilateral resources on the outcomes of
political processes in the donor countries. One mechanism already being discussed
within this framework is the currency transaction tax, which could raise at least $50
billion per year at a rate of 0.5 per cent; a tax on carbon market transactions has also
been considered as a possible source of multilateral finance.
176 World Economic and Social Survey 2009

Towards a global investment regime

to address the climate challenge
While market-based approaches will need to be part of the solution, as argued throughout
this Survey, the key focus of a wider approach should be on meeting the major investment
challenge of simultaneously addressing climate change, sustainability and economic devel-
opment. Without significant financial transfers from wealthy countries, any expectation
that poorer countries will move onto a low-emissions growth path is almost certain to be
disappointed.
This investment-led approach seeks to bring about a change in the develop-
ment trajectory so as to meet the growth and development goals of developing countries
consistent with reducing their carbon dependence. At the national level, and as part of a
long-term industrial development strategy, public investment in mitigation and adapta-
tion activities needs to be scaled up. Energy provision is a central component of this strat-
egy but it is interlinked with transportation, water security and economic diversification
(chaps. II and III). Industrial policy—understood not only as targeting and coordinating
specific sectoral support measures undertaken by Governments, but also as entailing the
socialization of investment risks, the removal of barriers to adopting otherwise profitable
technologies and support for technological learning and upgrading—has a key role to play
both domestically (chap. IV) and internationally (chap. V). A successful investment push
along these lines would in turn increase productivity and reduce the costs of using new
technologies, thereby opening up further investment opportunities.
A globally funded public In comparison with market-based mechanisms which would likely be accom-
investment programme panied by adjustments, a globally funded public investment programme would promote
would promote equity by
equity by enabling the developing world to sustain catch-up growth through the mobiliza-
enabling the developing
world to sustain catch- tion of resources domestically, while making significant cuts in emissions (chap. I). Such
up growth through the an investment programme would utilize market mechanisms insofar as government policy
mobilization of resources provided clear and unequivocal signals to private enterprises about the next wave of invest-
domestically, while making ment opportunities, without being based on a single price-based intervention.
significant cuts in emissions Efforts to develop an investment programme that combines development and
environmental goals on the scale that has been discussed in the present Survey have been
few and far between. This, of course, is why we are now facing the challenge before us.
However, the establishment by Brazil of a sugar cane-based ethanol energy and transport
system is one recent example of the success of such efforts, even more telling since it has
been achieved by a developing country. A historical example concerns an underappreciated
component of New Deal policies in the United States of the 1930s, namely, the Tennessee
Valley Authority (see chap. IV, box IV.1). With support at the federal level from the Rural
Electrification Administration and the Reconstruction Finance Corporation, the Author-
ity combined development, energy and environmental objectives into a concerted and
coordinated effort to transform the economic potential of the Southern States by lowering
transport costs, reducing the risk of flooding and creating a low-cost source of power that
not only directly raised living standards but also helped the region crowd in substantial
private investment and create new jobs. The big difference this time around is that the new
investment deal that is needed to meet the climate challenge must be recognized as a truly
global project.
 Financing the development response to climate change 177

Elements of a global programme

The review of available estimates of mitigation and adaptation costs suggests that additional
annual total investments in developing countries could be upwards of one trillion dollars
per year. The breakdown between the public and private sector will no doubt vary consid-
erably across time and among countries. However, according to the suggested scenario in
part B of figure VI.1, the initial push would be strongly biased towards the public sector
and marked by the need to front-load much of the required investment in the early stages of
a new development path. It seems likely, as a consequence, that even the highest estimates
underestimate the scale of the immediate challenge facing many developing countries if
they are to establish a new low-emissions, high-growth development pathway.
The present Survey does not attempt a detailed breakdown of the big push but, There needs to be a radical
as highlighted in the preceding sections, it is clear that there needs to be a radical shift in shift in the existing system
of funding for mitigation
the existing system of funding for mitigation and adaptation efforts. A central message is
and adaptation efforts
that, to bring about changes, a mix of financing mechanisms will be needed—a mix that
will vary across countries and over time. In the present section, we focus on the public
investment aspect of the pathway in developing countries.
A global approach to a publicly funded investment programme is based on
three elements:
• A development accord that recognizes equity as an integral part of a global
response to climate change
• Additional and substantially scaled-up financing to allow for climate action
with greater urgency: the case for a big push
• Independent and participatory governance structures along the lines of the
Marshall Plan.

A development accord
Equity is an essential ingredient of an effective global climate change policy, as reflected Equity is an essential
in the principle of “common but differentiated responsibilities and respective capabilities”, ingredient of an effective
global climate
as set forth in paragraph 1, article 3, of the United Nations Framework Convention on
change policy
Climate Change. Not only have today’s high-income economies generated about 80 per
cent of past fossil fuel-based emissions, but those same emissions have helped carry them
to high levels of social and economic well-being. These countries carry the responsibility
for the bulk of climate damage but they also have the capacity to repair it (Müller, 2008).
However, from a long-term perspective, limiting further damage also requires that de-
veloping countries shift their energy and land use and their consumption needs towards
low-emissions options.
Compelling developing countries to cut emissions at this stage of their devel-
opment constitutes an inappropriate—and unworkable—approach to facilitating prog-
ress. Such an approach would almost certainly freeze a pattern of income inequality that
already exhibits intolerable income gaps within and, in particular, across countries. Catch-
up growth and convergence remain fundamental policy priorities. Reconciling this with
climate objectives can be achieved only if the investments needed to drive growth assume
a technological profile different from the one that drove the historically unprecedented
growth performance of today’s advanced economies.
178 World Economic and Social Survey 2009

It is important to acknowledge that developing countries have already begun

to take significant steps towards developing energy efficiency and cleaner energy sources
and building multilateral support to finance further emissions reductions at an accelerated
pace (Pendleton and Retallack, 2009). However, much higher initial investment costs will
need to be incurred if the adjustment to a low-emissions economy is to take place at a faster
pace and on the requisite scale to meet climate goals while at the same time ensuring the
achievement of development goals.
This will require additional multilateral financing, on an adequate and pre-
dictable scale, comprising grants, concessional loans and compensatory payments. In the
context of the ongoing United Nations Framework Convention on Climate Change nego-
tiations, developing countries have insisted on the fact that article 4, paragraph 3, of the
Framework Convention implies that Annex II countries have a clear-cut responsibility for
providing new and additional financial resources to meet the agreed full costs incurred by
developing-country parties in complying with their obligations. Translating such respon-
sibilities into tangible resources is still a major stumbling block, depending on how much
weight is given to responsibility and capability. Placing this challenge in the context of an
evolving investment programme is to recognize that developing countries will themselves
be responsible for mobilizing resources on an increasing scale over time, as well as for
insisting on the responsibility of developed countries for meeting the additional costs of
undertaking such investments in the initial stages of the transition.

Additional and substantially scaled-up financing

The existing ODA model In light of previous discussions, it becomes clear that the existing ODA model is not up to the
is not up to the task task of funding the climate challenge. More substantial and more predictable forms of financ-
of funding the climate
ing will most certainly have to be found and new mechanisms of resource mobilization will
challenge
have to be considered, such as those suggested in box VI.6.
Yet, the obvious starting point for the scaling up resources would be to insist
that advanced countries meet their existing commitment to a target a 0.7 per cent of GNP
for ODA. Developing countries have rightly expressed both their reservations about treating
climate commitments simply as aid and their concerns, also justified, that additional expendi-
tures linked to climate change could “crowd out” assistance for development goals. However,
climate vulnerability is closely linked to interlocking stresses related to other development
challenges which in turn reinforce climatic vulnerabilities (chap. III). These close links be-
tween adaptation and development should provide extensive scope for synergies if developed
countries remain faithful to their ODA commitments (Levina, 2007). It will be imperative,
however, to recognize that financing for adaptation is not aid as such but is much closer to
a form of compensation paid by high-emitting countries for the damage they are inflicting.
There is no shortage of institutions available to channel such funding. However, new funding
mechanisms may still be needed, in the area, for example, of disaster management (United
Nations, 2008). The bigger challenge is likely to be one of coordinating the required expan-
sion of ODA, ensuring consistency across funding sources, and reducing duplication and
waste. This may require the establishment of a central agency to collect international adapta-
The “bilateralization” of tion funding and to provide some degree of coherence across programmes (Müller, 2008).
multilateral aid should be That said, criticisms of the governance of the aid architecture will need to be
minimized by imposing
urgently addressed as funding is scaled up. In the first place, the lack of transparency in
coordination between
funds and integrating the donor-dependent approach to the design of specific-purpose funds, as is particularly
resources apparent with respect to the current pattern of adaptation funding, will need to be cor-
 Financing the development response to climate change 179

rected. International cooperation should assist the integration of mitigation and adaptation
in the national policies of developing countries under the “country-led and country-owned”
principle. Second, there will be an urgent need to rationalize and minimize proliferation of
funding mechanisms. There has been a proliferation of specific funds administered by bi-
lateral agencies, which differ widely in terms of purposes, amount mobilized, time-horizons
and mechanisms for channelling resources to developing countries. The “bilateralization”
of multilateral aid should be minimized by imposing coordination between funds and in-
tegrating resources; for example, funding for reducing emissions from deforestation and
forest degradation could expand by combining resources and approaches from different
institutions (such as the forestry funds of Norway and Australia, and the Amazon Fund).
That the capacity to scale up multilateral financing exists has been revealed by
the financial crisis and this bodes well for climate financing. However, with the attention
of the international community focused on the deepening global economic crisis, there is
the danger that efforts to finance an effective response to climate change will be delayed.
Delaying investments in a new energy, transportation and health infrastructure, bolstering
the productivity of the rural economy and making it less susceptible to climatic shocks, is
as unnecessary as it is self-defeating (Stern and Kuroda, 2009). Making up for the loss of
private demand from the ongoing economic crisis will require vigorous counter-cyclical
fiscal policies for which a truly global coordinated response is appropriate (United Na-
tions, 2009). In this context, increased public investment to meet climate as well as devel-
opment objectives will bring short-term benefits through a demand impulse while aiding
the transition towards low-emissions economies.
However, developing countries are concerned that a dominant role for existing
multilateral institutions in future climate-related financing will perpetuate the unsatisfac-
tory practices associated with past development finance. The kinds of conditionalities at-
tached to that financing are seen as particularly unacceptable given that climate finance,
even more than development finance, is required to make adjustments to the past actions
of richer countries. Moreover, developing countries insist that decision-making should be
based on the one-country, one-vote principle (as under the framework of the United Nations
Framework Convention on Climate Change) and not on the amount of money contributed,
as is still the case in the international financial institutions. In these respects, many of the
recently established climate funds appear to represent, on one recent assessment, “a distinct
step back from the GEF compromise” and “are almost certain to create a new level of
North-South political discord over the funding for global environmental action at a histori-
cal juncture, when the world can ill afford it” (Porter and others, 2008, p. 47).
As suggested earlier, the initial responsibility for ensuring adequate multilateral The initial responsibility
funding lies with Annex II countries. Using the Greenhouse Development Rights (GDR) for ensuring adequate
multilateral funding lies
methodology discussed in chapter I, a possible breakdown of their contribution is given in
with Annex II countries
table VI.4. For every 100 billion dollars of climate financing, EU would contribute 32.9
billion, the United States 47.7 billion and Japan 11.2 billion. The Commission of Experts of
the President of the General Assembly (the Stiglitz Commission) (United Nations, 2009) has
recently proposed that industrialized countries dedicate 1 per cent of their national stimulus
packages, in addition to traditional ODA commitments, to help address the strains imposed
by the global economic downturn on the poorest citizens. In respect of the OECD countries,
the average weighted stimulus package will account for about the 3.4 per cent of GDP over
the period 2008-2010 (Organization for Economic Cooperation and Development, 2009).
That would generate additional ODA of over 1.3 billion dollars over two years. As such, this
represents a symbolic acceptance of the global nature of the challenge.
180 World Economic and Social Survey 2009

Table VI.4.
Possible breakdown of climate-related ODA flows for Annex II countries to 2020

GDP per capita Climate-related Share of ODA by

Population (United States ODA Annex II countries
(percentage dollars purchasing (percentage as of 2008
of world total) power parity) of flows) (percentage)
EU-15a 5.80 33 754 32.9 28.3
of which:
Germany 1.20 34 812 7.8 11.6
United Kingdom 0.90 34 953 5.3 9.5
France 0.91 33 953 4.6 9.1
United States 4.50 45 640 47.7 21.7
Japan 1.90 33 422 11.2 7.8
Others 1.00 38 149 8.2 11.9
Total Annex II countries 13.20 30 924 100.0 100.0
Source: Pendleton and Retallack (2009).
a The 12 accession countries of the European Union (EU) are not listed in Annex II but are probably exposed to
article 4.3 obligations as a result of their EU membership. However, because of their relatively marginal impact
on the big picture as presented in this table, they are not included in the calculation.

The steady increase in the finance, on a scale that is commensurate with the
projected scale of public investment that is required in order to shift to a low-emissions
development pathway will need new international funding instruments of the kind sug-
gested earlier. These will have to be considered in an open and dispassionate manner if real
and timely progress is to be made.

Independent and participatory governance structures

Donor Governments At a time when the international community needs to bring together myriad elements,
seem to have opted for a mechanisms and agreements into a strategic framework, donor Governments seem to have
disjointed approach which
opted for a disjointed approach which encourages fragmentation of the global response
encourages fragmentation
of the global response to climate change, to the great detriment of efforts to achieve effectiveness, efficiency and
to climate change, to the equity. A global investment programme aimed at effectuating the shift to low-emissions,
great detriment of efforts high-growth development pathways requires a governance structure that is able to pursue
to achieve effectiveness, a much more focused and coherent agenda, prevents dominance by donor countries and
efficiency and equity provides for participatory decision-making on financial contributions and disbursements.
Stern (2009, pp. 200-202) has recently argued, on these grounds, that the climate chal-
lenge probably needs a new institutional architecture.
Certainly, in dealing with the large scale of the financial transfers required
for mitigation and adaptation in developing countries, there is a clear need for an
enhanced financial mechanism, building on article 11 of the United Nations Framework
Convention on Climate Change. As a minimum, against the backdrop of the proliferation
of multilateral and bilateral financing mechanisms, such a body is needed for measuring,
reporting and verifying financial flows from a variety of developed-country sources and
for ensuring that greater coherence in the emerging system of climate financing is achieved
(Pendleton and Retallack, 2009).
 Financing the development response to climate change 181

The bigger question concerns the management and allocation of financial re-
sources. It is often argued that the World Bank and other multilateral development banks
might be better positioned to scale up financing than a fund under the authority of the
United Nations Framework Convention on Climate Change. However, these institutions
have major limitations in the context of global environmental finance (Porter and others,
2008). For instance, the newly established Climate Investment Funds that are administered
by the World Bank have been criticized not only for their governance structure, which
replicates the existing asymmetries of the Executive Board of the World Bank, but also for
undermining the United Nations Framework Convention on Climate Change and for not
being truly additional to existing ODA commitments (Tan, 2008). Indeed, on their own
assessment, multilateral development banks still do not seem to be systematically factoring
climate change into their investment choices and need to do more to ensure that all of their
investments and lending operations take climate change into account (World Bank, 2008b;
Ballesteros, 2008). Moreover, the bias in the lending activities of multilateral development
banks since the mid-1990s raises questions about the suitability of these institutions for
administering a publicly led global investment programme. The largest decline in World
Bank lending for infrastructure projects since the mid-1990s has occurred in the electricity
sector, triggered by the expectation that the private sector would take up the slack (Platz
and Schroeder, 2007). While the direction of the trend has been reversed since 2002, new
commitments on average have not yet reached the levels of the mid-1990s.
Developing countries have also pointed out that additional financing, even
on concessionary terms, to help them switch to cleaner energy sources will likely mean
their acquiring additional debt to address a problem to which they contributed relatively
little. This raises long-standing concerns for many developing countries about the role of
development finance, including the privileged position of creditors in international finan-
cial negotiations, and the use of adjustment lending, through attached conditionalities,
to shape their policy options across a broad range of economic and social issues. They are
concerned that housing any new financing mechanisms in the international financial in-
stitutions would subject them to the same governance arrangements and conditionalities
as were imposed on previous loans from these institutions. The Group of 77 and China
have expressed their preference for a global fund to be governed, not by the international
financial institutions or the Global Environmental Facility,9 but by the Parties to the
United Nations Framework Convention on Climate Change, following the model of the
Multilateral Fund for the Implementation of the Montreal Protocol and of the Adaptation
Fund under the Kyoto Protocol. On the other hand, a number of Annex I countries have
reservations about following the Montreal Protocol model for climate change financing.
Entrusting a Conference of the Parties-accountable body with the mandate for Entrusting a Conference of
a global investment programme could be an important first step towards the development the Parties-accountable body
with the mandate for a global
of a broader institutional structure on global climate change financing. However, such a investment programme could be
response could introduce the danger of locking new financing into an environmental proj- an important first step towards
ect-based approach, which would run counter to the arguments presented in this chapter. the development of a broader
institutional structure on global
climate change financing

9 The Global Environment Facility has indicated its intention to review and reshape its governance
structure in response to developing-country concerns over representation.
182 World Economic and Social Survey 2009

Living up to the challenge: lessons from the Marshall Plan

The right model for Whatever the institutional details finally agreed to, the right model for meeting shared
meeting shared global global challenges is still the Marshall Plan, as also noted by Al Gore in his Nobel Lecture
challenges is the
in 2007. On many counts, the scale and urgency of the climate and development challeng-
Marshall Plan
es need an integrated emergency response of the kind that informed the Marshall Plan.
Moreover, part of the success of the Plan was due to the fact that it bypassed the fledgling
Bretton Woods institutions which had not appeared to be up to the job of fashioning poli-
cies and supporting institutional reforms attuned to local conditions. Many might see this
as the principal lesson to be applied to the current challenge.
However, as noted in the World Economic and Social Survey 2008 (United Na-
tions, 2008), the Marshall Plan is not a blueprint which can simply be rolled out to meet
contemporary challenges. Rather, it encompasses a set of broad principles which can be
tailored to contemporary challenges and sensitivities.
Despite the demonstrated success of the Marshall Plan framework in Europe in
the 1940s, “aid” has developed over the years into a mixture of assistance for an assortment
of specific projects and ad hoc responses to unexpected shocks with little apparent coher-
ence, in respect either of the countries that receive it or of its global distribution. Donor
conferences are driven more by what donors want to promote than by the desire to support
specific multi-year national programmes. It is difficult to see how aid can ever be really
effective without an articulation of macroeconomic objectives and detailed programmes
for infrastructure investment, etc., and without a coherent account of priorities—what
should be done and in what order—and a sense of the necessary complementarities among
different investments and projects.
National development National development programmes along the lines of the Marshall Plan would
programmes along the make it easier to provide general, non-project assistance to Government budgets or for
lines of the Marshall Plan
financing the balance of payments, as was the case for a number of European countries
would make it easier to
provide general, non- under Marshall Aid. The structural changes implied by the shift to a low-emissions de-
project assistance to velopment pathway will surely bring with them fiscal and current-account pressures even
Government budgets or for as long-run adjustments are realized. The need to provide financial assistance to deal with
financing the balance of long-term imbalances is usually seen by the international financial institutions as evi-
payments dence of a weak commitment to reform and as encouraging a slackening of discipline by
postponing necessary adjustment. This was not the view of the Marshall Planners, who
regarded such assistance as an investment in structural change and as providing Govern-
ments with the breathing space required to ensure the success of difficult and often painful
policies. Nor can it be the view if the climate and development challenges are to be met.
Another major attraction of a Marshall Plan framework is that it can serve an
important political function. A multi-year programme for achieving economic and envi-
ronmental objectives, setting out their interrelationships, the means to achieve them and
their dependence on outside assistance, effectively embodies a Government’s vision of the
kind of societal structure at which it is aiming. Obviously of a highly political nature, the
proposed programme provides the basis for democratic discussion and for the kind of ne-
gotiations among competing views that should take place. The task is not an easy one, as is
shown by the history of indicative planning in France (Cohen, 1977), but obtaining popu-
lar support for such a programme can be a major stimulus for change. This will not always
result in what the international financial institutions regard as the “best” policies, but the
advantage of democratic processes is that they generate pressures to correct mistakes.
 Financing the development response to climate change 183

The creation of a “new Marshall Plan” could thus be the means of providing
a concrete operational basis for such ideas as “ownership” and “partnership”, which oth-
erwise risk degenerating into empty slogans. Moreover, a coherent national programme
bolstered by popular support, indicating where outside assistance could be most effective,
ipso facto becomes a powerful vehicle for persuading potential donors to respond to na-
tional priorities instead of following their own preferences with regard to what might be
available in a basket of seemingly unrelated projects.

Conclusion
In terms of the need to secure international cooperation, the climate financing challenge
is substantial and daunting. It is clear that, while market-based and voluntary approaches
will have an important role to play over time, they are inadequate for meeting the im-
mediate financing requirements. The shift to a low-emissions, high-growth development
pathway in the developing world is unlikely to be led by private sector investment and risk-
taking. Thus, more binding modalities of international cooperation must be pursued at the
same time that countries are dealing with the financial crisis. The same limitations that
dog international cooperation in respect of financing development apply to the response
to climate change. In the face of this predicament, it is important to realize, however, that
the international community can overcome the two sets of limitations simultaneously by
recognizing that a global investment programme directed towards climate change objec-
tives represents a key intervention in favour of development.
 185

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