Designing the Green Economy: Economic
Principles and Guidance for Policy Makers
Session 3
Innovation Policy, Environment and Development
Edward B. Barbier
11/17/2011
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Key questions
• What does the green economy mean in low and middle
income economies?
• What are the specific needs of developing countries with
respect to science, technology and innovation?
• What financial mechanisms might be useful for raising funds
for global public goods?
• What is the role of international cooperation in facilitating
global technology flows?
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What is a green economy?
• UNEP defines a green economy as one that results in “improved human
well-being and social equity, while significantly reducing environmental risks
and ecological scarcities.”
• Low carbon, resource efficient and socially inclusive.
• Income growth, employment and poverty alleviation should be driven by
investments that:
– Reduce carbon emissions and pollution
– Enhance energy and resource efficiency
– Prevent the loss of biodiversity and ecosystem services.
UNEP. 2011. Towards a Green Economy: Pathways to Sustainable Development and Poverty
Eradication. UN Environment Programme, Geneva and Nairobi.
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Progress towards a green economy?
• Green growth, the promotion of energy efficiency and clean energy
technologies and sustainable development are increasingly viewed as
complementary goals by international policymakers.
“We recognize that sustainable green growth, as it is inherently a part of
sustainable development, is a strategy of quality development, enabling
countries to leapfrog old technologies in many sectors, including through
the use of energy efficiency and clean technology. To that end, we will
take steps to create, as appropriate, the enabling environments that are
conducive to the development of energy efficiency and clean energy
technologies, including policies and practices in our countries and beyond,
including technical transfer and capacity building.”
The G20 Seoul Summit Leaders’ Declaration, November 11-12, 2010
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Global policy initiatives during the “Great Recession”
• During the 2008-9 recession, some governments included a sizable "green
fiscal" component in their efforts to boost aggregate demand.
• Three broad categories of support:
– Energy efficiency - Support for energy conservation in buildings; fuel efficient
vehicles; public transport and rail; and improving electrical grid transmission.
– Low carbon power - Support for renewable energy (geothermal, hydro, wind
and solar), nuclear power, and carbon capture and sequestration.
– Water, waste and pollution control – Support for water, waste and pollution
management and control, including water conservation, treatment and supply.
• Of the $3.3 trillion allocated worldwide to fiscal stimulus over 2008-9, $522
billion was devoted to green expenditures or tax breaks.
• Almost all was by G20 governments.
• Globally, green spending amounted to just under 16% of total fiscal stimulus
and 0.7% of world GDP.
• Support for energy efficiency accounted for $335 billion, or nearly two
thirds of all green spending globally.
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Green Stimulus as a Share of Gross Domestic Product (GDP)
France
Norway
Germany
United States
0.3%
0.4%
0.5%
0.9%
Japan
1.0%
Sweden
1.3%
Australia
1.3%
Saudi Arabia
1.7%
China
3.1%
South Korea
Global share
0.0%
5.0%
0.7%
1.0%
2.0%
3.0%
4.0%
5.0%
Source: Barbier, E.B. 2010. A Global Green New Deal: Rethinking the Economic Recovery. Cambridge University Press,
Cambridge and New York,.
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Will these policies be successful?
• HSBC Global Research forecasts that the global market for clean energy
and energy efficiency investments will triple to US$ 2.2 trillion by 2020 .
• The expansion will be led by low-carbon vehicles, such as plug-in hybrids
and full electric vehicles, China’s growing clean energy market and the
need for upfront capital for the new green technologies.
• But relying on green stimulus alone is not enough to instigate a global
"green" recovery.
• Fossil fuel subsidies and other market distortions, as well as the lack of
effective environmental pricing policies, carbon markets and regulations,
will diminish the impacts of G20 green stimulus investments on long-term
investment and job creation in green sectors.
• There may also be a trade-off between short-run and long-run growth,
environmental and employment impacts of green stimulus programs.
• Most poor economies will not be direct beneficiaries of the “clean energy”
boom, unless they receive urgent assistance.
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The global problem of “ecological scarcity”
• The Millennium Ecosystem Assessment found that over 60% of the world's
major ecosystem goods and services were degraded or used unsustainably.
• Over the next 50 years, the rate of global biodiversity loss is also expected
to accelerate, leading to the extinction of at least 500 or the 1,192
currently threatened bird species and 565 of the 1,137 mammal species .
• Low and middle income countries already account for 71% of global water
withdrawal, and their demand is expected to grow by 27% by 2025.
• Much of the remaining areas of relatively undisturbed ecosystems and
species richness is found in tropical developing regions.
• Well over 600 million of the rural poor currently live on lands prone to
degradation and water stress, and in upland areas, forest systems and
drylands that are vulnerable to climatic and ecological disruptions.
• Around three-quarters of the developing world’s poor still live in rural
areas, or twice as many poor people live in rural than in urban areas.
• Around 14% of the population and 21% of urban dwellers in developing
countries live in low elevation coastal zones that are exposed to climatedriven risks.
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The green economy and poverty eradication
• A transition to a green economy can contribute to poverty eradication.
• A number of sectors with green economic potential are particularly
important for the poor, such as agriculture, forestry, fishery, and water
management .
• Enabling the poor to access micro-insurance coverage against natural
disasters and catastrophes is also important .
• Investments in renewable energy can be targeted to improve clean and
affordable energy for the “energy poor”, the 2.4 billion people, who rely on
traditional biomass fuels for cooking and heating and the 1.6 billion people
who do not have access to electricity.
• Payments for ecosystem services, such as carbon sequestration in forests,
will need to focus more on poor forest communities as the primary
beneficiaries.
• Investments in clean water and sanitation can overcome child mortality,
water-borne disease, save time and costs of poor households.
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Funding priorities
• EU estimates that net additional investment worldwide in low-carbon
technologies will need to rise to around $245 billion by 2020, more than half
in developing economies.
• UNDP estimates that developing economies will require an additional $86
billion in adaptation financing by 2015
– $44 billion for climate-proofing development investment
– $40 billion for adapting poverty reduction to climate change
– $2 billion for strengthening disaster response
• Uncertainty over a future global carbon market inhibits private capital flows
and public policies, especially investments and technology transfers to
developing economies.
• Low-carbon investments are also inhibited by energy subsidies, which
amount to $300 bn worldwide (0.7% of world GDP).
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Funding priorities
• EU estimates that net additional investment worldwide in low-carbon
technologies will need to rise to around $245 billion by 2020, more than half
in developing economies.
• UNDP estimates that developing economies will require an additional $86
billion in adaptation financing by 2015
– $44 billion for climate-proofing development investment
– $40 billion for adapting poverty reduction to climate change
– $2 billion for strengthening disaster response
• Uncertainty over a future global carbon market inhibits private capital flows
and public policies, especially investments and technology transfers to
developing economies.
• Low-carbon investments are also inhibited by energy subsidies, which
amount to $300 bn worldwide (0.7% of world GDP).
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Funding priorities
• EU estimates that net additional investment worldwide in low-carbon
technologies will need to rise to around $245 billion by 2020, more than half
in developing economies.
• UNDP estimates that developing economies will require an additional $86
billion in adaptation financing by 2015
– $44 billion for climate-proofing development investment
– $40 billion for adapting poverty reduction to climate change
– $2 billion for strengthening disaster response
• Uncertainty over a future global carbon market inhibits private capital flows
and public policies, especially investments and technology transfers to
developing economies.
• Low-carbon investments are also inhibited by energy subsidies, which
amount to $300 bn worldwide (0.7% of world GDP).
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Table 1. Barriers to Implementing Cost-Effective Clean Energy Policies
Source: Adapted and modified from Jollands et al. (2010).
Category
Information and
behavioral barriers
Market organization
barriers
Barrier
Price distortion
Key problem associated with barrier
Costs associated with energy and incumbent technologies may
not be included in their prices; energy and incumbent
technologies may be subsidized
Information
Information on availability and nature of a new product or
Improve accessibility and availability
process is not easily available or accessible at time of investment of information on new products or
processes.
Transaction costs
Perceived costs involved in making a decision to purchase and
use equipment outweigh perceived benefits.
Reduce transaction costs,
Bounded rationality
Constraints on time, attention, and the ability to process
information lead consumers to make less efficient and suboptimal decisions
The initial cost of a project may be higher than the finance
threshold; poor or constrained access to funds.
Reduce the constraints on consumers'
decisions.
Principal agent problems; established companies may have
market power to guard their positions.
Poor regulation at national Regulations and codes not keeping pace with development or
or international level
leading to inefficient outcomes.
Enhanced access to finance; better
market organization; better designed
policies
Improved regulatory framework,
standards and implementation
Capital stock turnover
rates
Sunk costs; tax rules or regulations that encourage long
depreciation; inertia
Improve incentives to invest in new
capital and technology
Uncompetitive market
pricing and practices
Failure to benefit from scale economies, learning by doing,
technological diffusion
Regulation and reform of
uncompetitive pricing practices;
improve scale economies, learning by
doing and technological diffusion.
Technology and skillspecific barriers
Lack of familiarity with the new technology or insufficient
human skills for that technology
Enhance skills and technical knowhow.
Finance
Inefficient market
organization
Technological barriers
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Necessary condition
Remove price distortions and
subsidies; apply appropriate marketbased instruments.
Enhanced access to finance.
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Clean Development Mechanism
• The CDM has become an international institution through which low and
middle income countries can earn income from reducing greenhouse gas
(GHG) emissions through earning CER credits.
• By effectively setting an international price on carbon, the CDM has
facilitated the commercial viability of low-carbon technology transfer, in
terms of both equipment and know-how, has reduced some barriers to
information and capital flows necessary for investing in clean energy
technologies in recipient countries.
• The CDM has improved the quality of technology transfers to developing
economies by providing assistance in project design and collaboration in
management.
• 2% of CER credits are earmarked for the Adaptation Fund, which finances
adaptation investments in developing countries. Currently, the
Adaptation Fund has raised $12.6 million.
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Current problems with the CDM
• Regionally concentrated: 2/3 in Asia, 30% in Latin America, only 2% in Africa.
• 85% of the CERs from current registered projects are paid to five large
emerging market economies.
• 85% of CDM projects are also concentrated in nine countries
• Most of CERs issued are for large-scale initiatives: incineration of GHG (40% of
all CERs); grid-connected renewable electricity generation, fuel switching and
reducing transmission losses (45%); and capturing fugitive methane
emissions, such as pipelines, coal methane and landfill gas (10%).
• Important sectors, such as transportation, building and construction,
afforestation and reforestation, small-scale rural energy projects and energy
efficiency, are poorly represented in the current CDM project portfolio.
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Uncertainty over the future of the CDM
• While the general expectation is that some global carbon trading will
exist after 2012, there is considerable uncertainty over any future
carbon market or the CDM.
• Such uncertainty forces investors either to discount CERs deliverable
after 2012 or not to price them at all.
• As the end of 2012 approaches, CDM income is increasingly viewed as
contingent income.
• As long as this uncertainty over the post-2012 carbon market and CDM
persists, there could be a large decline in the future expected number
of projects approved and the CERs earned.
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CDM reform: Towards a global carbon market
• Any global climate change agreement must extend the CDM beyond
2012.
• CDM reforms need to increase the coverage of developing economies,
the sectors and technologies and the overall financing of global GHG
emission reductions.
• The scale of the mechanism needs to be increased, so that it can
deliver significantly greater finance and emission reductions globally.
• A much simpler and more transparent mechanism, such as sectoral
benchmarks that enable entities to receive CER credits for achieving a
targeted emissions intensity per unit output or technological
benchmarks.
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Estimates of World Subsidies (US $ billion)
OECD
Water
(irrigation,
supply and
sanitation)
2
53
55
Energy
non-nuclear
nuclear
80
9-14
220
NA
300
9-14
Agriculture
335
36
371
Transport
US
UK, Ger, Jap
55-174
52
NA
533-657
309
Totals
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Non-OECD World
107-226
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842-966
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Subsidies are worsening, not lessening
• Actual subsidies, especially for energy, tend to fluctuate from year to
year, and may be higher now than ever before.
• Globally, fossil fuel consumption subsidies amounted to $557 billion in
2008 (IEA/OPEC/OECD/World Bank 2010).
• Production subsidies accounted for an additional $100 billion.
• Together, these subsidies account for roughly 1% of world GDP.
• Phasing out all fossil fuel consumption and production subsidies by
2020 could result in a 5.8% reduction in global primary energy demand
and a 6.9% fall in greenhouse gas emissions
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Global funding for biodiversity and ecosystems
• The wide gap between the global benefits that humankind receives from
ecosystems and what we are willing to pay to maintain and conserve them
is a critical symptom of how oblivious we are to the risks arising from the
excessive ecological deterioration arising from the current pattern of
economic development.
• There are two aspects to overcoming this funding challenge:
• The design of adequate global mechanisms that provide adequate
compensation for ecosystem services.
• To raise and provide adequate financing of these mechanisms as well as
global ecosystem conservation generally.
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Financing mechanisms for funding global ecosystem conservation
Mechanism
Global Environmental Facility (GEF)
Description
A multi-donor global mechanism to meet the additional costs of
developing countries in achieving global environmental benefits
from biological diversity, climate change, international waters,
ozone layer depletion, reduced land degradation and abatement
of persistent organic pollution.
International payment for ecosystem services (IPES)
A global mechanism for raising and distributing funds from
beneficiaries of ecosystem services to those who conserve them.
Reduced emissions from deforestation and forest
degradation (REDD) scheme
A specific IPES aimed at reducing greenhouse gas emissions
from deforestation and forest degradation (REDD) in developing
countries.
Allocating a proportion of funds raised from a cap and auction
scheme for CO2 emissions among wealthy nations.
Global carbon cap and auction systems
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Global carbon tax
Allocating a proportion of funds raised from taxes on CO2
emissions among wealthy nations.
Financial transaction taxes (FTT)
Taxes collected on the sale of specific financial assets, such as
stock, bonds or futures.
Currency transaction taxes (CTT or Tobin tax)
Taxes applied to currency exchange transactions
International Finance Facility (IFF)
Mobilize financing from international capital markets by issuing
long-term bonds repaid by donor countries.
Taxes on airline travel or fuel
Taxes applied to international airline ticket sales or fuel use
Taxes on global arms trade
Taxes applied to international export sales of armaments
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Final remarks
• Fostering increased investments in clean energy and energy efficiency in
developing countries is necessary but not sufficient.
• A concerted global policy effort must be devoted to overcoming the
sustainability and funding challenges of rising ecological scarcity
worldwide, especially its implications for the poor.
• The funding priorities must also address the current global shortfall in
clean energy investments, climate change adaptation and ecosystem
conservation in developing countries.
• Agreement to reform and extend the CDM is essential.
• Perhaps the biggest hope for breakthrough for comprehensive financing of
global public goods might be a CTT or FTT.
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