Designing the Green Economy: Economic Principles and Guidance for Policy Makers

1. Designing the Green Economy: Economic Principles and Guidance for Policy Makers Session 3 Innovation Policy, Environment and Development Edward B. Barbier Barbier CIES/UNEP Workshop

2. 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? Barbier CIES/UNEP Workshop

3. 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. Barbier CIES/UNEP Workshop

4. 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 Barbier CIES/UNEP Workshop

5. 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. Barbier CIES/UNEP Workshop

6. Source: Barbier, E.B. 2010. A Global Green New Deal: Rethinking the Economic Recovery. Cambridge University Press, Cambridge and New York,. Barbier CIES/UNEP Workshop

7. 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. Barbier CIES/UNEP Workshop

8. 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 climate-driven risks. Barbier CIES/UNEP Workshop

9. 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 energyfor 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. Barbier CIES/UNEP Workshop

10. Funding priorities Barbier CIES/UNEP Workshop • 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).

11. Funding priorities Barbier CIES/UNEP Workshop • 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).

12. Funding priorities Barbier CIES/UNEP Workshop • 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).

13. Table 1. Barriers to Implementing Cost-Effective Clean Energy Policies Source: Adapted and modified from Jollands et al. (2010). Barbier CIES/UNEP Workshop

14. 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. Barbier CIES/UNEP Workshop

15. 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. Barbier CIES/UNEP Workshop

16. 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. Barbier CIES/UNEP Workshop

17. 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. Barbier CIES/UNEP Workshop

18. Estimates of World Subsidies (US $ billion) Barbier CIES/UNEP Workshop

19. 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 Barbier CIES/UNEP Workshop

20. 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. Barbier CIES/UNEP Workshop

21. Financing mechanisms for funding global ecosystem conservation Barbier CIES/UNEP Workshop

22. 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. Barbier CIES/UNEP Workshop