GLOBE Copenhagen Legislators Forum
October 24, 2009
Remarks by Graeme Wheeler
Managing Director, Operations
The World Bank
The Twin Challenges of Climate Change and Development
Legislators in the 21st century will be judged by their success in addressing global warming and reducing poverty.
Based on current trends, energy-related CO2 emissions would more than double by 2050 and put the world on a catastrophic trajectory that could lead to temperatures more than 5°C warmer than pre-industrial times. Concerted global action is urgently needed to limit global warming to around 2°C. An energy revolution is required to reduce global carbon emissions by half in 2050 relative to 1990 levels, and to decarbonize the world economy by the end of the century.
On the development front, the number of people living in extreme poverty – already more than twice the population of Europe - is increasing. None of the 7 millennium development goals are expected to be met and the 1.4 billion extreme poor (those living on under $1.25 a day ppp adjusted) are increasingly disconnected from global society. Even this number disguises the true nature of poverty – it disguises the infant mortality, the malnutrition, the lack of access to health care and education, and the political and social exclusion. Demographics will dramatically increase our challenge. Almost all of the 3 billion increase in global population projected by 2050 will occur in developing countries – two thirds of it in regions currently experiencing low economic growth.
Climate change and poverty are deeply intertwined. Modelers suggest that developing countries will bear 75% to 80% of the costs of the damage from climate change. Climate change will be felt most acutely in Africa, where 95% of agriculture is rainfall dependent, and in low lying areas like Bangladesh and small island states.
Just as the financial crisis originated in the developed world and contaminated developing countries, so too has the concentration of greenhouse gas. Today’s greenhouse gas problems are largely generated by developed countries with energy use per capita on average 5 times that of developing countries. Negotiations to resolve the issues are immensely challenging – particularly because Greenhouse gases come from multiple sources, and involve serious equity and moral considerations, and difficult issues of sequencing and competitiveness.
The Financial Backdrop for the Climate Change Negotiations
The financial backdrop for negotiating a global solution could hardly be more difficult. We move to Copenhagen at a time when massive portfolio adjustments are taking place in household, corporate, and government balance sheets.
Governments are burdened with new roles as guarantors and investors of last resort, and are taking on ownership interests outside their traditional investor habitat and risk tolerance. Public sector debt to GDP ratios in many countries are on an explosive path and policymakers worry whether mitigation policies will weaken their economic recovery. They are also concerned about the domestic fiscal impact of large financial transfers to developing countries for adaptation.
Retaining a balanced perspective is important. New poles of economic growth are emerging and global growth will accelerate as the portfolio adjustments continue, and the global transfer of skill enhancing technology and the catalysts of trade, investment and capital flows assume greater importance.
The Impact of Climate Change Policies on Potential Output Growth
We should be humble in discussing the impact of mitigation and adaptation policies on trend rates of economic growth. There are many uncertainties.
While the globe will become warmer with an additional stock of greenhouse gases, we do not know how much warmer or the specific impact on land use patterns, water scarcity, coastline flooding, and spread of new diseases.
Climate change is the largest externality challenge of our time. Internalizing this externality through pricing and regulation will increase the costs of production. In the short and medium term, this can have distributional impacts and slow the rate of economic growth. However, it is difficult to quantify the overall magnitude of these output effects through time - especially because these policy changes help reduce the longer term social and economic costs of more serious global warming.
It is very clear that preventing global warming in excess of 2°C will require substantial investment to transform the world’s energy systems and permit the needed adaptation. Pricing and standards will be needed to motivate the energy efficient investment.
Investment in new technologies is key. The necessary reductions in carbon emissions cannot be achieved with existing technologies without a dramatic slowdown in trend rates of economic growth. A mechanism to price carbon, either through a global carbon tax or a global allocation of tradable greenhouse gas permits, is needed to ensure that new vintages of capital are less carbon intensive.
Replacing existing capital with more energy efficient investment is not costless. It can lead to job losses, but these can be reduced by a well-targeted green fiscal stimulus, with a heavy emphasis on infrastructure.
Infrastructure spending has several positive features. It tends to generate stronger output growth than social transfers or tax cuts, and new investment embodies new technologies and removes bottlenecks to future growth and poverty alleviation. In addition, several studies suggest that investment in green energy generates stronger job creation per dollar invested than investments in fossil fuel energy. This is especially true of investment in solar and thermal energy and biomass.
Provided that the correct pricing signals are in place, the cost of reducing the carbon intensity of the global economy and supporting sound adaptation should be manageable over time for several reasons.
First, by 2050, the global economy is projected to expand significantly due to the spread of new technologies and higher labor force participation – especially in many developing economies. Future generations can expect to be wealthier than current generations.
Second, considerable energy is being wasted in the global economy. We see this with the flaring of gas and the inefficient use of coal and oil.
Third, adjustment to the capital stock need not involve wholesale scrapping. It can be a much smoother process as infrastructure reaches the end of its economic life and is replaced with new vintages embodying more energy efficient technologies. For example, the economic life of new factories and power plants tend to average 15-40 years. Road, rail, and power distribution networks - 40-75 years.
Opportunities to shift from high carbon to low-carbon capital stocks are wide-ranging and unevenly distributed in time. The lifetime CO2 emissions from coal-fired power plants planned around the world over the next 25 years are expected to equal those of coal-burning activities since the pre-industrial era.
And fourth, some countries will seek to develop dynamic capabilities and competitive advantages as providers of new technologies. Substantially expanded investments in research and development (possibly in the range of $100 billion to $700 billion annually) will be needed to develop these technologies.
Where are we in this adjustment?
Some real challenges lie ahead. While $500 billion or 15% of the $3 trillion current global fiscal stimulus relates to green infrastructure, this requires pricing and regulatory reforms to be more transformative. And when governments experience severe fiscal pressure, infrastructural maintenance is usually an early casualty, and less capital intensive technologies are adopted. We have seen this many times in Latin America, where countries have favored thermal power plants over hydro because of lower upfront capital costs – in spite of higher recurrent costs and a requirement for imported fuels. In addition, developing countries will need substantial financial support to build and transform their capital stock - particularly since 80% of their infrastructure is financed publicly or through official development assistance.
What is the World Bank Group doing?
We are stepping up our role and rapidly expanding our lending on energy efficiency and renewable energy. Last year, this grew by 25% and exceeded $3 billion. This represents around 40% of total energy financing and our goal is to increase this to 50% by 2011.
Nearly $7 billion has been pledged to the Climate Investment Funds. These funds have stimulated new low carbon or climate resilient work in over 20 countries.
We are also heavily involved in carbon finance. The 10 World Bank- managed carbon funds have, to date, purchased emission reductions from over 200 projects with an estimated carbon asset value of $2.5 billion.
We have issued green bonds and developed weather derivatives and hurricane insurance related products. We are testing methodologies and tools for greenhouse gas analysis of forestry, energy, and transport projects, and several country studies are underway on low carbon growth.
What do we need from Copenhagen?
A major breakthrough is needed.
High income countries need to commit to ambitious and credible carbon emission targets that can stimulate public and private investment in green infrastructure. Such an agreement would accelerate the expansion of carbon markets.
These commitments, along with an improved Clean Development Mechanism and finance and resources for developing countries to facilitate their adaption and mitigation efforts, would permit the early action that is necessary.
We know the consequences of not embracing the energy revolution that is needed. We cannot afford to let negotiation on climate change stultify like the beleaguered Doha Round. The stakes, which involve the future of the planet, are simply too high.