low-carbon development for least developed countries

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Oxfam Discussion Papers

Low-Carbon

Development

For Least Developed

Countries

Alex Bowen and Sam Fankhauser

Grantham Research Institute on Climate Change and the Environment and Centre for Climate Change Economics and Policy, London School of Economics and Political Science

August 2011

This paper examines the rationale for Least Developed Countries (LDCs) to pursue low-

carbon growth paths, and identifies areas where such countries can contribute to mitigation whilst retaining a focus on poverty reduction. It argues low-carbon growth paths, appropriate to the needs of LDCs, ought to be explored now. Policies for low- carbon development offer an opportunity to share in the benefits of green growth,address a range of existing market and government failures in LDCs, and provide low- cost options for global emissions reductions. Synergies between poverty alleviation and emissions reduction exist in the forestry and agriculture sectors, as well as rural electrification. But elsewhere there may be trade-offs, for instance in the transport and industrial sectors. Where additional costs are involved, these should not be borne by poor people, making it vital that an international framework is in place to assist LDCs,with rich countries compensating them for measures they undertake that go beyond their immediate development interests.

Oxfam Discussion Papers

Oxfam Discussion Papers are written to contribute to public debate and to invite feedbackon development and humanitarian policy issues. They are ’work in progress’ documents,and do not necessarily constitute final publications or reflect Oxfam policy positions. Theviews and recommendations expressed are those of the author and not necessarily thoseof Oxfam.

For more information, or to comment on this paper, email Sarah Best([email protected])

www.oxfam.org/grow



For Least Developed Countries , Oxfam Discussion paper, Month Year2

CONTENTS

EXECUTIVE SUMMARY ............................................................................................................................. 3

1. INTRODUCTION ..................................................................................................................................... 4

2. Climate change mitigation, adaptation, and development................................................................ 6

3. Low-cost options for greenhouse gas emission reductions in LDCs ............................................. 10

4. A low-carbon development path for poor countries ......................................................................... 12

5. Conclusions ............................................................................................................................................... 15

REFERENCES ............................................................................................................................................... 16

NOTES ........................................................................................................................................................... 18

ACKNOWLEDGEMENTS ......................................................................................................................... 23



For Least Developed Countries , Oxfam Discussion paper, Month Year 3

EXECUTIVE SUMMARY

The global community has to act collectively to halt climate change. But such collective action must take intoaccount the development needs of Least Developed Countries (LDCs), which are likely to be hit earliest andhardest while having the least capacity for adaptation. The priority of such countries remains povertyalleviation and the achievement of the Millennium Development Goals, but the three challenges of limitingclimate change, adapting to its consequences, and reducing poverty have to be faced together.

This will require LDCs eventually to follow a development path that differs from those trodden by today’sindustrial countries and emerging market economies. There is no room in the long run for high-emissioneconomies and high-carbon growth is unsustainable, given the possible consequences for fossil-fuelsupplies and climate change impacts. And there are some advantages for LDCs of low-carbon growth incertain circumstances. For instance, in tackling broader market and government failures, which inhibitproductivity and well-being – like inadequate incentives for appropriate technology development anddeployment – or increasing energy security and addressing local health and environmental problems.

By far the most important sources of greenhouse gas emissions in LDCs derive from land-use change, inparticular deforestation. Since halting forest loss is also a major development and local environmental issue,tackling land-use change is therefore a key priority of low-carbon development. Synergies between povertyalleviation and emission reduction also exist with rural electrification, where renewable energy solutions areoften least costly. And strengthening the capacity of the public sector to provide public goods such as energyinfrastructure can help development in general, not just low-carbon development. But elsewhere there maybe trade-offs between development and low-carbon objectives, for instance as much-needed investment intransport infrastructure leads to rising emissions.

Adoption of low-carbon development paths by LDCs, as appropriate to their needs, should be conditional onthe global costs of decarbonisation being shared equally. So, where reduction of emissions in LDCsintroduces costs, rich people – not poor people – should bear these. This makes it crucial that aninternational framework is in place to assist LDCs and compensate them for measures they undertake that

go beyond their immediate development interests.




the promotion of conventional growth, is rebutted. Second, the advantages for the world as a whole ifmitigation by LDCs is encouraged are rehearsed. Third, some possible and attractive low-carbondevelopment paths for LDCs are suggested. These can and ought to be consistent with a continuing focus inthe near term on the achievement of the Millennium Development Goals. Fourth, the paper concludes bydrawing out some implications for development policies and for the appropriate shape of a Global Deal tohalt human-induced climate change.




2. Climate change mitigation, adaptation, and

developmentEconomic growth has in the past been associated with increases in energy use and energy-related emissionsper head. There has been a strong correlation over time between increases in GDP and increases in energy

usage and CO2 emissions; this relationship has tended to be stronger among lower-income countries.9 Thecorrelation can be obscured in data across countries at a point in time, given the variety of energyendowments and energy needs (related, for example, to climatic variations across countries). The energyintensity of GDP is broadly similar for LDCs and the world as a whole, although world GDP per head isabout eight times the average LDC GDP per head. However, LDCs’ energy usage is less carbon intensive on

average;10 excluding land-use change, LDCs’ average CO2 emissions intensity of GDP was 195 tonnes per

million dollars of GDP in 2005, compared with an average of 487 tonnes for the world as a whole.11

The need for some ‘headroom’ in carbon use for LDCs to grow and overcome poverty lay behind the

acceptance under the Kyoto Protocol that poor countries need not adopt emission reduction targets. Butrapidly industrialising countries have been much more emissions intensive than typical LDCs. Thecorresponding figures for India and China were 505 and 1052 tonnes per million dollars of GDPrespectively. If all poorer countries were to move up towards these levels of emission intensity in power,transportation and industry as their economies grew, keeping global warming to 2°C or less would be anunobtainable objective. If China and India are to play their part in global emissions control and LDCs are tofollow them in achieving sustained economic growth and poverty reduction, the challenge is ultimately todecouple emissions and output growth. Given the international division of labour and the migration ofmore mature manufacturing industries to lower-income countries, that is also partly a challenge todecarbonise consumption of imports by rich countries.

The key to decoupling is to recognise the malfunctions in economies that encourage greenhouse gas

emissions. These emissions create a huge adverse externality, the likely damages flowing from climatechange and the risks of even more catastrophic and irreversible climate outcomes. In the absence of carbonpricing, firms and households do not factor these damages and risks into their decisions when engaging inactivities that lead to greenhouse gas emissions.

But that is not the only market failure involved in the battle against human-induced climate change. Perhapsthe most important ones for LDCs are:

1. Incentives that are inadequate to generate enough investment in research, development and deploymentof new technologies and processes, particularly those most relevant to the comparative advantages andpatterns of production in LDCs. The problem is that many new ideas give rise to benefits that do notaccrue to the people who thought them up.

2. Failure to understand and value ecosystem services properly – for example, the role of forests in

regulating rain-water run-off in hilly areas.

3. The ‘tragedy of the commons’ afflicting land-use in agriculture and forestry where property rights areunclear or contested.12

4. Imperfect information about the costs and benefits of energy efficiency, with users and producers, andlandlords and tenants, having differential access to information (‘asymmetric information’).

5. Under-provision by the market of public infrastructure goods (e.g. transport infrastructure).

Bad governance and conflict in societies can also distort economies,13 inhibiting growth and stimulatinggreenhouse gas emissions and environmental degradation at the same time. Encouragement of land grabsby agroforestry businesses, conflict over fossil fuel resources and subsidies for middle-class energy

consumption are three pertinent examples.14 And the provision of public goods – public health, energy

grids, irrigation schemes, public transport and so forth – in such circumstances is much more difficult.




All these sources of malfunctioning economies are costly and warrant tackling even without the threat ofclimate change. But our improved understanding of the latter increases the perceived costs of several ofthese malfunctions and the urgency of correcting them. That requires improved collective decision-making,which can generate other significant benefits, raising output directly and enhancing longer-run growthpotential. It can also improve the composition of output in economies, better reflecting the long-run costsand benefits of different activities and thus helping to make development more environmentally sustainable,as well as enhancing the life chances of the poor.

Action to reduce emissions is also likely to generate other valuable co-benefits. For example, developingrenewable energy sources can produce co-benefits such as reduced air pollution, greater energy security,reduced foreign exchange needs and an improved quality of life. The World Health Organization (WHO)estimates that 1.5 million premature deaths per year are directly attributable to indoor air pollution from theuse of solid fuels, implying more than 4,000 deaths per day, more than half of them children under five

years of age.15 More than 85% of these deaths (about 1.3 million) are due to biomass use, the rest due to coal.Indoor air pollution associated with biomass use is directly responsible for more deaths than malaria, almostas many as tuberculosis and almost half as many as HIV/AIDS. That improves the benefits in the cost-benefit calculus for carbon emission reduction measures. Aunun et al (2007) estimated that, in China

reductions in CO2 emissions of 10-20% could generate reductions in air pollution and other benefits thatwould more than offset the costs of action.

Another potential co-benefit is greater energy security. Developing renewable low-carbon energy sources islikely to provide more countries with indigenous energy supplies, reducing dependence on fossil-fuelimports and inadequate grid infrastructure, and giving them greater flexibility in energy supply. In severalcases, the technologies involved are likely to be less capital-intensive and more labour-intensive (hence theadvocacy of renewable technologies in proposals for green fiscal stimuli in developed countries, such asBowen et al., 2009).

Focusing on low-carbon growth will allow LDCs to benefit from the likely future bias in technologicalprogress towards renewable energy technologies. Learning-by-doing, together with carbon pricing, is likelyover time to induce significant cost reductions in renewable energy technologies compared with more

mature hydrocarbon-based power. The worldwide search for better biofuels gives some LDCs scope fordeveloping a new and valuable cash crop as well as a way of developing their own transport along low-carbon lines. However, such a development needs to be undertaken in the context of a comprehensive low-carbon growth strategy, so that new biofuel cultivation does not lead to accelerated deforestation and loss of

peatlands.16

There are a number of reasons why it makes sense for LDCs to adopt low-carbon growth paths appropriateto their needs and capabilities immediately. First, that would avoid ‘locking in’ high-carbon technologies inlong-lived plant, equipment and infrastructure or, alternatively, premature scrapping later on when low-carbon policies were finally adopted. Second, it would be ‘export friendly’ in a world in which rich countriesare likely to become more concerned about promoting low-carbon consumption. Third, it would allow LDCsto benefit from any subsidies for low-carbon research, development and deployment deriving from future

international agreements on intellectual property rights and make it more likely that funds would bedirected towards technologies relevant to the industrial structure of LDCs (in particular, agriculture andland-use). Fourth, it would enable LDCs to access the co-benefits discussed above as soon as possible.Finally, it would facilitate an eventual Global Deal on climate change, with the agreements on carbon

financing and other flows of funds to LDCs that would have to be part of such a deal.17 These flows of fundsshould be additional to current pledges of Official Development Assistance (ODA). But additionality in thissense does not logically entail that the funds should all be earmarked for explicit climate change policies. Asargued above, some of the most effective policies against climate change may be policies with the proximate

target of better governance and the correction of pervasive market failures.18

The question of incremental development funding draws attention to one of the caveats about the benefits toLDCs of adopting appropriate low-carbon growth paths as soon as possible. Globally, climate changemitigation is likely to entail resource costs (discussed further below), although these costs are likely to be

much less than the benefits from avoided climate change. Also, these costs will be front-loaded relative tothe benefits. Developed-country support for these costs needs to be in place before they are incurred. And,




in some cases, effective support may be very difficult to organise, for example, because of the inadequacy of

public-authority outreach in remote rural areas or of support mechanisms for the most poverty stricken.19

A second caveat is that a major share of mitigation costs will be due to the adoption of low-carbontechnologies before their marginal costs have been driven below those of fossil-fuel technologies. Early

adoption by developed countries is warranted by the returns to learning-by-doing and to reverse the biastowards innovation in currently cheaper technologies (Acemoglu et al, 2009). But it is not so clear how muchLDCs should share in the necessary R&D and experimentation. In many industry sectors, the comparativeadvantage in early-stage innovation and learning-by-doing lies with developed countries, and the challengewill be to ensure rapid technology diffusion once new technologies become cost-competitive. Here, LDCsmay be well advised to delay related capital investments until the relevant technologies have travelleddown the learning curve (while avoiding locking in soon-to-be-obsolete carbon-intensive technologies).However, there are still likely to be activities that will benefit from innovation and experience beingundertaken in LDCs (e.g. tropical forestry management, concentrated solar power). These may take longerto bring down costs, particularly if adequate technical assistance is difficult to deliver.

Third, many of the benefits from early action should flow from the correction of market failures. This willdepend on appropriate public policies being put in place. But greater public involvement risks the sort ofrent-seeking and distortion of incentives identified by development economists such as Collier and Easterly(Collier, 2008; Easterly, 2001). The pace at which ‘low-hanging fruit’ can be harvested may be slower than inOECD countries if improvements in governance and institution-building are required first.

Although research in this area is at an early stage, several efforts have been made to examine the practicalscope for low-carbon development, particularly among some of the larger, more rapidly growingdeveloping economies. Chandler et al (2002), for example, investigated climate change mitigation experienceand opportunities in Brazil, China, India, Mexico, South Africa and Turkey. They found that these countrieshad already made substantial reductions in emissions relative to ‘business as usual’, motivated primarily byeconomic, poverty, security and local environmental concerns. Erickson et al (2009) documented optionswith high mitigation potential that would also promote development, particularly in the promotion anddevelopment of renewable energy; the adoption, extension and enforcement of building and appliance

energy codes; and vehicle energy efficiency standards. Ellis et al (2009) has provided a review of a numberof case studies in high-, middle- and low-income countries, emphasising the advantages to developingcountries if they can gain access to climate-mitigation finance from abroad, but also the benefits of technicalassistance (a theme also present in Collier, 2008). Development agencies such as the World Bank and UKDFID have been promoting low-carbon growth studies and helping LDCs develop Nationally AppropriateMitigation Action plans. Project Catalyst20 has been identifying low- and no-cost mitigation options in avariety of countries. These studies suggest that the theoretical arguments for low-carbon development aresupported by empirical evidence. However, much more work tailored to the particular circumstances ofLDCs is needed, recognising that there are many obstacles to correcting market and policy failures, even ifthe resource costs of effective and well-designed action is low.

A popular counter-argument to the emphasis placed on climate change mitigation by policy-makersemphasises the need for traditional development to be encouraged. Schelling, for example, has suggestedthat it would be better for rich countries to transfer resources directly to LDCs to speed up their(conventional) growth and help the currently poor directly, rather than using those resources to develop

mitigation and to pay for poorer countries to mitigate.21 After all, the argument goes, it is not fair to ask thecurrently poor to make large sacrifices on behalf of following generations that are likely to be much richerthan they are. The focus needs to be on raising people out of poverty in the near term, not least to makesocieties more resilient in the face of climate change impacts – growth (and changing industrial structure) isthe best form of adaptation and, if achieved, warrants a less demanding global goal for stabilising

greenhouse gas concentrations in the atmosphere.22

The problem with this line of approach is two-fold, as Shalizi and Lecocq (2009) have pointed out.23 First, itdoes not take into sufficient account the benefits of accelerating mitigation actions globally, deriving frominduced technical change and the option value of early global action. Second, it does not place enough

weight on the risk that currently poor countries may stay poor if subjected to a higher incidence of climate-related disasters (and even more so if any of the low-risk, high-impact global climate catastrophes discussed




by climate scientists take place). We cannot be sure that developing economies will all converge towards theaverage levels of income per head of industrial countries; the evidence for the long-run convergence of

average per capita incomes outside of the OECD and major emerging-market economies is not convincing24 and a number of development economists have drawn attention to the poverty traps afflicting many LDCs

despite receiving development aid.

25

That has two implications. First, for a given distribution of income,there will be more people in absolute poverty for longer, so that the resilience of LDCs to climate change inthe future will be exaggerated. Second, a lower discount rate for LDC investment projects, including inclimate change mitigation and adaptation, will be appropriate.

It is right, however, to stress that development is key to tackling poverty and making economies moreclimate-resilient. Richer, more diversified economies are better able to deal with weather-related shocks.Countries that have higher levels of socioeconomic development, as indicated by basic measures of factorssuch as literacy, health and quality of governance, are hit less hard by extreme weather-related events andare better able to recover from the damages they do suffer. Richer households can afford to take a less risk-averse approach to innovation and adaptation to climate change. And, despite the synergies betweendevelopment and climate change mitigation identified above, there is a need for further research on theinteractions among policies aimed at these two objectives and at promoting adaptation to climate change.

Improving transport infrastructure, for example, is likely to be warranted on development grounds eventhough it encourages carbon emissions from vehicles. But carbon pricing and adaptation policies shouldinfluence the specific infrastructure choices made.




3. Low-cost options for greenhouse gas emission

reductions in LDCsThe costs of climate change mitigation globally are uncertain and much debated. Stern (2007) concluded thatthe expected annual cost of achieving emissions reductions consistent with stabilisation at around 500-550ppm CO2e was likely to be around 1% of GDP by 2050, within a range of +/- 3%. Given the increasingemphasis among policy-makers recently on the desirability of keeping the global temperature increase sincepre-industrial times to 2°C or less, much subsequent analysis has focused on a more ambitious target of 450

ppm CO2e or similar.26 Several large-scale modelling exercises have suggested that such a target is both

feasible and not much more expensive.27 But other studies are more sceptical.28 Estimates depend onassumptions about fossil fuel prices, the menu of technologies that will be available and the degree ofsubstitutability in production and consumption. Similarly, detailed engineering estimates of potentialenergy and emission savings have pointed to policy measures with negative costs over time (but perhapsnegative cash flows initially), while some economists have been sceptical about the existence of ‘freelunches’ of this sort. At the moment, it seems reasonable to conclude that climate change mitigation is likelyto involve costs overall, but that well-designed policies and incentives could bring these costs downsubstantially. Good policy entails implicit or explicit carbon pricing but also measures to tackle market andgovernment failures, not least underinvestment in low-carbon technological development, especially inareas of greater relative importance for LDCs such as agricultural practices and forest management, wheretechnical assistance from countries with stronger research capabilities is important.

One aspect of good policy design is to ensure that there is ‘what, where, when’ flexibility to keep costsdown, with firms and public agencies able to choose which greenhouse gas emissions to cut, thegeographical and industrial location of the cuts, and the timing of the cuts, subject to a credible and stablelong-term climate change policy framework. In the jargon of economists, minimising costs requires that the

marginal costs of additional emissions reductions are the same wherever they take place.29 With respect to

location, the 2010 World Bank World Development Report (World Bank, 2010) pointed out that if participationby developing countries is delayed until 2050 or after, that could double the costs of hitting any givenatmospheric stabilisation target. An international agreement covering only the five jurisdictions with the

highest total emissions (accounting for two thirds of emissions) would triple the cost of achieving a target.30

Developing countries offer similar opportunities for zero- or negative-cost mitigation as do industrialcountries, but more options at low-cost, mainly in agriculture and forestry, as Chart 1 below indicates. Theseestimates have to be treated with caution. They do not fully take into account the macroeconomic effects andrelative price changes likely to be induced by ambitious climate change policies; they may underestimate thecosts of surmounting barriers preventing the take-up of negative-cost options; and they do not reflect the

difficulties of financing investments for which the pay-offs arrive much later.31 But they are consistent withthe economic argument that the correction of market and policy failures can produce some very cheap

mitigation. And the rank ordering of options assessed on a consistent basis is helpful for policy-makers.




Chart 1: Marginal mitigation costs in developing and high-income countries

Source: World Bank (2010), Figure 1.3(a), based on data from McKinsey & Company.

So, as far as the location of emission cuts are concerned, developing countries in general offer the worldseveral low- or no-cost options for emissions reductions. The narrower group of LDCs offers somewhat lessscope, given their low levels of energy- and industry-related emissions, but the opportunities in agricultureand forestry are substantial, especially relative to their levels of GDP.

This is good news for two reasons. First, it means that some mitigation in LDCs (for example, by improvingforest management, introducing local solar power and reducing the use of unmanaged traditional biomassfor heating and cooking) could raise their productivity and employment while improving access to energy,providing an incentive for LDC authorities themselves to adopt low-carbon growth strategies. Second, itprovides an incentive to industrial countries to pay for emissions reductions in LDCs, reducing their own

mitigation costs while providing a stream of finance and technology for LDCs.32 Such payments are essentialif minimising the global costs of mitigation is to go hand in hand with an equitable distribution of those

costs.33

The payments can be generated through agreements and mechanisms such as the CleanDevelopment Mechanism, Reduced Emissions from Deforestation and Forest Degradation and the proposedCopenhagen Green Fund. Some of the burden to high-income countries will also be carried in the form ofhigher prices for imports from developing countries of high-carbon-content products (which should besubject to carbon pricing or taxation in the developing countries themselves, so that they benefit from theresultant revenue) and their low-carbon replacements (which are likely to be more expensive initially thanhigh-carbon ones, in the absence of carbon pricing).

Some policy-makers have argued that a uniform global carbon price would entail much larger paymentsthan necessary to those providing cheap mitigation opportunities. They have, in effect, argued for pricediscrimination, paying only just enough to get the mitigation done; that way, a given amount of climate-policy expenditure can be leveraged to have a bigger environmental effect. But the implication is that thecarbon price implicit in various financing arrangements of potential benefit to LDCs would be lower thanelsewhere (for example, the EU Emissions Trading System), reducing the funds available to LDCs. There aremajor dangers in this approach, in particular, the danger that the carbon price at the abatement margin thatis implicit in separate agreements for REDD or specific industries will not be high enough to achieve enoughmitigation – particularly if it turns out that some supposed negative-cost options are in fact costly, becauseof unanticipated transactions and implementation costs.




4. A low-carbon development path for poor

countriesThe main development objective for LDCs remains the achievement, and subsequent consolidation, of theMillennium Development Goals (MDGs), which UN member states adopted in 2001. There has beenconsiderable progress on poverty alleviation since then, but as the 2015 deadline for the MDGs approaches,it is clear that the performance in many areas is still badly off track. This is particularly the case for sub-Saharan Africa (see Annex 1), and it is why the MDGs remain the top priority for low-income countries.

Climate change does not alter these fundamental objectives, but it may affect the way in which the MDGsare reached. The objective is no longer just development, but development that is low-carbon and alsoresilient to climate change. The three challenges of poverty alleviation, emission abatement and climatechange adaptation have to be considered together; there will be synergies but also trade-offs among them.

The previous section showed how these three issues are intertwined. In this section we try to give a sense

what ‘low-carbon development’ might mean in specific sectors and for particular development issues. Theconclusions are, unavoidably, generic, given the short length of this paper. Actual low-carbon developmentplans will have to be much more detailed and of course country-specific. They will have to take into accountthe particular socio-economic circumstances of countries and their approach to economic growth,employment, education, public health, social protection, energy security, trade and industrial development.

Many developing countries have already embarked on such plans: Brazil, China, India and South Africa areperhaps the most prominent examples. Unlike traditional development plans, they do not necessarily havethe development needs of poor people at their centre and instead focus on identifying the cheapest emission

reduction options from a cost curve.34

But they tell us unequivocally that the low-carbon challenge in poor countries is fundamentally differentfrom that in rich countries. In high-income countries, decarbonisation is about changes to power generation,the redesign of electricity grids, cuts in industrial emissions, residential energy efficiency and newapproaches to transport. Capital-intensive and technologically sophisticated options are available. In LDCs,the decarbonisation challenges are in land-use change, electrification, private-sector development and accessto basic services, such as the provision of heat, light and water, as these are where emissions would be mostlikely to rise initially in the event of high-carbon development. Labour is more plentiful relative to capitaland employment-creating opportunities are generally more valuable.

As low-income countries move beyond the MDGs, we will see the emergence of a middle class with middle-class aspirations and consumption patterns. This will create pressure on emissions of the kind we alreadysee in developed countries and increasingly in middle-income countries like China. But, for the poorestcountries of the world this point is still a long way off; per capita incomes are still much lower and the

power, industry and transport sectors of their economies are much less important.35 When they reach it,

low-carbon technologies will hopefully be more developed and widely available, allowing them to realisetheir development ambitions within the global carbon constraint.

In the meantime, the main link between climate change and development is through adaptation. Mitigation,especially in agriculture and land-use, at least partly paid for by developed countries, and implicit orexplicit carbon pricing to give the right long-term signals are desirable, but the balance between spending onmitigation and adaptation is likely to be much more skewed towards adaptation. Poor countries are morevulnerable to climate change not only because they are exposed to more severe impacts – although many are

– but also because their institutional and socio-economic capacity to adapt is insufficient (Barr et al., 2010).36

Basic indicators of socio-economic development – such as educational attainment, good health care, safedrinking water, access to credit and competent government institutions – are all associated with higherresilience to and lower impacts from extreme weather events (see, for example, World Bank, 2010). Few, if

any, aspects of this agenda are associated with excessive greenhouse gas emissions.




In contrast, access to energy is an obvious area of friction between development and carbon emissions.Worldwide, some 1.6 billion people still do not have access to electricity, and 2.6 billion rely on firewood forcooking (World Bank, 2010).

Although there is no MDG on energy, we know that access to modern forms of energy is central to

development and poverty alleviation (Modi et al, 2005). Electricity is essential to provide basic services suchas education, health care and safe drinking water, and for all entrepreneurial activity.

The World Bank reckons that providing modern sources of energy (predominantly from the primary use offossil fuels) to everybody would add no more than 2% to global CO2 emissions. It seems a small price to pay,compared with the huge development benefits. Electric energy today makes up only 5% of carbon emissionsin low-income countries, compared with 38% in rich countries (World Bank, 2010).

Moreover, bringing electricity to LDCs need not necessarily incur excessive carbon emissions. A large partof the challenge is rural electrification, and we know that, in remote areas with dispersed demand and lowlevels of consumption, renewable energy sources, such as solar PV, can already compete with fossil fuel-based solutions such as diesel generators or the extension of the electricity grid. Creating solar PV marketsin LDCs poses financial and institutional challenges (for example, to establish reliable dealerships and

provide finance for upfront costs), but experience with the technology is growing and it shows that solar PVis cost-competitive. The World Bank is supporting projects in 30 countries that will bring electricity to 1.3million households (IFC, 2007).

Where electricity grids exist, the key challenge often is to make them more reliable, reduce outages and cuttransmission and distribution losses. In other words, there is significant scope for energy efficiencyimprovements in low-income countries as well, by improving infrastructure investment and management –usually involving public spending and regulation.

However, the institutional challenges, capacity gaps and financial barriers to realise this potential areinvariably large and will require effective assistance from the development community.

It is also clear that not all trade-offs can be avoided, as the controversy over the approval of South Africa’s

Medupi power station – prospectively the world’s largest coal-fired power plant – shows. There will be(potentially substantial) demand for increased power generation capacity in low-income countries, much ofit probably from conventional hydrocarbon sources. The onus will be on rich countries to ensure that high-carbon power plants can in due course be retrofitted with carbon capture and storage technology – and topay the associated extra cost.

Until energy demand picks up, the most important source of greenhouse gas emissions in low-incomecountries remains, by some distance, land-use change and forestry. Together it accounts for 50% of low-income country emissions (World Bank, 2010). Reducing emissions from deforestation and forestdegradation is often seen as one of the cheapest options to halt global warming. Inclusive, sustainable forestmanagement is also a crucial, pro-poor development measure. Reducing forest loss is one of the indicatorsfor MDG 7 on sustainable development (Annex 1) and a key priority of global development assistance.

The importance of this goal is easy to see. Forests are critical sources of income and well-being for manypoor people. An estimated 735 million people live in or near tropical forests and depend on them for theirlivelihood. The link between poverty and deforestation is, however, complex (Chomitz, 2007). Rich and poorpeople alike contribute to forest loss, and deforestation can both increase and reduce poverty levels.

Even more complex than the deforestation–poverty link are the social, economic and institutional factorsthat underlie deforestation. They include ill-defined property rights over forest assets, government captureby vested interests, large-scale corruption and, crucially, the undervaluation of ecosystem services. Forestscreate financial revenues as a source of food and timber, but not for the spiritual value, climate regulationand biodiversity services they also provide.

The single most important cause of forest loss, though, is agricultural expansion. High-value activities likepalm oil production and cattle ranching can yield revenues in excess of $3,000 per hectare (Grieg Gran,

2008), much more than standing trees – unless their carbon and ecosystem value can be factored in andmonetised.




This is why proposals to pay for reduced emissions from deforestation and forest degradation (REDD)under the emerging new global climate change regime are important. They might tilt the economic balancebetween cutting trees down and leaving them standing. The renewed willingness to tackle deforestation andto fund this effort internationally provides a unique opportunity to tackle this decades-old issue. However,the intricate nature of the problem and the deep political and economic constraints should not beunderestimated, particularly if REDD creates attractive new opportunities for rent seeking.

Pressure to increase agricultural output is also putting increased stress on ecosystem and forest resources. Agriculture contributes more than 20% to the gross domestic product of low-income countries and accountsfor about the same amount of their greenhouse gas emissions (World Bank, 2010). For many low-incomefamilies, it is their main source of income and subsistence. Although the share of agriculture in GDP will fallas nations grow richer and diversify, increasing agricultural productivity is an important developmentchallenge going forward.

It is essential to meet development goals on malnutrition and cater for a growing world population ofperhaps 9 billion by 2050. Unsurprisingly, UK DFID sees agricultural productivity as one of eight key factorsthat underpin economic growth in developing countries (DFID, 2009).

The unprecedented increase in agricultural output and productivity needed over the coming decades maybe at odds with the demands of a low-carbon economy. The green revolution of the 1960s and 1970sachieved its productivity boost largely on the back of mechanisation, irrigation and fertilisation – activitiesthat could well increase the carbon footprint of agriculture. There is ample scope for productivityimprovements through better farming practices and efficient management. Nevertheless, tacklingagricultural emissions is an important challenge for low-carbon development, exacerbated potentially by agrowing demand for biofuels and reduced agricultural yields as a result of climate change.

Transport and industry make up a much smaller share of overall greenhouse gas emissions in LDCs, 11% ofthe total compared with 38% in high-income countries. Private-sector-led growth is a cornerstone ofvirtually all poverty reduction strategies (DFID, 2009), brought about by improvements in the businessenvironment, better access to finance, support for small and medium-sized enterprises (SMEs) and the

promotion of foreign investment. Better transport, communications and trade infrastructure is anotherintegral part of this general thrust. We should therefore expect (and accept) that emissions from these sectorswill rise. The challenge is to ensure that economically efficient production practices and standards are

adopted that are likely to promote energy and carbon efficiency too.37 There are industrial abatementopportunities in all countries, including low-income countries.

Despite suspicions of a ‘race to the bottom’, foreign investment can often be associated with more efficient

production practices and the transfer of technologies.38 It may be more difficult to increase theenvironmental performance of SMEs, which contribute most to economic activity and provide the bulk of jobs in most countries. There is evidence that SMEs are often associated with inferior environmentalperformance (see Blackman, 2006). For both small and large firms, targeted policy measures and financialincentives will be crucial, including appropriate energy tariffs and – particularly in the case of SMEs – accessto finance and technical know-how. Similar policies will also be needed to ensure firms adapt to a changingclimate (Agrawala and Fankhauser, 2008).




5. Conclusions

The poorest countries of the world are greatly threatened by human-induced climate change. It is vital for

them that the global community collectively acts to halt it.39 The new dangers make it all the more importantthat collective action also takes into account the development needs of LDCs, which are likely to be hitearliest and hardest while having the least capacity for adaptation. The three major challenges of limitingclimate change, adapting to its consequences and reducing poverty have to be faced together. That requiresfinancial support from rich countries to help promote LDCs’ resilience and adaptive capacity. It alsorequires that LDCs eventually follow a development path that differs from both those trodden by today’sindustrial countries and those being explored by emerging-market economies at present. That too willrequire financial assistance from developed countries. There is no room in the long run for high-emissioneconomies and high-carbon growth is unsustainable, given the possible consequences for fossil-fuel suppliesand climate-change impacts.

The most important source of greenhouse gas emissions in LDCs is land-use change, in particular

deforestation. Halting forest loss is also a major development and local environmental issue and as such akey priority of low-carbon development. Synergies between poverty alleviation and emission reduction alsoexist in rural electrification, where renewable energy solutions such as solar PV are often cost-competitivewith fossil-fuel based solutions. Elsewhere there may be trade-offs between development and low-carbonobjectives, for example when it comes to transport and industrial development. Good transport links and athriving private sector are essential for growth and development. Emissions from these sources maytherefore increase, but it is important that the cleanest and most efficient technologies are deployed.

Low-carbon growth paths appropriate to the needs of LDCs ought to be explored now, even though, in thenear term, the emphasis must be on poverty alleviation and adaptation.

Moving on to such paths is likely to entail higher resource costs initially. On grounds of equity, those extracosts should be borne largely by today’s rich countries and by future generations, who – if climate-change

policies are successful – will be better off and subject to much less risk than they would have been otherwise.That is why it is important that international negotiations focus on the financing needs of the LDCs. But low-carbon growth for LDCs need not be solely a story about extra costs in the near term, with the promise ofmore sustainable development in the long term. The threat of climate change has cast more light on theimportance of key failures in markets and governance and increases the urgency of tackling them – in LDCsas in other countries. The poorest countries can benefit immediately from a greater focus on this task – witha recognition of the need to correct underinvestment in appropriate technology development, a greateremphasis on resolving undefined or contested land rights, the provision of networks for the delivery ofcleaner energy to the poor, and an appreciation of the co-benefits for health and the environment that couldflow from low-carbon development strategies.




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NOTES

1 See Dell, Jones and Olken (2008). Jones and Olken (2010) also find that high temperatures in poor countries have an adverse

effect on their exports, especially agricultural and light‐manufacturing exports.

2 See Burgess et al (2009) on India.

3 Hallegatte et al (2007).

4 Stern (2007) and IPCC (2007) describe many of the likely developments and the non‐negligible risks of even worse outcomes.

5 Richardson et al (2009).

6 WRI CAIT database, accessed 12 August 2010. International bunkers included. Cumulative data are for the period 1850 to 2006.

LDCs comprise for this purpose: Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Cape Verde,

Central African Republic, Chad, Comoros, Congo Dem. Republic, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea,

Guinea‐Bissau, Haiti, Kiribati, Laos, Lesotho, Liberia, Madagascar, Malawi, Maldives, Mali, Mauritania, Mozambique, Myanmar,

Nepal, Niger, Rwanda, Samoa, Sao Tome & Principe, Senegal, Sierra Leone, Solomon Islands, Sudan, Tanzania, Togo, Uganda,

Vanuatu, Yemen and Zambia.

7 Source as in footnote 6. Data on emissions from land use change and forestry are not available for many individual LDCs, but the

difference between total emissions per head for LDCs as a group and for the world as a whole is estimated to be very similar to the

difference excluding land use change and forestry, even though these activities (together with agriculture) are more important for

LDCs.

8 People differ about what would be a fair distribution of the costs of climate change mitigation. The degree of aversion to

inequality is crucial. Stern (2007) offered estimates of the costs of climate change using an assumption that implies that people

should pay broadly in proportion to their per capita consumption for climate change mitigation. Carbon pricing without income

transfers would be unfair if carbon‐intensive products such as energy accounted for a larger share of poor people’s than of rich

people’s consumption. Some economists, such as Dasgupta (2008), have argued that policymakers should be more averse to

inequality than was Stern, implying that larger transfers to poor people are needed to pay for the climate‐mitigation costs they

would otherwise bear.

9 See Bowen et al, 2009. The relationship does not disappear at high levels of income per capita if proper allowance is made for

past technical progress and technology choice. In other words, there does not appear to be a robust ‘environmental Kuznets Curve’

phenomenon for CO2 emissions (see the discussion in Stern, 2004).

10 But carbon intensity varies widely across countries; in 2006, the carbon intensity of electricity production varied from 1842.6

gCO2e per kWh in Botswana to 1.4 gCO2e per kWh in Mozambique.

11 WRI CAIT database accessed 4 May 2010.

12 See Hardin (1968).

13 As documented, for example, by the research discussed in Collier (2008). Collier stresses how such factors inhibit growth in many

LDCs, home to the ‘bottom billion’, partly by preventing good governance, institution building and provision of public goods.

14 The OECD and IEA have detailed the high costs of energy subsidies (see the discussion in Burniaux et al, 2009). These may be

motivated to some extent by concerns about the access to energy by the less well off (the issue of ‘energy poverty’) but it is far

from clear that the poor are the main beneficiaries. In any case, direct financial transfers and micro loans to the poor may be more

effective in tackling poverty as well as more efficient from the point of view of the structure of the economy.

15 Quoted in World Bank (2009).

16 Blanford et al (2009) and Wise et al (2009) illustrate in a global framework the dangers of biofuel production displacing forests

and food production in developing countries, severely distorting global land use, in the absence of appropriate climate change

mitigation policies in those countries.

17 These additional funds are warranted to make the incidence of mitigation and adaptation costs fairer; the responsibility of

developed countries for the lion’s share of past greenhouse gas emissions strengthens the case.




18

Similarly, there is no reason why the uses of funds labelled ODA should be entirely unaffected by the realisation that climate

change is a more serious threat than previously thought. In practice, earmarking seems to be a crude way of facilitating monitoring

by donor countries, in particular to ensure that recipients do not ‘free‐ride’ on emissions cutbacks by developed nations.

19 But, just as energy subsidies supporting fossil‐fuel use do not necessarily help the poorest, particularly if adequate energy supply

is not forthcoming at subsidised prices, pricing carbon need not harm the poorest if combined with a strategy to promote locally

generated renewable energy and energy efficiency.

20 An NGO providing policy analysis and advice to parties involved in the UNFCCC negotiations (www.project‐catalyst.info)

21 See, for example, Schelling (1997, 2007).

22 A related critique of climate change mitigation policy has emerged from Lomborg and the so‐called Copenhagen Consensus

(Lomborg (ed.), 2009). This draws attention to the higher benefit‐cost ratios from several alternative development policies.

However, the approach to climate change policy taken there makes insufficient allowance for risk and inequality aversion or the

uncertainties about the dangers of climate catastrophes. Also, Lomborg is remarkably sanguine in assuming a high likelihood of a

zero‐carbon energy technology soon displacing hydrocarbons without aggressive carbon pricing.

23 Schelling himself argues for the need to act immediately to mitigate, even though he is less keen on the idea of a global

greenhouse gas atmospheric concentration target unchanging over time.

24 Quah (1996).

25 See Collier, op. cit. Flows of development assistance seem lower than warranted by the degree of inequality aversion assumed by

Stern (and even more Dasgupta) in calculating the expected costs of climate change, Equity considerations would seem to point to

the need for more redistribution from the rich to the poor within generations, but less redistribution from current to future

generations once the climate‐change externality has been addressed – that is, less saving to bequeath capital to future generations.

The implication for capital accumulation in currently poor countries is ambiguous.

26 There has still been remarkably little economic analysis of whether the advantages of having a target of 450ppm CO2e instead of,

say, 550ppm, outweigh the additional costs. Some economists who have studied this question remain sceptical, while agreeing that

appropriate action is much better than no action (e.g. Nordhaus, 2008).

27 See, for example, the reports of the ADAM and RECIPE projects, Hulme et al (ed.s), 2009, available at www.adamproject.eu/, and

Edenhofer et al, 2009, available at www.pik‐potsdam.de/, respectively.

28 Some of the papers for the 22

nd Stanford Energy Modeling Forum suggest that it may be impossible to stabilise at 450 ppm CO2e.

See the special issue of Energy Economics, Vol. 31, Supplement 2, December 2009, available via emf.stanford.edu/

29 The marginal costs should rise over time, in line with a rising common global carbon price.

30 World Bank (2009), pp. 55‐56.

31 Fighting human‐induced climate change entails significant investment flows. Globally, that means that either other investment

has to be displaced or private and/or public consumption has to be reduced, through fiscal or monetary measures. That is likely to

add to the costs of mitigation policy calculated from marginal abatement cost curves.

32 Carbon offset markets allow this to be done in a decentralised way, but they are not the only option. Developed country

governments have an incentive to give financial support to funds that will provide help for decarbonisation in developing countries.

But targets for emission reductions financed by developed countries must be stringent enough (together with nationally

appropriate actions among developing countries) to generate the global reductions necessary. For some developed countries, that

might entail financing long‐run reductions greater than the current level of emissions physically located in those countries.

33 See the discussion in footnote (8). Economists often assume that efficiency and equity can be treated separately, but this rests on

an assumption that side payments can always be made to correct any adverse distributional consequences of improvements in

efficiency. That assumption is very strong, particularly when payments across borders and across time may be necessary. And

payments can sometimes induce new inefficiencies by changing incentives and encouraging rent seeking.

34 See Project Catalyst (2009) for a summary.

35 According to the World Bank (2009), power, transportation and industry accounted for 5%, 4% and 7% respectively of low‐

income country GHG emissions, compared with 26%, 7% and 16% in middle‐income countries. In contrast, land‐use change and

forestry accounted for 50%, compared with 23%.

36 The distinction between mitigation and adaptation is not always clear‐cut. Many activities designed to promote development

could and should promote both. In this context, it is unhelpful to insist on rigid earmarking of financial assistance for one or other

or traditional development objectives.




37

By ‘economically efficient’, we mean that production is carried out at least cost when costs are valued at the appropriate prices,

which may differ from actual prices if there are market and regulatory failures – of which the failure to price carbon emissions is

one of the most important. The terms energy and carbon efficiency are used in the looser sense of lower use of energy and carbon

for given output.

38 See EBRD (2005) and Smarzynska and Wei (2001). The “race to the bottom” concern was expressed eloquently by Mabey and

McNally (1998).

39 The unfair distribution of climate change impacts was an important “reason for concern” identified by the IPCC back in 2001

(McCarthy et al., 2001).



For Least Developed Countries , Oxfam Discussion paper, Month Year

Annex 1: Progress with the Millennium Development Goals




ACKNOWLEDGEMENTS

We are grateful to Oxfam GB for initiating this paper and to Robert Bailey, KirstyHughes, Kate Raworth and their colleagues for their thoughtful and detailed comments.We would also like to acknowledge support by the Grantham Foundation for theProtection of the Environment, as well as the Centre for Climate Change Economics andPolicy, which is funded by the ESRC and Munich Re.



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