Opportunities and challenges for building the new climate economy

18 September 2015

Where might international cooperation and partnerships galvanise stronger action on climate change and economic development? What role for trade governance?

This is a year of unprecedented opportunity. Landmark intergovernmental conferences – the UN financing for development talks in Addis Ababa, Ethiopia in July, followed by the UN summit to adopt the post-2015 development agenda and Sustainable Development Goals (SDGs) in New York, US this month, then the G20 Summit in Antalya, Turkey in November, and finally the UN climate talks (COP21) in Paris, France in December – have the potential to advance a new era of international cooperation that could help countries at all income levels build lasting development and economic growth while reducing climate risk.

A goal once seen as distant – to end extreme poverty, achieve broad-based prosperity, and secure a safe climate, simultaneously – is increasingly within reach. As the Global Commission on the Economy and Climate’s 2014 report Better Growth, Better Climate argued, crucial investments will be made over the next 15 years in the world’s cities, land use, and energy systems. These could generate multiple benefits for economic growth, human development, and the environment; or they could lock countries into high-carbon pathways with severe economic and climatic consequences. Through credible, consistent policies to drive resource efficiency, infrastructure investment, and innovation, both developed and developing countries can achieve stronger economic performance and climate goals simultaneously.

Partnerships for better growth and a better climate

The Global Commission’s latest report published in July finds, however, that the transformation pace towards a low carbon economy needs to be rapidly accelerated. It recommends a set of ten actions for enhanced international collaboration in key areas – from clean energy to forest protection – that can drive economic growth and reduce climate risk in tandem. Together, it estimates that these could achieve up to 96 percent of the emissions reductions needed by 2030 to help keep the world below a two degree Celsius warming from pre-industrial levels as agreed by the international community, demonstrated in Figure 1. The report shows how such actions can be scaled up through cooperative, multi-stakeholder partnerships not just between governments, but also among businesses, investors, states and regions, cities, and communities. Moreover, across a number of the recommendations, the international trade community has a big role to play in building a new climate economy.

Figure 1: Emissions reduction potential for each of the Global Commission’s recommendations (Gt C02e)

Note: Bars show mean emissions reduction potential for each field with the full ranges in brackets. 
Source: New Climate Economy, 2015. Estimates of Emissions Reduction Potential for the 2015 Report, Technical Note. Available at: http://bit.ly/1Q7qPuS 

Momentum is building

Technological innovation, new economic trends, and new political commitments are now combining to build momentum for change. Renewable energy costs continue to decline, while energy storage and demand management technologies are being developed rapidly, creating new opportunities to build cleaner and more efficient energy systems and to expand energy access in developing countries. Carbon pricing has been adopted or is planned in about 40 countries as well as more than 20 subnational jurisdictions, with over 1000 major companies and investors declaring their support for such policies. In the last two years alone, 28 countries have launched efforts to reform fossil fuel subsidies, helped recently by lower oil prices. Cities are adopting ambitious emission reduction and air quality targets and plan to track their progress using common standards.

Some 175 governments, companies, indigenous peoples’ groups, and civil society organisations have committed to halt deforestation by 2030, and leading consumer goods and agricultural trading companies are working with tropical forest countries and communities to eliminate deforestation from their supply chains. International finance to support climate resilience and low carbon investment continues to grow. Issuances of “green bonds,” for example, have more than tripled in the last year. Companies, investors, governments, and financial regulators are increasingly integrating climate change into their investment and business strategies, creating more new opportunities and competitive advantages for market leaders.

The price tag, meanwhile, of continuing the current fossil fuel-based economic model is also becoming ever clearer. Air pollution primarily related to fossil fuel-based energy and vehicle emissions leads to an estimated 3.7 million premature deaths globally each year, with millions more suffering from respiratory illnesses. Growing traffic congestion is causing serious economic costs in cities throughout the world, while road traffic accidents kill around 1.25 million people annually, with over 90 percent of fatalities occurring in developing countries. As low carbon energy costs fall and climate policy is tightened, moreover, locked in high carbon assets increases the risk of future devaluation or stranding.

More speed and scale is needed

But action is not yet occurring at the scale or speed necessary for structural transformation toward a new climate economy. For example, despite its crucial importance to growth, infrastructure investment remains inadequate almost everywhere. It continues to be constrained by the protracted effects of the global financial crisis, deeply embedded market failures, underlying weaknesses in policies and institutions, and the inertia of a longstanding high-carbon economic model. Moreover, while carbon dioxide emissions are beginning to decouple from growth in both advanced and some emerging economies, this process is not happening rapidly enough to avoid the worst impacts of climate change. To hold global warming to under two degrees Celsius, the carbon emitted per dollar of GDP in the global economy needs to decline by around five percent a year between now and 2050, compared to a current rate of 1.5 percent.

Paris is critical

Governments from nearly 200 nations are now working hard to achieve a new international climate agreement for the post-2020 period to be inked at COP21 in Paris. A strong deal would provide a vital foundation for a lower carbon and more resilient global economy, sending an important signal to businesses and investors on the future direction of global growth. The Global Commission argues that the agreement should include a long term goal for emissions to reach near zero or below in the second half of the century and a mechanism for regular strengthening of commitments. A strong and equitable package of support for developing countries is also needed through which international public finance mobilises private sector flows, complements strong domestic financial resources, and helps enhance institutional and technological capacities.

On the one hand countries’ climate action plans submitted as part of this process, known as “intended nationally-determined contributions” (INDCs), in many cases represent historically ambitious commitments.  But, on the other hand, a serious problem has emerged. It is clear that added together the national pledges are not going to achieve a sufficient level of emissions reduction to keep the world below the two degrees Celsius threshold. It is important that INDCs are considered under the Paris deal as floors rather than ceilings to national ambition and can be strengthened in the future.

Key areas for cooperative action

The Global Commission’s 2015 report identifies ten key areas of opportunity for stronger, cooperative climate action that will also lead to significant economic benefits. Multi-stakeholder cooperation has the potential to scale up technological change, expand markets, reduce costs, address concerns about international competitiveness, spread best practice, and increase the flows of finance. Some of the report’s recommendations include stronger action by city authorities, including the implementation of low carbon urban development strategies prioritising policies and investments in public, non-motorised and low-emission transport, building efficiency, renewable energy and efficient waste management. City-level partnerships such as “C40” and initiatives such as the Compact of Mayors should be scaled up to help drive this. The Global Commission estimates that low carbon investment in major cities could save around US$17 trillion globally by 2050 and up to 3.7 gigatonnes of carbon dioxide emissions (Gt CO2e) a year by 2030.

The report also calls for a scaling up of sustainable land use financing toward a global target of halting deforestation by 2030 and restoring at least 500 million hectares of degraded farmlands and forests. Governments, multilateral, and bilateral finance institutions, the private sector and willing investors should work together through partnerships such as the UN’s REDD+, the multi-stakeholder Initiative 20x20 in Latin America, and the Africa Climate-Smart Agriculture Alliance (CSA). This would enhance agricultural productivity and resilience, strengthen food security, and improve livelihoods for rural and forest communities, and could save up to 9.0 Gt CO2e a year by 2030.

Another key action would involve stronger cooperation among multilateral and national development banks with governments and the private sector to reduce the cost of capital for clean energy, aiming for total global investment to reach US$1 trillion by 2030. This would improve energy security and reduce the costs of air pollution from fossil fuels and could save up to 7.5 Gt CO2e a year by 2030. The report also identifies agreement under the G20 to raise energy efficiency standards to the global best for goods such as appliances, lighting, and vehicles as an important step. G20 countries should also commit to introduce carbon pricing, phase out fossil fuel subsidies, and ensure that all new infrastructure is climate-resilient and compatible with climate mitigation plans and goals. Global businesses should make a stronger commitment to long term emissions reduction, including agreement in major industries on sectoral transformation roadmaps. In addition, the report recommends greater cooperation between developed and emerging economies to scale up research and development of the low-carbon technologies, which will also be needed after 2030. Governments should take action to reduce emissions under the international aviation and maritime treaties and the Montreal Protocol on hydrofluorocarbons (HFCs). Efforts in these two sectors could reduce emissions by as much as 2.6 Gt CO2e in 2030.

Trade and global convergence of energy efficiency standards

The Global Commission’s recommendations have several important implications for international trade policy. This includes the proposal on energy efficiency. G20 countries produce 94 percent of all vehicles, so the standards they set determine the global market. Greater energy efficiency can benefit countries at all stages of development. Estimates indicate that investment in energy efficiency could boost cumulative economic output globally by US$18 trillion by 2035, increasing growth by as much as 1.1 percent annually, and save up to 6.9 CO2e a year by 2030 in G20 countries alone. [Ref 1] This is particularly the case for fast-growing economies trying to achieve universal energy access with limited resources. Energy efficiency standards, as part of a wider policy package, can be an effective means of changing consumer and business behaviour, and driving product innovation. International cooperation can amplify the benefits by aligning and gradually raising efficiency standards around the world.

Converging on a smaller number of standards will expand the size of global markets for the most efficient technologies and reduce non-tariff barriers to trade. A 2010 study by the International Centre for Trade and Sustainable Development (ICTSD) explored the role of trade in helping to harmonise energy efficiency standards globally and highlighted a number of benefits. [Editor’s note, ICTSD is the publisher of Bridges Trade BioRes]

Investment in energy efficiency markets worldwide in 2012 was between US$310-360 billion, according to the International Energy Agency. The larger the market, the greater the incentive for companies to cater to it and to apply the higher efficiency standards to all their products, taking advantage of economies of scale. International standards and harmonisation have generally been found to have a positive, or at least neutral, effect on trade. [Ref 2] Moreover, the benefits of common standards accrue not just to the largest manufacturers, but also to smaller national producers seeking overseas markets.

There are strong economic grounds for countries to raise their standards over time and gradually converge towards the global best. This does not mean that all countries would have the same standards. There are likely to be differences for countries at various stages of development. The goal would, however, be to converge toward a smaller number of standards. Adoption of these standards would be voluntary and they could be applied in different ways. In some cases, countries may require all products to achieve a minimum performance level, such as for new buildings. In others, such as for domestic appliances, minimum energy performance standards can be set but labelling products can also be important by allowing consumers to choose. In all cases an important principle is that standards should be subject to continuous improvement so that the global best is not a static concept but a constantly evolving one.

There are already some examples of efforts to harmonise standards at the international level. For instance, a voluntary approach to harmonise regional test procedures for mid-size industrial electric motors has been coordinated between standards bodies, trade bodies, manufacturers, and country governments through the International Electrotechnical Commission (IEC). The initiative has developed a set of recommended energy efficiency thresholds, with countries choosing the one that is most suitable, and dates for progression sending a clear direction for manufacturers. In addition, work is ongoing related to passenger vehicles in the G20 through the Global Fuel Economy Initiative, which also works with other multilateral policy processes including the UN Framework Convention on Climate Change.  

This paper is based on the Global Commission on the Economy and Climate’s report: Seizing the Global Opportunity: Partnerships for Better Growth and a Better Climate.

Michael Jacobs, Senior Advisor to the New Climate Economy, a project of the Global Commission on the Economy and Climate.Report Director of the Global Commission’s report, Seizing the Global Opportunity: Partnerships for Better Growth and a Better Climate.

Russell Bishop, Senior Economist for the New Climate Economy project. Lead author of the energy efficiency and innovation work of the Global Commission’s report, Seizing the Global Opportunity: Partnerships for Better Growth and a Better Climate.

[Ref 1] Bishop, R., 2015 (forthcoming). Raising Energy Efficiency Standards to the Global Best. Contributing paper for Seizing the Global Opportunity: Partnerships for Better Growth and a Better Climate. New Climate Economy, London and Washington, DC. Available at: http://newclimateeconomy.report/misc/working-papers/ 

[Ref 2] Swann, P., 2010. International Standards and Trade: A Review of the Empirical Literature. Report for the UK Department of Business, Innovation and Skills (BIS). OECD (OECD Trade Policy Working Papers, 97). Available at: http://www.oecd-ilibrary.org/content/workingpaper/5kmdbg9xktwg-en?site=f...

 

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