Green Money

NEW YORK – There is little doubt that green will be the metaphorical color of choice for world leaders when they gather at the G-20 Summit in Pittsburgh. Attention will focus on turning the “green shoots” of recovery into sustainable “green growth,” leading to “green economies” consistent with the goal of protecting the world’s climate. Governments in rich countries are beginning to spell out just what that will mean in terms of policy and lifestyle changes and the investments required to develop clean energy sources. But, to be successful, a “green new deal” will have to address some enormous challenges in the developing world, where the impact of global warming will be felt first and hardest, and where rapid growth requires massive expansion of cheap energy. Globally, more than 30 million tons of oil equivalent are consumed in the form of primary energy every day, equivalent to 55 kilowatt hours per person per day, with rich countries, on average, consuming more than twice that figure. For many developing countries, the figure is well under 20 kwh; China is still well below the global average, and even most emerging markets consume less than one-third of the average in many advanced economies. The economics behind efforts to close these energy gaps are relatively straightforward. Up to a threshold of around 100 kwh per capita per day, energy consumption and human development indicators go hand in hand. At current prices, between $10 and $20 per person per day would be needed to reach that threshold. This puts energy security well beyond the means of not just the poorest, but also of most people in emerging economies. Spending $10 per day on energy services would, for example, exhaust the per capita incomes of countries such as Angola, Ecuador, and Macedonia. Hence, big investments in energy services are the order of the day throughout the developing world. In order to provide more energy to meet development goals without accelerating global warming, there must be a shift to a new energy infrastructure built around renewables (of which the most significant are probably solar power, wind, and biofuels), cleaner coal, and carbon capture and storage. The problem is that these are currently much more costly options than their carbon-heavy alternatives. Policy makers in developing countries are concerned that being forced to go down this path could put modern energy services beyond the reach of poor countries, families, and communities. Market-based solutions to the climate challenge run the very serious risk of undermining development objectives, precisely because they aim to raise the price of energy services in order to make renewable energy sources attractive to private investors. Indeed, the protectionist elements tacked on to these proposals make them decidedly anti-development. So what is needed is massive public investment in cleaner energy provision, coupled in the short term with appropriate subsidies to offset high initial prices. If targeted at the most promising technology options (say, solar and wind), such a strategy would yield early unit cost write-downs through innovation, learning, and economies of scale; give the private sector clear, credible, and attractive signals; and encourage energy efficiency. The big obstacle is access to predictable and affordable finance. The onus is on rich-country governments to support this big push into clean energy in the developing world, as it was their carbon-fueled economic prosperity that has brought us to the brink of a climate catastrophe. So far, rich countries have not risen to the challenge; despite commitments made at Kyoto, Bali, and elsewhere, the resources committed for climate-change mitigation – let alone adaptation – in developing countries have been paltry and poorly targeted. The scale of the needed support is comparable to the Marshall Plan, which committed 1% of the United States’ GDP per year to help European reconstruction after World War II. But, as with the original plan, the long-term returns from such a commitment will be enormous. This time, moreover, the burden will not fall on one country alone, and a broader mix of traditional and innovative sources of financing are already available to help fund the required investment programs in energy efficiency and renewables. Even so, scaling-up multilateral support will require a massive overhaul of international finance. Back in April, G-20 leaders accepted that investing in a low-carbon infrastructure, particularly energy services, is key to a truly sustainable economic and environmental future. In Pittsburgh, with the clock ticking on talks to adopt a successor treaty to the Kyoto Protocol this December in Copenhagen, the G-20 will have a real opportunity to show that the color of serious money to meet both climate and development goals really is green. Jomo Kwame Sundaram, the United Nations Assistant Secretary-General for Economic Development, was awarded the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

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