Friday, 29 June 2012

Financing renewable energy: Who should pick up the bill?

By Stephen Spratt

The Rio+20 Summit ended as expected: long on aspiration, short on hard commitments. Everyone accepts the need to move to a more sustainable model of economic development and growth. The question posed at the original summit – and still outstanding twenty years later – is how on earth this is to be achieved?

While there are real disagreements on what many aspects of the ‘green economy’ should look like, there are areas of consensus. Perhaps most important is the general acceptance of the need to move away from a reliance on fossil fuels towards clean forms of energy. So how are we doing on this front?

Gaining energy from renewable resources?
Despite repeated failures to secure global deals to reduce carbon emission to sustainable levels, annual investment in renewable increased six-fold from 2004 to 2010. This was also the year that developing countries overtook developed countries for the first time, accounting for more than half of the $268billion of investment. While this is very much to be welcomed, it is nowhere near enough. Energy from non-renewable sources (coal, oil and gas) still represents the overwhelming bulk of energy production globally, and there seems little chance of this changing – countries aspire to sourcing 10-20% of their energy from renewable sources, not 100%. Although China has become a global leader in renewable energy – and is largely responsible for investment growth in recent years – it is still building a new coal-fired power station every week. Why is this? and what can be done about it?

I recently co-authored (with Stephany Griffith-Jones and Jose Antonio Ocampo) a paper for the 2012 European Report on Development, which examined this issue. We looked at three questions:
  1. What are the obstacles to increasing investment in renewable energy in developing countries? The primary obstacles are economic: renewable energy remains more expensive than non-renewable in most instances. Despite the fact that costs have fallen significantly – particularly in wind and solar – the fact remains that renewables are rarely competitive in terms of cost, and often significantly more expensive.
  2. What mechanisms could be developed to overcome these? The potential mechanisms to address these could take one of two forms. Firstly, the cost of producing renewable energy can be reduced, and/or secondly, returns to renewable energy producer can be increased. A variety of mechanisms already exist, or have been proposed, to alter the economics of renewable energy in this way. Many countries have implemented feed-in-tariffs, some have directly subsidised the cost base, others have provided guarantees, yet others have explored how to build in a price for carbon.
  3. Who should bear the cost of funding these mechanisms? Despite their differences, public mechanisms to alter the economics of the renewable energy industry have a common feature: they represent a cost to the public purse, and often a significant one. Which brings us to the question of responsibility, particularly who should bear this cost? 
‘Polluter pays’ principle
If ever there was a case for employing the ‘polluter pays’ principle, this would seem to be it. So who is the polluter? Well, the overwhelming responsibility for climate change rests with today’s developed economies. As their share of annual emissions rises, the larger emerging economies also have some responsibility – though it is important to recognise that it is cumulative rather than current emissions that matters.

What no-one suggests is that low income countries bear any meaningful responsibility for climate change. So, while the UK governments should financially support renewable energy in the UK, this does not hold for poorer developing countries. If these countries are to switch to renewable energy in a major way, therefore, someone else needs to bear the costs of financing the mechanisms to make this happen.

As long as renewable energy remains more expensive than fossil-fuels – and this could be a long time yet – countries will bear a real economic cost for moving away from fossil fuels. If we want developing countries to make this shift – which is only necessary because of problems we have largely caused – then it is today’s developed countries that need to provide the financial support needed to incentivise private investment.

*Image reproduced from The Open University Learning Space - Introducing environmental decision making

Tuesday, 26 June 2012

Trading experience: What can environmental negotiations learn from trade failures?

By Carlos Fortin

In a recent Development Horizons blog Lawrence Haddad persuasively argued for more lateral thinking to understand multilateral inertia on the environment, and suggested we could learn from trade failures.

Failures of WTO
World Trade Organization (WTO) analyst Paul Blustein has made some perceptive observations what these failures may be. He was struck by the fact that in a three-month WTO course (in 2009) for developing country officials there was only one day on trade theory; the bulk of the course was spent instructing the students in “the art of hard headed mercantilism … the basic idea is that each team is supposed to gain as much access as possible for its country’s most competitive exports in the other countries’ markets, while giving up as little access as possible in its own market”.*

In fact, a major problem in trade negotiations in the WTO has been the contradiction between the free trade theoretical approach of the organisation, which views trade negotiations as a positive-sum game; and the mercantilist ethos of the country negotiators, who effectively define the negotiations as a zero-sum game.  This, of course, makes a successful outcome difficult, and, in some cases (e.g. agriculture), impossible, at least so far.

The fundamental cause of the mercantilist stance of negotiators lies, of course, in the national political economy of the negotiations.  Governments stand to lose revenue when they reduce tariffs; national industries stand to lose domestic market shares when they face competition from imports.  The training of negotiators compounds the problem.

What to do? 
For one thing, the training of negotiators –both from developing and developed countries- and more generally the public discourse of the WTO and the international trade community should strike a balance between emphasising the win-win possibilities of trade and recognising frankly its distributional consequences.

For another, and more importantly, the international community as a whole should address the distributional issue seriously through mechanisms to compensate the countries that would experience welfare loses; this can be done by means of direct transfers as well as policy changes elsewhere that raise the welfare of the affected countries. The very good paper by Patrick Low and Marina Murina referred to in Lawrence‘s blog hints clearly that the WTO might not have been sufficiently diligent in considering this problem and that, as a result, “the challenges faced by the multilateral trading system in defining its scope and negotiating agenda may have been greater”.

So, what lessons from trade for the environmental question?
Environmental negotiations are in some important respects different from those in trade, and again the Low/Murina paper identifies lucidly the main differences. But the basic principles –maximise mutual benefits and compensate for losses incurred- are the same. What this duo say about trade negotiations -“if countries can suffer welfare losses from participating in internationally agreed regulatory reform, some notion of justice and legitimacy would seem to require that the distributional issue receives consideration” - seems just as valid when applied to the environmental field.

*Paul Blustein, Misadventures of the Most Favored Nations. Clashing Egos, Inflated Ambitions and the Great Shambles of the World Trade System, New York, PublicAffairs, 2009: 22

Friday, 22 June 2012

On Rio+20, Twitter storms and fossil fuel subsidies

By Dirk Willenbockel

Up to now I have resisted all temptations from our blog coordinators to write about the Rio+20 summit. For a seasoned observer who consciously lived through the past 25 years of UN initiatives and political discourse on sustainable development from the 1987 Brundtland Report onward (yes, I am that old), it is  not easy to get particularly enthusiastic about Rio+20. After the 1992 Rio Declaration and Agenda 21 and the 2002 Johannesburg Plan of Implementation, the prospect of yet another declaration that more or less just reconfirms earlier broad aspirations and intentions without including specific and enforceable commitments does not appear overly exciting - politically important and necessary as such reconfirmations may be.

Moreover, from a global long-run perspective and in light of the Durban debacle, signing noble pronouncements of intent on sustainable development while postponing a meaningful global climate deal beyond the point of no return seems rather futile. As I put it bluntly elsewhere some time ago, ‘given that climate change ... is very likely to be the predominant force adversely affecting ecosystems over the course of the 21st century, discrete policy efforts to preserve ecosystems in the absence of decisive global climate change mitigation action would seem to be as useful as re-arranging the deck chairs on the Titanic’.

But enough fatalism for today. What I find interesting to see (and worth blogging about) is that Rio+20 seems to draw the attention of a wider public to the critical issue of fossil fuel subsidies. The Guardian reports that in the run-up to the summit a 24-hour Twitter storm campaign to end fossil fuel subsidies became the top trend on Twitter this Monday.

The International Energy Agency estimates that in 2010 such subsidies amounted to more than US $400 billion across 37 countries included in their study. According to the IEA chief economist, phasing out these subsidies could provide around half the emissions reductions needed over the next decade to reach a trajectory that would limit global warming to 2o C.

A large chunk of this sum is attributable to fuel subsidies in developing and emerging countries. Cutting such subsidies as part of a transition to a low-carbon growth path is widely considered as an unpalatable policy option, as the resulting fuel price increases hit poor households and reduce economic growth due to higher energy costs in production. In Nigeria, a fuel subsidy cut triggered mass protests that led to a policy U-turn last year.

However, recent collaborative IDS research with Vietnamese partners commissioned by UNDP and briefly summarised here indicates that adverse distributional and growth side effects of fossil fuel subsidy cuts are by no means inevitable. A model-based dynamic scenario analysis suggests in particular that adverse impacts on poor households can be neutralised by using part of the government savings arising from the subsidy cut for compensating income subsidies. Using the additional fiscal space to foster additional productive and more energy-efficient investments may actually raise income and consumption for all households in the medium run – a variant of the familiar double-dividend effect of environmental taxation.

Monday, 18 June 2012

Connecting diasporas for giving

By Noshua Watson

I clocked this blog post on The Guardian (UK) about the potential for indigenous philanthropy* and development in Sri Lanka, by our Sussex anthropology colleague, Tom Widger. Tom is working on a study on the impact of charity, philanthropy and inclusive business on poverty reduction and wellbeing in Sri Lanka.

In his blog, Tom notes that Sri Lankans are some of the most generous givers in the world (8th according to the World Giving Index and the highest ranking developing country) but their giving does not line up with the issues that larger, international donors support and goes toward more humanitarian relief than longer-term issues.

Tom mentions that his study will look at the Sri Lankan diaspora as well as local giving in Colombo.  Given the role of remittances in Sri Lanka’s economy (about 10% of GDP), diaspora giving could be even greater than philanthropy from organisations on the island itself. Widger mentions that there is a disconnect between Sri Lankans’ generous indigenous giving and institutionalised philanthropic organisations.  Organising diaspora giving could be a way to institutionalise giving but make sure that it still corresponds with Sri Lankans’ own priorities.  However, building diaspora giving networks has its own challenges.

In his study of Bangladeshi diaspora giving, Safi Rahman Khan points out migrants need help with forming diaspora organisation and fundraising.  They also need help from home country governments in guaranteeing safe money transfers, legislating philanthropy-friendly tax law and vetting home country charities. Widger also mentions that Sri Lankan charities have difficulty raising funds because it is associated with giving to radical groups.  IDS Research Fellow Mariz Tadros writes that Islamic philanthropies face similar challenges.  She believes giving must be led by legitimate local actors.

We’ve begun to consider diasporas as communities that need to be included in development cooperation.  Examining diaspora philanthropy makes a run-around the debate over whether remittances count as development and goes to the heart of the matter: How do people support their own communities’ well-being?  I hope that the evidence from this study will influence future development cooperation frameworks.

* I would really like to emphasise that for philanthropy research in general, the definition of “indigenous” needs to include indigenous philanthropy from the diaspora. 

Friday, 8 June 2012

Crime and punishment in the Eurozone

By Stephen Spratt

Economists are keen on incentives. Rather than crude prohibitions, the most effective and efficient way to influence behaviour is with economic incentives, where ‘bad’ behaviour is punished and therefore discouraged, while ‘good’ behaviour is rewarded and therefore encouraged.

This came to mind last weekend, which I spent in Ireland, arriving straight after a referendum on the new Eurozone fiscal pact. Given zero growth, high unemployment, brutal public spending cuts, the prospect of all of these continuing for the foreseeable future, and the sense that the EU in general – and Germany in particular – were making things worse not better, I had thought that there was every chance of a resounding victory for the ‘no’ campaign. As it was, 60 per cent voted ‘yes’.

From what I saw, the ‘yes’ campaign used two arguments. The first was fear – bad as things are, they could get a whole lot worse; the prospect that bailout funds might be withheld as some kind of punishment was floated, for example. Second, it was implied that a ‘yes’ vote would enable Ireland to capitalise on its reputation as the EU-IMF’s ‘star pupil’, and renegotiate the terms of its bailout as a reward for its good behaviour.

And there was some reason to believe this might work. In January of this year, a ‘senior German official’ was quoted in the Irish Times as saying that: ‘It should be the case that the good pupils are rewarded for their perseverance, not punished with demands for continued adherence to the programme.’

Putting aside what this says about power imbalances in Europe, and the general offensiveness of the language, it appears the opposite may be true. In the immediate aftermath of the ‘yes’ vote, the Irish Times quoted a spokesman for the German Finance Minister, Wolfgang Schäuble, who said that it would send a ‘negative signal’ for the terms of the Irish deal to be reopened. More precisely, a ‘senior German official’ was quoted as saying that: ‘Ireland is considered a model bailout student so you have to think of the consequences of such a renegotiation which would, in effect, double Ireland’s bailout programme.’

This suggests a complete reversal of the usual approach to incentives: punishment for good behaviour. A Eurozone government – and its citizens – might reasonably conclude that toeing the line is not only immensely painful and unfair, but unlikely to deliver the ‘reward’ of a better deal on external debt. If being ‘good’ means you have to always be the ‘star pupil’ because of the example this sets to the rest of the class, while the ‘difficult pupils’ are cut all the slack, expecting countries to stick to painful austerity packages within the Eurozone may have become even harder than it was already.