Mitigation of climate change: a process of structural change

With pro-active industrial policies, developing countries will gain - not lose, says UNCTAD´s Trade and Development Report 2009

Geneva, 7 September 2009 -- Climate change mitigation does not contradict development goals but is a process of structural change worldwide that offers enormous economic opportunities for enhancing development, argues UNCTAD´s Trade and Development Report 2009 (TDR)(1).

The Copenhagen Conference on Climate Change scheduled for December offers a new opportunity to engage all countries in an effective international framework for policies aimed at reducing greenhouse gas emissions and limiting global warming. For developing countries and transition economies to benefit from these opportunities, necessary structural changes cannot be left to market forces alone; pro-active industrial policies must be undertaken to link into the fast growing market for "green technology" and "environmental goods", says the report.

The TDR ´09, subtitled "Responding to the global crisis" and "Climate change mitigation and development", was released today.

Scientific research suggests that the humanitarian, social, and economic consequences of global warming, if unabated, will be dramatic, and the negative impact will be particularly strong in most developing countries. Temperature increases could reach 6º by the end of the century. To improve the prospects for development and poverty reduction, a sharp reduction of greenhouse gas emissions (GHG) which would limit the temperature increase to 2-2.5ºC by 2050 is necessary. Achieving this target, however, is not possible without resolute policy efforts that trigger a process of structural change towards more climate-friendly modes of consumption and production around the world. Developed economies must assume the lead in climate change mitigation, the report notes. They account for the largest share of the accumulated GHG in the atmosphere and have greater economic, technological and administrative capacities for shifting rapidly to a low-carbon economy. But contributing to climate change mitigation is also in the interest of developing and transition economies. The TDR says it would considerably improve their prospects for development and poverty reduction. In developing and transition economies, especially in the largest and fastest growing among them, GHG emissions are on a steeply rising trend. This trend will continue unless these countries, too, take vigorous actions to change the mix of their energy use and their modes of production and consumption.

Product and process innovation in support of climate change mitigation is not fundamentally different from other innovation activities: they emerge from entrepreneurial spirit and the search for competitive gains, the report says. But since climate change mitigation is increasingly recognized as a public good, such innovation also calls for direct government intervention through the introduction of regulations that impose or prohibit certain forms of production and consumption, that establish emission performance standards, and set strict regulations for GHG reductions. "Until today, there has been insufficient investment in public and private research for the development of alternative sources of energy and cleaner production methods, which has led to ´carbon lock-in´ in current modes of production and consumption," UNCTAD Secretary-General Supachai Panitchpakdi remarks in the Overview to the report. "Proactive policies are therefore needed, including subsidies and public acquisition of patents, to advance technological progress and accelerate the process of catching up from past underinvestment. Moreover, experience shows that technological change advances faster when the public sector takes the lead in R&D and in the practical application of new technologies."

UNCTAD economists contend that climate change mitigation must be seen as a process of structural change, which entails adjustment burdens for many households, firms and economies, but also offers enormous new opportunities for product and process innovation, income growth, and employment growth. They compare this process to that of mechanization, motorization, digitalization and other processes of structural change in the past. The UNCTAD report also points to experiences from both developed and developing countries showing that many synergies are possible between GHG emission reductions and development objectives.

From this perspective, there is no inevitable trade-off between climate change mitigation and development. Much of the technology needed for a reduction of greenhouse gas emissions exists already, but needs to be applied more widely. In addition, it is necessary to further develop and use new technologies and renewable types of energy. This implies considerable potential for growth: the market for renewable energy and green technologies, as well as for energy-efficient cars, buildings and appliances will grow rapidly in the coming decades -- probably faster than any other market. Thus, for each country the costs of climate change depend on how much value-added resulting from the production of non-fossil energies and climate friendly equipment, appliances, and consumer goods can be generated at home.

"There is considerable scope for developing economies in the years and decades ahead to gain from the opportunities that will emerge from the structural change towards renewable sources of energy, climate-friendly technologies, low-carbon equipment and appliances, and more sustainable modes of consumption", the report notes. Successful participation in these new markets could help developing and transition economies to combine climate change mitigation policies with faster growth. But this process cannot be left to the market alone: it requires well-conceived industrial policies that foster the creation of capabilities for producing such goods, or spur participation in their production and subsequent upgrading.

The global market for "green technologies" and "environmental goods" is still dominated by developed countries, but several developing economies already account for an increasing share of this market, and it will be important that developing countries and transition economies make integration into this market part of their development strategies. "For some countries, climate change mitigation offers new possibilities to exploit natural comparative advantages, particularly in the production of low-carbon energy, which so far have been of minor economic importance; for others it may offer opportunities to build new dynamic comparative advantages," the TDR says.

Developing countries can contribute to innovation in climate protection processes and in environmental goods adapted to specific local circumstances and exploiting comparative advantages. These countries also could participate in markets for green technology and environmental goods by integrating into international production chains, as many of them have successfully done in other sectors of manufacturing industry. Seizing opportunities offered by fast growing new markets and strategic integration into such markets are not entirely new challenges. They have been key elements in the design of successful strategies for diversification and industrial upgrading. Each developing and transition economy will need to devise its own strategy for integrating into the emerging markets for new products that help achieve GHG abatement objectives. Those strategies will have to take into account both the local needs for specific "environmental goods" and the possibilities for producing such goods locally, including for regional and global markets.

The creation and strengthening of industries for green technology and environmental goods can be supported by research and development in public institutions, by easing access to patents, and by fiscal and financial support for the production of climate-friendly equipment, appliances, and consumer goods. Well-targeted FDI policies can also be part of an industrialization strategy aimed at taking advantage of the global move to a low-carbon economy. As in other areas where technological progress and innovation on a broad scale was achieved in the past, government procurement can play a decisive role. A proactive industrial policy with a special focus on climate-friendly innovation and on the production of green technology and environmental goods is of particular relevance in the context of forward-looking development strategies, because the policy space for support measures in this area is greater than in other areas, because it is less narrowly circumscribed by multilateral agreements, the report says.

The enlistment of developing and transition economies in efforts to combat global warming could be greatly encouraged by appropriate international measures. In light of the public good achieved in reducing climate change, the flexibilities of the World Trade Organization´s (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) could be interpreted in a way that would ease patent protection, as by allowing compulsory licensing of patents for the production of climate-friendly equipment and goods that embed climate-friendly technologies, and related processes. This would be similar to the exemptions accorded for medicines in support of public health. The international community would also need to mobilize additional financial resources, not only to help developing countries adapt to the consequences of climate change, but also to support their contribution to climate change mitigation.