Kelly Sims Gallagher
In the struggle to combat climate change, the world is fighting the last war. Since the dawn of the Industrial Revolution, countries have released one and a half trillion metric tons of carbon dioxide into the atmosphere. The largest cumulative emissions have come from the United States, European countries, China, and Russia, in that order. But these countries are now prosperous enough to pay for policies that can place them on the path to net-zero emissions by midcentury. The top emitting countries of the future could come largely from the developing world—countries such as Brazil, India, Indonesia, and South Africa, which face the herculean task of bringing millions out of poverty while simultaneously adapting to the harsh realities of climate change.
If industrialized countries do not shoulder the responsibility to help prevent this next wave of emissions, the global effort to avoid climate disruption will fail. Efforts to ensure that today’s largest polluters rapidly curb their emissions are vitally important, but this progress risks being erased if poorer countries find it impossible to pursue a low-carbon development strategy. In order to simultaneously preserve the environment and help lift hundreds of millions of people out of poverty, rich countries must provide financing and policy support at a scale that has so far been unavailable to poorer countries.
There are roughly two dozen emerging economies across the globe that are poised to expand their greenhouse gas emissions dramatically in the near future if they do not receive this assistance. Their population size, rapid economic growth rates, and reliance on fossil fuels have placed them on a trajectory for a dramatic expansion of their emissions. Together, they could cause the same massive wave of emissions that China produced during the first two decades of this century, when it released 195 billion metric tons of greenhouse gases into the atmosphere. This would render impossible the efforts to reach global “net zero” by midcentury, which scientists say is necessary to avoid the worst effects of climate change.
This challenge represents not only a scientific and political dilemma but an ethical and moral one, as well. Citizens of the world’s least developed countries have the same aspirations for economic prosperity as citizens of China, Germany, or the United States do. Those who argue that the only way to combat climate change is to reduce economic growth miss the fundamental unfairness of global economic development, which has left a third of the world’s population behind. Yet if developing countries follow the “grow first and clean up later” pattern established by the United States, western Europe, and East Asian countries, the consequences for the climate will be catastrophic.
International focus, however, remains stubbornly fixated on the carbon emissions of China, the United States, and the EU. Institutions largely designed by and for developed countries—such as the Major Economies Forum on Energy and Climate and the G-7—continue to be central for climate diplomacy, even if they have not yet proved effective in reducing global emissions. But most of those countries’ emissions have already peaked, and they all boast the mature governance institutions, vibrant private sectors, and ready access to capital that make it entirely plausible for them to achieve net zero by 2050.
The developing world, however, has none of these advantages. Many leaders from developing countries are no less concerned about climate action than their counterparts in Beijing, Washington, and Brussels, and the choices they make in the next five to ten years will determine the extent to which a surge in emissions can be prevented. So far, however, the efforts to provide their countries with low-carbon economic growth opportunities have been woefully inadequate. Although the recent UN Climate Change Conference, known as COP26 (the 26th Conference of the Parties), resulted in incremental progress, negotiators also acknowledged “with deep regret” that countries had failed to mobilize the financing for green development strategies that had been promised in previous agreements—and even those pledges were insufficient to address the scale of the problem. Meanwhile, the private sector continues to invest in whatever energy projects it wishes—regardless of how dirty they are.
Although world leaders have announced their intention to limit the global temperature rise to 1.5 degrees Celsius, the planet is currently on track to experience warming far in excess of that level. The consequences of this will be devastating: according to the latest report by the UN’s Intergovernmental Panel on Climate Change, every additional 0.5 degrees Celsius of warming beyond 1.5 degrees Celsius will cause “clearly discernible increases in the intensity and frequency of hot extremes . . . as well as agricultural and ecological droughts.” In the event of two degrees Celsius warming, extreme heat waves that normally would have occurred only once in 50 years will likely occur 14 times during the same time frame. Three hundred and fifty million more people risk being be exposed to deadly heat: residents of Karachi, Pakistan, and Kolkata, India, for example, could experience, on an annual basis, conditions like those of the heat wave that struck the Indian subcontinent in 2015, which killed thousands. These changes will afflict the developed and the developing world alike; there is no alternative but to collaborate to avoid the worst effects of climate change.
PLAYING CHICKEN WITH THE CLIMATE
When American leaders were previously confronted with rapidly growing emissions from the developing world, they largely responded to the challenge by pointing fingers. Their inaction paved the way for a massive spike in greenhouse gas emissions.
In 1997, the U.S. Senate unanimously approved the Byrd-Hagel Resolution, which declared that the United States would not sign on to an international agreement mandating emission reductions if it did not decree a reduction in greenhouse gas emissions for developing countries, as well. The game of chicken started by Senator Robert Byrd, Democrat of West Virginia, and Senator Chuck Hagel, Republican of Nebraska, continued for 17 long years, until 2014, when U.S. President Barack Obama and Chinese President Xi Jinping jointly announced that they were committing their countries to emission-reduction targets of their own choosing. This breakthrough paved the way for the adoption in 2015 of the global Paris agreement on climate change, in which every country in the world made a nationally determined commitment to limit emissions.
When the Byrd-Hagel Resolution was passed, China’s emissions were just 3.1 billion metric tons annually. U.S. emissions stood at 5.5 billion metric tons per year, and on a per capita basis, Americans emitted eight times as much carbon dioxide as the Chinese. Today, China emits far more greenhouse gas emissions than any other country, although its per capita emissions are half those of the United States. If industrialized countries such as the United States had supported China’s shift to a low-carbon economic model during the almost two decades that separated the Byrd-Hagel Resolution and the Paris agreement, the world would almost certainly have avoided the rise in China’s emissions of nearly 200 billion metric tons since the beginning of the twenty-first century.
In 1997, China’s GDP was dwarfed by the United States’, standing at less than $1 trillion in current U.S. dollars. Its accession to the World Trade Organization in 2001, however, unleashed the potential of its export-led development model: China’s GDP grew by leaps and bounds for the next 20 years, reaching $14.7 trillion by 2020. This is the development model that most developing countries look to for inspiration today—but it is a climate disaster. As the growth of China’s economy exploded, the country’s emissions likewise skyrocketed, surpassing those of the United States in 2005 and tripling in only 14 years.
Hundreds of millions of people were pulled out of poverty during China’s economic “miracle.” But urban air pollution choked China’s cities, and pollution fouled its water supplies. A 2007 joint study conducted by the Chinese government and the World Bank found that the water in half of China’s main rivers was unsafe for human consumption. The same study estimated that the economic burden associated with air pollution alone was equivalent to cutting 1.16 percent off of China’s GDP.
No single country is likely to produce the same volume of emissions as China did during the first two decades of this century. China’s emission growth was a function of its massive population size, high economic growth rate, and heavy reliance on coal for energy. There are 15 major emerging-market or developing countries that possess two out of three of these drivers (Bangladesh, China, Congo, Egypt, Ethiopia, India, Indonesia, Pakistan, the Philippines, South Africa, Tanzania, Thailand, Turkey, Uganda, and Vietnam); eight other countries are deeply reliant on petroleum consumption, the next most carbonintensive fuel (Algeria, Brazil, Iran, Kazakhstan, Mexico, Nigeria, Russia, and Saudi Arabia). This makes a total of about two dozen countries deserving priority attention and support.
Several of these countries together, if they continue on their current economic growth paths, could easily create a wave of emissions similar to the one China caused from 2000 to 2020. For instance, if just four of them—Indonesia, Iran, Nigeria, and Saudi Arabia—were to meet their pre-pandemic emission growth rates (as reported by the Climate Action Tracker) through 2050, their cumulative net emissions between now and then would be 197 billion metric tons. This figure would be equivalent to China’s emission output between 2000 and 2020.
A power plant outside of Tianjin, China, October 2021Thomas Peter / Reuters
This calculation does not take into account any planned emission-reduction policies or pledges. Thankfully, many developing countries have announced their intentions to improve their climate records: South Africa has pledged to reach net-zero emissions by 2050, Indonesia and Saudi Arabia have committed to reaching net zero by 2060, and India has promised to achieve net zero by 2070. But none of these countries has produced a detailed plan for how to achieve its goal. Meanwhile, Iran has not yet announced a timeline for reaching net zero, and countries heavily reliant on coal, such as India and Vietnam, will have a particularly difficult time making the transition to a green economy. Despite these challenges, Vietnam committed at COP26 to phase out domestic coal use by the 2040s.
Wealthy economies will need to provide some form of support for all these countries to bring an end to business as usual. Many countries in the developing world have good intentions to avoid climate change but need the financing and technical support to accomplish this policy shift. They will understandably prioritize poverty alleviation and economic growth—especially now, as the world comes out of a global recession caused by the COVID-19 pandemic.
These developing countries are also more vulnerable to extreme weather events caused by climate change. If the world doesn’t begin rapidly reducing emissions, their growth will be hobbled by increasingly frequent hurricanes, mudslides, floods, and droughts. One analysis, sponsored by a global network of central banks, found that most countries could experience a 10–25 percent loss of GDP if no additional steps are taken to mitigate climate change. The greatest GDP losses are projected to occur in sub-Saharan Africa and South Asia, but China and the United States could still suffer substantial losses of up to ten percent of GDP. According to a UN report published earlier this year, it is estimated that the cost of adapting to climate change in developing countries will rise from $70 billion today to up to $500 billion by 2050.
The transformation of some of these countries will be especially difficult if they rely heavily on fossil fuel production, which is the case for Iran, Russia, and Saudi Arabia. Even if they curb emissions in their domestic economies, they will still be exporting coal, oil, and gas to support their economic growth. If they continue to abet emission growth in other countries, their net-zero pledges will be rendered hollow.
FEELING THE HEAT
Despite the implementation of four major climate agreements and increasingly dire warnings from scientists, greenhouse gas emissions from all sources increased by 58 percent between 1990 and 2020. The concentration of greenhouse gases in the atmosphere increased by 18 percent during the same period (since some emissions are absorbed by oceans and forests).
Even the Paris agreement, a good outcome by the standards of international climate negotiations, is far from adequate. If all countries fulfill their promises, emissions will be 15 billion metric tons lower and global average temperatures will be one degree Celsius lower in 2050 than otherwise would have been the case. Yet by most estimates, total warming will still be an intolerable 2.7 degrees Celsius.
There are three major reasons why global efforts have come up short. First, in the Paris agreement, as with most global environmental agreements, countries face few consequences for missing their targets. Climate negotiators settled on an approach that allows each country to determine its own path to reducing carbon emissions in the hope that this would secure universal participation—and sure enough, 193 countries submitted nationally determined targets under the Paris agreement. But there is no enforcement mechanism to make sure countries honor their commitments and no way to make laggards step up their efforts. Many political leaders have also set ambitious targets for the distant future, long after they will have left office—meaning that they will not be the ones forced to make the hard decisions necessary to achieve their stated goals.
Second, emerging economies (as well as many industrialized economies) have failed to develop a model of economic growth that does not rely on fossil fuels and energy-intensive industrialization. Japan, South Korea, and China adopted what became known as the East Asian development model—an approach that is manufacturing-intensive and export-led, with significant state intervention—and are all among the top ten emitters today. China is trying to reduce the carbon intensity of its economy by switching to renewables and nuclear energy, but its abandonment of coal has been too slow.
Third, public and private capital flows to developing economies do not provide sufficient financing to green energy projects. The International Energy Agency has estimated that $4 trillion in annual investments in clean energy is required to decarbonize the global energy system. In Paris, negotiators committed to mobilizing only $100 billion per year for developing countries by 2020—and even that pledge has not been met.
Although climate finance is notoriously difficult to track, the world appears to be mobilizing slightly more than $600 billion annually, just 15 percent of what is needed. National development institutions and corporations provide the bulk of the money (approximately $275 billion), multilateral and commercial banks come in second (with more than $190 billion), and individual investors and state-owned enterprises each provide roughly $55 billion. But three-quarters of these funds are spent domestically in developed countries, leaving little for the developing world. Sub-Saharan Africa benefits from only roughly $20 billion in climate finance per year, for example, compared with East Asia’s $292 billion.
Most multilateral development institutions have failed to prioritize low-carbon energy projects. A study of investments from the World Bank, the International Finance Corporation, and the Asian Development Bank in 2015 and 2016 found that only about 20 percent of the financing from these three institutions was aligned with the goal of staying below warming of two degrees Celsius.
The World Bank has reported that it provided $9.4 billion in financing for energy efficiency and renewable energy between 2015 and 2020. It does not report on its fossil fuel investments, making it difficult to assess its overall portfolio—although one German nongovernmental organization, Urgewald, conducted research that suggests the World Bank has invested $10.5 billion in new fossil fuel projects since the signing of the Paris agreement. By contrast, two of China’s so-called policy banks (the China Development Bank and the Export-Import Bank of China), which are government run, financed $16.3 billion in hydropower projects, $7.8 billion in nuclear power, and $2.4 billion in renewables between 2016 and 2020.
Although most multilateral development banks halted financing for coal a decade ago, they have done too little to support alternatives to this carbon-intensive fuel. There has been some modest progress: the Asian Infrastructure Investment Bank and the New Development Bank have both actively financed renewable energy projects. The World Bank’s energy strategy, updated in 2020, reiterates that the bank no longer finances coal projects, that it halted financing for upstream oil and gas in 2019, and that it has “ramped up” efforts to help developing countries transition to clean energy.
These are welcome initiatives, but the multilateral banks’ investments in clean energy are still insufficient. The World Bank’s Climate Investment Funds has supported 26 gigawatts of clean power since 2008, whereas China alone has financed 32 gigawatts of clean energy projects in the last five years. The main financing vehicle under the Paris agreement is the Green Climate Fund, a small organization that as of October 2021 had financed just 190 projects around the world, with a cumulative commitment of $10 billion. Although the fund should continue to be part of the solution, project-by-project approaches are not going to provide the scale of support that is needed.
The failure of multilateral development banks to make financing for clean energy widely available means that they are ceding the space to public and private investors who are more interested in profit or geopolitics than climate change. China’s Belt and Road Initiative has provided crucial development support to many poorer countries, but more than 55 percent of the BRI’s energy finance has gone to fossil fuels, and of that, 70 percent was investment in coal. Overall, China financed 133 gigawatts of new power plants between 2000 and 2021, of which 56 gigawatts were from coal, 35 gigawatts were from hydropower, nine gigawatts were from wind, four were from solar power, and one was from nuclear power. Xi recently committed to stop building overseas coal plants and to “step up” support for low-carbon and clean energy projects, but whether China will follow through on these promises remains to be seen.
A Chinese-funded wind farm near Addis Ababa, Ethiopia, November 2015Tiksa Negeri / Reuters
But as tempting as it is to criticize China for funding overseas coal projects through its state-owned policy banks, it is important to note that 87 percent of the financing for overseas coal plants between 2013 and 2018 came from non-Chinese public and private financiers, including U.S. commercial investment banks, Japanese public and private banks, and more.
During the Trump administration, the United States offered almost no support for green development strategies. The U.S. Export-Import Bank temporarily halted lending in 2015 because it lacked a quorum on its five-member board and the Republicans refused to confirm new appointees. It was reauthorized in 2019 with a backlog of $39 million worth of projects in its financing pipeline. The United States didn’t have a development bank until 2019, when the U.S. International Development Finance Corporation was born—and even then, the Trump administration made little use of it. The DFC has committed to reach net zero in its investment portfolio by 2040 and announced in September that climate-focused investments would account for one-third of its portfolio by fiscal year 2023.
The United States also has the U.S. Agency for International Development, or USAID, but its resources are dwarfed by those of the world’s development banks. USAID’s budget for the 2021 fiscal year committed just $600 million to climate efforts. The Power Africa initiative of USAID during the Obama administration, which aimed to expand access to clean energy in Africa, was a great example of what is needed—but it withered on the vine during the Trump years. As of March 2021, Power Africa had financed only 12 gigawatts of renewable energy, 4.8 gigawatts of which were already online. The resources being devoted to clean energy programs are simply too small to meet rising demand in the developing world.
ARRESTED DEVELOPMENT
Many developing countries are not only willing to develop more sustainably but also eager to do so. The challenge is securing the necessary financing and technical assistance to make the transition to clean energy without jeopardizing their economic growth.
Take Ethiopia, which has committed to a nonfossil fuel future and has a long list of geothermal, hydro, solar, and wind energy projects in its electricity-sector master plan. But many of these projects have not yet been financed, even as Ethiopia ranks as one of the top three countries in the world for the number of people without access to electricity. Due to the country’s lack of creditworthiness, China has been the main interested lender for Ethiopia’s renewable projects: Beijing’s Export-Import Bank has provided $4.4 billion in financing for nine hydro and wind power projects and five transmission and distribution projects since 2000. Meanwhile, the World Bank has provided $2.4 billion in loans to Ethiopia during this period for energy and climate-related projects.
Other countries are open to clean energy but are preoccupied with near-term solutions to their energy shortages. Pakistan has pursued an “all of the above” energy strategy, including expanding coal, hydro, natural gas, nuclear, solar, and wind power. China’s policy banks have financed a mix of fossil fuel and nonfossil fuel projects in the country, investing a whopping $20.6 billion in 19 energy projects since 2000, including seven coal, five hydro, and three nuclear projects. During the same time period, the World Bank appears to have invested $4.4 billion, primarily in clean energy and transmission and distribution projects. For Pakistan, climate mitigation no doubt feels like a luxury it cannot always afford as it works to increase its economic growth and alleviate poverty.
While the barriers to expanding clean energy in Ethiopia and Pakistan may be primarily financial, many other developing countries simply don’t know how to pursue greener development. Some aren’t even sure they want to do so, worrying that it will undercut their foremost priority: development. Most developing-world policymakers have minimal familiarity with renewables and a great deal of familiarity with coal. According to the International Energy Agency, in 2020, countries outside the Organization for Economic Cooperation and Development relied on coal, peat, and oil shale for 36 percent of their total energy supply, while renewables supplied only 16 percent.
In 2016, Bangladesh, opting for what it considered the most cost-effective path for power development, issued a power-sector master plan that embraced a shift from natural gas to coal. This is ironic, given that Bangladesh is one of the countries most vulnerable to climate change. (More recently, its government seems to have started to have second thoughts, introducing a new development plan that at least acknowledges that Bangladesh’s heavy reliance on fossil fuels “is a matter of concern.”) The national energy strategies of Indonesia, South Africa, and Vietnam also champion coal, largely because these countries have abundant domestic supplies of the fuel.
An example of what is needed was announced at COP26, when France, Germany, the United Kingdom, the United States, and the European Union committed to provide $8.5 billion to help South Africa achieve a just transition away from coal and implement policies to decarbonize its economy. Policies like this can speed the shift to cleaner sources of energy in emerging markets, ensuring that their economic development does not hamper efforts to mitigate climate change.
FOLLOW THE MONEY
The process of global climate negotiations is necessary but not sufficient to solve the climate crisis. This work needs to be coupled with efforts to ensure that developing countries can access sufficient resources to pursue low-carbon development strategies. The public and private sectors must mobilize financing for the roughly two dozen countries where economic growth could cause large increases in emissions in the near future. Some of these countries, such as Saudi Arabia, should be able to finance their transitions without international assistance (although they may still benefit from policy advice). Others, such as Ethiopia, India, Pakistan, Tanzania, and Vietnam, will need much more comprehensive support in terms of financing, capacity building, and technical assistance.
At the moment, national climate policies are essentially divorced from global financial flows. Changing that starts with governments, which must hold themselves and one another to account for regulating private financial institutions and greening their own public investments. Private firms control the overwhelming majority of international financial flows but have failed to regulate themselves despite the many voluntary agreements that already exist, such as the Green Bond Principles, which provide guidelines for financing environmentally sound and sustainable projects.
Therefore, governments must step in. Financial regulators could require the disclosure of climate-related investments, prohibit companies from making new investments in coal or other high-carbon industries (as recently proposed in a bill by U.S. Senator Jeff Merkley, Democrat of Oregon), and promote cooperation among central banks to reduce climate-related risks in the financial system. The U.S. Federal Reserve recently joined the Network of Central Banks and Supervisors for Greening the Financial System, a group of 80 central banks and supervisory authorities that is sharing best practices for strengthening the financial system’s resilience to climate-related risks.
The public sector is in equally dire need of reform. The governments of major emerging economies, such as Brazil, China, India, Mexico, and Russia, must reform their state-owned enterprises to be carbon neutral and start moving away from taxes on fuel as a major source of revenue. One option is to shift from fuel and income taxes to carbon taxes, which could promote the use of low-carbon energy sources while allowing governments to maintain their tax bases. Industrialized nations that have already implemented a carbon tax should provide technical assistance to developing countries. Norway, for example, has deep experience with these policies: it has proposed tripling its national tax on carbon dioxide emissions by 2030, while also committing to offset these increases with reductions in other taxes to avoid decreased competitiveness.
The other big task is to fundamentally rethink how global development institutions function. The inventor Charles Kettering, who led General Motors’ research division in the first half of the twentieth century, once observed that managers should “never put a new technology in an old division,” because it will get eaten by its siblings. That is why the world needs a new global green development bank. Such a bank should be modeled on the World Bank or the Asian Infrastructure Investment Bank but be devoted solely to financing low-carbon, resilient economic development trajectories. It could offer grants, loans, loan guarantees, and other types of investments to developing countries without the cumbersome project-by-project approach currently used by the Green Climate Fund. It should be staffed by experts who can provide technical assistance to developing countries about how to establish the environment necessary to spur private-sector investment in low-carbon industries. Ideally, it would induce a “race to the top” as each country tried to outperform the others in the delivery of sustainable prosperity solutions.
Finally, a low-carbon development model must concentrate on green industrialization—that is, job creation and growth in industries that do not result in pollution. Moving forward, this model could tap new digital technologies to produce economic activity that is less carbon-intensive. Expanding service industries, creating strategies for sustainable agriculture, and investing in new high-tech energy, transportation, and building industries are also key elements of a low-carbon development model.
There have been important success stories in the developing world that show the potential of this kind of development model. In India, a state-owned company aggregated commitments from cities and states to buy 85,000 electric three-wheelers, which are now available for purchase at subsidized rates. In Kerala, the state government has ordered that government offices purchase electric vehicles. These are the sort of procurement and financing arrangements that the developing world needs going forward. But electric vehicles still accounted for less than two percent of India’s automobile sales last year, underscoring the need to quickly scale up efforts to decarbonize economies around the world.
LEADING THE WAY
It is entirely possible to stop the next wave of emissions, provided both developed and developing countries show leadership in confronting the challenge. Many emerging economies are willing to adopt policies to mitigate climate change: of the roughly two dozen countries identified as having the potential for high emission growth, half have proposed net-zero targets for midcentury. Indonesia is about to institute a modest carbon tax on coal plants, and Mexico and South Africa already have carbon taxes in place. China recently finalized a national emission-trading system for power plants, and Kazakhstan has established its own emission-trading regime. Ethiopia has released an economic strategy that prioritizes green development, featuring plans to expand its electricity supply from renewables and to reforest the country.
But these countries also need financing and policy support, and unfortunately, the world’s two largest economies have failed to offer climate leadership. The United States has not modeled a good policy approach to low-carbon economic growth, as meaningful climate legislation remains stalled in Congress. The country arguably leads the world in clean energy research and development, but it falls terribly short in transferring those inventions to the marketplace because of its historical inability to create stable market incentives for low-carbon industries. The United States should be leading the push for reform of the multilateral development banks and the establishment of a global green bank. It must also begin regulating its private banks so that they cease investing in high-carbon industries and instead provide financing for low-carbon industries and fuels.
China, meanwhile, has concentrated on industrial policy for low-carbon industries. Its firms have already conquered global solar markets and are on the way to expanding their control of the market for electric vehicles and batteries. Likewise, Beijing created stable markets for renewable energy deployment, resulting in China having the largest renewable energy capacity in the world. But China is far from a role model: it has not yet managed to stop building coal plants or to reform its fossil-fuel-based state-owned enterprises. Furthermore, it has not yet articulated a plan for increasing financing of clean industries overseas, and its investments through the BRI and other funding instruments remain shrouded in secrecy. Both the United States and China need to fully disclose their public and private investments in overseas markets so that they can be held to account for their impact on the climate.
This abdication of leadership leaves the ball in the court of major developing countries, such as India, Indonesia, and South Africa, to forge a new approach. Developing countries have proved their capacity for innovation but need resources and policy assistance from their developed counterparts to transition to a low-carbon development model. This support from rich economies—which became rich, needless to say, by pumping the lion’s share of carbon into the atmosphere—is the only way for the world to mitigate the effects of climate change.
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