69125 v2 Inclusive Green Growth t Overview See the full report at THE WORLD BANK Washington, D.C. Inclusive Green Growth The Pathway to Sustainable Development THE WORLD BANK Washington, D.C. This booklet contains an Overview for the forthcoming book, Inclusive Green Growth: The Pathway to Sustainable Development. See the full report at www.worldbank.org/inclusivegreengrowth. To order copies of the full-length book, published by the World Bank, please use the form at the back of this booklet. © 2012 International Bank for Reconstruction and Development I International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This volume is a p~oduct of the staff of The World Bank with external contributions. The findings, interpre- tations, and conclusions expressed in this volume do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. Foreword Inclusive green growth is the pathway to sus- of prosperity to which they aspire with the tainable development. needs of the more than 1 billion people still Over the past 20 years economic growth living in poverty and the imperative of a bet- has lifted more than 660 million people out ter managed environment. of poverty and has raised the income levels Indeed, green growth is a vital tool for of millions more, but growth has too often achieving sustainable development. But sus- come at the expense of the environment. A tainable development has three pillars: eco- variety of market, policy, and institutional nomic, environmental, and social sustainabil- failures mean that the earth's natural capital ity. We cannot presume that green growth is tends to be used in ways that are economi- inherently inclusive. Green growth policies cally inefficient and wasteful, without suf- must be carefully designed to maximize ben- ficient reckoning of the true social costs of efits for, and minimize costs to, the poor and resource depletion and without adequate most vulnerable, and policies and actions reinvestment in other forms of wealth. These with irreversible negative impacts must be failures threaten the long-term sustainabil- avoided. ity of growth and progress made on social Green growth also requires improved indi- welfare. Moreover, despite the gains from cators to monitor economic performance. growth, 1.3 billion people still do not have National accounting indicators like GDP access to electricity, 2.6 billion still have no measure only short-term economic growth, access to sanitation, and 900 million lack whereas indicators like comprehensive safe, clean drinking water. Growth has not wealth-including natural capital-help us been inclusive enough. determine if growth is sustainable in the long This report argues that sustained growth run. is necessary to achieve the urgent develop- The Conference on Environment and ment needs of the world's poor and that there Development, held in Rio in 1992, focused is substantial scope for growing cleaner with- on inclusion and the environment but failed out growing slower. Green growth is neces- to mention growth. In the lead up to Rio+20, sary, efficient, and affordable. It is the only we are reminded that, in 1987, Gro Harlem way to reconcile the rapid growth required Brundtland, then Prime Minister of Norway, to bring developing countries to the level framed the call for governments to change FOREWORD their approach to growth: "What is needed Today, more than ever, we must pay now is a new era of economic growth- attention to the triple bottom line. Inclusive growth that is forceful and at the same time growth must be green. Green growth must be socially and environmentally sustainable." inclusive. Rachel Kyte Vice President Sustainable Development Network The World Bank Overview Key Messages • Greening growth is necessary, effi- • The way forward requires a blend of cient, and affordable. It is critical. to economics, political science, and social achieving sustainable development psychology-smart solutions to tackle and. mostly amounts to gMd growth political economy constraints, over- policies. come deeply entrenched behaviors and • Obstacles to greeninggrowth are polit- social norms, and develop the needed a ical and behavioral inertia and lack financing tools. of financing instruments-not the cost • There .is no single green growth model. of green policies as commonly thought, Green growth strategie~:> will vary • Green growth should focus on what across countries, reflecting local con- needs to be d.one in the next five to texts and preferences:_but all coun- 10 years to avoid getting locked into tries, rich and poor, have opportuni- unsustainable paths and to generate ties to make their growth greener and immediate, loc;1l benefits. more inclusive without slowing it. 0 ur current growth patterns are not <1nd social go<1ls are not only highly compat- just unsustainable; they are also ible, but also largely complementary. Growth deeply inefficient. As a result, they drives poverty reduction (though the extent stand in the way of sustainable development to which it does so depends on the degree of and its objectives of social, environmental, inequality). And improved social outcomes, and economic sustainability (figure 0.1). The such as better health and education and past 20 years have shown that the economic greater equality of opportunity, are good 1 2 INCLUSIVE GREEN GROWTH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT FIGURE 0.1 The three pillars of sustainable development damage. As such, efforts to foster green growth must focus on what is required in the next five to 10 years to sustain robust growth, while avoiding locking economies into unsustainable patterns, preventing irre- versible environmental damage, and reduci111g the potential for regret. Moreover, rapid action is needed to keep the costs of greening growth manageable and avoid irreversible losses. This urgency applies to developing and developed countries alike: • Developing countries-which will account for the vast majority of global growth in income, infrastructure, and population in the coming decades-need to choose whether to build right or risk facing costly policy reversals in the future. • High-income countries-which, with 16 percent of world population, still account for more than 75 percent of global con- sumption and 41 percent of global emis- sions of carbon dioxide (C0 2 )-must act Note: Economic and social sustainability, on the one hand, and social and environmental sustain- ability, on the other, have been found to be not only compatible, but also largely comp1ementary. according to their responsibility. Most Not so with economic and environmental sustainability, as growth has come largely at the expense important are changes in the patterns of of the environment-hence, the dotted line on this figure-which is why green growth aims to ensure that economic and environmental sustainability are compatible. consumption and production that boost demand for green technologies. This is essential to stimulate technological innova- for growth. Not so with the economic and tion and the scale of production necessary environmental pillars: for the past 250 years, for prices to drop and green technologies growth has come largely at the expense of the to become competitive. Thus, Germany's environment. And environmental damages aggressive solar feed-in tariff was criri- are reaching a scale at which they are begin- cal in boosting global demand for solar ning to threaten both growth prospects and panels, thereby reducing their cost. the progress achieved in social indicators. What can be done to turn this situation As to how to make growth greener, text- around? We argue that what is needed is books going back at least to the 1950s offer green growth-that is, growth that is effi- the basic instruments, with environmental cient in its use of natural resources, clean in taxation, norms, and regulations being the that it minimizes pollution and environmen- main tools of a green growth strategy. Tod21y, tal impacts, and resilient in that it accounts technology is making it easier to implement for natural hazards and the role of envi- these .measures and monitor their impacts. ronmental management and natural capital However, making these measures work in preventing physical disasters. And this is complex in real-world settings plagued growth needs to be inclusive. by governance failures, market failures, Inclusive green growth is not a new para- and entrenched interests and behaviors. It digm. Rather, it aims to operationalize sus- requires complementary policies, including tainable development by reconciling develop- public investments, innovation and indus- ing countries' urgent need for rapid growth trial policies, education and training, labor and poverty alleviation with the need to market reforms, and communication. Mak- avoid irreversible and costly environmental ing matters worse is the urgency with which OVERVIEW 3 these policies must be designed and imple- new green industries (such as China's promo" mented, especially in the face of enormous tion of solar photovoltaic production). uncertainty about the future climate and The subsequent three chapters focus on technology. human, natural, and physical capital and . Although we have much theoretical and their roles in a greener production function. empirical knowledge to draw on, green Chapter 4 tackles the debate on whether growth raises challenging questions, espe- green growth will create jobs, with political cially when it comes to the developing world. leaders keen to promote the idea of green jobs For example, how can developing countries to reduce high unemployment levels. It finds avoid locking in unsustainable and inefficient that, while there is surely potential to create socioeconomic systems? Will technology green jobs, the_net impact is what matters, allow developing countries to pursue a less and that will depend largely on the nature environmentally damaging development path of the policy chosen and the soundness of than industrial countries did? What is the labor markets and the business environment. best way to manage growth with scarce fiscal Importantly, evidence on past regulation sug- resources and limited planning and technical gests that fears about massive job losses are know-how? Is green growth just an aspira- misplaced. tional goal-desirable from an environmen- Chapter 5 reviews what we know about tal and ethical point of view, but unattain- managing natural capital. Depending on the able given competing economic needs? type of resource (such as extractable or cul~ At heart, these are questions of economics, tivated renewable), the tools include defining which is why the report takes an economic property rights, helping firms to move up the approach-using the standard tools of main- value chain, managing trade-offs between stream growth and environmental econom- higher growth and greener outcomes, and ics-with some forays into what social psy- incorporating the economic values of services chology can tell us about the determinants in policy decisions. of human behavior. Chapter 1 examines Chapter 6 explores why infrastructure is whether green growth is, in fact, feasible and at the core of inclusive green growth poli- the implications for welfare-the ultimate cies, underscoring the high potential for both goal of economic policy. It argues that our regret (given the tremendous inertia built current system is inefficient, thereby offering into infrastructure investments) and benefits opportunities for cleaner (and not necessarily (given the need for massive increases in infra- slower) growth. And it identifies the flaws in structure services in developing countries). the "grow now, clean up later" argument. Chapter 7 filters the key lessons through a The next two chapters tackle the cross- political economy lens and provides a frame- cutting issues of market and governance fail- work for building an inclusive green growth ures. Chapter 2 looks at the range of tools strategy-in light of the technical tools avail- that can be marshaled to change behavior able, the need to maximize local and immedi- with respect to environmental and natural ate benefits while minimizing lock-in, and the resources-tools that aim to improve social uncertainties about the future climate and welfare through greener growth. These technologies. include effective market signals, properly What are the overall messages of the framed and judiciously used information, report? and rules and regulations. Chapter 3 explores First, inclusive green growth is neces- the need to navigate between market and sary, efficient, and affordable. It is neces- governance failures through the careful use sary because sustainable development cannot of innovation and industrial policies, such as be achieved without it. It is efficient in that research and development (R&D) subsidies addressing the market and governance fail- for drought-resistant crops, national strate- ures that plague our economic systems will gies for electric cars, and efforts to create create plenty of scope for growing cleaner 4 INCLUSIVE GREEN GROWTH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT without necessarily growing slower. The best eries in Namibia, reform of the Common example is the $1 trillion to $1.2 trillion cur- Agricultural Policy in the European Union rently being spent on environmentally harm- (EU), and progress on fossil fuel subsidies ful subsidies for fossil fuel, agriculture, water, in the Islamic Republic of Iran, where care and fisheries. Green growth is affordable was taken to manage the losers and publi- because many green policies pay for them- cize the benefits. selves directly, and the others make economic • Smart about changing the behavior of con- sense once externalities are priced and eco- sumers and firms and the view of societies system services are valued. about what constitutes social success and Second, greening growth is constrained by acceptable behavior. This entails combin- social and political inertia and by a lack of ing economic incentives with well-framed financing instruments-not affordability, as information and the marketing techniques is commonly believed. Entrenched behavior, that public health specialists (or car sales- special interests, and the complicated politi- men) commonly use. cal economy of reform explain why measures • Smart about developing the appropriate that amount to good growth policies have financing tools for the private sector, espe- not yet been implemented. Also, many green cially small firms, for local governments growth measures require increased up-front (China's cities are developing in a sprawl- capital. Yet the debate on financing remains ing fashion in part because land sales at focused on who pays what, rather than their peripheries are an important source of on how to finance economically (let alone revenue for city governments; World Bank socially) profitable investments. and DRC 2012), and for national govern- Third, greening growth should be care- ments, which are sometimes so fiscally fully sequenced-not occur in one fell constrained that they have to choose the swoop-with priority going to what needs investment with the lowest up-front cost to be done in the next 5 to 10 years, both (such as a thermal power plant) over one to avoid getting locked into unsustainable that may be less expensive in the medium paths and to offer immediate, local benefits. term (such as a hydroelectric plant in a Those benefits will help to reduce the cost country with abundant water resources). of the transition and facilitate the political Fifth, there is no single green growth economy of reform. Urban forms that are model. Inclusive green growth strategies created today will affect city structures and will vary across countries, reflecting local housing and transport options for decades contexts, preferences, and resources, but or even centuries. With urban populations all countries-rich and poor-have oppor- in developing countries set to increase by 1.5 tunities to green their growth without billion over the next 20 years, there is a win- slowing it. dow of opportunity to affect urban patterns at low cost. Fourth, the search for solutions needs Greening growth is necessary, to shift from a search for more financial efficient, and affordable resources (difficult anyway amid today's fis- cal woes) to "getting smart": Necessary: Making development sustainable requires inclusive green • Smart about learning the lessons of com- growth plex reforms to tackle difficult political economy questions, given that many green Growth-even measured with such an policies trade immediate costs for later ben- imperfect metric as gross domestic product efits or redistribute benefits from one group (GDP)-is now recognized as a critical driver to another. Notable successes include trade of poverty reduction (figure 0.2, panel a; reforms across the world, reform of fish- Ferreira and Ravallion 2009). It has resulted OVERVIEW 5 in an 80 percent increase in GDP per capita FIGURE 0.2 As incomes increase ... in developing countries over the past 20 years, a.... Poverty recedes {poverty fieadcount and GDP per capita) despite substantial increases in population. 100 Living standards have improved for many 95 (figure 0.2, panels band c), with morethan 90 85 660 million rising out of poverty and remark- 80 able progress being made in literacy, educa- 75 70 tion, life expectancy, malnutrition, and infant, 65 child, and maternal mortality. And while 60 55 China drove much of global poverty reduc- 50 tion, other countries that experienced growth 45 40 also saw poverty decline rapidly. Ghana, for 35 example, grew much faster than the African 30 25 average and managed to reduce its poverty 20 rate from 51 to 30 percent between 1990 and 15 10 2005 (World Bank 2011c). 5 Moreover, growth need not cause income 0 -5 L-----~------~------~----~------~ inequality. The famous Kuznets curve argu- 0 5,000 10,000 15,000 20,000 25,000 ment, which posits that inequality first GDP per capita {$, PPP) increases and then decreases with income, is not supported by the evidence. Inequality has b.... Literacy rises {female literacy rate and GDP per capita, 2009) increased substantially in recent decades in 120 China, but also in the United States and most of Europe. And it has declined in much of Latin America (Milanovic 2010). Some coun- tries reduce inequality as they grow; others let it increase. Policies matter. Thus, the links between the economic and social pillars of sustainable development are generally self-reinforcing. But the story is not so simple when it comes to the economic 5,000 10,000 15,000 20,000 25,000 30,000 35,000 and environmental pillars. Economic growth GDP per capita {2005 $, PPP) causes environmental degradation-or has for much of the past 250 years-driven by c.... Child mortality falls {mortality rate for children under five market failures and inefficient policies. As and GDP per capita, 201 0) with inequality, overall environmental per- 200 formance does not first get worse and then 180 <: improve with income-no Kuznets curve ~ ~ 160 here either. Of course, some local and vis- ~~ 140 ible environmental public goods do worsen at 0 ~ first and eventually improve with income- .,5 ~ 120 typically local air quality. But this is not true -* & 100 ~~ of local pollutants with invisible or long-term *l ~ 80 ~"' impacts (such as the accumulation of pesti- g ~ n:I"O 60 cides and toxic chemicals in land and water) ~ § 40 E or global pollutants (such as greenhouse gases 20 in the atmosphere). These often get worse with higher income (figure 0.3). 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Against this backdrop, some observers, GDP per capita {2005 $, PPP) mostly in high-income countries, have argued Source: For panel a, Ferreira and Ravallion 2009; for panels b' and c, World Bank 2011c. 6 INCLUSIVE GREEN GROWTH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT FIGURE 0.3 As incomes increase ... will bring decreasing returns to well-being. In fact, in low-income countries, average income a.... Local and visible pollutants tend to decline (PM10 concentration and income per capita, 2008) is only about $500 (World Bank 2011c).l A redistribution of world income across rich 180 and poor countries-even if it were politically 160 feasible-would leave all with an income of about $8,000 per person per year. Further, even after the rapid growth of the past decade, some 1.3 billion people do not have access to electricity, 900 million do not have access to clean water, 2.6 billion lac:k access to improved sanitation, and around 800 million rural dwellers do not have access to an all-weather road and are cut off from 20 the world in the rainy season (Fay and others 2010; lEA 2011). Even with the rapid decline 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 in the share of people living in poverty, close to 1 billion could still be living on $1.25 per GDP per capita (2005 $, PPP) day in 2015. With continued growth at abolllt the same speed as during the past 20 years, b.... Global pollutants, such as C02 emissions, tend to increase developing countries would account for about (C02 emissions and income per capita, 2008) half of the world's income and consumption 40 (but close to 90 percent of the world popula- 35 tion) by 2050. ~ 30 Continued rapid population growth in "' a. .§ ~ 25 several developing regions further compli- .!a 8. 20 cates matters. Current projections are that Q) "' E c: the world will reach some 9 billion· people 0 § 1s by 2050. This implies that even more rapid u 'i:: 'W 10 5 growth is needed to tackle poverty, and more 5 aggressive social policies are needed to ensure that children, especially girls, and mothers 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 receive the care, nutrition, schooling, and GDP per capita (2005 $, PPP) employment opportunities they need. And, of Source: For both panels, World Bank 2011c. course, this demographic challenge puts fur- ther stresses on the environment, particularly against the need for more growth, suggesting because much of the rapid population growth that what is needed instead is a redistribution is happening in environmentally fragile loca- of wealth (Marglin 2010; Victor 2008). They tions, notably in Africa. point to the happiness literature, which sug- Thus, growth is a necessary, legitimate, and gests that above a country average of $10,000 appropriate pursuit for the developing world, to $15,000 per capita, further growth does but so is a clean and safe environment. With- not translate into greater well-being (Easter- out ambitious policies, growth will continue to lin 1995; Layard 2005). degrade the environment and deplete resources While this argument has value, it remains critical to the welfare of current and future more relevant for high-income countries, generations. And what about the argument where average annual incomes hover around that ambitious policies would be too costly $36,000. Developing countries-with aver- and destroy jobs? The evidence reviewed in age income of around $3,500 per capita-are this report suggests that there is plenty of room still far from the point at which more wealth to green growth without slowing it. OVERVIEW 7 Efficient: Current patterns of growth habitat loss and degradation, is 100 to 1,000 are not only unsustainable, but also times higher than before humans walked the wasteful planet (Pimm and others 1995). In 2008, 875 species became extinct, and more than There is mounting evidence that our patterns 17,000 others are at high risk (IUCN 2009). of growth and consumption are unsustain- Carbon dioxide emissions are accumulat- able at the scale required by our current and ing in the atmosphere, approaching a level that projected population. Much of this, however, will make it impossible to maintain global is owing to inefficient ·production and con- mean temperature below 2°C in excess of sumption and poor management of natural the preindustrial level, even though the prob- resources. ability of irreversible environmental changes is increasing with temperature (for example, Unsustainable rapid ice loss in Greenland and forest die- Population and income growth and the back in the Amazon). Carbon dioxide is also resulting increase in demand for food have affecting the world's oceans. Because of global driven the expansion of agricultural pro- warming, we have already committed to high duction around the w~rld. 2 Intensification probabilities of coral bleaching and mortal- and productivity increases have helped to ity by the late twenty-first century, which will limit ecosystem loss in many countries, but significantly harm reef ecosystems (World poorly managed intensification has also exac- Bank 2010d). The concurrent acidification of erbated agrochemical and water pollution, oceans, which absorb about one quarter of soil exhaustion, and salinity. Extensive farm- the excess carbon dioxide in the atmosphere, ing, driven by large-scale expansion in some is threatening marine food webs and could regions and poverty-level subsistence agricul- undermine the global fishing industry and ture in others, has contributed to land degra- food security (Laffoley and Baxter 2009). dation and deforestation; forest losses aver- Lastly, energy prices are likely to be high aged 5.2 million hectares annually between in the future, because oil resources that are 2000 and 2010, mostly in tropical-and, easy and cheap to extract and use have already hence, more intensely biologically diverse- been extracted, and the world is now turning regions (FAO 2010). By 2008 one quarter of toward fossil fuels that are more expensive- the world's land surface was degraded as a and more damaging to the environment-such result of soil erosion, salinization, nutrient as shale gas, tar sands, oil from deep offshore depletion, and desertification (Bai and others wells, or even liquefied coal. Without signifi- 2008). cant changes in energy policy, the amount Income and population growth have also of resources the world economy will have to stretched water supplies. Water withdrawals dedicate to fossil fuel extraction and energy have tripled in the past 50 years, leading to production is likely to increase substantially, water scarcity and groundwater depletion making higher energy efficiency even more (World Bank 2007b). Withdrawals are pro- desirable in the future than it is today. jected to increase in developing countries by another 50 percent by 2025, by which time Wasteful roughly 5.5 billion people-two thirds of The environment can be thought of as natu- the projected global population-will live in ral capital that is often inefficiently man- areas facing moderate-to-severe water stress aged, with many precious resources wasted. (UNESCO and WWAP 2006). Investing in natural capital-just like Growth has similarly strained ecosystems, investing in human or physical capital-is with roughly 60 percent of ecosystem ser- therefore good growth policy. The value vices now of lower quality than 50 years ago of the services provided by well-managed (MEA 2005). Additionally, the current rate ecosystems is illustrated by the impact of of species extinction, stemming mainly from reforestation and watershed restoration 8 INCLUSIVE GREEN GROWTH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT programs. In China's Loess plateau, such groundwater withdrawals and the depletion programs were associated with a near dou- of key aquifers. India suffers from the same bling of household incomes as a result of problem in addition to spending some 2 per- higher-value agricultural production as cent of GDP on a fertilizer subsidy overly well as reduced frequency of landslides and weighted in favor of nitrogen; the resulting flooding and increased resilience to drought use of fertilizer is causing serious pollution (figure 0.4; World Bank 2005b). problems. This inefficiency stems partly from the Production and consumption processes fact that many natural resources are com- are often wasteful, too. This is particulady mon property, so consumption by one per- obvious in the energy sector. Existing energy son precludes consumption by another, and efficiency technologies can cost-effectively it is hard to exclude potential users. Open- reduce energy use in new buildings by at least access regimes for common property cre- 30 percent. In fact, making new buildings in ate incentives to use up such resources as China more energy efficient would reduce quickly as possible. Open access fisheries are energy costs by more than 50 percent, while a classic example in which catch per fisher increasing construction costs by only 10 per- and per vessel has been declining steadily cent. Waste also plagues food production. because of overfishing, and continued deple- Some 15 to 30 percent of food produced in tion threatens the livelihood of more than developing countries is lost before it reaches 100 million people and the food security of the market due to poor storage and transport many more. facilities. In high-income countries, mean- Subsidies exacerbate common property while, one third of food is wasted through problems, yet substantial resources are allo- losses in supermarkets and homes and "plate- cated to environmentally harmful price sup- waste" (Foresight 2011). port schemes (box 0.1). Global subsidies The possibility of solving market and to fisheries are estimated at $10 billion to governance failures opens the way to poli- $30 billion and are partly to blame for the cies that have both economic and environ- sixfold increase in the fleet capacity index mental benefits and is at the heart of green between 1970 and 2005 (World Bank and growth strategies. (In that respect, greening FAO 2009). 3 In Mexico, subsidies for energy growth is first and foremost based on good used in irrigation, amounting to around 1 growth policies.) These market and gover- percent of GDP, are exacerbating excessive nance failures have long been understood, FIGURE 0.4 The Loess plateau, before and after the watershed restoration program Source: Fort he left-hand image, Till Niermann, March 25, 1987, http://en.wikipedia.org/wiki/File:Loess_landscape_china.jpg; for the right-hand image, http://d ig ita Imedia.world bank .org/sl ideshows/chi na1005/ OVERVIEW 9 BOX 0.1 What is the aggregate economic support to the (over)use of natural capital? $1 trillion to $1.2 trillion annually · A compilation of estimatesby intemational organi" fuel price supports, grants, concessional credit and zations of aggregate support for the use of natural insurance, and direct payments to industry. Esti- capital suggests an approximate total of $1 trillion mates range from $10 billion per year (World Bank to $1.2 trillion, consistent with McKinsey's estimate and FAO 2009) to $27 billion per year (UNEP of $1.ltrillion (McKinsey and Company 2011). This 2011). support includes the following: • Transfers to agriculture: $370 billion. This rep- resents total support to the agriculture sector in • Fossil fuel subsidies: $455billion-$485 billion. This OECD .countdes (OECD 2011a) and includes dif- includes subsidies to fossil fuel production or use ferent types of instruments, some environmentally in Organisation for Economic Co"operation and harmful, such as market price supports, but some Development (OECD) countries ($45 billion to $75 not, such as payments decoupled from production billion a year between 2005 and :2.010) and con- levels. sumption in developing economies ($409 billion in 2010; lEA 2011). While these estimates suffer from errors of inclu- • Water subsidies: $200 billion-$300 billion. This sion (some of the OECD countries' agricultural sub- represents· subsidies to groundwater extractioti or sidies that were included <: rently spends on fossil fuel subsidies (Wang > £:= 0 800 and others 2010; lEA 2008). -;a:C Furthermore, determining affordability is :::J <: ~ 600 <=o ttlM about more than a financial ledger. Green pol- -0 400 icies can contribute to growth (box 0.2) and "'"' .2 .5 -~ boost a nation's overall wealth. And they help "0 200 "0 to reduce the damage done by environmen- "' 0 tal degradation, which is costly for an econ- omy: equivalent to 8 percent of GDP across a sample of countries representing 40 percent of the developing world's population (figure Source: More information on these models can be found in the following sources: on MESSAGE, van Vliet and others 2012;on ReMIND, Luderer and others 2012; on TIAM-WORLD, Lou lou and Labriet 0.6). As a result, benefits may well outweigh 2008; on lEA, lEA 2011. the costs (implying a negative net economic Note: lEA (2011) does not provide estimates for a 550 ppm scenario. cost). $900 billion to $1,700 billion of green investments in land, water, and energy could yield economic returns of around $3 trillion per year, rising to $3.7 trillion with carbon between $350 billion and $1.1 trillion per at $30 per ton and no energy, agricultural, year by 2030 (figure 0.5). A 550 ppm tar- or water subsidies (McKinsey and Company get appears much easier to achieve, requiring 2011). some $50 billion-$200 billion of additional Thanks to such benefits, the net costs investments per year, but an additional $75 of greening growth appear manageable, billion to $100 billion would still be needed to although affordability will, of course, depend adapt to climate change (World Bank 2010d). on the speed and ambition of the greening (as Adding needed investments in water and land illustrated by the difference between the 450 to energy, annual investments of $900 bil- ppm and 550 ppm targets) and on the design lion to $1,700 billion could be needed over of policies. But the worse the environmental and above business-as-usual requirements degradation and existing inefficiency, the (McKinsey and Company 2011). greater the potential benefits to be obtained But many of these capital investments will from green policies. be recouped through subsequent savings, so At the firm level, the cost of environmental the net financial costs will be much lower. regulation to firms is typically modest, wilth For example, the high capital cost of wind costs lower than expected thanks to the ab[l- and solar energy or hydropower is offset by ity of firms to adapt and innovate (chapter 3). their low operating costs. Globally $1 spent As a result, there is no evidence that environ- on energy efficiency saves $2 through investc mental regulation systematically hurts prof- ments in new supply, with the savings even itability. While studies from the 1980s and greater in developing countries (World Bank 1990s found negative impacts, more recent 2010d). As a result, the World Bank estimates papers find more positive results, partly that more than half the measures needed to because they allow a few years for firms to decarbonize the energy systems of develop- adapt and partly perhaps because we have ing countries would eventually pay for them- become better at designing environmental selves, bringing the financial costs down to regulations that promote efficiency gains OVERVIEW 11 BOX 0.2 Th~ many ways in which green policies can contribute to growth Green policies and practices can contribute to growth promoting greater efficiency (Nidumolu and others through three channels (see chapter 1). First, they 2009). can help to increase the amount of natural, physical, Third, green policies stimulate innovation. Study and human capital available: Better-managed soil is after study reports .that well-designed environmen- more productive. Wellcmanaged natural risks result tal regulations stim.ulate innovation by firms, as in lower capital losses from natural disasters (Hal- measured by R&D spending or patents (see chapter legatte 2011). Healthier environments result in more 3). Surveys of firms in the European Union identify productive workers: a recent California study shows existing or future environmental regulation as the a strong impact of air quality on the productivity of main driver for the adoption of incremental inno- farm workers (Graff Zivin and Neidell2011). vations. Similarly, international sustainability stan- Second, they can promote efficiency. For instance, dards can help local firms to upgrade their environ- imposing environmental taxes (taxing "bads") and mental practices, a form of catch-up inn.ovation. In removing distortionary subsidies creates fiscal space developing countries, green policies can also encour- for governments to lower labor taxes or subsidize age the adaptation and adoption ofgreener technol- green public "goods" such as public transport or ogies that have been developed elsewhere. renewabie energy. In London, congestion taxe.s, Finally, green policies also accrue non-growth besides reducing traffic; helped to finance invest- gains to welfare. They can reduceinequality through ments in the aging public transport system,. thereby job creation and poverty alleviation, and they can increasing effectiveness of the price signal. by reduc- reduce output volatility by increasing resilience to ing the costs or "disutility" associated with switch- environmental and economic shocks, like natural ing from single-car use to public transport (frans- disasters or spikes in commodity prices. A model- port for London 2008). And many firms-including ing exercise suggests that half of the cost of climate large multinationals such as Hewlett Packard; Cisco, policies to limit greenhouse gas concentration at 550 Clorox, and FedEx-are finding that embracing sus- ppm could be paid for by less vulnerability to oil tainability has improved the bottom line in part by scarcity (Rozenberg and others 2010). (Ambec and others 2011). Further, where rev- dramatically expanded regulation in Cali- .enues from environmental taxes are used to fornia and decreasing refinery productivity reduce taxes on labor and income, the impact in the rest of the United States. Interviews on GDP is likely to be neutral or positive, as with plant managers suggest productiv- found in an analysis of seven EU countries ity increases resulted from a careful rede- (Andersen and others 2007, cited in Ambec sign of production processes to comply and others 2011). with the new regulations (Berman and Bui Other ex-post analyses confirm this con- 2001 and others). Similarly, the productiv- clusion. The EU Emissions Trading Sys- ity of the Mexican food-processing indus- · tem has no negative impact on net imports try increased with stronger environmental in the aluminum, steel, and cement sectors regulations (Alpay and others 2002, cited in (Ellerman and others 2010; Quirion 2011; Ambec and others 2011). Sartor 2012) or on the performance of Ger- Mor~over, there is no evidence that envi- man firms in general (Anger and Oberndor- ronmental policies have led to an exodus of fer 2008). Meanwhile, the climate levy on firms to "pollution havens" (locations with U.K. firms seems to affect energy efficiency, lax environmental policies). Tighter environ- but not economic performance and firm exit mental regulation may cause firms to relo- (Martin and others 2009). cate, but they will choose locations that are Refineries located in Los Angeles sig- more attractive overall, as pollution abate- nificantly increased productivity in the ment costs represent a small share of pro- late 1980s and early 1990s, a time of duction costs for most industries (Copeland 12 INCLUSIVE GREEN GROWTH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT FIGURE 0.6 Reducing environmental degradation would provide But obstacles are plentiful, and substantial economic benefits green growth is no substitute for (cost of enviromental degradation expressed as percentage of GOP equivalent) good inclusive growth policies Tunisia If green growth is necessary, efficient, and affordable, what is impeding it? Across Jordan countries and income levels, a mix of gover- El Salvador nance and market failures, complex political economy, entrenched interests and behav- Guatemala iors, and financing constraints are significant Syrian Arab obstacles. Further, despite much rhetoric to Republic the effect, green growth is no panacea and Nepal will not substitute for a good business envi- Lebanon ronment and the reforms that are needed to promote growth and protect the poor. Colombia Morocco When first-best recommendations me,et Algeria second-best situations Peru Much of green growth is about good growth policies-addressing market failures and Benin "getting the price right" by introducing envi- Bangladesh ronmental taxation, pricing environmental externalities (such as carbon pricing), cre- Egypt, Arab Rep. ating tradable property rights, and reduc- Pakistan ing inappropriate subsidies. These measures are critical for enabling the private sector to Iran, Islamic Rep. undertake needed investments and innova- Nigeria tions and for getting consumers to internalize Central African the true costs of their behavior. But as with Republic all good economic policy making, textbook Average policy recommendations, however appropri- ate, must be applied with insights into behav- China iors, political economy, and governance and Tajikistan market failures. This is an enormous chal- lenge for a variety of reasons. Ghana First, getting prices right may be difficult 0 because of political or social acceptability cost of environmental degradation as issues. The benefits are usually diffuse and %of GDP equivalent uncertain, while the costs (the burden of the price increase) are immediate, visible, and Source: World Bank 2004, 2005a, 2006a, 2006b, 2006c, 2006d, 2006e, 2006f, 2007a, 2007b, 2007c, 2008, 2009, 2010a, 2010b, 2010c, 2011a, World Bank and DRC 2012. often concentrated on a vocal minority. This is why price changes can be achieved only when political economy issues are managed 2012). Factors such as availability of capital, with appropriate complementary policies. labor abundance, location, institutions, and Second, getting prices right may not be agglomeration effects are more important sufficient because other market imperfec- than environmental policy in determining tions can prevent prices from being the sil11er the location choice and competitiveness of bullet of environmental policies. These mar- firms. ket imperfections include the following: OVERVIEW 13 • Low price elasticity. The ability of prices tricity providers, city planners, battery pro- to trigger changes in behavior and technol- ducers, and car manufacturers. ogy is sometimes limited by substit~tion Third, inertia and biases in behavior are possibilities: the responsiveness of dnvers such that many efficiency measures that to higher fuel prices is low in the absence might pay for themselves are not imple- of alternative means of transportation. The mented. Household responses to higher ability of firms in the renewable energy sec- energy prices are often disappointing, ~?d tor to respond to incentives will depend firms do not always exploit all opportunities on whether transmission lines are built to improve efficiency (Gillingham and oth- between centers of consumption and pro- ers 2009; Allcott and Mullainathan 2010). duction. In these cases, price-based policies Energy savings of 20-25 percent could be may have to be complemented with direct achieved through improved industrial pro- infrastructure investments (such as public cesses in high-income and emerging econo- transportation and transmission lines) and mies (World Bank 2010d). other policy actions, like changes in urban Fourth, financing tools to tackle up-front planning or in norms and regulations. But investments are inadequate. Take the case of if substitution capacity is limited by alter- solar, wind, or hydroelectric energy, which natives, their provision may increase the is characterized by much higher capital economy's efficiency and boost income or costs than fossil-based energy, but extremely promote economic growth, making the low operating costs, or energy efficiency price increase more politically acceptabl.e. that requires up-front investments in new • Missing markets or institutions. Specific equipment or add-ons whose costs are .then institutional measures may be required to recouped over time through energy savmgs. transform the "right price" into the right Even with agriculture or fisheries, a shift to incentive. Where tenants are paying energy more sustainable practices typically results bills, for instance, owners and developers in lower returns and investments in early have little incentive to "build right" or to years that are then offset by higher returns in invest in more energy-efficient appliances the future. The need for up-front financing unless they can recoup their investments can be a binding constraint for developing- through higher rents or sales price. This country governments (especially local ones "principal-agent" problem can be tackled with limited access to capital markets and a through information (such as energy effi- small tax base) and the private sector (espe- ciency labels for homes), specific schemes cially small and medium enterprises). Few to finance investments in energy efficiency, countries have a well-developed banking sec- or norms (such as compulsory retrofit when tor, let alone energy service compa.nies that homes are sold). specialize in financing investments m energy • Lack of credibility and predictability of efficiency. price signals. Governments cannot co~­ mit to maintaining environmental pnce instruments over the long term, which No substitute for good growth policy: puts them in a poor position to encourage The private sector needs an enabling firms to undertake long-term, risky invest- environment ments (notably in R&D and long-lived infrastructure). Green growth strategies are growth strategies • Coordination failures and knowledge exter- with the additional goal of fostering a better nalities. Prices are ill-suited to address the environment. As such, they cannot substi- "classic" market failures usually invoked to tute for good growth policies: environmen- justify innovation and industrial policies. tal measures are unlikely to offset distorted Think about electric cars whose develop- labor markets, illiquid financial systems, or ment requires coordination between elec- poor business environments. 14 INCLUSIVE GREEN GROWTH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT FIGURE 0.7 Developing countries may have substantial create a potential comparative advantage unexploited potential in green exports in green activities (such as water resources (green and close-to-green exports as a share of total exports from developing and hydropower potential or insolation and countries, 2000-10) solar power potential). Realizing this poten- tial could generate jobs and exports, thereby boosting growth and output. "' 8 But green policies cannot address struc- ·E tural constraints to growth and employment e0 c: ::I 0 creation, at least if deployed alone. They will a. X u 6 0'1 "' ·a. c: not be effective at creating green jobs where ~ ...._ 0 Qj > 4 labor markets are distorted and regulations 0 "' '# -c discourage small business development. They E 2 will not offset an unattractive business envi- 0 ~ ronment. And where the labor force's skills are inappropriate for developing a competi- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201 0 tive manufacturing sector, environmental green exports close-to-green exports policies can hardly replace education. Thus, Source: Dutz and Sharma 2012, based on data from the Commodity Trade Statistics database a recent study of South Africa concludes tha.t, (COMTRADE) and a six-digit proximity matrix based on COMTRADE. Note: Close-to-green exports are exports of goods that are not "green" but require similar skills-in while the idea of developing green industries the way growing apples requires the same set of skills as growing pears so that a country that is (such as solar power) is appealing, it has good atthe former is likely to be good atthe latter. little chance of succeeding unless structural problems such as regulatory obstacles to the creation of small enterprises and the lack of A case in point is "green jobs," a topic that skilled workers are addressed (World Bank has attracted substantial attention following 2011b). the recent global financial crisis. Advocates Skill shortages already appear to be stress that, in a situation of high unemploy- impeding the greening of growth. In China ment, a green fiscal stimulus could effectively and India, rural electrification programs are address recession-induced unemployment and suffering from a lack of skilled workers. Rea- set the stage for cleaner post-recession growth sons for these shortages include a scarcity patterns. The argument is attractive: although of scientists and engineers, the poor reputa- green projects may not be the most labor tion and limited attractiveness of some sec- intensive or "shovel ready," they have the tors important for the green transition sw;h added advantage of carrying environmental as waste management, and a limited number benefits. That said, a fiscal stimulus-green of teachers and trainers in environmental ser- or not-is effective only if unemployment is vices (ILO and CEDEFOP 2011). linked to insufficient demand rather than to In countries where the business environ- structural issues (such as lack of skilled work- ment is not conducive to investment and ers or a poor investment climate). growth, better economic policies must be the Beyond stimulus effects, some countries- first step. Lessons from trade liberalization including Brazil, China, Germany, Japan, the are telling: where labor mobility is limited Republic of Korea, and Morocco-are look- by skills and regulations and where invest- ing at green growth as a potential source of ments in the sectors that benefit from trade longer-term growth through which to cre- liberalization are impaired by inappropriate ate new markets. And even though not every policies, both workers and the private sector country can become the world leader in solar take longer to adjust. The benefits from more panels or wind turbines, developing countries trade take longer to materialize, and adjust- may have substantial unexploited potential ment costs are much higher. Similarly, eco- in green exports (figure 0.7). Many develop- nomic benefits from green policies are more ing countries have natural endowments that likely to be large and immediate if economic OVERVIEW 15 policies are conducive to change and favor poor account for the majority of those with- the development of more environmentally out access to basic services. friendly and more productive activities. In sum, hopes that green growth will single- handedly solve countries' employment, com- petitiveness, or poverty problems are probably The poor and vulnerable need as unfounded as the fear that environmen- social protection tal policies will lead to massive loss of jobs While there is a general presumption that the or competitiveness. Adjustment costs may poor suffer most from environmental degra- vary across industries because some sectors dation and its impact, this need not imply that are inherently more innovative than others they would benefit automatically from green and tend to adapt better. Better regulation- growth policies. For example, removing fossil particularly if supported by training, R&D fuel subsidies would clearly reduce the poor's support, and the recycling of environmental purchasing power unless compensated for by taxes into other tax cuts-will help to mini- · other measures. mize these adjustment costs and maximize But subsidies are often regressive and can benefits. Also needed are steps to protect the be replaced by better-targeted transfers at a poor from the potential downsides of green fraction of the cost (figure 0.8). By one esti- policies and to ensure that they benefit fully mate, the cost to the budget of transferring from the likely upsides. $1 to the poorest 20 percent of the popula- tion via gasoline subsidies is $33 (Arze del The way forward: Good and Granado and others 2010). Similarly, con- inclusive growth policies tailored sumption subsidies for water and electricity to real-world challenges can usefully be replaced by connection subsi- dies that are invariably better targeted, as the So greening growth requires good growth policies adapted to political economy realities and entrenched behaviors. It entails reforms FIGURE 0.8 Fossil fuel subsidies benefit in the patterns of pricing, regulation, and primarily the rich public investment that trigger resistance. It (fossil fuel subsidy allocation, by income quintile, average across requires complex changes in behaviors and 20 countries, various years) social norms because, even with efficiency gains and new technology, it is unlikely that bottom quintile middle-class consumers (whether in rich or in 7% poor countries) can stick to current consump- top Q4 tion patterns. And it requires knowing when quintile to go for the politically expedient rather than 43% the economically optimal, carefully deploy- ing social marketing tools and making finan- cial tools available. Complicating matters is the fact that Q3 opportunities to green growth at a manage- 16% able cost are not evenly distributed over time. This creates urgency for some, though not all, green policies and is one of several arguments for why "grow dirty and clean up later" is not a good option even for poor countries (box 0.3). What follows is a three-prong strategy for 23% tackling entrenched interests and behaviors, Source: Arze del Granado and others 2010. financing constraints, and the risk of lock-in. 16 INCLUSIVE GREEN GROWTH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT -------------.---- .. ---------------------------------------------------------~- BOX 0.3 Why ngrow dirty and clean up later" is misleading Many argue that poor countries should focus on sat- Similarly, mismanaging water resources impairs isfying human needs before attending to nature, espe- people's ability to grow crops and feed their fami- cially given their relatively small environmental foot- lies. Where natural assets like soil quality, water, print. This argument is misleading for several reasons. and standing forests serve as critical inputs into First, not all environmental goods are superior economic production, good environmental policies goods whose share in total consumption increases enhance income generation and poverty alleviation. with income. Individuals who struggle to feed and Second, it may be impossible or prohibitively house themselves may not see biodiversity protection expensive to clean up later. The loss of many envi- and climate change mitigation as priorities, but local ronmental assets-most obvio}lsly biodiversity-is environmental goods affect their. daily lives, with irreversible. This is also the case with climate. significant impact on income and welfare. The lack Because greenhouse gases reside in the atmosphere of solid waste disposal, for example, is not merely an for a long time, each emitted molecule will influence environmental issue. By clogging drains, it leads to the climate over decades (for methane), centuries health hazards and flooding, with serious economic (for C0 2 ); or longer. Irreversibility may also occur and human consequences: because of economic and technological lock-in. A lot of infrastructure is long lived, and today's choices • In Haiti, poor solid waste disposal is to blame for will be hard to reverse. Urbanforms are largely the resurgence .of diseases such as dengue and for determined when city populations are. increasing vulnerability to storms. rapidly and most buildings and transport systems • In India, better sohd waste disposal systems were are being built. The consequences of development a principal recommendation of the fact-finding ·based on .a low-density, individualc-vehide transpor- committee established to investigate the causes of tation model are largely irreversible, as evidenced by the 2005 Mumhai floods, which caused almost the current struggles of U.S; urban planners to den- $2 billion in damages and killed an estimated 500 sify and develop public transport systems. people. Prong 1: Tailored strategies that circumstances, and "best practices" should maximize local and immediate benefits be imported with caution. and avoid lock-in Maximize local and immediate benefits. In Green growth policies require governments addition to being tailored to local circum- to do a better job of managing both market stances, strategies need to address the politi- and governance failures. This is obvious in cal economy of reform. Green growth strate- any discussion of green innovation or indus- gies should aim to minimize transition costs trial policies, but also of the regulatory and by offsetting them to the extent possible, with market ("good growth") reforms that are visible and immediate benefits. This implies needed, some of which are complex. Even designing policies to maximize short-term, sophisticated administrations may struggle local benefits, such as increased efficiency with market-based instruments, as experi- and productivity, safety and resilience, job ence with the European Trading System has creation, and poverty alleviation. demonstrated (Betz and Sato 2006). Opti- mal solutions will differ across countries Avoid lock-in. Governments cannot make with varying degrees of institutional capac- all of the changes needed at once: they have ity, transparency, accountability, and civil limited resources and limited implementation society capacity. Therefore, green growth capacity to devote to complex problems; they strategies need to be tailored to a country's also have limited political capital to defend OVERVIEW 17 TABLE 0.1 Some guiding principles for establishing green growth strategies Local and immediate benefits LOWER HIGHER (Trade~offs.existbetween short-and long-term or local and global benefits} LOWER (action is less urgent} Lower-carbon, higher-cost energy supply Carbon pricing Stricter wastewater regulation HIGHER Land use planning (action is urgent) Public urban transport Family planning Sustainable intensification in agriculture Large-scale multipurpose water reservoirs policies against interest groups and politi- up family planning policies to manage popu- cal opposition. A focus on the sectors and lation pressures and improve health and edu- interventions that are most urgent-that is, cation outcomes), (b) have a positive economic those that can help to prevent irreversibility cost but large direct welfare impacts (that is, or reduce inertia-is thus called for. when they target local environmental goods Table 0.1 illustrates the implications for pri- such as local air pollution or natural risks), ority setting of emphasizing local and immedi- or (c) are financed from external resources ate benefits and urgency. While lower-carbon (including through carbon trading). energy from renewable sources is highly desir- able, it is easier to build renewable plants later Actively manage the political economy of (even if this requires retiring thermal power reform. Managing the political economy of plants) than to try and reverse poor land-use reform also entails measures that target those planning that has resulted in sprawling cit- segments of the population that would other- ies. Good land-use planning and urban public wise oppose reforms. For example; in 2010 transport can provide short-term benefits-for the Islamic Republic of Iran increased domes- instance, by reducing congestion and exposure tic energy prices by up to 20 times, reducing to disasters and by favoring denser and more fossil fuel subsidies by some $50 billion-$60 energy-efficient development. Table 0.1 pro- billion. It offset them with $30 billion in cash vides general statements on a few green poli- transfers that benefited 80 percent of its popu- cies; this analysis needs to be carried out at lation, thereby addressing the fact that oppo- regional, national, and local scales to take into sition to the reform of such subsidies usually account specific contexts (see, for instance, an comes from the middle class. The combina- application to the Mediterranean countries in tion of cash transfers with a well-orchestrated CMI2012). public relations campaign was critical to the Developing countries (especially low- success of the reform (Guillaume and others income countries) should prioritize policies 2011). that (a) have a negative or zero economic cost Understa·nding the sources of resistance to thanks to synergies with development (such a reform helps to design the reform process as developing hydropower where appropriate, in a way that minimizes this resistance (box implementing effective urban plans, or scaling 0.4). Sound information about winners and 18 INCLUSIVE GREEN GROWTH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT -----------------------------------------------------------------------------~- BOX 0.4 Morocco: The importance of political economy A sound understanding of the winners and losers of The results are astonishing: more than 70 percent possible green growth strategies helps policy makers of the population was unaware of the existence of find ways to address tough economic reforms-as energy subsidies. Thus, the vast majority of buyers Morocco has recently learned in its quest to overhaul of 12 liter cooking gas bottles-a product as wide- a universal subsidy system that rewards fossil fuel spread as bread-did not know that the real market consumption. By gaining insights into the political price was more than DH 100 ($14) instead of the economy of reform, Morocco is now poised to reform standard retail price of DH 40 ($5.6). In addition, its energy.subsidy, which would sharply reduce fiscal a large majority opposed the idea of reducing subsi- costs and facilitate a greener growth path. dies-although this majority decreased once offered The problems with the energy subsidy are multi- a well-targeted social program, and fell even further ple. Its fiscal impact reached 5.5percent of GDP when the program was explained in detail. In the in 2011, absorbing roughly 17 percent of the total end, it was the wealthy that remained the group investment budget. It undercuts Morocco's ambi- most opposed to reform. tious mitigation goals by keeping the price of fossil- This simple exercise in revealing political based energy products low, thus making renewable awareness and preferences helped the previous and efficiency investments less competitive. And it is government develop a communication strategy regressive, with the wealthy benefitting the most. over the medium term, starting from informing So why has Moroc.co hesitated to reform the the population of the existence of the subsidy. sys- subsidy? A big reason is that the subsidy reform tem and explaining its disadvantages. A commu- was believed to be unpopular, although the govern- nication campaign ensued in the first months of ment had never done a survey to ascertain just how 2011, and the government elected in November unpopular, among which segments of society, and 2011now has energy subsidy reform at the top of whether alternatives could motivate changes. For its agenda. that reason, the World Bank offered to conduct such a poll in 2010 using a nationally representative sam- Box text contributed by Andrea Liverani. ple of 1,600 households. losers enables an information campaign to be like GDP. By doing so, it helps to identify tailored to potential critics. situations in which economic growth does One way of improving public decisions not create wealth (because natural assets are and determining priorities is to inform deci- consumed more rapidly than other assets are sion makers of the value of the services pro- created) and is not sustainable. For instance, vided by natural ecosystems, so that this a green accounting exercise suggests that value can be compared directly with the eco- China's growth would be much lower than nomic costs and benefits of their decisions. its official GDP growth of nearly 10 percent a Indeed, most environmental assets do not year if envi.ronmental depletion and degrada- have widely accepted prices either for their tion were included. Indeed, calculations put intrinsic value or for the services they pro- China's adjusted net national income growth vide (such as flood protection). As a result, at about 5.5 percent a year (World Bank and decisions that involve a trade-off between DRC2012). economic interests and natural assets (such as building a road through a rain forest) are Prong 2: Measures that promote and difficult to assess. incentivize smart decision making Green accounting extends beyond the valuation of natural assets and focuses on a Even though the information provided by country's stock of natural and other assets green accounting can help inform and bal- (its wealth) rather than on a flow measure ance the debates on political choices and OVERVIEW 19 public investments, it does not constitute an to delay decision makin,g related to complex incentive for firms and individuals. To influ- problems such as climate change (Tversky ence their behavior, additional measures are and Shafir 1992). At the same time, people required, and it is here that governments can like to "do the right thing" and are heavily play a critical role by ensuring that market influenced by social norms. incentives promote green behavior on the As a result, how messages are framed, what part of firms and individuals. values are appealed to, and how the needed Getting the prices right will influence efforts are presented are critical. When given consumer demand as well as firms' choice the choice of voluntarily paying for a carbon of production processes (for example, higher offset for an airline ticket, some 60 percent energy prices will make firms use more ener- of Americans will do so regardless of politi- gy-efficient technologies to minimize their cal affiliation. When the offset is referred to production costs) and products (to respond to as a carbon tax, support falls from 60 to 25 consumer demand that changes with relative percent among Republicans (Hardisty and prices). But it will also make them innovate, others 2010). More generally, framing green develop, and implement new technologies policies as a way to reach an ambitious and and processes. positive social goal (such as becoming carbon Getting prices right also has a central role neutral by 2050 or becoming a leader in solar in shaping the built-up structure of cities. technologies) makes them more acceptable Land developers respond to price signals so (and less prone to reversal at the next change that higher land prices lead to higher densi- of government) than if they are perceived as a ty-enhancing productivity spillovers and constraint to economic development. the supply of affordable housing and manag- Another approach showing promising ing demand for transport. When "official" results is tweaking "choice architectures" to land prices do not reflect demand and are "nudge" people to make better decisions for depressed at the urban periphery, sprawl or the environment or other desirable outcomes suburbanization likely will be excessive. without restricting their freedom of choice But market incentives will not suffice. For (Thaler and Sunstein 2008). To count as green policies to succeed, governments will a nudge, the intervention must be easy and need all of the arrows in the public policy cheap, but not constitute a mandate. Chang- quiver. ing the default options-without changing the options themselves-can be an efficient lnforming and nudging to influence way to promote greener behaviors. In two individuals and address behavioral biases cases where the default option offered by the Behavioral biases limit the impact of mar- electricity provider was a cleaner but more ket incentives and complicate the design of expensive one, fewer than 5 percent of cus- environmental policies. For example, one tomers requested a shift to a cheaper, but explanation for the large unexploited poten- less green, source of electricity (Picherta and tial that exists in energy efficiency springs Katsikopoulos 2008). from the "cognitive myopia" that prevents individuals from accurately weighing future Policies that unleash the power of the benefits against immediate costs. Also, indi- private sector viduals measure gains and losses with respect Firms have a major role to play in provid- to a reference point and weigh losses more ing solutions to green growth. Through their than gains (Tversky and Kahneman 1992); capacity to innovate and adjust their produc- as a result, they tend to consider the cost of tion processes, firms are key to keeping the new environmental policy as a loss and to cost of green policy in check. This means that disregard environmental damages avoided. governments need to influence the behavior People are biased toward the status quo, tend of firms by providing· appropriate incentives to choose the default option, and have an and regulations in addition to the right eco- aversion to ambiguity, resulting in a tendency nomic incentives. 20 INCLUSIVE GREEN GROWTH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT Use information. Besides prices, firms are cannot address the "classic" market failures subject to pressures from their customers, that are usually invoked to justify innovation stakeholders, and investors, and this pressure or industrial policies: increasing returns and can be used to green their behavior. Promot- knowledge externalities in new industrie:s, ing transparency and access to information information asymmetries, capital market on environmental impacts can create social imperfections, and the coordination needed pressure to reduce these impacts. A 1996 across different sectors to permit a techno- amendment to the U.S. Safe Drinking Water logical transition. As a result, most countries Act requiring community drinking water sys- resort to some form of innovation and indus- tems to report regulatory violations publicly trial policies in their growth strategies. has been sufficient to reduce the incidence of Such policies need to be used with care subsequent violations, even in the absence of and tailored to the country context. Today, additional financial incentives. frontier innovation and basic R&D are highly In China, Indonesia, the Philippines, and concentrated in high-income countries and a Vietnam, performance evaluation and ratings few large emerging economies. High-income programs that reported emissions data and countries have a critical responsibility to step assessed plants' environmental performance up their efforts on green innovation and its helped a large number of plants initially rated deployment as well as to take new technolo- as "noncompliant" to rise to "compliant" (in gies to scale through demand-side policies. contrast, plants rated as "flagrant viqlators" Failure to do so will severely compromise and "compliant" stayed in those categories). the ability of developing countries to pun:ue One reason these programs work is that they green growth. provide the information needed for civil soci- In lower-income countries, capacity is often ety and legal and political systems to act to not sufficient for frontier innovation; whalt is reduce pollution. But it also works because needed are policies to support the adapta- they attract the attention of managers to effi- tion and dissemination of existing technolo- ciency-increasing opportunities, which can gies. These technologies have been developed be implemented at low or even negative cost. and tested in richer countries, making their support through trade, dissemination, and Impose where it makes sense. Market and industrial policies less risky than the develop- price instruments are sometimes difficult to ment of new technologies. The best way to implement or to enforce, they lack predict- accelerate technology diffusion is to reduce ability and credibility over the long term, trade barriers. In China, photovoltaic panel and they may be inefficient when economic fabrication technologies were introduced actors do not take them fully into account, mainly through the import of manufactur- such as not fully valuing fuel economy when ing equipment from Europe. Also critical are buying a car (Greene 2010). This is why it is policies to increase adaptation and adoption sometimes easier to implement norms and capacity through education and training as regulations, as is done by Australia, Canada, well as trade and industrial policies (such as China, the European Union, Japan, Korea, local content requirements). and the United States for car fuel efficiency Moreover, several developing countries standards (An and others 2007). are pursuing green industrial policies-bio- fuels in Brazil and solar energy in China and Use innovation and industrial policy, but Morocco. Lessons from past successes and with caution. Prices are notoriously limited failures of standard industrial policies are instruments for transforming economies or clear: governments should subject firms to triggering investments with long-term or · competition, have clear sunset clauses, and uncertain payoffs. Since they depend on gov- focus on well-identified market failures, spill- ernment actions, they have long-term cred- over, or latent comparative advantages (for ibility and predictability issues. They also example, solar potential in North Africa). But OVERVIEW 21 most green industries will require some type could benefit from public-private partner- of policy support, making a market test more ships. Private participation in infrastructure complex to design (is a technology not com- has grown at a steady pace (13 percent a petitive because the government is not pricing year) over the past 20 years but remains con- the externality correctly or because the tech- centrated in a few middle-income countries nology is not the most competitive available?) and a few sectors, namely, telecom and, to a and making it even more imperative for gov- lesser extent, energy (World Bank and PPIAF ernment to navigate carefully the twin risks of 2012). New investments in renewable energy policy and market failures. Typically, environ- are largely private (some $143 billion of the mental policy (such as a carbon tax) should $211 billion invested in renewables in 2010), address the environmental externality, while but 82 percent of private renewable energy the standard tools of innovation and indus- investments that take place in developing trial policies are used to address knowledge countries occur in Brazil, China, and India externalities and other market failures such as (UNEP and Bloomberg New Energy Finance economies of scale and coordination failures. 2011). Yet the need for innovation, efficiency, and "smart investments" (smart grids, smart transportation, and smart houses) makes the IProng 3: Innovative financing tools that role of the private sector even more critical !tackle higher up-front financing needs in green growth policies than it already is in Even when environmental or green infra- traditional infrastructure finance. structure policies and investments pay for Three weaknesses hold back private financ- themselves, they can involve significant up- ing of infrastructure-green or not (MDB front costs and require specific financial tools. Working Group on Infrastructure 2011): Innovative financing is therefore urgently needed, especially where gains from better • The scarcity of resources to prepare proj- environmental management cannot immedi- ects and bring them to a stage at which ately be monetized. they are "bankable" (that is, attractive to Resources are available but remain small private sectors). Developing-country gov- relative to need, so they need to be leveraged. ernments-at least those with limited expe- With respect to climate change mitigation, rience with public-private partnerships- recent estimates suggest that a package of are often reluctant to borrow to prepare public sources (including a redirection of sub- uncertain projects, while private investors sidies currently destined for fossil fuels), mul- are unwilling to invest in preparing a proj- tilateral development bank flows, and carbon ect they may have to bid for and not win. offset flows could leverage some $200 billion • The mismatch between the tenor of the to $400 billion in 2020 in additional private funds available, with the preference of flows (MDB Working Group on Climate investors for short-term funds and the Finance 2011). This is close to the expected needs of infrastructure for long-term funds investment needed to reach a 550 ppm C02- (15-25 years). Few countries have well-de- eq target, but about half of what is needed to veloped capital markets or banking institu- reach a 450 ppm C02 -eq target. As for the tions able to transform short-term deposits biodiversity market, offset and compensation into long-term products, and not enough programs officially amount to some $2.4 bil- refinancing tool options are available. lion to $4 billion per year, but may be much • The challenge of cost recovery. The ability bigger, given that most of the existing mar- to charge at full cost is behind the mas- kets are not transparent or analyzed enough sive expansion in telecom services, but few to estimate their size (Madsen and others other infrastructure sectors.are able to do 2011). so, although where they have, investors Increasing the role of the private sector have come, as they did in Colombia's water is critical. Many of the needed investments sector. Solutions include measures to price 22 INCLUSIVE GREEN GROWTH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT infrastructure services close to cost recov- Africa (Global Partnership for Financial ery, while ensuring affordability for low- Inclusion 2011). Even in the more sophis- income households. ticated markets, most firms find it tough to get credit for investments aimed at business Another weakness springs from the addi- activities other than expansion. tional policy risk created by the fact that How can these obstacles to green invest- the profitability of green investments is ments be overcome? The public sector, inter- often dependent on public policies (such as national financial institutions (IFis), and feed-in tariffs or environmental taxation). bilateral donors can help by providing funds Thus, Spain's retroactive reductions in solar for project preparation as well as conces- feed-in tariffs, Germany's and France's deci- sional elements for pioneer investments. Such sions to reduce the amount of support for support can go a long way toward changilng future projects, and the lack of progress on risk-return profiles and giving investors more a U.S. energy bill all combined to depress confidence in the long-term viability of their the private sector's appetite for renewable projects. energy investments in 2010. As a result, More generally, well-designed public clean energy share prices dipped, reflecting finance mechanisms help to mobilize private investor concerns, despite continued strong investments in energy efficiency and renew- government support for renewable energy in able energy (World Bank forthcoming b) . In China (UNEP and Bloomberg New Energy the case of renewable energy and energy effi- Finance 2011). ciency, the following tends to have the great- Renewable energy and energy efficiency est leverage: illustrate the need for innovative public • Credit lines or guarantee instruments to financing instruments (World Bank forth- engage private banks. The experience of coming b). Renewable energy is capital inten- the International Finance Corporation is sive with a long payback period and may face telling: between 1997 and 2011 some $65 the technology risks associated with emerging million in concessional funding, primar- technologies (such as concentrated solar) or ily for risk-sharing facilities, generated unique resource risks (drilling for geother- $680 million in sustainable energy finance mal). Energy efficiency suffers from the fact investments (IFC 2011). that most local banks rely on balance sheet • "Fund of funds" under which the govern- financing, rather than project-based financing ment invests a relatively small amount of that is based on the cash flow generated by the long-term capital in a range of private, pro- investments. The result is that the customers fessionally managed funds that then invest most in need of financing (small businesses in clean energy or energy efficiency and households) are typically deemed not • Public funds to reduce interest rates for creditworthy. And energy efficiency invest- consumer financing, typically through ments tend to be small, with high transaction financial institutions or utilities. costs, so that banks may not find them attrac- tive in the absence of dedicated credit lines to In addition, energy service companies increase confidence and capacity and instru- (ESCOs), which provide clients with energy ments to aggregate small deals. auditing, propose energy-savings mea- Furthermore, access to financing is par- sures, and financing, can help consolidate ticularly problematic for small and medium multiple small transactions. ESCOs as an enterprises (SMEs), which account for a large industry often require public support to share (60 percent in many countries) of pol- establish: in China, it took more than a lution and resource use. Some 65 to 72 per- decade of support by the government and cent of all SMEs (between 240 million and the World Bank before the ESCOs grew to 315 million firms) lack access to credit, with a $1 billion industry in 2007 (World Bank a particularly daunting picture in Asia and 2010d). OVERVIEW 23 TABLE 0.2 Financing mechanisms need to be tailored to the maturity of the local financial sector (context-dependent financing tools for clean energy in East Asia and the Pacific) Level of financial sector development Indicator Low Medium High Country income level Low income (e.g., Lao PDR) Middle income Upper middle income (e.g., Thailand) (e.g., Malaysia) Banking services Basic banks Full-range banks Universal banks Non-bank financial services None • Government bonds • Government and • Equity corporate bonds • Equity • Alternatives (private equity, venture capital) Interest rate Administrative setting Largely market based Fully market based Access to finance for SMEs Limited Partial Readily available Availability of long-term Limited (up to 1 year) Partial (up to 7 years) Full (up to 15 years) financing Risk management Weak Adequate Robust Appropriate dean • Lines of credit • Lines of credit • Lines of credit energy financing (liquidity support) (demonstration) (demonstration) instruments • Concessional financing • Partial risk guarantee • Partial risk guarantee • Dedicated debt funds • Equity funds • Consumer financing Source: World Bank forthcoming b. Overall, the relevant mix of financing experience in developing social safety nets for instruments will depend on the market barri- the poor (box 0.5). ers (access to credit, transaction cost, or per- ception of risk), market segments (SMEs, large Conclusions developers, or polluters), and local context In sum, this report approaches green growth (such as the maturity of the local financial sec- from a pragmatic point of view. The current tor) in which they seek to operate (table 0.2). model is not just unsustainable, it is ineffi- In addition, payments for environmental cient. Improving it is good economics, so let's services (PES)-whereby farmers and land- fix market failures, internalize externalities, owners are compensated for maintaining assign property rights, improve governance, their land's ability to provide ecosystem ser- and influence behaviors. But making green vices (such as the regulation of water flows, growth happen and ensuring it is inclusive water purification, control of soil erosion, will also require an acute understanding of and habitats for wildlife)-are promising, but political economy and social psychology. underutilized. Fortunately, efforts to develop As such, this report speaks primarily to REDD+ are helping to develop PES schemes. 4 those who fear that greening growth may In addition, in developing countries, policy be too expensive, may be too ambitious at makers have tried to design PES programs to an early stage of development, or should benefit the poor. But whether these schemes concern only high-income countries. To in fact benefit the poor depends on the nature them, the report makes a clear case that of the scheme. Brazil appears to have been greening growth is neither unaffordable nor successful in this regard, building on its technically out of reach, there are plenty of 24 INCLUSIVE GREEN GROWTH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT -----------------------------------------------------------------------------------~-- BOX 0.5 "Green" cash transfers are helping poor communities in the Brazilian Amazon An innovative addition to the Brazilian Balsa Fami- Investments for administrative support to com- lia (family allowance) conditional cash transfer munity associations make up 10 percent of the total program-the world's largest and one of the best paid to families during the year. Balsa Floresta is regarded in terms of coverage and targeting-is being impkmented by the State Government of being implemented for communities living inside Amazonas and the Funda<;ao Amazonia Sustentavel protected areas in the Amazon region. (Sustainable Amazonia Foundation). The funds are The Balsa Floresta (forest allowance) rewards tra- generated by the interest on an endowment initially ditional communities for their commitment to stop established with contributions from the state govern- deforestation by distributing payments for ecosystem ment and private donors. Deforestation is monitored services to families, communities, and family asso- on a yearly basis by the Amazonas State Secretariat ciations. In order to be eligible to receive the grants, for the Environment and Sustainable Development families must enroll their children in school, sign a through satellite imagery analyzed by independent zero deforestation commitment, and attend a two- institutions. The program currently benefits 7,614 day training program on environmental awareness. families in 15 protected areas, covering around 10 Each eligible family receives a monthly stipend of million hectares.of forests-. The State of Amazonas R$50 ($30), paid to the mother. Community associa- has succeeded in halving the deforestation rate over tions can also be eligible to receive payments of up the past five years. to R$4,000 ($2,500) to support sustainable income generation activities, such as honey production, fish Box text contributed by Adriana Moreira. farming, and sustainable forest management. ------------------------------------------------------------------------------------- BOX 0.6 Joining forces: A common platform to move forward on greening our economies and growth processes How does the World Bank's definition of green growth So while the three reports differ in their focus as economic growth that is environmentally sustain- and target audience, they are fully consistent in able compare to those advocated in recent major their broad vision and policy advice. This common reports on green growth? The OECD defines green vision is being developed further in the context of growth as "fostering economic growth and develop- the Green Growth Knowledge Platform (GGKP), a ment, while ensuring that natural assets continue partnership of the three institutions and the Global to provide the resources and environmental services Green Growth Institute. The GGKP-launched in on which our well-being relies" (OECD 2011b). The January 2012-is a global network of researchers United Nations Environment Programme (UNEP) and development experts seeking to identify and defines a green economy as "one that results in address major knowledge gaps in green growth the- improved human well-being and social equity, while ory and practice. Through widespread consultation significantly reducing environmental risks and ecolog- and world~class research, the GGKP aims to provide ical scarcities" (UNEP 2011). Like the approach pro- practitioners and policy makers with better tools to moted in this report, these definitions are consistent foster economic growth and implement sustainable with sustainable development as an ultimate objec- development (http://www.greengrowthknowledge tive and with green growth or a green economy as a .org). means to reconcile its economic and environmental pillars, without ignoring social aspects. OVERVIEW 25 !immediate benefits and a poor country can tries to reduce emissions from forested lands reap economic benefit from better environ- and invest in low-carbon paths to sustainable mental management. And although high- development. REDD+ goes beyond deforesta- income countries, which still account for 75 tion and forest degradation and includes the role of conservation, sustainable management percent of global consumption and a dispro- of forests, and enhancement of forest carbon portionate share of environmental degrada- stocks (http://www.un-redd.org/). tion, absolutely have to implement ambitious environmental measures, all countries will gain from starting early. References Greening growth need not entail slower Allcott, H., and S. Mullainathan. 2010. "Behav- growth and is affordable. However, achieving ior and Energy Policy." Science 327 (5970): a green economy overnight probably is not. 1204-05. The costs of greening growth will depend Alpay, E., S. Buccola, and J. Kerkvliet. 2002. on the degree of ambition. Rapidly and "Productivity Growth and Envir.onmental dramatically decreasing our impact on the Regulation in Mexican and U.S. Food Manu- planet would be quite costly. So, too, would facturing." 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