96413 Decarbonizing Development Decarbonizing Development: Smoothing the Transition and Protecting the Poor Stabilizing climate change entails bringing net emissions of carbon dioxide (CO2) to zero. CO2 stays in the atmosphere for hundreds, if not thousands, of years. As long as we emit more than we capture or offset through carbon sinks (such as forests), concentrations of CO2 in the atmosphere will keep rising, and the climate will keep warming. Countries can follow three principles in their efforts to create a planning ahead for a future with zero emissions, (b) getting carbon prices and policies right, and (c) ­ zero-carbon future: (a) ­ smoothing the transition and protecting the poor. This policy note is drawn from Decarbonizing Development: Three Steps to a Zero-Carbon Future (2015) by Marianne Fay, Stephane Hallegatte, Adrien Vogt-Schilb, Julie Rozenberg, Ulf Narloch, and Tom Kerr. Washington, DC: World Bank. Success in stabilizing climate change will be largely they do not want climate mitigation policies to be imple- ­determined by the ability of policies to ensure that the decar- mented at the expense of the poor and vulnerable. Even if bonization of the economic system c ­ ontributes to economic the poor are the most vulnerable to climate change so that development and the sustainable eradication of poverty. mitigation policies are helpful in the long run, it does not Understandably, analyses of climate policy packages typi- follow that mitigation policies favor the poor in the short climate side of the package— cally focus on the design of the ­ term. Rather, ensuring that mitigation contributes to both the pricing instruments, the role of regulation and norms, long-term and short-term reductions in poverty and and the support to innovation and green technology. inequality is a goal in and of itself. It is also critical to the However, much of the challenge lies in the political public and political acceptability of the associated reforms. economy. Climate policy gains are spread across the economy, and Managing the Political Economy of Reform many of the benefits of climate change stabilization take without Getting Captured by Vested Interests place in the future. In contrast, policy costs tend to be visi- Even if the impact is small at the macroeconomic ble, immediate, and concentrated over a few industries, scale, a carbon price may cause concentrated losses in which may have a de facto ability to veto the reform. ­carbon-intensive sectors, especially in the form of stranded Governments can deal with this situation by designing assets—whose owners may therefore oppose the reform policies in a way that avoids concentrating losses, or by ­ and in some cases have the power to veto it. For a carbon explicitly compensating some of those most affected, to price consistent with the 2°C target, the value of coal power help smooth the transition. plants stranded worldwide between now and 2050 could The goal of the transition is sustainable development reach $165 billion. And climate stabilization will require rather than just lower emissions. For climate change keeping some of the known fossil-fuel reserves in the reforms to succeed, they should be consistent with a coun- ground, leading to a loss of wealth for some companies, try’s social objectives and should garner political support. countries, and regions. Where vulnerable sectors, such as Governments typically have multiple policy objectives, and steel or coal mining, dominate the local economy, regional 1 impacts could be severe, with social, cultural, and political import competition. Experience from trade liberal- implications. ization has shown that support such as wage subsi- dies to encourage hiring in the expanding sectors and A number of options can help smooth the transition unemployment insurance for the displaced workers and avoid concentrating losses (either spatially or within a can effectively help mitigate most of the losses and particular interest group). have generally modest costs. ■■ Help those who might be most affected become ■■ Start reforms with fiscal instruments or regulations part of the transition, and benefit from it instead. (such as performance standards) that apply only to For instance, some automakers have already posi- new capital and new investments. This approach is tioned themselves as leaders in green and electric less efficient from an economic point of view than or hybrid cars, and thus could be potential ­ winners immediately introducing a carbon price. But it has the from more ambitious climate mitigation. Oil and gas advantage of putting the economy on the right path companies can reinvent themselves if they develop without hurting owners of existing capital (hence, technologies to capture and store carbon. Research ­ reducing resistance). It also creates a constituency and development and innovation support are a way for change, as business owners are less likely to lobby of supporting this transition if they target those for repeal of a carbon law or against the subsequent most likely to be affected and transform them into introduction of a carbon tax if they have already possible ­winners. Also, when pilot projects for green invested in the new, cleaner capital. This approach technologies are created, they could be located in the also delivers emission reductions and—maybe most areas that are most likely to be negatively affected by important in places with highly distorted prices— climate policies, to ensure that all regions get benefits ­ prepares the economy for the introduction of a car- from the reform. bon price or the removal of fossil-fuel subsidies, as it progressively transforms the economic system into Success requires managing vested interests without being a more efficient one that remains competitive with captured by those interests. Governments may make mis- appropriate energy prices. takes when trying to smooth the transition—by erring when ■■ Adopt compensation schemes that support those they try to pick the winners, by supporting declining sectors who are most affected. Strong social ­ protection sys- beyond what is needed, or by being captured by special tems play the role of broad-based compensation ­ interests. That is why they have often taken steps to help ­ systems, since they protect households and indi- reduce the likelihood of costly failures and capture. For viduals against economic shocks. Specific instru- example, ­ several East Asian governments used trade compet- ments can also be implemented, as when Japan itiveness as a marker for their industrial policies: government supported traditional industries (such as textile and support was swiftly cut to industries that could not compete ­ shipbuilding) in the 1960s and 1970s. Japan relied on in international markets. Such a clear test may be more diffi- fiscal policies and, starting in 1978, planned capac- cult for low-carbon technologies that by nature depend on a ity reduction, providing assistance to troubled firms government policy to be attractive (whether carbon price or and mitigating negative impacts on labor. The U.S. a regulation), but in general, the following can help: Trade Adjustment Assistance also provided reem- ployment services to displaced workers and financial ■■ Clear and transparent criteria that determine when assistance to manufacturers and service firms hurt by public support should be terminated, 2 ■■ An institutional design that balances flexibility implemented a quasi-­universal cash transfer (about $45 per (needed to adjust policies when new information month per ­ capita) as part of its subsidy reforms. Data from is available) and predictability (so that long-term developing countries show that taking $100 away from investment is possible), and fossil-fuel subsidies and redistributing the money equally ­ ■■ Transparency and public accountability—so the ben- throughout the population would on average transfer $13 eficiaries of the policies are the public rather than the to the bottom quintile of the population and take $23 away firms that are being supported. from the top quintile (figure 1). Another way to ensure poor people benefit is with in- Ensuring Poor People Benefit from the kind measures, and the financing of public goods and infra- Reform structure. Ghana’s 2005 fossil-fuel subsidy reform increased Evidence suggests that carbon pricing and fossil-fuel sub- percent but also included the price of transport fuels by 50 ­ sidy reforms can favor poor people—mostly because they an expansion of primary health care and electrification in generate revenue that can be recycled to maintain or poor and rural areas, the large-scale distribution of efficient improve the lives of the poor. lightbulbs, public transport improvements, and the elimi- nation of school fees at government-run primary and sec- Fossil-fuel subsidies and artificially low energy prices are ondary schools. Similarly, new resources from fossil-fuel not an efficient way to help poor people, but removing subsidies or carbon pricing can be used to pay for public them without care can still hurt the poor. These measures goods, such as education, health, or infrastructure. By ­some drain fiscal coffers, hurt the environment, slow the deploy- accounts, taxing natural rents, including ­ carbon emissions, ment of greener technologies, and chiefly benefit the better off. But even if removing fossil-fuel subsidies and adopting carbon pricing improve equity, these measures will also Figure 1 Using Fossil Fuel Subsidy Resources for increase the price of energy and other goods (such as food), Universal Cash Transfer Would Benefit Poor People potentially reducing poor households’ purchasing power. (Impact of recycling $100 from a fossil fuel subsidy to a Further, higher prices for modern energy could lock poor universal cash transfer) people into using solid fuels for cooking, with impacts on health, gender balance, and children’s access to education Variation in annual income per capita (women and children spend a disproportionate amount of $13 $9 time collecting traditional fuels and spend more time $4 exposed to indoor pollution). Also, industrialization has been a powerful force for poverty reduction in many coun- –$3 tries and could theoretically be slowed by higher energy prices. –$23 It is thus critical to use the savings or new proceeds gener- Bottom Second Third Fourth Top ated by climate policies to compensate poor people, pro- quintile quintile quintile quintile quintile mote poverty reduction, and boost safety nets. One way to Source: Based on F. Arze del Granado, D. Coady, and R. Gillingham. do so is by recycling revenue through tax cuts and increased 2012. “The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries.” World Development 40 (11): 2234–48. transfers to the population—as British Columbia did to Note: The figure shows the impact of reducing the fossil fuel subsidy budget ensure that its reforms were progressive. Similarly, Iran by $100, and distributing the savings across the population. 3 Decarbonizing Development current infrastruc- could finance a significant share of the ­ million low-income households estimated 25 million to 50 ­ ture gap. ­arbon payments are fully developed and will benefit if c pro-poor participation conditions are secured. Similarly, care must be taken in the design of land-use- based mitigation policies, so they benefit the poor. Redistribution and revenue cycling have also been Designing such policies entails ensuring that governments shown to significantly increase the odds of reforms suc- do not restrict access to land for the poorest p­ eople and ceeding, especially when corresponding benefits were prop- respect and strengthen customary rights. A good example is erly communicated to the public. A review of reforms in the Brazil’s Terra Legal program, which offers ­formal recogni- Middle East and North Africa showed that all reforms with tion to indigenous land and grants land titles to some cash and in-kind transfers were classified as successful, as 300,000 smallholders. In addition, ­payment for ecosystem opposed to only 17 percent of the cases without. In services can directly increase the incomes of poor land Germany, a study found that businesses were aware of users. Such programs in Brazil, Ecuador, and Guatemala higher energy taxes but not of the associated cuts in payroll aim to support poor communities, although so far evidence taxes. But once they were informed, they were less likely to of their impact is ­limited. The hope is that by 2030, an disapprove of the energy tax. 4