69125 The Pathway to Sustainable Development THE WORLD BANK Inclusive Green Growth The Pathway to Sustainable Development Inclusive Green Growth The Pathway to Sustainable Development © 2012 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org 1 2 3 4 15 14 13 12 This volume is a product of the staff of The World Bank with external contributions. The �ndings, inter- pretations, 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. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Of�ce of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. ISBN (paper): 978-0-8213-9551-6 ISBN (electronic): 978-0-8213-9552-3 DOI: 10.1596/978-0-8213-9551-6 Cover design: Richard Fletcher, Fletcher Design. Library of Congress Cataloging-in-Publication Data has been requested. Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Greening growth is necessary, ef�cient, and affordable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 But obstacles are plentiful, and green growth is no substitute for good inclusive growth policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 The way forward: Good and inclusive growth policies tailored to real-world challenges . . . . 15 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 1 An Analytical Framework for Inclusive Green Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Why not grow now and clean up later? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Delaying action can be costly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Is green growth really possible? The analytical basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 A real-world framework for green growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 What about welfare? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Trade-offs and synergies between green policies and growth . . . . . . . . . . . . . . . . . . . . . . . . . 40 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2 Influencing Firms, Consumers, and Policy Makers through Market and Nonmarket Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Incentivizing: Providing effective market signals to spur green growth. . . . . . . . . . . . . . . . . . 47 Informing and nudging: Using information and framing to influence economic actors . . . . . 52 Imposing: Using rules and regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 v vi CONTENTS 3 Green Innovation and Industrial Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Innovation policies: Tailoring mixes of instruments to a country’s innovation potential . . . . 67 Green industrial policies: Ensuring that the standard caveats apply . . . . . . . . . . . . . . . . . . . . 80 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 4 Human Capital: Implications of Green Growth Policies for Labor Markets and Job Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Green policies may create jobs, but are no substitute for sound labor markets . . . . . . . . . . . . 92 But environmental regulation need not kill jobs either . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Smoothing the transition to greener growth paths for the labor market . . . . . . . . . . . . . . . . . 99 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 5 Natural Capital: Managing Resources for Sustainable Growth . . . . . . . . . . . . . . . . . . . . . . 105 Extractable renewable resources: De�ning property rights and moving up the value chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Cultivated renewable resources: Innovation, sustainable intensi�cation, and integrated landscape approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Nonprovisioning services: Creating knowledge and markets for economic valuation. . . . . . 117 Nonrenewable resources: Promoting rent recovery and reinvestment . . . . . . . . . . . . . . . . . . 123 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 6 Physical Capital: The Role of Infrastructure in Green Growth Strategies . . . . . . . . . . . . . . 133 Infrastructure as the heart of green growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 Recognizing the need for ef�ciency: Meeting large unsatis�ed infrastructure needs within tight �scal constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Minimizing the potential for regrets and maximizing short-term bene�ts . . . . . . . . . . . . . . 149 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 7 Crafting a Green Growth Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 The challenges of developing a green growth strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 A step-by-step process for crafting a green growth strategy . . . . . . . . . . . . . . . . . . . . . . . . . 158 Uncertainty and the need for robust decision making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 Boxes O.1 What is the aggregate economic support to the (over)use of natural capital? $1 trillion to $1.2 trillion annually . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 O.2 The many ways in which green policies can contribute to growth . . . . . . . . . . . . . . . . . . 11 O.3 Why “grow dirty and clean up later� is misleading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 O.4 Morocco: The importance of political economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 O.5 “Green� cash transfers are helping poor communities in the Brazilian Amazon . . . . . . . 24 O.6 Joining forces: A common platform to move forward on greening our economies and growth processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1.1 Persistent concerns about local pollution in high-income countries . . . . . . . . . . . . . . . . . 32 1.2 An economic framework for green growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 1.3 Using individual transferable quotas to revitalize �sheries . . . . . . . . . . . . . . . . . . . . . . . . 38 CONTENTS vii 1.4 Reducing vulnerability to oil shocks by increasing energy ef�ciency . . . . . . . . . . . . . . . . 40 2.1 Institutional and market failures that help explain why growth is often environmentally unsustainable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.2 Lessons from CO2 emission trading schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 2.3 The political economy of subsidy reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 2.4 What is “green accounting�? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 2.5 Changing the default option to spur the use of renewable energy . . . . . . . . . . . . . . . . . . 55 2.6 Modifying car buyer behavior in France. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 2.7 How are PERPs faring in developing countries? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 2.8 What is the best way to promote vehicle fuel economy? . . . . . . . . . . . . . . . . . . . . . . . . . . 58 3.1 Market failures that can justify innovation and industrial policies . . . . . . . . . . . . . . . . . 66 3.2 Shedding light on green innovation, technologies, and industrial policies . . . . . . . . . . . . 68 3.3 What are green base-of-pyramid innovations? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 3.4 Rapidly growing champions of “new sustainability� . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 3.5 African monsoon multidisciplinary analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 3.6 “Pinstripe greens�: Private �nanciers making millions from clean-tech ventures . . . . . . . 77 3.7 Voluntary standards support the sustainable management of South African deep-sea �shing and Indonesian palm oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 3.8 The role of green procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 3.9 Comparison of photovoltaic support policies in Germany and China . . . . . . . . . . . . . . . 82 3.10 Lessons from a “green� industrial policy: U.S. biofuels . . . . . . . . . . . . . . . . . . . . . . . . . . 85 4.1 A framework to estimate the impacts of green policies on jobs . . . . . . . . . . . . . . . . . . . . 97 4.2 Shortage of skills and inadequate training provisions can undermine green programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 5.1 Job creation and revenue generation from off-shore capture �sheries in Namibia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 5.2 Reform of forest tenure in Albania and China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 5.3 Conservation agriculture in Brazil and Zambia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 5.4 The use and misuse of agricultural input subsidies in India . . . . . . . . . . . . . . . . . . . . . . 114 5.5 Producing a better backyard chicken in India. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 5.6 Involving local communities in nature-based tourism in Indonesia . . . . . . . . . . . . . . . . 119 5.7 Scoring a triple win in Ethiopia by restoring the landscape . . . . . . . . . . . . . . . . . . . . . . 122 5.8 How the mining sector is investing in communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 6.1 The case for immediate action in the transport sector . . . . . . . . . . . . . . . . . . . . . . . . . . 136 6.2 The impact of technologies on transport policies—not enough? . . . . . . . . . . . . . . . . . . 137 6.3 Bene�ts from using photovoltaic electricity in rural areas . . . . . . . . . . . . . . . . . . . . . . . 138 6.4 Hydropower as a green choice for lower-income countries . . . . . . . . . . . . . . . . . . . . . . 138 6.5 The energy challenge: Expanding access and increasing supply in an ef�cient, clean, and cost-effective manner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 6.6 Pairing cost recovery with deregulation in Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 6.7 Using noneconomic incentives to reduce the demand for water and sanitation . . . . . . . 145 6.8 Harnessing smart information and communication technologies to shape a green future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 7.1 Implementing a green growth strategy in the Republic of Korea . . . . . . . . . . . . . . . . . . 157 7.2 MCA4Climate: A practical framework for planning pro-development climate policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 7.3 Using a policy framework to analyze the bene�ts of Morocco’s Ouarzazate concentrated solar power project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 7.4 Incorporating uncertainty in protecting Ho Chi Minh City. . . . . . . . . . . . . . . . . . . . . . 166 7.5 Using robust decision making in water planning in southern California water . . . . . . . 168 viii CONTENTS Figures O.1 The three pillars of sustainable development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 O.2 As incomes increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 O.3 As incomes increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 O.4 The Loess plateau, before and after the watershed restoration program . . . . . . . . . . . . . . 8 O.5 Up-front investment costs for energy supply and energy ef�ciency could be substantial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 O.6 Reducing environmental degradation would provide substantial economic bene�ts . . . . 12 O.7 Developing countries may have substantial unexploited potential in green exports . . . . 14 O.8 Fossil fuel subsidies bene�t primarily the rich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.1 The three pillars of sustainable development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 1.2 Global pollutants and local, visible ones follow different paths . . . . . . . . . . . . . . . . . . . . 33 1.3 The denser the city, the lower the transportation emissions . . . . . . . . . . . . . . . . . . . . . . . 34 1.4 Green policies hold the potential to sharply boost output . . . . . . . . . . . . . . . . . . . . . . . . 37 B2.4.1 Some regions are doing better than others in wealth creation . . . . . . . . . . . . . . . . . . . . . 53 2.1 Energy-reporting electrical outlet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 B2.6.1 A sudden shift to greener cars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 B2.8.1 Fuel ef�ciency standards are key to reducing emissions from the transport sector . . . . . 59 3.1a Green frontier innovation occurs mostly in high-income countries… . . . . . . . . . . . . . . . 69 3.1b . . . with East Asia leading the way in developing regions . . . . . . . . . . . . . . . . . . . . . . . . . . 69 3.1c . . . but worldwide green patents remain low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 3.2 Green exports are growing, especially in the East Asia and Paci�c region . . . . . . . . . . . . 71 3.3 Developing countries may have a substantial unrealized potential for producing green exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 3.4 Green imports are vital worldwide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 3.5 Snapshot of technology creation and diffusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 4.1 Many developing countries need to increase their enrollment in technical tertiary education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 5.1 Current �shery practices are not sustainable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 5.2 Not enough wealth creation from natural capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 6.1 Urban densities determine cities’ options for greening . . . . . . . . . . . . . . . . . . . . . . . . . . 135 B6.1.1 As income rises, will countries choose low energy consumption in road transport? . . . 136 6.2 Upfront investment costs for energy supply and greater energy ef�ciency could be substantial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 B6.6.1 Access to basic infrastructure services has risen dramatically in Colombia . . . . . . . . . . 143 6.3 Too few countries are implementing plans to mitigate against natural disasters . . . . . . 148 7.1 Schematic for crafting solutions in the presence of deep uncertainty . . . . . . . . . . . . . . . 167 Tables O.1 Some guiding principles for establishing green growth strategies. . . . . . . . . . . . . . . . . . . 17 O.2 Financing mechanisms need to be tailored to the maturity of the local �nancial sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 1.1 Potential bene�ts of green growth policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5.1 Poor soil quality and land degradation hurt economic growth . . . . . . . . . . . . . . . . . . . 110 5.2 Impacts of payment for ecosystem services schemes on poverty reduction . . . . . . . . . . 121 6.1 Sectors in which inertia and sensitivity to climate conditions are great . . . . . . . . . . . . . 134 6.2 Gaps in access to infrastructure in developing countries remain large, particularly in Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 CONTENTS ix 6.3 Effect of land use and density on use of public transport . . . . . . . . . . . . . . . . . . . . . . . . 147 7.1 Inter-ministerial arrangements for coordinating on climate change strategy in selected countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 7.2 Channels through which green policies could contribute to growth . . . . . . . . . . . . . . . 159 7.3 Some guiding principles for establishing green growth strategies. . . . . . . . . . . . . . . . . . 161 7.4 Framework for measuring potential bene�ts from green growth policies . . . . . . . . . . . 164 B7.3.1 Co-bene�ts of the Ouarzazate concentrated solar power project . . . . . . . . . . . . . . . . . . 165 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- �cient reckoning of the true social costs of e�ts 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, ef�cient, 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 xi xii 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 Acknowledgments T his report was written by a team led Giraudet, Céline Guivarch, Bernard Hoek- by Marianne Fay and Stéphane Halle- man, Guy Hutton, Vijay Jagannathan, Nalin gatte and composed of Marjorie-Anne Kishor, Franck Lecocq, Robert Lempert, Bromhead, Alex Bowen, Michael Chaitkin, Robin Mearns, Aurélie Méjean, Christopher Mark Dutz, Atsushi Iimi, Urvashi Narain, Neal, Junko Narimatsu, Elisa Portale, Val- and David Tréguer. Signi�cant contributions entin Przyluski, Riikka Rajalahti, Apurva were made by Antonio Estache, Adrian Foz- Sanghi, Randeep Sudan, Nancy Vandycke, zard, Kirk Hamilton, Tim Kelly, Masami Xiaodong Wang, and Monika Weber-Fahr. Kojima, Andreas Kopp, Somik Lall, Eduardo Finally, the report drew on background Ley, Marcelino Madrigal, Diego Rodriguez, papers produced for the inaugural conference Siddharth Sharma, and Adrien Vogt-Schilb. of the Green Growth Knowledge Plat- Geoffrey Heal acted as adviser to the form (available at http://www.greengrowth report, in addition to being a key contributor knowledge.org) by Brian Copeland; Stefan to developing the analytical framework. Dercon; Jaime de Melo; Tony Gomez-Ibañez; This report bene�ted from extensive dis- Winston Harrington, Richard Morgenstern, cussions with Milan Brahmbhatt. We grate- and Daniel Velez-Lopez; Larry Karp and fully acknowledge the comments and advice Megan Stevenson; Howard Kunreuther and provided by our peer reviewers: Rosina Bier- Erwann Michel-Kerjan; David Popp; Guido baum, Richard Damania, Uwe Deichmann, Porto; Andreas Schäfer; Sjak Smulders and Vivien Foster, Jean-Charles Hourcade, Mike Cees Withagen; Jeff Vincent; and Elke Weber Toman, David Popp, Thomas Sterner, Jeff and Eric Johnson. Vincent, and Zhang Yongsheng. Other use- The report was edited by Barbara Karni ful inputs and suggestions were provided by and Laura Wallace. Zoubida Allaoua, Edward Andersen, Jock This report was sponsored by the Sustain- Anderson, Ruben Bibas, Dan Biller, James able Development Network of the World Brumby, Christophe Crepin, Jacqueline Bank under the leadership of Inger Andersen Devine, Casper Edmonds, Louis-Gaëtan and Rachel Kyte. xiii Abbreviations $ US$ unless otherwise indicated AMMA African Monsoon Multidisciplinary Analyses ANS adjusted net savings CO2 carbon dioxide CO2-eq carbon dioxide equivalent COMTRADE Commodity Trade Statistics database ESCO energy service company ESTD early-stage technology development ETS Emissions Trading System EU European Union GDP gross domestic product GGKP Green Growth Knowledge Platform GRP Green Rating Project (India) Gt gigatons HPS Husk Power Systems IEUA Inland Empire Utility Agency IFI international �nancial institution ITQ individual transferable quota ITS Intelligent Transport Systems MCA4Climate Multi-Criteria Analysis for Climate MDG Millennium Development Goal NOx nitrogen oxides OECD Organisation for Economic Co-operation and Development PES payments for environmental services PERP performance evaluation and ratings program PM10 particulate matter up to 10 micrometers in size xv xvi ABBRE VIATIONS PNK Putri Naga Komodo (Indonesia) ppm parts per million PPP purchasing power parity PROPER Program for Pollution Control, Evaluation, and Rating (Indonesia) PV photovoltaic R&D research and development REDD Reducing Emissions from Deforestation and Forest Degradation RSPO Roundtable on Sustainable Palm Oil SME small and medium enterprise SO2 sulfur dioxide TAC total allowable catch UNEP United Nations Environment Programme UWMP Regional Urban Water Management Plan VC venture capital WAVES Wealth Accounting and Valuing Ecosystem Services 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 good growth political economy constraints, over- policies. come deeply entrenched behaviors and • Obstacles to greening growth are polit- social norms, and develop the needed ical and behavioral inertia and a lack �nancing tools. of �nancing instruments—not the cost • There is no single green growth model. of green policies as commonly thought. Green growth strategies will vary • Green growth should focus on what across countries, reflecting local con- needs to be done 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, local bene�ts. more inclusive without slowing it. O ur current growth patterns are not and social goals are not only highly compat- just unsustainable; they are also ible, but also largely complementary. Growth deeply inef�cient. 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 (�gure O.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 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T FIGURE O.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 Economic into unsustainable patterns, preventing irre- sustainability versible environmental damage, and reducing 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 Sustainable for the vast majority of global growth in development income, infrastructure, and population in the coming decades—need to choose whether to build right or risk facing costly Social Environmental policy reversals in the future. sustainability sustainability • 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 (CO2)—must act Note: Economic and social sustainability, on the one hand, and social and environmental sustain- according to their responsibility. Most ability, on the other, have been found to be not only compatible, but also largely complementary. 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 �gure—which is why green growth aims to consumption and production that boost ensure that economic and environmental sustainability are compatible. 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 criti- 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 ef� - 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. Today, 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 �nds avoid locking in unsustainable and inef�cient 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 �scal 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 de�ning which is why the report takes an economic property rights, helping �rms 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 inef�cient, thereby offering into infrastructure investments) and bene�ts opportunities for cleaner (and not necessarily (given the need for massive increases in infra- slower) growth. And it identi�es the flaws in structure services in developing countries). the “grow now, clean up later� argument. Chapter 7 �lters 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 bene�ts 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 ef�cient 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 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T 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 bene�ts. selves directly, and the others make economic • Smart about changing the behavior of con- sense once externalities are priced and eco- sumers and �rms 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 �nancing 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 �nancing 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 � nancing 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) pro�table 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 bene�ts. term (such as a hydroelectric plant in a Those bene�ts 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, refl ecting 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 (dif�cult anyway amid today’s �s- 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 e�ts or redistribute bene�ts from one group (GDP)—is now recognized as a critical driver to another. Notable successes include trade of poverty reduction (figure O.2, panel a; reforms across the world, reform of �sh- Ferreira and Ravallion 2009). It has resulted OVERVIEW 5 in an 80 percent increase in GDP per capita FIGURE O.2 As incomes increase . . . in developing countries over the past 20 years, a. . . . Poverty recedes (poverty headcount and GDP per capita) despite substantial increases in population. 100 Living standards have improved for many 95 (�gure O.2, panels b and c), with more than 90 85 660 million rising out of poverty and remark- 80 able progress being made in literacy, educa- 75 % of the population living on 70 tion, life expectancy, malnutrition, and infant, 65 child, and maternal mortality. And while 60 $1 a day or less 55 China drove much of global poverty reduc- 50 tion, other countries that experienced growth 45 40 also saw poverty decline rapidly. Ghana, for 35 example, grew much faster than the African 30 25 average and managed to reduce its poverty 20 rate from 51 to 30 percent between 1990 and 15 10 2005 (World Bank 2011c). 5 Moreover, growth need not cause income 0 –5 inequality. The famous Kuznets curve argu- 0 5,000 10,000 15,000 20,000 25,000 ment, which posits that inequality first GDP per capita ($, 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 females ages 15 and above) 100 of Europe. And it has declined in much of female literacy rate Latin America (Milanovic 2010). Some coun- 80 tries reduce inequality as they grow; others 60 let it increase. Policies matter. Thus, the links between the economic and 40 social pillars of sustainable development are 20 generally self-reinforcing. But the story is not so simple when it comes to the economic 0 0 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 �ve market failures and inefficient policies. As and GDP per capita, 2010)  with inequality, overall environmental per- 200 formance does not � rst get worse and then 180 improve with income—no Kuznets curve mortality rate (deaths of children under 5 per 1,000 live births) 160 here either. Of course, some local and vis- 140 ible environmental public goods do worsen at 120 � rst and eventually improve with income— typically local air quality. But this is not true 100 of local pollutants with invisible or long-term 80 impacts (such as the accumulation of pesti- 60 cides and toxic chemicals in land and water) 40 or global pollutants (such as greenhouse gases 20 in the atmosphere). These often get worse 0 with higher income (�gure O.3). 0 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 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T FIGURE O.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).1 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 country-level PM10 concentration about $8,000 per person per year. (micrograms per cubic meter) 140 Further, even after the rapid growth of the 120 past decade, some 1.3 billion people do not 100 have access to electricity, 900 million do not 80 have access to clean water, 2.6 billion lack access to improved sanitation, and around 60 800 million rural dwellers do not have access 40 to an all-weather road and are cut off from 20 the world in the rainy season (Fay and others 2010; IEA 2011). Even with the rapid decline 0 in the share of people living in poverty, close 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 to 1 billion could still be living on $1.25 per GDP per capita (2005 $, PPP) day in 2015. With continued growth at about the same speed as during the past 20 years, b. . . . Global pollutants, such as CO2 emissions, tend to increase developing countries would account for about (CO2 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. Continued rapid population growth in (metric tons per capita) 30 several developing regions further compli- CO2 emissions 25 20 cates matters. Current projections are that the world will reach some 9 billion people 15 by 2050. This implies that even more rapid 10 growth is needed to tackle poverty, and more 5 aggressive social policies are needed to ensure 0 that children, especially girls, and mothers 0 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 inef�cient 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 world. 2 Intensification probabilities of coral bleaching and mortal- and productivity increases have helped to ity by the late twenty-�rst century, which will limit ecosystem loss in many countries, but significantly harm reef ecosystems (World poorly managed intensi�cation has also exac- Bank 2010d). The concurrent acidi�cation 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 deserti�cation (Bai and others wells, or even lique�ed coal. Without signi�- 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 inef� ciently 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 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T 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 (�gure O.4; World Bank 2005b). problems. This inef� ciency stems partly from the Production and consumption processes fact that many natural resources are com- are often wasteful, too. This is particularly 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 �sheries are energy costs by more than 50 percent, while a classic example in which catch per � sher increasing construction costs by only 10 per- and per vessel has been declining steadily cent. Waste also plagues food production. because of over�shing, 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 O.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 bene�ts 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 � rst 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 O.4 The Loess plateau, before and after the watershed restoration program Source: For the left-hand image, Till Niermann, March 25, 1987, http://en.wikipedia.org/wiki/File:Loess_landscape_china.jpg; for the right-hand image, http://digitalmedia.worldbank .org/slideshows/china1005/. OVERVIEW 9 BOX O.1 What is the aggregate economic support to the (over)use of natural capital? $1 trillion to $1.2 trillion annually A compilation of estimates by international 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 $1.1 trillion (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: $455 billion–$485 billion. This OECD countries (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 2010) and con- levels. sumption in developing economies ($409 billion in 2010; IEA 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 extraction or sidies that were included are not environmentally irrigation infrastructure—estimated as the differ- harmful) and exclusion (they do not include develop- ence between the market value of water and the ing countries’ subsidies to agriculture, estimated by part of costs covered by tariffs. Limited data are the OECD at about $200 billion for the few emerg- available, but Myers and Kent (2001) estimate ing economies for which data were available) and water sector subsidies at $230 billion in 2000 and are therefore neither precise nor exhaustive, they do McKinsey (2011) cites estimates of $200 billion to suggest that substantial resources go to environmen- $300 billion. tally harmful subsidies. • Fishery subsidies: $10 billion to $30 billion. This encompasses a wide variety of instruments such as and their persistence suggests that the dif- costly than fossil fuel). Environmental poli- ficulty of correcting them should not be cies alter relative prices and therefore change underestimated. the structure of demand, requiring costly adjustments in the structure of production. Demand may decrease in sectors that have Affordable: Much of green growth high capacity (coal production) and increase pays for itself, and an innovative in sectors that have limited capacity (public private sector keeps costs in check transport). As a result, ef�ciency may fall, at Environmental policies should, in principle, least during an adjustment phase, jobs may improve social welfare and economic effi- be lost, and the poor may suffer if compensa- ciency by reducing excessive pollution and tory measures are not adopted. other environmental bads. Nevertheless, such Moreover, the up-front capital require- policies clearly have costs. They can hit tax- ments are high. The energy investments payers who have to pay the bill (for subsidies needed globally to achieve greenhouse gas to renewable energy or public spending on concentration of 450 parts per million (ppm) green R&D) or producers and consumers if carbon dioxide equivalent (CO2-eq; the level the policies mandate the use of more expen- needed to maintain a 50 percent chance of sive or less productive technologies (such as not exceeding global warming of 2°C above renewable energy resources that are more preindustrial temperatures) could amount to 10 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T FIGURE O.5 Up-front investment costs for energy supply and between $140 billion and $175 billion per energy efficiency could be substantial year in 2030 or perhaps half a percentage (additional investment needed in the energy sector, both in energy supply and point of developing countries’ GDP (World demand, in 2030 to reach a 450 ppm and a 550 ppm CO2-eq objective, according to Bank 2010d). In East Asia, the estimated four global models) additional net � nancing required for a sus- 1,200 tainable energy path is $80 billion, not much more than the $70 billion the region cur- additional annual investment 1,000 rently spends on fossil fuel subsidies (Wang in 2030 ($ billions) 800 and others 2010; IEA 2008). Furthermore, determining affordability is 600 about more than a �nancial ledger. Green pol- 400 icies can contribute to growth (box O.2) and boost a nation’s overall wealth. And they help 200 to reduce the damage done by environmen- 0 tal degradation, which is costly for an econ- 550 450 550 450 550 450 450 omy: equivalent to 8 percent of GDP across a ppm ppm ppm ppm ppm ppm ppm MESSAGE TIAM-WORLD ReMIND IEA sample of countries representing 40 percent of the developing world’s population (�gure 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, Loulou and Labriet O.6). As a result, bene�ts may well outweigh 2008; on IEA, IEA 2011. the costs (implying a negative net economic Note: IEA (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 O.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 bene�ts to be obtained But many of these capital investments will from green policies. be recouped through subsequent savings, so At the �rm level, the cost of environmental the net financial costs will be much lower. regulation to � rms is typically modest, with For example, the high capital cost of wind costs lower than expected thanks to the abil- and solar energy or hydropower is offset by ity of �rms to adapt and innovate (chapter 3). their low operating costs. Globally $1 spent As a result, there is no evidence that environ- on energy ef�ciency saves $2 through invest- 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 � rms 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 � nancial costs down to regulations that promote efficiency gains OVERVIEW 11 BOX O.2 The many ways in which green policies can contribute to growth Green policies and practices can contribute to growth promoting greater ef�ciency (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. Well-managed natural risks result tal regulations stimulate 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 � rms 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 Neidell 2011). vations. Similarly, international sustainability stan- Second, they can promote ef�ciency. For instance, dards can help local � rms to upgrade their environ- imposing environmental taxes (taxing “bads�) and mental practices, a form of catch-up innovation. In removing distortionary subsidies creates �scal space developing countries, green policies can also encour- for governments to lower labor taxes or subsidize age the adaptation and adoption of greener technol- green public “goods� such as public transport or ogies that have been developed elsewhere. renewable energy. In London, congestion taxes, Finally, green policies also accrue non-growth besides reducing traffic, helped to finance invest- gains to welfare. They can reduce inequality 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 (Trans- disasters or spikes in commodity prices. A model- port for London 2008). And many � rms—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 �nding 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 re� nery 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 con� rm 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- Moreover, there is no evidence that envi- man � rms in general (Anger and Oberndor- ronmental policies have led to an exodus of fer 2008). Meanwhile, the climate levy on � rms to “pollution havens� (locations with U.K. � rms seems to affect energy ef�ciency, lax environmental policies). Tighter environ- but not economic performance and �rm exit mental regulation may cause � rms 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 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T FIGURE O.6 Reducing environmental degradation would provide But obstacles are plentiful, and substantial economic bene�ts green growth is no substitute for (cost of enviromental degradation expressed as percentage of GDP 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 �nancing constraints are signi�cant 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 �rst-best recommendations meet 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 dif�cult 0 2 4 6 8 10 12 because of political or social acceptability cost of environmental degradation as issues. The bene�ts 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 silver the location choice and competitiveness of bullet of environmental policies. These mar- �rms. 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 substitution Third, inertia and biases in behavior are possibilities: the responsiveness of drivers 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 �rms in the renewable energy sec- energy prices are often disappointing, and tor to respond to incentives will depend �rms do not always exploit all opportunities on whether transmission lines are built to improve ef�ciency (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, �nancing 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 ef�ciency 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 acceptable. that requires up-front investments in new • Missing markets or institutions. Speci�c equipment or add-ons whose costs are then institutional measures may be required to recouped over time through energy savings. transform the “right price� into the right Even with agriculture or �sheries, 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-ef�cient appliances the future. The need for up-front � nancing 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 ef�- small tax base) and the private sector (espe- ciency labels for homes), speci�c schemes cially small and medium enterprises). Few to �nance investments in energy ef�ciency, countries have a well-developed banking sec- or norms (such as compulsory retro�t when tor, let alone energy service companies that homes are sold). specialize in �nancing investments in energy • Lack of credibility and predictability of ef�ciency. price signals. Governments cannot com- mit to maintaining environmental price 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 �rms 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 � nancial systems, or ment requires coordination between elec- poor business environments. 14 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T FIGURE O.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- 10 tial could generate jobs and exports, thereby boosting growth and output. 8 But green policies cannot address struc- from developing countries tural constraints to growth and employment % of total exports 6 creation, at least if deployed alone. They will not be effective at creating green jobs where 4 labor markets are distorted and regulations discourage small business development. They 2 will not offset an unattractive business envi- ronment. And where the labor force’s skills 0 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 that, (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 at the former is likely to be good at the 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 � nancial 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 �scal stimulus could effectively and India, rural electri�cation 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 such added advantage of carrying environmental as waste management, and a limited number bene�ts. That said, a �scal stimulus—green of teachers and trainers in environmental ser- or not—is effective only if unemployment is vices (ILO and CEDEFOP 2011). linked to insuf�cient 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— � rst 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 bene�t 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 bene�ts 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 (�gure O.7). Many develop- nomic bene�ts 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 bene�t 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 bene�ts. 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 (�gure O.8). By one esti- policies and to ensure that they bene�t 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 Granado and others 2010). Similarly, con- The way forward: Good and sumption subsidies for water and electricity inclusive growth policies tailored can usefully be replaced by connection subsi- to real-world challenges 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 O.8 Fossil fuel subsidies bene�t 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 11% to go for the politically expedient rather than 43% the economically optimal, carefully deploy- ing social marketing tools and making �nan- 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 O.3). Q2 What follows is a three-prong strategy for 23% tackling entrenched interests and behaviors, Source: Arze del Granado and others 2010. �nancing constraints, and the risk of lock-in. 16 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX O.3 Why “grow 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 obviously biodiversity—is environmental goods affect their daily lives, with irreversible. This is also the case with climate. signi�cant 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 CO2), 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. Urban forms 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 solid waste disposal systems were are being built. The consequences of development a principal recommendation of the fact-finding based on a low-density, individual-vehicle transpor- committee established to investigate the causes of tation model are largely irreversible, as evidenced by the 2005 Mumbai 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 bene�ts be imported with caution. and avoid lock-in Maximize local and immediate bene�ts. 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 bene�ts. 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 O.1 Some guiding principles for establishing green growth strategies Local and immediate benefits LOWER HIGHER (Trade-offs exist between short-and (Policies provide local long-term or local and global benefits) and immediate benefits) LOWER (action is less urgent) • Drinking water and sanitation, solid waste • Lower-carbon, higher-cost energy management Inertia and/or risk of lock-in supply • Lower-carbon, lower-cost energy supply • Carbon pricing • Loss reduction in electricity supply and irreversibility • Stricter wastewater regulation • Energy demand management • Small-scale multipurpose water reservoirs HIGHER • Land use planning (action is urgent) • Reduced deforestation • Public urban transport • Coastal zone and natural area • Family planning protection • Sustainable intensi�cation in agriculture • Fisheries catch management • 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 O.1 illustrates the implications for pri- such as local air pollution or natural risks), ority setting of emphasizing local and immedi- or (c) are � nanced from external resources ate bene�ts 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 bene�ts—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-ef�cient development. Table O.1 pro- billion. It offset them with $30 billion in cash vides general statements on a few green poli- transfers that bene�ted 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 speci�c 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 CMI 2012). 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 Understanding 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 O.4). Sound information about winners and 18 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX O.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 � nd 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 �scal 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 5.5 percent 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- T his simple exercise in revealing political based energy products low, thus making renewable awareness and preferences helped the previous and ef�ciency investments less competitive. And it is government develop a communication strategy regressive, with the wealthy bene�tting the most. over the medium term, starting from informing So why has Morocco 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 � rst 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 2011 now 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 bene�ts of their decisions. its of�cial GDP growth of nearly 10 percent a Indeed, most environmental assets do not year if environmental 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 DRC 2012). economic interests and natural assets (such as building a road through a rain forest) are Prong 2: Measures that promote and dif�cult 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 making related to complex incentive for �rms and individuals. To influ- problems such as climate change (Tversky ence their behavior, additional measures are and Sha� r 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 �rms 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 �rms use more ener- of Americans will do so regardless of politi- gy-efficient technologies to minimize their cal af�liation. 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 “of�cial� 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 suf�ce. 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 ef�cient Informing 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 bene�ts 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, � rms 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 � rms 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 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T 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 industries, 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 suf�cient 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 �nancial 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 violators� Failure to do so will severely compromise and “compliant� stayed in those categories). the ability of developing countries to pursue 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 suf�cient for frontier innovation; what is reduce pollution. But it also works because needed are policies to support the adapta- they attract the attention of managers to ef�- 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 dif�cult 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 inef�cient 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 ef�ciency 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-identi�ed 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, ef�ciency, and “smart investments� (smart grids, smart transportation, and smart houses) makes the Prong 3: Innovative �nancing tools that role of the private sector even more critical tackle higher up-front �nancing needs in green growth policies than it already is in Even when environmental or green infra- traditional infrastructure �nance. structure policies and investments pay for Three weaknesses hold back private �nanc- themselves, they can involve signi�cant up- ing of infrastructure—green or not (MDB front costs and require speci�c �nancial 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 CO2- (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 CO2-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 of�cially amount to some $2.4 bil- re�nancing 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 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T 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 � rms � nd 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 changing future projects, and the lack of progress on risk-return pro�les and giving investors more a U.S. energy bill all combined to depress con�dence 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 �nance mechanisms help to mobilize private investor concerns, despite continued strong investments in energy ef�ciency 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 ef�- 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 �nance mal). Energy ef�ciency suffers from the fact investments (IFC 2011). that most local banks rely on balance sheet • “Fund of funds� under which the govern- �nancing, rather than project-based �nancing 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 � nancing (small businesses in clean energy or energy ef�ciency 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 �nancial institutions or utilities. costs, so that banks may not �nd them attrac- tive in the absence of dedicated credit lines to In addition, energy service companies increase con�dence and capacity and instru- (ESCOs), which provide clients with energy ments to aggregate small deals. auditing, propose energy-savings mea- Furthermore, access to � nancing is par- sures, and � nancing, 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 �rms) lack access to credit, with a $1 billion industry in 2007 (World Bank a particularly daunting picture in Asia and 2010d). OVERVIEW 23 TABLE O.2 Financing mechanisms need to be tailored to the maturity of the local �nancial sector (context-dependent �nancing tools for clean energy in East Asia and the Paci�c) 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 �nancial 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 �nance 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) �nancing Risk management Weak Adequate Robust Appropriate clean • 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 O.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 �nancial sec- from a pragmatic point of view. The current tor) in which they seek to operate (table O.2). model is not just unsustainable, it is inef�- In addition, payments for environmental cient. Improving it is good economics, so let’s services (PES)—whereby farmers and land- � x 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 bene�t the poor. But whether these schemes concern only high-income countries. To in fact bene�t 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 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX O.5 “Green� cash transfers are helping poor communities in the Brazilian Amazon An innovative addition to the Brazilian Bolsa Famí- 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. Bolsa Floresta is regarded in terms of coverage and targeting—is being implemented by the State Government of being implemented for communities living inside Amazonas and the Fundação Amazônia Sustentável protected areas in the Amazon region. (Sustainable Amazonia Foundation). The funds are The Bolsa 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 bene�ts 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 �ve years. to R$4,000 ($2,500) to support sustainable income generation activities, such as honey production, �sh Box text contributed by Adriana Moreira. farming, and sustainable forest management. BOX O.6 Joining forces: A common platform to move forward on greening our economies and growth processes How does the World Bank’s de�nition 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 de� nes 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 signi�cantly 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 de� nitions 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 bene�ts and a poor country can tries to reduce emissions from forested lands reap economic bene�t 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. 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An Analytical Framework for Inclusive Green Growth 1 Key Messages • It is inef�cient either to pursue growth and frontier), a stimulus effect (stimulating the only later worry about its environmental con- economy in times of crisis), and an innova- sequences, or to promote environmental sus- tion effect (accelerating development and tainability and subsequently worry about its adoption of technologies). growth implications. • Green policies can also contribute to wel- • The analytical case for green growth is strong: fare through direct environmental bene�ts, green policies can indeed contribute to eco- through distributional effects (including nomic growth over the short term, if they are poverty reduction and job creation), and designed in an appropriate framework. through increased resilience to shocks • Green policies can contribute to growth (including natural disasters and commod- through four effects: an input effect (increas- ity price volatility). Welfare impacts will be ing production factors), an efficiency effect greater if efforts are made to make green (bringing production closer to the production policies inclusive. C hina grew at about 10 percent a year approach. First, the cost of environmental over the past 30 years, transform- degradation, estimated at 9 percent of gross ing it from a poor country to the domestic product (GDP), is threatening both world’s second-largest economy. Yet, the economic competitiveness and welfare. As Chinese government is now reconsidering a result, China’s population is demanding the strategy that permitted this economic a cleaner and safer environment. Second, miracle in the hope of greening its develop- China is looking for new sources of growth, ment process (World Bank and DRC 2012). supported by innovation and higher value Two factors motivate this possible change in added production, and wants to be an early This chapter is based on Hallegatte and others (2011). 29 30 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T mover in the race toward greener production environmental, and social problems. Utili- processes and products. ties often refuse to serve them and insecure China is not the only such country. property rights discourage residents from Brazil, Indonesia, Mexico, Morocco, and investing in establishing connections to water Tunisia are greening their growth process or or electricity networks. Creating functioning looking to use green industries as sources of land markets with secure land tenure helps growth. Ethiopia is developing a green growth informal settlers access solid waste removal, strategy. Kenya is investing heavily in geo- sanitation and drainage, and drinking water. thermal power. And many other countries are It also increases welfare and labor produc- hoping to better balance the environment and tivity, both directly and indirectly, by giving the economic imperative of rapid growth. such settlers greater access to credit and by The reality is that the world needs green allowing them to invest in small businesses, growth, and it needs it now. But what exactly thereby increasing aggregate output. One does “green growth� mean? Green growth example of the environmental benefits of can be thought of as economic growth that a green growth policy is the World Bank– is environmentally sustainable. More spe- �nanced water quality and pollution control ci�cally, it aims to operationalize sustainable project around the Lake of Guarapiranga development by enabling developing countries in Brazil. Urban renewal and slum upgrad- to achieve robust growth without locking ing were critical to improving water quality, themselves into unsustainable patterns. The which in turn provided a reliable water sup- World Bank’s environmental strategy de�nes ply source for the city of São Paulo. green growth as growth that is ef�cient, clean, Most green growth policies are environ- and resilient—ef�cient in its use of natural mental policies in the sense that their primary resources, clean in that it minimizes pollution objective is to preserve the environment. But and environmental impacts, and resilient in not all of them are. Policies that improve that it accounts for natural hazards and the energy security or reduce urban congestion, role of environmental management and natu- for example, may yield substantial environ- ral capital in preventing physical disasters. mental bene�ts even if doing so is not their Importantly, green growth is not inher- primary objective. ently inclusive. Its outcome will likely be good Many observers have argued that environ- for the poor, but speci�c policies are needed mental issues will “solve themselves� with to ensure that the poor are not excluded from economic development. This chapter exam- bene�ts and are not harmed in the transition. ines the flaws in the “grow now, clean up The welfare impacts of green policies will be later� argument and discusses what growth greater if efforts are made to make the poli- theory and evidence reveal about the com- cies inclusive. patibility of environmentally sustainable Greening growth is essential to achieving policies and growth. It investigates whether sustainable development and its objectives green growth is in fact feasible—beginning of social, economic, and environmental sus- with the analytical case for green growth tainability (�gure 1.1). Economic growth and before reviewing the implications for welfare, social achievements are widely recognized the ultimate goal of economic policy—and as complementary, but growth and environ- explores how to identify trade-offs and syn- mental sustainability are often perceived as ergies implied by a green growth strategy. antithetical. Greening growth would recon- cile the need for environmental sustainabil- ity with that for economic growth and social Why not grow now and clean improvement. up later? Fortunately, many policies provide both The “grow now, clean up later� argument environmental and economic benefits. is based on the idea that environmental Informal settlements can pose economic, quality first deteriorates with growth and A N A N A LY T I C A L F R A M E W O R K F O R I N C LU S I V E G R E E N G R O W T H 31 then improves—an environmental Kuz- FIGURE 1.1 The three pillars of sustainable development nets curve.1 In this framework, the envi- ronment eventually improves as national income rises because the environment is a “superior good� (a good whose consump- Economic tion increases more than proportionately sustainability with income). 2 The framework implies that poor people care less about the environment than wealthier people, give priority to con- sumption over environmental quality, and act upon these preferences. Once basic needs have been met, this argument goes, people place greater weight on the environment, Sustainable leading to investments in environmental development protection and clean-up that increase envi- ronmental quality, assuming appropriate collective action proves possible. Economic growth will therefore automatically lead Social Environmental sustainability sustainability countries to environmental protection. There are serious flaws in this argument. First, a distinction needs to be made between environmental impacts that affect welfare through income and consumption and those Note: Economic and social sustainability, on the one hand, and social and environmental sustainability, that affect welfare through the amenity value on the other, have been found to be not only compatible, but also largely complementary. Not so with economic and environmental sustainability, as growth has come largely at the expense of the of environmental assets. In urban areas, poor environment—hence, the dotted line on this �gure—which is why green growth aims to ensure that households that struggle to feed and house economic and environmental sustainability are compatible. themselves will indeed place a lower prior- ity on the amenities provided by a park than Third, it is difficult to infer preferences wealthier households might. However, they about collective goods from individual behav- care deeply about the absence of solid waste ior. Cities offer many more jobs and opportu- management and its results—dengue epidem- nities than rural areas but also much higher ics, clogged urban drains, and the destruction levels of local pollution. The fact that people of their homes and small businesses by floods. move from rural areas to cities does not mean In rural areas, protecting forests to prevent the they would not prefer slightly fewer opportu- extinction of rare animals may not be a prior- nities and higher environmental quality. Their ity for households that struggle to feed them- preferences are not completely revealed by selves (unless of course the poor can share in the binary choice of “moving or not moving the bene�ts from wildlife protection). But the to the city,� because they do not have a con- same households are likely to care about pro- tinuum of choices of increasing opportunities tecting soil quality and managing water flows, and decreasing environmental quality. which allow them to grow crops. Fourth, because the influence of environ- Second, even when poor communities care mental quality and welfare is often indirect, about the environment, they may not have people may not link environmental problems the “voice� to make their concerns heard. (such as water or soil quality) to the health Policies implemented in developing coun- problems they confront. 3 Better informa- tries may be more representative of the pref- tion, not just higher incomes, may be needed erences of the elite than of the poor or may if individuals are to demand higher envi- reflect institutional constraints, such as those ronmental quality at earlier stages of devel- imposed by poorly de�ned property rights (as opment. Even developed countries are only in open access resources). beginning to address the complex issue of 32 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T the environmental damages of pesticides and that it may simply be too costly to do so. chemicals. Indeed, it may be more economical to Fifth, although some dimensions of envi- reduce or prevent pollution at an early stage ronmental quality improve with average of growth than to incur the higher clean-up income, many others do not. Local environ- costs at later stages, even when future costs mental issues with short-term, highly visible and bene�ts are discounted. Acting early is manifestations (such as local air and some critical when the choice of technology and types of water pollution) are usually resolved infrastructure can “lock in� high-carbon spontaneously as countries develop. In con- or polluting lifestyles or economic struc- trast, global public goods with long-term tures. This issue is particularly relevant in consequences (such as climate change or bio- developing countries, where most of the diversity) and local environmental issues with infrastructure will be built in the next few complex and less visible consequences can keep decades. getting worse (box 1.1). As for climate change, a variety of The case of Costa Rica illustrates the experts have studied the optimal timing of contrast between local, visible pollutants action (Nordhaus 1992; Wigley and others and global ones. In 1978, when per capita 1996). Prematurely depreciating investments GDP was about $2,200, emissions of nitro- can be costly if climate change turns out gen oxides (NOx) and sulfur dioxide (SO2) to be less threatening than expected or if peaked, before leveling off and then declin- the discount rate used to calculate future ing slightly. Over the same period, however, losses is too low. But early action may well carbon dioxide (CO2) emissions continued to result in savings. Lecocq and others (1998) rise (�gure 1.2). � nd that in the absence of perfect foresight, speci�c policies regarding green infrastruc- ture and long-lived capital must be adopted Delaying action can be costly early to achieve mitigation objectives at a Making the “grow now and clean up later� lower cost. Jaccard and Rivers (2007) show argument even less palatable is the fact that early action is preferable in long-lived BOX 1.1 Persistent concerns about local pollution in high-income countries Complex and “invisible� local environmental issues polluting water and agricultural productions, and do not necessarily improve with income. In countries contains known carcinogenics (Aubertot and others like France, efforts to understand the transfer of 2005; Multignier and others 2010). pesticides to the environment (mostly water bodies) In the United States, the Safe Drinking Water Act began only some 20 years ago, under the pressure regulates only 91 contaminants, despite the fact that of a European Union Directive regulating drinking more than 60,000 chemicals are used within the water (Aubertot and others 2005). Soil contami- country’s borders. Scientists have examined many of nation is harder to monitor and can lead to severe these chemicals and have identi�ed hundreds associ- long-term environmental and health hazards, as the ated with a risk of cancer and other diseases at small example of the insecticide chlordecone illustrates. concentrations in drinking water, according to an Chlordecone, which was banned only recently, analysis of government records by the New York was used extensively in the French West Indies Times (Duhigg 2009). The implication is that mil- for more than 30 years, exposing the population lions of Americans are exposed to water that does to severe health hazards (Multignier and others not meet safety standards meant to protect against 2010). The chemical remains in the soil for decades, cancer or other serious diseases. A N A N A LY T I C A L F R A M E W O R K F O R I N C LU S I V E G R E E N G R O W T H 33 FIGURE 1.2 Global pollutants and local, visible and that urgent action be taken on long-lived ones follow different paths infrastructure. In the absence of such action, (relationship between GDP and emissions in Costa Rica, physical capital will have to be replaced ear- 1970–2009) lier, at great cost. 70 7 Another argument for early action has to CO2 emissions (right) do with the fact that the needed technolo- SO2 and NOx emissions (thousand tons) 60 6 gies will not become affordable unless there CO2 emissions (million tons) 50 5 is suf�cient demand to deploy them to scale. NOx emissions (left) Countries or � rms may be tempted to wait 40 4 for better and less expensive technologies to 30 3 become available. But these technologies will SO2 emissions (left) 20 2 be developed only if serious commitments to pollution reduction are made (Goulder and 10 1 Mathai 2000; Manne and Richels 2004; Sue 0 0 Wing 2006). Early action is thus justi�ed by 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 GDP per capita (constant year 2000 $, PPP) the technological changes that action would induce. Developing these technologies is a Source: Based on data from the International Energy Agency, the Joint Research Center, and World Development Indicators. critical role of high-income countries and the main reason why they need to act quickly on issues such as climate change. capital sectors, such as infrastructure and And even worse, some damages cannot be urbanization, even if marginal costs are reversed. In such cases, investments in envi- higher there. Denser cities have lower CO2 ronmental quality protection can be neces- emissions from transportation (�gure 1.3). sary in the short term. In Kenya, for exam- But Gusdorf and others (2008) find that ple, traditional forests are being destroyed. influencing the shape and density of cities Replanting can restore the country’s water (“changing urban forms�) to make them tower and other functions, but most biodiver- less energy consuming is extremely costly. sity losses are probably irreversible (Chapin Developing countries would therefore do and others 2000). well to prevent their cities from growing in Climate change itself may be irreversible. a low-density manner dependent on auto- This irreversibility is a clear incentive for early mobiles if their target for the end of the action, as the consequences of warming exceed- 21st century is to have high-density, energy- ing 2°C are highly uncertain and potentially ef�cient cities. severe (Ambrosi and others 2003; Ha-Duong One measure of the importance of early and others 1997; World Bank 2009). The 2°C action is provided by Davis and others (2010), objective, for example, is achievable only if sig- who estimate that without early scrapping, ni�cant emission reductions can be made before existing energy infrastructure commits us 2030 (Meinshausen and others 2009; O’Neill to warming of about 1.3°C above preindus- and others 2009). trial temperatures. Introducing other types of If growing dirty now and cleaning up later infrastructure (including the capital that con- is not an option, then what is needed are joint strains the demand for transport, such as dis- green and growth policies. It is inefficient tant suburbs) and non-CO2 gases, Guivarch to pursue growth and then worry about its and Hallegatte (2011) estimate this “com- environmental consequences or to promote mitment� at 1.7°C. These results imply that environmental sustainability and then worry keeping the increase in global warming below about its growth implications. But the pos- 2°C (the internationally recognized objec- sibility to green growth has been questioned. tive of climate policies [World Bank 2009]) The next section provides a framework to requires that almost all new infrastructure investigate the potential for greening growth be designed with climate change in mind without slowing it. 34 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T FIGURE 1.3 The denser the city, the lower the transportation emissions (relationship between urban density and per capita emissions) 8,000 Atlanta 7,000 per capita transport emissions (kg CO2) Houston 6,000 5,000 San Francisco 4,000 Los Angeles 3,000 Toronto 2,000 Riyadh Brussels Bangkok 1,000 Singapore Barcelona Hong Kong, China São Paulo Seoul Curitiba Manila Mumbai Tunis Chennai 0 0 50 100 150 200 250 300 350 400 population density (persons per hectare) Source: Kenworthy and Laube 2001. Is green growth really possible? “natural capital�—as a factor of production The analytical basis (Dasgupta and Heal 1974; Nordhaus 1974; Solow 1974).4 If the environment is consid- Modern grow th theory dates back to ered as productive capital, it makes sense to 1956, when Robert Solow put forward a invest in it, and environmental policies can be formal model that suggested that growth considered as investment. in output— GDP—comes from increases In this “greener� framework, environmen- in physical capital, labor, and productiv- tal policies increase economic output directly ity (box 1.2). In this model, physical capi- by improving environmental conditions (for tal increases thanks to investment. Labor example, better forestry management reduces increases as a result of population growth, soil erosion, leading to more productive agri- greater labor force participation, and bet- culture). Failure to manage the environment ter health and education. And productivity results in the depreciation and destruction of increases thanks to technological change— natural capital, with direct adverse impacts which can stem from investments in educa- on output. Cleaning up the environment tion and research and development (R&D), also increases human well-being directly, by economies of scale, and learning by doing. improving air and water quality and reducing What is missing in this model, however, is exposure to natural hazards, although these the notion that economic production depends bene�ts are not necessarily captured by con- directly on the stock of natural resources ventional (GDP) statistics. and the quality of the environment—that Whether investing in the environment is, that the environment is a factor in the increases only the level of production or also production function. This notion has been its rate of growth is likely to depend on the around at least since Malthus ([1798] 1965), context in which the investment is made. but it was not until the early 1970s that Where credit constraints limit output growth, classical growth theory was modified to investing in the environment will accelerate embrace the environment— referred to as A N A N A LY T I C A L F R A M E W O R K F O R I N C LU S I V E G R E E N G R O W T H 35 BOX 1.2 An economic framework for green growth Classical growth theory (Solow 1956) assumes that where y (a value between 0 and 1) measures the ef�- output (Y) is produced using technology (A), physi- ciency of the production process. cal capital (K), and labor (L). The relationship can A second modi�cation introduces PE , which can be written as follows: be thought of as the effort dedicated to environmen- tal policies: Y = f (A, K, L). Y = y (PE) f [A (PE), K (PE), L (PE), E (PE)]. Growth in output results from increases in pro- duction factors (physical capital and labor) and In this case, environmental policies can create syn- productivity, which rises as a result of technologi- ergies with economic output by increasing productive cal change, including changes in organization and capital (K, L, and E), improving ef� ciency y , and practices. In this approach, the environment plays no accelerating technological change by increasing A. productive role. Ultimately, it is welfare that matters, not output. The idea that economic production depends This means that the model needs to account for the directly on the stock of natural resources and impact of output on welfare (or utility, U). As invest- the quality of the environment—that is, that the ment does not increase welfare directly, utility can environment is an argument in the production be modeled as depending only on the current level function—has been around at least since Malthus of consumption, C, plus the direct effect of the envi- (1798). It was further developed in the environmen- ronment, E: tal economics literature that took off in the early 1970s. In this approach, the environment becomes U = u (C, E). “natural capital,� an input in economic production In practice, environmental policies can affect and growth. The production function can thus be utility directly (positively or negatively), with effects rewritten as follows: that are not mediated by aggregate consumption or Y = f (A, K, L, E), the state of the environment such as distributional impacts or increased resilience. The utility function where E represents the environment (natural can thus be written as follows: capital). To analyze the effect of green growth policies, U = u (C, E, PE). however, growth models need to be modified to Distribution (how total consumption is distrib- incorporate market failures and the fact that the uted across individuals) and volatility (how total economy is not at its optimal equilibrium. A � rst consumption is distributed over time) affect welfare modi�cation replaces the production function with and can be influenced directly by environmental the production frontier—the maximum production policies. Everything else equal, many people favor level possible with the available technology, physi- stable consumption patterns and lower consumption cal capital, labor, and environment, assuming maxi- inequality; the utility function can thus include an mum ef�ciency. Actual production is given by aversion for risk and inequality. Y = y f (A, K, L, E), Sources: Hallegatte and others 2011 and World Bank. growth, because a higher production level because these economic activities do not gen- increases income and savings. Where growth erate suf�cient returns to allow households to is limited by investment opportunities, it will save and accumulate assets. fail to boost growth, because institutions are A key question in this framework is the not in place to allow investors to bene�t from extent to which production factors are com- their investment revenues. Where people are plements or substitutes. If they are comple- engaged in low-return activities, a limited ments (or weak substitutes), protecting the increase in the production level may improve environment is necessary to maintain eco- welfare but will not spur economic growth, nomic production. If they are substitutes, in 36 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T principle, increased investment in physical market failures and other suboptimalities, or human capital or technological change such as the following: can compensate for damage to the environ- • Knowledge spillovers and economies ment. In fact, the ability to do so appears of scale that lead to underinvestment in limited. 5 Food production requires soil and R&D water, even if technology and increased labor • Underutilization of physical capital or intensity can reduce the quantities needed. labor, for temporary (crisis) or structural The low elasticity of substitution between reasons natural capital and other inputs implies that • Behavioral biases, such as the inability a small percentage increase in natural capital to make decisions about low-probability can free large percentage quantities of other events (Camerer and Kunreuther 1989; inputs.6 Tversky and Sha� r 1992) While direct economic bene�ts from envi- • Other market failures, such as principal- ronmental policies occur mainly over the agent issues, information asymmetry in long term, green policies can also contribute capital markets, and coordination failures. to short-term economic growth because the world’s economies perform far from their Actual economic output depends on the optimum levels. Indeed, many market fail- “production frontier� (the maximum pro- ures hurt both the environment (by reducing duction level possible with the available the effective supply of natural capital) and technology, physical capital, labor, and envi- the economy (by causing an extremely inef- ronment, assuming maximum efficiency) �cient use of natural resources). Correcting and on ef�ciency (how close the real-world these market failures, although sometimes production system actually is to the produc- costly, can increase efficiency and yield tion frontier). benefits that go beyond the environment. Green growth policies can thus be seen as An example is urban congestion, which not policies that move the economy away from only causes air pollution but also reduces suboptimalities and increase ef�ciency—and the productivity and economies of scope hence contribute to short-term growth— cities provide. The reality is that the use while protecting the environment. Subop- and management of “natural capital� are timalities often persist because removing plagued by extensive market failures, such them is complex or requires large upfront as unpriced externalities and poorly de� ned investments. Assessing the possibility to cor- property rights. rect these market failures requires devoting The problem for analysts is that models attention to their causes, to institutional and of economic growth usually fail to cap- political obstacles, and to transaction costs. ture environmental contributions, partly How do environmental policies increase because they generally ignore the role of conventionally measured GDP? They do natural capital and partly because they so through four channels linked to input, assume a world with no market failures. As ef�ciency, stimulus, and innovation effects. the potential for green policies to accelerate Figure 1.4 illustrates each of these effects. income growth arises from market failures, such models cannot be used to assess the Input effect impact of such policies. The input channel works by increasing the quantity of natural, human (labor), and phys- A real-world framework for ical capital (arrow i in �gure 1.4). Speci�cally, green growth green policies can achieve the following: To be useful for analyzing the effect of • Increase natural capital through better green growth policies, a broader framework management of scarce resources. Individual is needed that is modified to account for transferable �shing quotas, for example, A N A N A LY T I C A L F R A M E W O R K F O R I N C LU S I V E G R E E N G R O W T H 37 FIGURE 1.4 Green policies hold the potential to sharply boost output output shifted production frontier (iii) maximum production frontier output enhanced efficiency actual (ii) suboptimal production output Z Z = composite of human (labor), physical, and natural capital (i) Note: Arrow (i) represents increase in factors of production. Arrow (ii) represents enhanced efficiency and stimulus effect. Arrow (iii) represents shift in production frontier. help maintain and even increase � sher- reducing economic losses caused by ies and thus the economic activity that coastal floods. depends on them (box 1.3). • Increase labor by improving health (Hanna 2011). Better environmental poli- Efficiency effect cies can decrease atmospheric pollution in cities, reduce the severity and incidence of The efficiency channel works by increas- respiratory diseases, increase labor effec- ing productivity, through correcting mar- tiveness, and reduce days lost to illness. A ket failures and influencing behaviors, and study on the link between air pollution and by enhancing the ef�ciency of resource use labor productivity on farms in California (arrow ii in figure 1.4). One example is shows that a decrease in ozone concentra- energy efficiency. Many firms and house- tions of 10 parts per billion (for an aver- holds fail to make cost-effective energy- age value of 50 parts per billion) increased efficiency investments—probably because worker productivity by 4.2 percent (Graff of market failures and behavioral biases Zivin and Neidell 2011). (Gillingham and others 2009). Improving • Increase physical capital by better man- the insulation of new buildings is often cost- aging natural risks, which in turn leads effective, but firms and households often to lower capital losses from natural fail to do so because of a lack of informa- disasters (Hallegatte and others 2007). tion and the fact that building and housing Protecting mangroves, for instance, not prices do not adequately reflect differences only protects biodiversity, it can also in heating costs. Environmental policies improve the resilience of coastal zones that aim to reduce energy consumption and to hurricanes and storm surges, thereby carbon emissions may correct these market 38 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 1.3 Using individual transferable quotas to revitalize �sheries Lack of property rights in the sea has led to over- system thus provides an incentive for quota own- �shing—in some cases with devastating results. The ers (� shers) to invest in the long-run health of their use of individual transferable quotas (ITQs) can cor- �shery. The quotas generally represent a substantial rect this market failure, increasing both output and share of �shers’ wealth; if they overexploit the �sh- employment in the �shing industry. ery, they thus risk impoverishing themselves. Under ITQs operate by setting a cap on the total allow- this system, they have an incentive to leave �sh in the able catch (TAC). The cap is set at a level that is water to breed and generate future catch, an incen- consistent with the long-term survival of the species tive they otherwise lack. ITQs align the interests of (that is, less than the rate of growth of the �sh stock). �shers and the �shery, generally improving both the Once a TAC is set, it is divided into individual quo- health of the �shery and the pro�ts of the men and tas, the amounts that particular boats or skippers women who depend on it. can catch. Only quota owners are allowed to � sh. Are ITQs making a difference? In studies of more If the TAC changes from year to year, the number than 11,000 � sheries, 121 of which had instituted of tons represented by the quota also changes, but ITQs, Costello and others (2008) and Heal and the fraction of the TAC assigned to individuals does Schlenker (2008) � nd a substantial increase in catch not. These quotas are transferable: they can be sold, within a few years of the implementation of ITQs given, or bequeathed to others. (A related approach and a signi�cant decrease in the chance of a �shery is that of “catch shares,� under which each boat or collapsing once it is managed as an ITQ. On average, owner is entitled to a share of the TAC but the shares within 17 years of implementing an ITQ, the catch are not transferable.) at � sheries with ITQs rose by a factor of �ve, with The value of the ITQ depends on the productiv- yields of some �sheries rising by a factor of 200. The ity of a �shery—1 percent of a thriving and produc- institution of ITQs allows �sheries to prosper, gen- tive � shery with large � sh stocks is worth far more erating better livelihoods for the people who work in than 1 percent of an almost-extinct �shery. The ITQ them and more food for the world as a whole. failures or influence these behaviors, lead- Innovation effect ing to less environmental damage and to Environmental policies can shift the pro- a more efficient economy, with a higher duction frontier (increasing the potential growth potential. output the economy can produce) by accel- erating the development and dissemina- Stimulus effect tion of innovation and creating knowledge The stimulus channel can occur during an spillovers (arrow iii in figure 1.4). 8 Given economic recession, when capacity utiliza- that investments in knowledge tend to tion and employment are low (also arrow be lower than desirable in the absence of ii in �gure 1.4). Large investments in green public intervention, policies that encour- infrastructure increase demand, poten- age green technologies can thus usefully tially increasing employment over the short increase R&D (Acemoglu and others 2012; term (Zenghelis 2011). Underemployment Fischer and Newell 2008; Gerlagh 2006; is not always related to demand, however; Otto and Reilly 2008).9 (The opposite effect it can be structural, especially in devel- is also possible, as research on green tech- oping countries.7 In this case, a stimulus nologies could crowd out research on other may prove costly and do little to increase productivity-increasing technologies [Popp employment. and others 2009].) The innovation effect is A N A N A LY T I C A L F R A M E W O R K F O R I N C LU S I V E G R E E N G R O W T H 39 illustrated by investments in R&D on pho- preservation of ecosystem services (a topic tovoltaic power motivated by the desire to explored in chapter 2). mitigate greenhouse gas emissions. Success could make photovoltaics competitive with fossil fuels, increase the supply of electric What about welfare? power, and reduce the cost of providing Ultimately, however, what matters is wel- electric power to remote off-grid communi- fare, not output. The next step, therefore, ties (see chapter 6). is to broaden the framework to take into At the same time, the costs associated account the impact of the environment on with environmental efforts create a trade-off welfare (or utility), which can be positive or between environmental protection and eco- negative. Welfare can be assessed by view- nomic production. For example, environmen- ing utility as depending on the current level tal efforts may have the following effects: of consumption and the direct effect of the environment (through its health effects and • Reduced productivity, by causing pro- amenity value). ducers to use more expensive or less pro- Welfare also depends on income distribu- ductive technologies or by crowding out tion and employment. As such, analysts must R&D in nonenvironmental domains. take into account the fact that environmental • Early retirement of physical capital policies may affect different social groups or based on polluting technologies (Grubb regions differently. These policies may cre- and others 1995; Jaccard and Rivers ate jobs for some types of workers in some 2007). This effect can be represented as regions and eliminate jobs for other types a decrease in capital or an increase in of workers in other regions. Because women capital depreciation. In addition to the tend to be more dependent on common prop- direct cost, the increase in investment erty resources and more vulnerable to the needed to replace retired capital reduces impacts of natural resource degradation than consumption— and thus welfare — at men (Foa 2009), environmental protection least over the short term. and green policies can also help improve gen- • Increases in the pricing of some goods der equality, with many economic and social and services, altering relative prices. co-benefits. These distributive effects have By changing the structure of demand, both social and political economy implica- environmental policies may reduce the tions that may require the implementation ability of the structure of production to of complementary policies to compensate meet demand. For example, policies may losers (see chapter 2). If compensatory �nan- reduce demand in some sectors that have cial transfers are possible at zero cost and a high production capacity (such as road labor markets are perfect, efficiency can transport) and may increase demand in be separated from equity. If such transfers sectors that have more limited produc- are impossible or costly and labor markets tion capacity (such as public transpor- are imperfect, it is necessary to pursue ef�- tation). This effect can be measured as ciency and equity simultaneously, which may lower ef�ciency. require setting more modest goals (Goulder T hese costs, and their assessment, and Parry 2008). depend on the de� nition of economic out- Analysts must also factor in the fact put. In a green accounting framework that that environmental policies can increase includes valuation of ecosystem services, a or decrease volatility. These policies can reduction in economic productivity because create shocks in the economy and can of environmental regulations can be more distort intertemporal trade-offs. But they than compensated for by a reduction in can also reduce potential risks to growth externalities—through, for example, the by increasing resilience to environmental 40 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 1.4 Reducing vulnerability to oil shocks by increasing energy efficiency The vulnerability of the world economy to oil shocks consumption by cars, industries, and the residential has diminished since the 1970s (Nordhaus 2007). sector. Possible explanations for this decline include the Over the longer term, climate policies may have decrease in the average oil intensity of world GDP; similar results: by driving technological change and the increased flexibility of labor markets (in par- investment away from oil-intensive patterns, these ticular wages), so that pass-through infl ation is less policies reduce oil consumption and vulnerability likely for a given monetary policy; a change in the to oil shocks (Rozenberg and others 2010). Climate nature of oil shocks (the 1973 and 1979 shocks fol- policies can thus reduce vulnerability to oil scar- lowed supply disruptions; the 2008 shock resulted city and uncertainty over oil reserves. In particu- from increased demand from emerging markets); and lar, such policies might reduce the obsolescence of improved con�dence in monetary policy, which sta- capital in case of large changes in energy prices. bilized inflationary expectations as a result of nearly Cities that are denser, less dependent on individual three decades of low and stable inflation (Blanchard vehicles, and less energy consuming are also less and Gali 2010; Gregorio and others 2007). vulnerable to volatility in oil prices (Gusdorf and Speci�c energy security policies drove the decrease Hallegatte 2007). Climate policies and other poli- in GDP oil intensity. In some countries, higher taxes cies aiming at higher ef�ciency in the use of natural on gasoline consumption reduced oil consumption. resources can thus increase the security and resil- In others, norms and regulations reduced energy ience of the economy. shocks (such as natural disasters) or eco- Measuring the net impacts of green growth nomic shocks (such as oil shocks or spikes policies also requires capturing suboptimal in commodity prices) (box 1.4).10 In so conditions caused by market or government doing, they can stabilize output and con- failures or nonrational behaviors. Models sumption, increasing welfare if risk aver- based on �rst-best assumptions (perfect mar- sion is accounted for. kets, rational expectations, and so forth) can assess the costs of these policies in a perfect world; they cannot be used to estimate their Trade-offs and synergies bene�ts. between green policies and The balance between costs and benefits growth will be affected by how they are de� ned. In Armed with this framework for green growth, a narrow economic framework, a policy to how do policy makers weigh the trade-offs protect a mangrove forest has an economic between the costs (possible reductions in opportunity cost (because it prevents shrimp investments, income, and consumption) and farming or tourism development, for exam- bene�ts (possible improvements on the envi- ple) and no direct bene�t. In contrast, in a ronmental, social, and economic fronts)? framework that includes the valuation of Given that the net impact varies depending ecosystem services, the policy also has eco- on the policy considered, the context, and nomic bene�ts, including protection against the time horizon,11 a start is classifying the coastal storms, the creation or maintenance potential bene�ts of green growth policies, as of a breeding ground for fisheries, and the done in table 1.1. In a green growth context, availability of wood for the local community. any new policy should be examined for ways The “green accounting� approach incorpo- to maximize the potential for short-term ben- rates the valuation of ecosystem services into e�ts while minimizing the costs. national accounts, thereby providing a much A N A N A LY T I C A L F R A M E W O R K F O R I N C LU S I V E G R E E N G R O W T H 41 TABLE 1.1 Potential bene�ts of green growth policies Type of benefit Impact on welfare Channels through which policy affects welfare Environmental Increases welfare directly Improved environment Economic Increases welfare by raising income Increase in factors of production (physical capital, human capital, and natural capital) Accelerated innovation, through correcting market failures in knowledge Enhanced efficiency, through correcting nonenvironmental market failures and influencing behaviors Social Increases welfare through distributional effects, Increased resilience to natural disasters, commodity reduced volatility, and other social indicators price volatility, and economic crises Job creation and poverty reduction better measure of trade-offs than traditional mental quality deteriorates. But as economies national income accounting. As such, it is shift from industry to services, environmental central to green growth strategies. quality improves. In sum, although many observers fear that 3. In some cases, even specialists debate the importance of these relationships. green policies require incurring large costs 4. Later efforts to explicitly model the envi- now for bene�ts that will materialize only in ronment into an endogenous growth frame- the long term, the reality is that many of the work include work by Smulders (1994) and bene�ts can occur in the short and medium Bovenberg and Smulders (1996); for a review, term. Moreover, green policies can contribute see Smulders (1999). to growth. Action therefore needs to be taken 5. Few studies examine the potential for sub- now—at least on issues that carry a risk of stituting other inputs for natural capital lock-in and irreversibility—to minimize (Markandya and Pedroso-Galinato 2007). regret and avoid costly policy reversals. In 6. It may be possible to compensate for the loss the next two chapters, we look at the cross- of natural capital with other types of capital cutting issues of market and governance, in the short term but not the long term. An example would be increasing the use of fer- beginning with the range of tools that can be tilizer to compensate for soil degradation— marshaled to change behavior with respect to a short-term solution that is not sustainable environmental and natural resources—tools over the long term. that aim to improve social welfare through 7. For an illustration of this point in the context greener growth. of South Africa, see World Bank (2011). 8. This argument on the impact of green policies on productivity is the macro-scale equivalent Notes of the Porter hypothesis (Porter and van der 1. Kuznets argued that as a country devel- Linde 1995), which states that regulation ops and national income rises, inequality can enhance innovation and business per- increases, but once a certain national income formance at the micro scale (for a review, see level is reached, inequality then declines. His Ambec and others 2011). now disproved theory was extended to the 9. A frequently asked question is whether pub- environment, where it has also been rejected lic support of green innovation should target (Andreoni and Levinson 2001; Barbier 1997; green innovation or general innovation. The Brock and Taylor 2010). opposite question—can green innovation 2. Another common interpretation is that the policies accelerate innovation in general?—is environmental Kuznets curve reflects struc- posed here. tural transformation of an economy. As 10. 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A Macroeconomic Plan Economics 70 (1): 65–94. for a Green Recovery. London: Grantham ———. 1974. “The Economics of Resources Research Institute on Climate Change and the or the Resources of Economics.� American Environment. Economic Review 64: 1–14. Influencing Firms, Consumers, and Policy Makers through Market 2 and Nonmarket Mechanisms Key Messages • Because economic incentives promote effi- changes needed to protect the environment, cient solutions, “getting the prices right� is given market failures, behavioral biases, and key to greening growth without slowing it. political economy considerations. Complementary policies will be needed to • Other tools—such as information judiciously mitigate negative distributional impacts. deployed to influence economic actors, and • Economic incentives cannot induce all of the norms and regulations—are also needed. T he starting point in greening growth the public-good nature of many environ- is an understanding of why so much mental goods; and missing or incomplete of traditional economic growth has property rights (box 2.1). With a common been “non-green�—that is, why the world pool resource like a �shery or a shared aqui- is not using environmental assets ef�ciently, fer, for example, the lack of property rights a reality that is harming economic growth (such as individual quotas) can lead to over- and the environment. exploitation and ultimately a collapse of the For economists, achieving greener growth resource. is fundamentally about changing the incen- For psychologists, achieving greener tives that have led to environmental deg- growth is about compensating for behavioral radation and depletion—that is, “getting biases, tailoring information and messages the prices right.� The reasons markets are to the way people learn, and improving the failing to appropriately price the environ- way in which environmentalists and econo- ment and thus create incentives to encour- mists communicate the costs and bene�ts of age greener growth are many (Sterner 2003). greener behaviors. Examples include social They include institutional and policy fail- marketing campaigns that changed social ures; market failures, such as externalities, norms around water usage in Australia or 45 46 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 2.1 Institutional and market failures that help explain why growth is often environmentally unsustainable Growth may be environmentally unsustainable are nonrival (one person’s enjoyment of the ame- because of institutional and policy failure. Institu- nity does not decrease another person’s enjoy- tions and governments may themselves face bad ment) and nonexcludable (there is no practical incentives, driven by political economy. Or they may way to prevent people from enjoying an amenity lack information on the overall impact of the poli- such as a beautiful view). The result is that public cies they promote. Subsidizing energy “to bene�t the goods are typically underprovided by private mar- poor� is a classic example—the subsidy encourages kets, because there is no way for private actors energy consumption, thereby increasing emissions to appropriate all the bene�ts from providing the of local air pollutants that often disproportionately public good. affect the health of the poor. Moreover, it is gener- • Information asymmetries and agency problems. If ally the nonpoor who bene�t most from energy sub- different agents have different information, envi- sidies, because they can afford an energy-intensive ronmental impacts can result. Factory owners lifestyle. typically have much more information about pol- Alternatively, market failures may be to blame. lutants, treatment measures, and treatment costs Under some technical assumptions, competitive mar- than environmental regulators, which can reduce kets are an ef�cient means of allocating goods. But the effectiveness of regulation. Landlord-tenant real markets deviate from the ideal in a multitude relationships lead to a type of agency problem of ways that can have severe consequences for the with regard to energy ef�ciency: If the landlord environment and social welfare. Examples include pays the energy bills, the tenant has no incentive the following: to conserve energy; if the landlord owns the fur- nace but the tenant pays the energy bills, the land- • Externalities. These are uncompensated damages lord has no incentive to invest in a more ef�cient imposed by one economic agent on another. For furnace. example, a factory owner can maximize pro�ts • Missing or incomplete property rights. For com- from production by releasing untreated effluents mon pool resources (for example, a �shery or a into a river rather than incurring the costs of shared aquifer), the lack of property rights (such treatment. But the resulting water pollution can as individual quotas) can lead to overexploitation damage the health of people drinking the water and ultimately the collapse of the resource. From downstream. This health damage is external to the an economic perspective, overexploitation mani- pro�t-maximizing decisions of the factory owner, fests itself as dissipation of resource rents: in the with the result that the social bene�ts from pro- absence of quotas, exploitation efforts by users of duction are less than private pro�ts. the common pool drives up costs to the point at • Public goods. Many environmental assets have a which economic pro�ts drop to zero. public-good nature—they provide services, such as amenities or the regulation of water flow, that Source: Sterner 2003. littering behavior in the United States. So for and natural resources—tools that aim to psychologists, incentives also matter but they increase social welfare through greener must be tailored to how people process infor- growth. The tools fall into the following mation and react to it. areas: Unfortunately, inappropriate incentives, or the lack of incentives, led to the current • Incentivizing: providing effective market widespread inef�ciency in the way natural signals to spur green growth resources are used. This chapter exam- • Informing and nudging: using informa- ines the range of tools that can be mar- tion and framing to influence economic shaled to increase ef� ciency by changing actors behavior with respect to the environment • Imposing: using rules and regulations. INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 47 Incentivizing, informing and nudging, or can be a double dividend. Countries in the imposing—some combination of the three Organisation for Economic Co-operation and is likely to be needed. Determining the best Development (OECD) have imposed some mix requires a solid understanding of how 375 environment-related taxes and about individual decisions are made and framed. 250 environment-related fees and charges Behavioral economics and social psychol- (OECD 2006). However, about 90 percent of ogy thus provide indispensable insights into revenues from these taxes comes from taxes how to green growth. Economists will ignore on fuels and cars (OECD 2011). The major- them at their peril. ity of OECD countries also tax water usage in agriculture. Although they appear to have improved water ef�ciency, these price instru- Incentivizing: Providing effective ments still fall short of full cost recovery market signals to spur green (OECD 2010, cited in OECD 2011). growth In addition to reflecting social and envi- ronmental costs in prices through taxes, Economic incentives promote efficient “full-cost pricing� implies the phasing out of solutions harmful subsidies, such as subsidies on fos- Economic incentives—traditional price and sil fuels, � sheries, forestry, water use, land quantity instruments—are critical to pro- use, and agriculture. These subsidies not only moting green outcomes, because they change encourage carbon emissions, resource deple- behavior in a manner that typically leads to tion, and environmental degradation, they least-cost solutions. The intuition behind this also distort trade and strain public � nance. approach can be seen in markets for tradable Reforming them should be a high priority, pollution emission rights. Because polluting although it may not be easy. � rms use different technologies for produc- Quantity instruments. Unlike pollution tion, their pollution abatement costs differ, taxes and subsidy reforms, which affect often markedly. Firms with high marginal existing markets, quantity instruments (such abatement costs therefore tend to prefer to as tradable permit schemes) create new mar- pollute more and purchase permits from kets for pollution allowances by affecting the �rms that have low marginal abatement costs costs of production. Once these new mar- and �nd it pro�table to invest in less polluting kets reach equilibrium and the permit price processes and sell their pollution rights. This is determined, the cost of acquiring pollution trade allows the market to minimize the over- permits affects the costs of production in a all cost of achieving a given pollution target. manner equivalent to a pollution tax. Trad- Economists recommend a variety of able permits or quotas have also shown good incentive-based instruments to reduce envi- results in managing renewable environmental ronmental damage and depletion—such as assets, notably �sheries. taxes, tradable permits, subsidies, deposit- “Cap and trade� schemes for pollu- refund schemes, and refunded emission tion emissions have become the dominant payments—that focus on either price or market-based approach to controlling oxides quantity. In the case of carbon dioxide of sulfur (SOx) and nitrogen oxides (NOx) in (CO2), for example, the debate has centered the United States, in the European Union’s on emission taxes, subsidies, and tradable Emission Trading Scheme for CO2 , and in emission permits. many other jurisdictions. The basic prin- Price instruments. These instruments ciple is that regulators determine the total aim to change behavior by ensuring that the allowable emissions per year (the cap) and prices paid for goods and services reflect their allocate permits to polluters based on a vari- full social costs, including externalities. To ety of schemes (including “grandfathering� the extent that environmental taxes replace based on historical emissions or auctioning other distortive taxes (say, on labor), there of all permits); � rms are then free to trade 48 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T permits. The evidence on the ef�ciency of the generate revenues (theoretically both do, but U.S. SOx trading scheme is positive: markets in practice countries have tended to allocate have been liquid and permit prices (hence, permits free of charge). As such, many juris- total cost to firms) have been lower than dictions, particularly in Europe, have opted originally estimated (Fullerton and others for hybrid schemes to control carbon emis- 1997). Moreover, international experience sions: tradable permits for large emitting with CO2 emission trading schemes suggests sectors and taxes for smaller sectors charac- that they can be used to assign a price to pol- terized by many actors, such as transport. luting emissions from large sources, although implementation can be dif�cult (box 2.2). But imperfect markets and political Price versus qu antit y instruments. economy complicate matters Although price schemes and cap and trade schemes are theoretically equivalent instru- Although in theory, economic incentive– ments, they have distinctive characteristics based instruments are the most effective, in in practice (World Bank 2010). For example, practice, market imperfections and politi- permit systems create certainty regarding cal economy mean that additional measures emission reductions but uncertainty about may be needed to make these instruments price; taxes provide certainty regarding price more efficient. One well-known case con- but uncertainly about emission reductions. cerns innovation and long-lived investments, They also differ regarding economic and for which prices are not always ef�cient (see administrative ef�ciency and their ability to chapter 3). But there are other circumstances BOX 2.2 Lessons from CO2 emission trading schemes A review of existing and proposed carbon trading collapse. Allowing permits to be banked—that is, schemes in Alberta, Australia; the European Union allowing permits from one period to be used in (EU); New Zealand; Switzerland; Tokyo; and the subsequent periods—can overcome this problem, United States (both national and state-level schemes) but this solution simply carries forward the surplus shows that these schemes are complex to implement permits into the next phase. Other options include but can be used to create a price of carbon for large establishing a price floor, with cancellation of any emitters. To implement them effectively, policy mak- unsold permits, or initially using a �xed price to ers should keep in mind the following dos and don’ts: aid the collection of data on emissions and abate- ment costs that can then be used to determine the • Targets. Ambitious long-run targets are needed subsequent allocation. if firms are to invest in reducing their carbon • Offsets or links to other trading zones. Trading footprints. outside the permit scheme can help reduce permit • Allocation. Free allocation of permits to produc- prices, but doing so runs counter to policy goals ers in the electricity generation sector should be to reduce domestic emissions and provide incen- avoided, because it leads to windfall pro�ts at the tives for innovation in achieving this reduction. expense of consumers (electric utilities are typi- • Support to carbon-intensive sectors. Concerns cally free to pass costs along to consumers). Free about the competitive impacts on carbon-intensive allocation to new entrants should also be avoided, sectors will lead to lobbying for �nancial support because it risks locking in high-carbon footprints to these sectors. Any support should be time lim- (by, in effect, subsidizing a new source of emis- ited, and communicated as such, to reduce �scal sions). The EU Emission Trading Scheme is reduc- costs and provide incentives for �rms to invest in ing the free allocation of permits. less polluting technologies. • Start-up. Trading schemes have tended to overallo- cate permits in the initial phase, leading to a price Source: IEA 2010. INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 49 in which narrow reliance on incentive-based or her house may not be able to recoup the instruments is misplaced. These include bene�ts from the investment. In this case, cases when: attaching a long-term insurance contract to Feasible alternatives are lacking. For pric- the property rather than the owner could ing mechanisms to be successful in address- help create the right incentives (Kunreuther ing environmental issues, feasible alternatives and Michel-Kerjan 2012). must be readily available or easily brought Prices are difficult to change. The fact to market. One example is high fuel prices, that so much pricing is currently inef�cient which will be more effective at reducing indi- suggests complex political economy consid- vidual car use if public transport is available erations. Whether it takes the form of pref- or cities have been designed in such a way erential access to land and credit or access that walking or cycling are options. Another to cheap energy and resources, every subsidy example is the emissions pricing scheme of creates its own lobby. Large enterprises (both the U.S. acid rain program, which success- state owned and private) have political power fully reduced SO2 because the required tech- and lobbying capacity. Energy-intensive nologies were available and well understood export industries, for example, will lobby for (Zysman and Huberty 2010). In this case, subsidies to maintain their competitiveness. prices were a powerful incentive for adopting In emerging economies, industries that are existing alternative technologies. likely to be most affected by climate change Market imperfections exist. Prices may policies are export-based industries, which be ineffective incentives because of market are also the most influential and most able to imperfections or imperfect contracts. For oppose environmental policies (Mattoo and example, contracts may need to be designed others 2011; Victor 2011). Thus, governments in a particular way to address the principal- need to focus on the wider social bene�ts of agent problem (the difficulty of motivat- reforms and need to be willing to stand up to ing one party [the agent] to act on behalf of lobby groups (box 2.3). another [the principal]). An example is when In considering pricing reforms or the building owners are responsible for insulation introduction of new taxes, policy makers and heating systems but tenants pay energy need to consider social impacts. Increasing bills; if owners cannot transfer the cost of energy prices, for example, has far-reaching higher energy ef�ciency through higher rents, impacts, because energy is used pervasively in they will under-invest in energy efficiency production and in households. And although regardless of energy prices. energy subsidies almost invariably bene�t the Another example is flood insurance if it is rich much more than the poor, their removal not “risk-based�—that is, if the premium is can have devastating impacts on the purchas- not calculated as a function of the risk level, ing power of the poor (Arze del Granado which is itself based on the characteristics and others 2010).1 and location of the asset. Insurance that is not To prevent this from happening, policy risk-based creates a moral hazard problem, as makers need to adopt complementary poli- it reduces incentives to invest in prevention. cies, such as the use of existing safety nets Households or businesses investing in risk (where available), alternative short-term miti- mitigation improvements (such as a rein- gation measures and subsidies, and energy- forced roof or windows) are not rewarded pricing solutions. In middle- and high-income fully for their investments. Moving toward countries, social safety nets can be used for a “risk-based� premium would encourage compensation. In low-income countries, prudent behavior. However, this approach is where safety nets are often lacking, ad hoc dif�cult to implement with one-year insur- measures are frequently necessary. Informa- ance contracts, because investing in risk tion to target support is often not available, mitigation produces bene�ts over decades— especially in urban areas, where geographic meaning that a homeowner who sells his targeting is very inef�cient (Kanbur 2010). 50 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 2.3 The political economy of subsidy reform What lessons have been learned about subsidy Another study, which focuses on petroleum prod- reform? An analysis of the political economy of sub- uct subsidies, con� rms the importance of addressing sidy reform—which looks at the few attempts that the political logic that led to subsidy creation and have been successful—suggests the need for careful either compensating the political interest that would analysis of the likely social impact of the reform and otherwise oppose reform or � nding a way to insulate implementation of a program of appropriate support the reform from its opposition—advice that applies for those affected (Nikoloski 2012). Other elements to any subsidy reform (Victor 2009). In addition, it of success include political will and institutional is critical to ensure the transparency of the costs and capacity, as well as an effective communications and purpose of the subsidy. Reforming a subsidy may be outreach strategy that explains the justi�cation for easier if all members of society are fully aware of the the reform and the bene� ts to be derived from it. costs they are paying and the extent to which they or As for the timing and pace of the reform, there is others are bene�ting. no clear lesson as to whether “big bang� or gradual approaches are more successful. Moreover, the political economy of instruments are optimal—is only a rough reform will likely require compensatory approximation of how people actually make transfers to the middle class. In the Islamic decisions. In practice, individuals make deci- Republic of Iran, for example, where the sions in a variety of ways: “by the head� law that reformed fuel and food subsidies (based on calculation), “by the heart� (based stipulated that 50 percent of the revenues on emotion), and “by the book� (based on raised had to be redistributed to households, rules) (Weber and Lindemann 2007). Alterna- the initial thought was to target the bot- tive or complementary policies and measures tom 30–50 percent of the income scale. In are therefore needed to address behavioral the end, 80 percent of households received biases or changes in values and preferences. signi�cant transfers (Guillaume and others Four types of behavioral biases are 2011)—no doubt contributing to the success particularly important. First, “cognitive of the reform. myopia� prevents people from accurately In the end, the redistributive impacts of a balancing future benefits and immediate carbon price scheme depend on how revenues costs and from assessing the desirabil- from the scheme are used. Compensatory ity of reductions in immediate bene� ts in measures can offset unwanted distributional exchange for future gains (Ainslie 1975; effects. However, such schemes require the Benartzi and Thaler 2004). institutional capacity to manage the classical Second, individuals are inconsistent in challenges of redistributive policies: political their treatment of time (Ainslie 1975): they acceptability, imperfect information and tar- apply high discount rates to costs and ben- geting, and behavioral issues. efits that will occur at some point in the future, discounting much less when both time points are in the future and one occurs To be effective, incentives must later than the other, in a kind of “hyperbolic reflect behaviors discounting.� These biases explain why it Designing effective environmental poli- is dif�cult to implement policies that entail cies requires a good understanding of immediate costs but future bene�ts even if how behaviors are determined and how the result is a net (discounted) gain. A classic they can be influenced. 2 The hypothesis of example is the failure of consumers to buy rational behavior—under which price-based more energy-ef�cient appliances even when INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 51 future energy savings would more than com- low-probability, high-severity events often pensate for higher up-front purchase costs appear erratic. In particular, people usu- (Gillingham and others 2009). ally overreact when a rare event eventu- Third, individuals suffer from “loss ally occurs (Weber and others 2004). For aversion�—that is, they weigh losses more instance, extremely ambitious flood defense than gains, evaluating both relative to a ref- projects were designed after each big flood erence point (Tversky and Kahneman 1992). in New Orleans, but none has been com- If individuals use the current situation as the pleted so far, as public interest in the issue reference point, they will consider the cost of faded a few years after each event. This environmental policy as a loss and weigh it tendency to overreact to recent events and more heavily than the gain (averted environ- then forget needs to be taken into account mental damages). If the reference point is the in developing green growth strategies, espe- future, when the loss is the environmental cially for disaster risk management (Halle- destruction, they will weigh it more heavily gatte 2011). than the gain (the averted cost of environ- Learning by being told. Learning by mental policies). Weber and Johnson (2012, being told involves the absorption of objec- 16–17) make the following observation about tive information. For instance, hydrometeor- farmers: ological data can be collected and analyzed to generate quanti�ed risk assessments that Skillful insurance salespeople have long known that they need to move a farmer’s reference help individuals make informed choices. But point, away from its usual position at the status providing information will not be enough quo, down to the level of the possible large loss to induce appropriate risk management or that could be incurred in case of drought. By environment-friendly behavior, because focusing the insuree’s attention on the severity of people treat abstract information on dis- the possible loss and resulting consequences, all tant events differently from concrete, emo- smaller losses (including the insurance premium) tionally charged information linked with are to the right of this new reference point, mak- real-world experience (Trope and Liberman ing this a decision in the domain of (forgone) 2003). So what is needed is a combination gains, where people are known to be risk averse of communication tools that accounts for and will choose the sure option of buying the this bias and practical information on what insurance. needs to be done—for instance, rules to Fourth, individuals have an aversion to save energy or water or how to react in case ambiguity, which causes them to delay mak- of disasters. ing decisions (Tversky and Shafir 1992). 3 Learning by observing and imitating. Aversion to ambiguity is particularly prob- Learning by observing and imitating has lematic for environmental issues, such as cli- the concreteness that “being told� does not mate change, that involve huge uncertainties: have, making action more likely. One way of while it disappears if decision makers regard encouraging learning by observing and imi- themselves as expert in a domain (Heath and tating is to help individuals compare their Tversky 1991), few people consider them- behaviors with more environment-friendly selves experts in environmental policy. ones and to provide them with feedback on Different behavioral changes can be their consumption and with tips on how to triggered by different learning processes— change their behaviors. In one experiment, such as learning by being hurt, being told, an Internet-based tool that combined feed- and observing and imitating (Weber and back on past consumption, energy saving Johnson 2012). tips, and goal setting was used to encour- Learning by being hurt. Learning by age households to reduce their energy con- being hurt refers to learning from personal sumption. Households with access to the experience. Because recent events have a tool reduced their direct energy consump- strong impact, which recedes over time tion by 5 percent; household without access (Hertwig and others 2004), reactions to to the tool increased their consumption by 52 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T 0.7 percent (Abrahamse and others 2007). Environmental valuation can help in a Indicators are thus critical—even when they number of ways: are imperfect—because they allow individu- als to monitor their effort. • It estimates people’s willingness to pay All of these biases vary with culture for environmental goods and services or and education (Weber and Hsee 1998). For willingness to accept compensation for instance, individuals with greater ability the loss of an environmental asset (Bolt to reason with numbers are more likely to and others 2005; Ley and Tran 2011). rely on calculation-based processes to make • It assesses the value of the services pro- their decisions (Peters and others 2006). vided by natural ecosystems. Because This diversity means that policy makers may ecosystem services are typically provided need to align their approaches with the cog- as externalities—for example, an upland nitive biases present in a given country or forest provides water regulation services population.4 to lowland farmers—the natural systems providing these services may be at risk when decisions are made that ignore the Informing and nudging: Using information and framing to flow of services from natural areas and influence economic actors their bene�ts to people. • It establishes the schedule of marginal Many motives other than price signals drive benefits associated with the provision individuals’ behavior. It is therefore critical of different quantities of environmental that information on the environmental con- goods and services—such as changes in sequences of their actions go beyond price. the volume of pollution emitted. This Information needs to be framed in a man- information is useful when setting tax ner that accounts for behavioral biases and rates on environmental “bads� or when the ways in which people learn and make determining total quota sizes, such as decisions. Governments have a role to play the number of pollution emission permits to ensure that the required information is that will be issued in a given time period. produced and disseminated effectively. For- • It facilitates “green accounting� (box 2.4), tunately, they can rely on the experience which focuses on a country’s stock of gained from decades of public health cam- assets (its wealth) rather than relying on paigns. However, a vibrant civil society will a flow measure such as GDP. As such, it be essential to ensure that action follows promotes good economic management, information. identifies situations in which economic growth is not wealth creating (because Informing to influence policy makers: the growth degrades natural resources The role of green accounting faster than it creates wealth), and assesses whether a country’s economic trajectory Environmental assets are seldom traded is sustainable. However, green accounting through markets and thus do not have readily and environmental valuation are not sub- identi�able prices. In such cases, development stitutes for price signals, because they do decisions (such as building a road through a not affect incentives faced by individuals rainforest) are often made with incomplete and �rms. information. As a result, they may not maxi- mize social bene�ts. Given that the outputs of environmental projects generally do have Informing and nudging to influence a readily identi�ed economic value—a road individuals: Tackling behavioral biases may increase the access of farmers to markets and thus increase food production—it is vital Good design and careful interventions can that economic values for environmental assets help align individual preferences with social be comparable to other economic values. goals and address behavioral biases. INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 53 BOX 2.4 What is “green accounting�? All accounts serve two purposes: a scorekeeping (Asheim and Weitzman 2001; Dasgupta and Mäler purpose, providing indicators on how well you 2000; Hamilton and Clemens 1999). are doing, and a management purpose, providing At the regional level, East Asia and South Asia detailed statistics so that anybody who does not like have exhibited strong wealth creation over more than the “score� has the information to understand and a decade. In contrast, Sub-Saharan Africa, where do something about it. the depletion of oil and minerals has been offsetting In standard national accounting, GDP is meas- savings by the public and private sectors, displays a ured as the market value of all goods and services worrisome trend (�gure B2.4.1). At the country level, produced by a country within a specified time China’s near 10 percent annual GDP growth is being period. Changes in GDP indicate whether the econ- partly offset by environmental depletion and deg- omy is growing, but not whether this growth is sus- radation, reducing its adjusted net national income tainable. In particular, the use or misuse of natural growth to an estimated 5.5 percent (World Bank and capital is not taken into account. DRC 2012). Green accounting extends national accounts to With green accounting, the scorekeeping indica- include the value of the damage and depletion of the tors (such as wealth accounts) can be used alongside natural assets that underpin production and human GDP to better assess how well a country is doing well-being. In particular, net saving, adjusted for for the long term. It also provides detailed accounts the depreciation of produced assets and the deple- for management of natural capital, which many tion and degradation of the environment, indicates countries have adopted over the past 20 years— whether well-being can be sustained into the future. especially for water, energy, and pollution. However, Negative net saving indicates that it cannot, because few countries have adopted the revised macroeco- the assets that support well-being are being depleted nomic indicators. FIGURE B2.4.1 Some regions are doing better than others in wealth creation (net saving by region, 1975–2008) 15 a. Genuine saving rates in LCR, MNA and SSA b. Genuine saving rates in EAP, ECA and SAR 10 35 30 5 25 0 % GNI 20 % GNI –5 15 –10 10 –15 5 –20 0 75 78 81 84 87 90 93 96 99 02 05 08 75 78 81 84 87 90 93 96 99 02 05 08 19 19 19 19 19 19 19 19 19 20 20 20 19 19 19 19 19 19 19 19 19 20 20 20 year year Latin America & Sub-Saharan Africa (SSA) East Asia & Europe & Central Asia (ECA) Caribbean (LCR) Pacific (EAP) Middle East & North South Asia (SAR) Africa (MNA) Source: World Bank 2011. Note: GNI = gross national income. (continued next page) 54 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 2.4 (continued) A new partnership—Wealth Accounting and economic growth and diversi�cation. A key compo- Valuing Ecosystem Services (WAVES)—is expanding nent of WAVES in Botswana will be the establish- efforts to account for ecological services. Botswana, ment of water accounts—physical supply and use a WAVES partner country, has defined one of its accounts as well as monetary accounts (for supply overarching objectives as to continue to grow while costs, tariffs paid, and the value of water in dif- diversifying away from diamonds (which currently ferent uses). Water accounts will enable Botswana account for about 35 percent of national income) to answer the following questions: Is there enough and eradicating poverty. Several natural resource– water in the right places to support the diversi- based sectors are being tapped to play a lead role fication strategy? What are the economic trade- in this development strategy, including nature-based offs among competing users? How can incentives tourism, mining (especially coal for export), and for water ef� ciency be created? In the wake of the irrigated agriculture. recent privatization of water under full cost recov- Water plays a critical role in Botswana’s develop- ery management, what will happen to poor house- ment, given its scarcity; the increasing reliance holds’ access to water resources? The answers to on shared, international water resources; and the these questions are critical for helping policy makers water-intensive nature of sectors identified for chart the best path forward. Avoiding fear mongering. Given cogni- where organ donation is the default option, tive myopia and people’s tendency to weigh more than 85 percent of people are organ emotion-filled consequences more heavily donors. In contrast, in neighboring countries than abstract consequences, policy makers where people must designate themselves as may be tempted to scare people into adopt- organ donors, less than 30 percent of peo- ing environment-friendly behavior. Using ple do so (Johnson and Goldstein 2003). In “catastrophism� to make people change the United States, automatically enrolling their behavior is ineffective, however, for two employees in saving programs and requiring reasons. First, fear is only briefly effective. them to opt out if they preferred not to par- Once people get used to the problem, they ticipate increased participation from 37 per- revert back to their initial behavior (Weber cent (under the opt-in design) to 86 percent 1997). For example, farmers informed about (Madrian and Shea 2001). weather risks have a tendency to implement Using nudging. In recent years, behavioral one mitigating measure (such as buying economists and the behavior change com- insurance), after which they consider their munity overall have stepped up their interest vulnerability problem solved, without con- in the potential role of nudges to influence sidering how additional action may help. behaviors. This approach advocates tweak- Second, people have only a limited abil- ing “choice architectures� to nudge people ity to worry; an increase in worry about one to make better decisions about their health, hazard decreases worry about other hazards the environment, or other desirable outcomes (Weber 1997, 2006). This means that a pol- without restricting their freedom of choice icy based on fear leads to competition among (Thaler and Sunstein 2009). To count as a hazards, and success in one area (for exam- nudge, the intervention must be easy, inex- ple, climate change) comes at the cost of fail- pensive, and voluntary. Nudges are increas- ure in others (for example, water pollution). ingly being used to stimulate green behaviors; Greening default options. An important studies show promising results. For example, behavioral bias that environmental policy an electrical outlet (designed by Muhyeon makers can use to their advantage is the Kim) that displays how much power it is tendency of people to stick with the default using makes people more conscious of their option (box 2.5). In European countries, energy use (�gure 2.1). The Danish Nudging INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 55 BOX 2.5 Changing the default option to spur the use of renewable energy To spur, rather than coerce, the purchase of renew- approach (Picherta and Katsikopoulos 2008). It able energy, policy makers could rewrite the default looked at two cases in which electricity providers electricity purchase contract to include a minimum offered green options with more renewable energy share of electricity produced from renewable sources. and a higher price as the default option. In both Consumers would have to opt out to purchase their cases, fewer than 5 percent of customers decided to electricity without this constraint, at a lower cost. shift to less expensive, less green options. A study of the impact of such “green default� in electricity provision provides support for this FIGURE 2.1 Energy-reporting electrical outlet Source: Webster 2012. Note: Designer Muhyeon Kim has designed a switch that displays how much power it is using. Research has found that people are more conscious of their energy use when they can see it in action. Network even hosts a Web site, iNudgeYou. than individual decisions (Milch and others com, dedicated to sharing applications and 2007). By framing environmental protec- study �ndings. tion as a “social project,� policy makers can Framing decisions judiciously. The way make individuals think in terms of social and economic actors react to policies depends collective goals. For example, surveys show on many factors, including how the policy is that many passengers are willing to pay more presented, or framed. Firms know this well, for fl ights to account for the environmental which is why they rely on marketing tools damage that flying causes. However, their and branding in addition to price signals. By willingness to do so depends partly on what priming or framing personal behavior as part the surcharge is called: simply relabeling a of a larger social goal, the public and private carbon “tax� as a carbon “offset� increases sectors can induce people to behave in more its acceptability (Hardisty and others 2010). environment-friendly ways, particularly when In addition, people are more likely to they act as groups, as group decisions have accept increases in energy prices if they per- been found to be made with less sel�shness ceive them as needed to reach an ambitious 56 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T and positive social goal than if they perceive approaches (Tietenberg 1998). Studies show them as top-down government decisions to that it is making signi�cant inroads in terms reduce oil imports or protect the climate. of environmental bene�ts. Germany presented its decision to gradu- One type of disclosure program relies on ally replace its nuclear plants with renewable emissions data without using them to rate or energy sources as a collective national project otherwise characterize environmental per- that positions it as a leader in the transition formance. Regulations requiring U.S. elec- toward a greener economy. This framing tric utilities to mail bill inserts to consumers makes it more likely that the public will accept reporting the extent of their reliance on fos- the resulting increases in the price of electric- sil fuels led to a signi�cant decrease in fossil ity. It also reduces the risk that the decision fuel use (Delmas and others 2007). Another will be reversed by the next government. type of scheme involves reporting regulatory The certainty afforded by the decrease in the violations. A policy of publicly disclosing the chance of policy reversal increases incentives identity of plants that are noncompliant or for long-term investments in research and “of concern� spurred emissions reductions in development and new technology. a sample of pulp and paper plants in British It may be more ef�cient to change the val- Columbia (Foulon and others 2002). ues related to the emotional part of decisions Performance evaluation and ratings pro- than to count on prices and other policies grams (PERPs) report emissions data and use to counteract emotion-based decisions. For them to rate plants’ environmental perform- instance, many consumers prefer big and inef- ance. Examples include China’s GreenWatch �cient cars for status-related reasons. As long program; India’s Green Rating Project (GRP); as such cars provide status, raising their price Indonesia’s Program for Pollution Con- may not reduce consumers’ desire to own trol, Evaluation, and Rating (PROPER); the them. For this reason, price mechanisms may Philippines’ E coWatch prog ram; and be less effective than efforts to make green Vietnam’s Black and Green Books initiative and ef�cient cars a status symbol (Griskevicius (box 2.7). These programs—which require and Tybur 2010). Ideally, price mechanisms no enforcement capacity or even a well- and behavioral changes can reinforce each defined set of environmental regulations other, as recent trends in French car purchases but do require an active civil society, local show (box 2.6). activism, or both—are particularly helpful It may also be more ef�cient to influence in developing countries, where weak formal consumer behavior through advertising than institutions make traditional enforcement of through price—witness the hundreds of bil- environmental regulations dif�cult. Thanks lions of dollars firms spend every year to to advances in information technology, the advertise consumer products (Bertrand and administrative cost of such programs (mainly others 2009). What is true for commercial data collection and dissemination) is falling consumption choices is likely to be true for (Dasgupta and others 2007). environmental behaviors. Public disclosure can improve environ- mental performance through a variety of channels. It can have the following effects Informing and nudging to influence (Powers and others 2011): �rms: Enabling public pressure and focusing managers’ attention • Affect demand for � rms’ products (out- Information allows citizens or governments to put market pressure). put pressure on businesses—the goal of pro- • Affect demand for publicly traded com- grams that collect and disseminate informa- panies’ shares and the ability of such tion about �rms’ environmental performance. companies to hire and retain employees This approach has been deemed the “third (input market pressure). wave� in environmental regulation, after • Encourage private citizens to sue pollut- command-and-control and market-based ers (judicial pressure). INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 57 BOX 2.6 Modifying car buyer behavior in France From 2003 to 2009, the average emissions of new €536 during the period. This shift in preferences cars in France decreased, dropping precipitously in accounts for 20 percent of the overall decrease in 2008 when the government introduced a “feebate� average CO2 emissions of new cars—of which 34 per- that increased the price of high-energy and reduced cent is related to the type of cars on the market and the price of low-energy-consuming cars (figure 46 percent to price effects (gasoline prices and the B2.6.1). The average willingness to pay for a reduc- feebate). The biggest preference changes occurred tion of 10 grams of CO2 per kilometer increased by among young people and rich people. FIGURE B2.6.1 A sudden shift to greener cars (average CO2 emission of new cars in France, 2003–09) 160 compulsory feebate energy labels 155 grams per kilometer 150 145 140 135 130 03 04 05 06 07 08 09 3 4 5 6 7 8 l-0 l-0 l-0 l-0 l-0 l-0 n- n- n- n- n- n- n- Ju Ju Ju Ju Ju Ju Ja Ja Ja Ja Ja Ja Ja observed emissions trend Source: Durrmeyer and others 2010. BOX 2.7 How are PERPs faring in developing countries? Performance evaluation and ratings programs rated “noncompliant� rose to “compliant� over (PER Ps) —which are increasingly being used time (in contrast, plants rated “fl agrant violators� throughout the world—appear to generate environ- and “compliant� tended to remain in these catego- mental bene�ts. Indonesia’s Program for Pollution ries) (Dasgupta and others 2007). This evidence is Control, Evaluation, and Rating (PROPER) spurred consistent with the findings of other studies that signi�cant emissions reductions in wastewater dis- concluded that performance ratings led to improve- charges (García and others 2007, 2009). A qualita- ments among plants with moderately poor perfor- tive evaluation of PERPs in China, Indonesia, the mance records but not among plants with either Philippines, and Vietnam found that in all pro- very bad or good records (García and others 2007; grams examined a large number of plants initially Powers and others 2011). 58 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T • Build support for new pollution control standards-based solutions may be more ef�- legislation or more stringent enforce- cient than incentive-based solutions in some ment of existing legislation (regulatory contexts. Moreover, introducing a new stand- pressure). ard may prove easier, especially in sectors • Enhance pressure from communit y that are already regulated, than increasing groups and nongovernmental organiza- (or introducing) prices. In such cases, existing tions (community pressure). institutions can be relied upon to enforce new • Provide new information to manag- norms, and complex policy making may not ers about their plants’ discharges and be necessary. options for reducing them (manage- That said, the enforcement costs of norms rial information) (Blackman and others and standards should not be underestimated. 2004; Tietenberg 1998). Enforcement of a norm on emissions or a trading scheme requires the establishment of The impact of information disclosure goes emission measurement and reporting systems, beyond its effect on environmentally conscious which are costly to create and operate. consumers. Even when environmental con- Norms and regulations can also have cerns are low and consumers are unlikely or negative side effects, by favoring incumbent unable to change their consumption patterns, �rms at the expense of new entrants, thereby disclosure can create an incentive for busi- reducing the ability of the economy to inno- nesses to reduce their environmental impacts. vate and grow (Copeland 2012). To avoid such a risk, policy makers must design envi- ronmental regulation in a way that does not Imposing: Using rules and create additional barriers to entry into mar- regulations kets, especially for small firms, which are Price-based instruments such as taxes and often innovative and create the most jobs. polluting permits are generally considered Policy makers must also avoid the risk of preferable to norms and standards, under a rebound effect. Promoting water conserva- the simplifying assumptions of economic tion technologies may increase the acreage modeling (competitive industry, no enforce- of crops requiring irrigation, resulting in an ment cost, and so forth) (Baumol and Oates increase in total water consumption (Pfeiffer 1988; Morgenstern and others 1999). This and Lin 2010). Improving the fuel ef�ciency may not be the case when additional com- of automobiles, by making it cheaper to drive, plexities are considered (Helfland 1999). leads to an increase in car use, reducing by When enforcement costs and political 30 percent any energy gain reaped by economy constraints (such as reaction against improved technology (Sorrel and others 2009) increases in fuel prices) are factored in, (box 2.8). BOX 2.8 What is the best way to promote vehicle fuel economy? Are incentive-based measures or norms and regula- to drive aging, and therefore less fuel-ef�cient, cars. tions more effective in increasing individual car fuel In addition, when car owners do purchase more fuel- economy? Proponents of incentives argue that higher ef�cient cars with unchanged fuel price, their ability fuel prices are more ef�cient than stricter fuel ef� - to drive more for the same price can result in rebound ciency standards. The latter, they contend, increase effects, thus reducing energy savings and leading to the costs of new vehicles, causing car owners (includ- increased traf�c congestion. In contrast, fuel taxes ing organizations with fleets) to wait longer to replace cause car owners to drive less, thereby not only their cars. The result is that fuel consumption remains decreasing local pollution but also reducing traf�c the same rather than decreasing as owners continue congestion and accidents. In addition, by increasing (continued next page) INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 59 BOX 2.8 (continued) tax revenues, fuel taxes can potentially allow other, price. Moreover, the carbon prices that have been more distorting taxes to be reduced without affecting implemented in the industrial sector (for example, the budget. the European Union’s Emission Trading System) are Proponents of fuel ef�ciency standards argue that not high enough to trigger manufacturer’s invest- consumers may not appropriately value fuel economy ments in the technologies needed to dramatically when buying a car (Greene 2010). If consumers under- reduce emissions (Vogt-Schilb and Hallegatte 2011). value fuel economy, fuel efficiency standards will In such a situation, fuel ef�ciency standards, like improve welfare. They also argue that opposition to the ones implemented in Australia, Canada, China, the fuel taxes makes their imposition dif�cult politically. European Union, Japan, the Republic of Korea, and The debate over which approach is better ulti- the United States (An and others 2007), are a reason- mately depends on the mitigation burden that should able second-best solution, particularly when they are be borne by the automobile sector—that is, pick- announced early enough to let manufacturers adapt ing an appropriate carbon price as the basis for fuel their investments plans accordingly (figure B2.8.1). taxes. The problem is that there is no consensus as Standards are best applied in combination with price to what could constitute an “appropriate� carbon increases to minimize the risk of rebound. Figure B2.8.1 Fuel efficiency standards are key to reducing emissions from the transport sector (historical fleet CO2 emissions and current or proposed standards, 2000–25) 300 250 grams CO2 per kilometer, normalized to NEDC 200 150 100 50 0 95 97 99 01 03 05 07 09 11 21 23 13 15 17 19 25 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 year US-LDV US-Car California-LDV California-Car Canada-LDV Canada-Car European Union Australia Japan China Korea,Rep. Mexico Sources: International Council on Clean Transportation; An and others (2007). Note: The NEDC is a driving cycle used in Europe to assess car emissions. LDV = light duty vehicle. 60 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T The efficiency of market-based instru- of per unit abatement costs (how much it costs ments is compromised by the existence of to reduce pollution by one unit) but from market failures that cannot be � xed. Emis- errors in the quantity of emission reductions sion intensity standards, for example—which achieved (how much pollution is reduced by a are widely considered to be less effective than given regulation). This � nding suggests that emission taxes—can be preferable in sectors if regulation costs are often overestimated, so where production has positive external con- may their bene�ts. sequences (for example, knowledge creation, In sum, rules and regulations are generally transportation), because they generally have considered second-best solutions in situations less of an impact on output. Emission inten- with perfect markets (markets with perfect sity standards can also improve social wel- information and competitive industries). In fare relative to emission taxes in the presence the real world, where settings are imperfect, of market power (Holland 2009). The idea they can be a useful complement to price- that a unique carbon price in the economy based incentives. In the next chapter we look is the optimal policy has been challenged in at the need to navigate between market and situations in which future carbon prices are governance failures through the careful use unpredictable (Vogt-Schilb and Hallegatte of innovation and industrial policies. 2011); technologies exhibit lock-ins, making it dif�cult to disseminate new technological options (Kalkuhl and others 2011); or labor Notes markets or revenue-raising taxes are distor- 1. In a review of energy subsidies across more tionary (Richter and Schneider 2003). than 30 countries, Arze del Granado and Norms and standards are usually costly others (2010) estimate that it costs $33 to in economic terms. They should not be transfer $1 to poor households through a implemented without a detailed analysis of gasoline subsidy. The �gure is high because their costs and bene�ts—but predicting and the vast majority of gasoline is consumed by higher-income households. measuring the economic cost of regulations 2. Weber and Johnson (2012) provide a compre- and norms is dif�cult. For instance, a pol- hensive review of this issue in a background lution regulation can increase production paper for this report. costs for industries and lead to reduced out- 3. The Ellsberg paradox (Ellsberg 1961) shows put and employment, but it can also favor that when faced with a choice between risk more labor-intensive technologies and create (which is represented by known probabili- jobs. A study of pulp and paper mills, plas- ties) and uncertainty (in which probabilities tic manufacturers, petroleum refiners, and are not available) decision makers display a iron and steel mills in the United States �nds preference for risk. This tendency is known that the impact of regulation on employment as ambiguity aversion. is industry specific and the overall impact 4. This is a different issue from cultural dif- ferences, which may make certain policies insigni�cant (Morgenstern and others 2002). unacceptable (rather than ineffective) in When they target local public goods, regula- particular countries. For example, London tions can even lead to net economic gains— successfully adopted congestion charges, by reducing health impacts from pollution, whereas such schemes are considered exclu- decreasing health costs, and increasing labor sionary in France, which explains why they productivity, for instance. have not been applied in Paris to date. In an analysis of U.S. environmental regu- lations, Morgenstern and others (1999) �nd that ex ante estimates of total (direct) costs References tend to exceed actual costs, suggesting that A bra h a m s e , W. , L . S t e g , C . 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Green Innovation and Industrial Policies 3 Key Messages • Innovation and industrial policies are poten- should focus on adapting and disseminat- tially useful tools to spur green growth, as ing technologies already developed and they can correct market (environmental and demonstrated. nonenvironmental) failures, but they should • Although green growth and trade interact, be designed to minimize risks from capture it is not through the much publicized but and rent-seeking behaviors. seldom observed “pollution haven� effects. • More advanced countries need to invest Green policies create opportunities for devel- in frontier innovation through research oping exports of green products; meanwhile, and development; lower-income countries imports facilitate the adoption of greener, (with more limited technological capacity) more ef�cient technologies. B razil has supported the development these types of environmental policies—which of a biofuel industrial sector for really amount to green innovation policies decades. China is subsidizing research and green industrial policies. Some com- and development (R&D) and industrial pro- monly used policies include R&D subsidies duction of photovoltaic (PV) panels, most of for drought-resistant crops, national strate- which it exports. Morocco is investing pub- gies for electric cars, and efforts to create new lic resources in producing electricity from green industries such as China’s promotion of concentrated solar power and plans to sell solar PV production. renewable energy to Europe. In all three Why are these policies even needed? Get- cases, the policy objective is both to produce ting prices right is critical to addressing envi- environmental bene�ts and to create growth ronmental externalities and providing the and jobs. right signal for economic agents to modify These countries are not alone in pursuing their consumption, production, and invest- such approaches. Indeed, most countries tap ment patterns. But as chapter 2 showed, 65 66 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T doing so is dif� cult because of behavioral knowledge externalities, latent comparative quirks, political reasons, market or con- advantage and increasing returns, informa- tract imperfections, and low price elastici- tion asymmetries, capital market imperfec- ties (how responsive quantities demanded or tions, and the coordination needed across provided are to a certain price change). industries to permit a technological transi- And prices are notoriously limited instru- tion (box 3.1). ments for transforming economies or trigger- Further, for green growth, getting the ing investments with long-term or uncertain price right requires pricing externalities, payoffs. Indeed, they are ill-suited to address which requires government intervention. the “classic� market failures usually invoked Future government policies (on carbon prices to justify innovation and industrial policies: or pollution limits) determine the size and BOX 3.1 Market failures that can justify innovation and industrial policies Many market failures may justify the broad inno- subsidies or trade protection—can be provided vation policies and more targeted innovation and to foster new technologies. industrial policies that aim to support a specific • Coordination failures. Industrial policies may green industry, � rm, or technology: be warranted to address coordination failures within and across industries (Murphy and others • Knowledge externalities and capital market imper- 1989; Okuno-Fujiwara 1988; Pack and Westphal fections. Absent government intervention, knowl- 1986; Rodenstein-Rodan 1943; Trindade 2005). edge spillovers create a gap between the private The idea is that developing a comparative advan- and social returns to producing knowledge that tage in an activity can depend on another activ- typically leads to under-provision of knowledge. ity in the region or country. (Morocco is hoping And this is ampli�ed by information asymmetry to develop a concentrated solar industry, which in capital markets. Competitive innovation proj- requires creating the demand, the needed trans- ects may struggle to �nd �nancing, making it dif- mission lines, and the domestic supply chain for �cult for new businesses and activities to start. those parts in which Morocco can develop a com- This is especially true because young businesses petitive advantage—such as mirrors.) An indus- have more dif�culty securing �nancing than large trial policy through which the government acts established companies, even though they may be as the precommitment mechanism can solve this very innovative. problem (Rodrik 2004). The same argument holds • Latent comparative advantages and increasing for “soft� industrial policies—policies that sup- returns. Latent comparative advantages—that port particular clusters by increasing the supply is, future as opposed to current comparative of skilled workers, encouraging technology adop- advantages—are sometimes cited as a justi- tion, and improving regulation and infrastructure fication for industrial policies (Harrison and (Harrison and Rodríguez-Clare 2009). Rodríguez-Clare 2009; Khan 2009; Rodrik • International rent shifting. Some industries are 2004). Industrial policies may be warranted characterized by fixed costs or indivisibilities if the advantage includes learning or increas- limiting the number of entrants and creating ing returns to scale, which require support at oligopolies, with significant rents for installed an early stage. When two or more technologies businesses. A classic example is the competi- (some not even invented) are substitutes, pro�t- tion between Airbus and Boeing (Baldwin and maximizing innovators may focus on improv- Krugman 1988; Helpman and Krugman 1989). ing the productivity of existing technologies Depending on the case, it can be welfare enhanc- (“building on the shoulders of giants�) because ing to either introduce speci�c taxes to capture the market for these technologies is large and the and redistribute the rent or support new entrants returns are higher. Support—through production to increase competition and reduce rents. (continued next page) GREEN INNOVATION AND INDUSTRIAL POLICIES 67 BOX 3.1 (continued) • Spatial, redistributive, and political economy moti- for example, structural change or trade liberaliza- vations. Industrial policies are frequently used to tion leads to unemployment and workers �nd it promote regional balance and stimulate job growth dif�cult to shift from sunset to sunrise industries. and other economic activity where unemployment In this case, an industrial policy can support a is worse, the population poorer, or a geopolitical declining industry to mitigate transitional costs reason exists to promote production in an area and allow time for retraining and shifting workers (such as Manaus in Brazil). Industrial policies are toward growing industries. also used to smooth economic transitions—when, pro�tability of the future green market. But frontier technologies and the diffusion and because they cannot credibly commit to adoption of green technologies new to the future policies, governments create policy firm, is critical to greening growth proc- risks for green �rms. It thus makes sense for esses.1 Achieving greener growth requires governments to share risks through invest- both green innovation policies, supported ment subsidies. To the extent that such sub- sometimes by more targeted industrial poli- sidies reduce the future cost of green policies, cies, and environmental policies to create they enable today’s governments to influence demand where the traditional environmental future policies: it is more likely that carbon externalities are not fully reflected in market prices will be implemented in the future if prices (box 3.2). inexpensive low-carbon alternatives are avail- Green frontier innovation is growing fairly able (Karp and Stevenson 2012). rapidly, albeit from a small base. But the For these reasons most countries resort lion’s share of this growth is in high-income to some form of innovation and industrial countries, raising concerns about the ability policies in their growth strategies. But given of developing countries to access and adapt the mixed record of these policies—rife with new technologies tailored to their needs. A both successes and failures—green growth few large middle-income economies— Brazil, strategies must heed the lessons from inno- China, India—can become signi�cant frontier vation and industrial policies over the past green innovators; they are already leading in decades. incremental process innovation in the wind, This chapter explores the concepts of solar, and biofuel markets. Other countries green innovation and industrial policies and need to rely on global frontier innovation identi�es their main bene�ts and potential efforts while developing the capacity to iden- pitfalls. It � nds that they represent poten- tify, adapt, and absorb relevant technologies tially useful tools for facilitating green that are new to their �rms. growth, provided that they are tailored to The challenge is to combine innovation country contexts and that care is taken to and environmental policies to make them navigate between the risks of market and effective and ensure that they are suitably governance failures. balanced among policies that support fron- tier innovation (relevant mostly for more Innovation policies: Tailoring technologically advanced countries); policies mixes of instruments to a that promote catch-up innovation and the country’s innovation potential adoption and spread of suitably adapted tech- nologies; and policies that improve domestic Green innovation, which includes both the absorptive capacity, including strengthening creation and commercialization of new local skills. 68 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 3.2 Shedding light on green innovation, technologies, and industrial policies Green innovation is the development and com- early-warning systems, and climate-resistant tech- mercialization of new ways to solve environmental nologies (sea-walls; drainage capacity; reductions problems through improvements in technology, with in the environmental burden of disease; water, for- a wide interpretation of technology as encompass- est, and biodiversity management). ing product, process, organizational, and marketing • Support wealth creation from the more produc- improvements. In addition to frontier (new-to-the- tive and sustainable uses of biodiversity, including world) innovations, this de� nition includes catch- natural cosmetics, pharmaceutical products, other up (new-to-the-� rm) innovations—also known as sustainable bioprospecting, nature-based tourism, absorption—which covers the diffusion (both across more sustainable production of plants and live- and within countries), adoption, adaptation (to local stock, and ecosystem protection. contexts), and use of green technologies. Green innovation policies are policies seeking to Green technologies comprise many fundamen- trigger green innovation by encouraging innovation tally different technologies to achieve more resource- broadly (horizontal policies) or supporting a speci�c ef� cient, clean, and resilient growth. They include technology (vertical policies). technologies needed to achieve the following goals: Green industrial policies are policies aiming to • Reduce pollution and achieve greater resource green the productive structure of the economy by efficiency in buildings (thermal insulation and targeting speci� c industries or � rms. They include new materials, heating, energy-efficient light- industry-speci� c research and development subsi- ing); production processes (new uses of waste dies, capital subsidies, and tax-breaks; feed-in tar- and other by-products from firms); agriculture iffs; and import protection. They do not include (from improved and resilient crop and livestock policies targeting demand (such as consumer man- breeds, water management, and farming systems dates), which can be met by imports without chang- to mechanical irrigation and farming techniques); ing local production. and infrastructure and urban design (such as land In practice, green innovation and industrial poli- use zoning). cies can be dif�cult to separate. Brazil’s support for • Mitigate climate change through a cleaner energy biofuels relies on a range of policy tools from broad supply (wind, solar, geothermal, marine energy, innovation to targeted industrial policies, with the biomass, hydropower, waste-to-energy, hydrogen ultimate goal of triggering innovation. Germany’s fuels); low-carbon end use (electric and hybrid support for solar photovoltaic power amounts to vehicles, climate-friendly cement); and carbon innovation policy using industrial policy tools. Both capture and storage. countries would likely consider these efforts as part • Reduce vulnerability and adapt to climate change of their environmental policies. with tools for understanding climate risks, better Source: Dutz and Sharma 2012 and World Bank. Frontier innovation and catch-up only 100 patents granted to poorer coun- innovation tries. Within the developing world the East Asia and Paci�c region has by far the larg- Since the mid-1990s green frontier innova- est number of patents; the Middle East and tion has increased substantially worldwide, North Africa has the smallest number of pat- mostly in high-income countries (�gure 3.1a). ents (�gure 3.1b). China, in 10th place glo- In recent years the gap between developed bally in number of patents �led in more than and developing countries for green patents— one country, is the only emerging economy those based on key greenhouse gas–mitiga- represented among the top 10 “high-quality� tion technologies—continued to widen, with innovating countries (Dechezleprêtre and the richer countries granted some 1,500 others 2011). The number and share of green patents in the United States compared with GREEN INNOVATION AND INDUSTRIAL POLICIES 69 patenting remains very small—less than FIGURE 3.1A Green frontier innovation occurs mostly in 1 percent—in both developed and developing high-income countries… regions (�gure 3.1c). (number of green patents granted in the United States, developing In the developing world a few techno- versus high-income countries) logically sophisticated countries are surfac- ing as significant innovators; appropriate green innovation policy in these countries is likely to differ from appropriate policy high-income in other developing countries. A group of countries nine emerging economies (Argentina, Brazil, China, Hungary, India, Malaysia, Mexico, the Russian Federation, and South Africa) accounted for nearly 80 percent of all U.S. green patent grants to developing countries, developing over 2006–10. 2 And unlike the less techno- countries logically sophisticated countries, these “high flyer� economies display a sharp upward trend in green patenting, with their green 0 1,000 2,000 3,000 4,000 5,000 6,000 patent grants more than doubling between number of green patents granted 2000–05 (30 grants) and 2006–10 (more 2006–10 2001–05 1996–2000 than 70 grants). Source: Dutz and Sharma 2012, based on data from PATSTAT (the European Patent Office’s But even if there is little capacity for fron- Worldwide Patent Statistical Database). tier green innovation in most developing countries, substantial capacity may exist for catch-up green innovation through the adop- tion and adaptation of green technologies as well as indigenous base-of-pyramid innova- tions, aimed at meeting the needs of poor FIGURE 3.1B . . . with East Asia leading the way in developing consumers (box 3.3). regions . . . Trade data suggest that there is substan- (number of green patents granted in the United States, by developing tial potential for catch-up innovation. Envi- region) ronmental goods constitute a nontrivial and rising share of exports (3.4 percent in devel- 60 number of green patents granted oping countries in 2010, 6 percent in high- income regions; �gure 3.2). But, except for the East Asia and Paci� c region, the share 45 of green exports has not been rising, sug- gesting a need for greater diffusion of green 30 technologies. The policy implication of this trend depends on the extent to which it refl ects some underexploited comparative 15 advantages in developing countries that account for lower levels of home produc- 0 tion and export of green goods and ser- MNA AFR LAC SAR ECA EAP vices, whether driven by speci�c market or region policy failures. Information on the extent 1996–2000 2001–05 2006–10 to which weaker environmental regulations Source: Dutz and Sharma 2012, based on data from PATSTAT (the European Patent Office’s in many developing countries account for Worldwide Patent Statistical Database). Notes: Total U.S. Patent Office grants in OECD green technology areas. Developing regions are these differences could suggest appropriate AFR (Africa), EAP (East Asia and Paci�c), ECA (Europe and Central Asia), LAC (Latin America and the policies. Caribbean), MNA (Middle East and North Africa), and SAR (South Asia). 70 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T FIGURE 3.1C . . . but worldwide green patents remain low Even if developing countries are not (green patents granted as a percentage of all patent grants in the United increasing their exports of green products, States, by region) they could have substantial potential for moving into green industries to the extent 1.2 that they are producing nongreen goods that use inputs or technologies similar to those 1.0 used to produce green goods. The concept of “proximity� between products is useful for 0.8 examining this broader capability for green exports. 3 For example, a country with the percent 0.6 ability to export apples will probably have most of the conditions suitable for exporting 0.4 pears but not necessarily the conditions for producing electronics. Indeed, trade in green and close-to-green goods is about three to 0.2 five times that of green goods alone, with East Asia and Paci�c and Latin America and 0 the Caribbean countries on par with high- ECA LAC SAR EAP developing high income income countries (�gure 3.3). This difference 1998 2004 2010 suggests a potential for developing exports in green products. Source: Dutz and Sharma 2012, based on data from PATSTAT (the European Patent Office’s World- wide Patent Statistical Database). As for green imports, studies show that, as Note: Ratio of three-year moving averages of U.S. Patent Office grants in OECD green technology a share of all imports, they are as important areas to all U.S. Patent Office grants. BOX 3.3 What are green base-of-pyramid innovations? Base-of-pyramid innovations are de� ned as innova- Aakash Ganga (“river from sky�). In Rajasthan, tions that meet poor consumers’ needs. They include India, ancient rainwater harvesting systems have formal innovations for the poor—namely, innova- been modernized to collect safe drinking water. tions by global and local formal private companies This low-cost adaptation in arid regions has spurred and public institutions, whether fully privately pro- additional innovations, generating many co-bene�ts vided, supported by public subsidies, or produced for ef�ciency and inclusiveness: through public-private partnerships (such as medi- • Automation of the traditional surveying system cines for neglected diseases and seeds for “neglected� with satellite imaging, which shortens design time, soil types and climates). They also include informal minimizes earthwork, and reduces material costs. innovations by local grassroots inventors, largely • Creation of a numbering plan for reservoirs, through improvisation and experimentation. Often which facilitates co-investments. facilitated by co-creation with poor consumers • Inducement of demand for stretchable roofs, themselves, the innovations typically seek to better which has spurred more innovation. meet the needs of poor households at dramatically • Introduction of accounting transparency, which lower costs per unit, aided by signi� cant scale-up has spurred policy debate on broader inequities in in volumes. They thus seek “to do more (products) water affordability. with less (resources) for more (people)� (Prahalad and Mashelkar 2010). Three examples are described Novel uses of rice husks. Rice husks are one of below. India’s most common waste products. Husk Power (continued next page) GREEN INNOVATION AND INDUSTRIAL POLICIES 71 BOX 3.3 (continued) Systems (HPS), winner of the 2011 Ashden Awards � lter out bacteria. It is intended for rural households for sustainable energy, has adapted and converted a that lack electricity and running water. biomass gasi�cation using diesel technology into a Affordable green housing. In Mexico, Vinte spe- single-fuel rice husk gasi�er for rural electri�cation. cializes in building affordable, sustainable housing Households stop using dim kerosene lamps when for low- and middle-income families. Its research they get HPS electricity, thereby saving on kerosene and development in new technologies helped it intro- (and reducing CO2 emissions) and facilitating eve- duce innovations such as home designs that reduce ning studying and other productive activities. Tata energy costs by 75 percent. Consulting Services sells a $24 Swach (“clean� in Source: Dutz and Sharma 2012. Hindi) water � lter that uses ash from rice milling to in developing countries as they are in high- FIGURE 3.2 Green exports are growing, especially in the East Asia income countries, indicating the inter- and Paci�c region national transfer of green technology as (export of green goods and services as a percentage of all exports, embodied in green consumer products (�gure 2000, 2005, 2010) 3.4). Inasmuch as some of these products are 7 used as inputs, this also indicates the green- ing of the input mix, which may reflect adop- 6 tion and adaptation of technologies by local � rms. For instance, the purchase of manu- 5 facturing equipment in international markets is the main channel through which Chinese 4 percent producers acquired the technologies and skills necessary to produce PV panels (de la 3 Tour and others 2011). And the importing of green products may be a response to domes- 2 tic demand-side green policies in developing countries. However, there has not been any 1 signi�cant upward trend in any region. 0 The dissemination of green technologies MNA SAR ECA AFR LAC EAP developing- high- can be accelerated through policies that country income- increase adaptation and adoption capacity 2000 2005 2010 average country (such as education in relevant disciplines, average especially sciences and engineering) and Source: Dutz and Sharma 2012, based on data from COMTRADE + OECD list of environmental six- digit harmonized system categories. through trade and industrial policies (such Note: Developing regions are AFR (Africa), EAP (East Asia and Paci�c), ECA (Europe and Central Asia), as local content requirements and technol- LAC (Latin America and the Caribbean), MNA (Middle East and North Africa), and SAR (South Asia). ogy transfers). A good example is the suc- cess of the high-speed train program initi- is among the �ve top world competitors in ated in the Republic of Korea in 1993 by the exports of high-speed trains. In Morocco purchase of the French Alstom TGV (train à the contract for high-speed trains and grande vitesse). The contract included tech- the Casablanca tramway included a local nology transfers (partly through training factory (created by Alstom and Nexans) Korean workers in France) and the local- specializing in railway beam and wire pro- ization of 50 percent of manufacturing in duction, which will produce for the local Korea (Lee and Moon 2005). Today, Korea and international markets. 72 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T FIGURE 3.3 Developing countries may have a substantial Green imports from higher-income coun- unrealized potential for producing green exports tries may not, however, meet the needs of (export of green versus green plus close-to-green goods and services poorer consumers in low-income countries. from developing regions, as a percentage of all exports from developing In principle, home-grown base-of-pyramid regions, 2000–10) innovations can offer a complementary sup- 10 ply of relevant green technologies (box 3.3). But few green base-of-pyramid innovations have been suf�ciently scaled up to date, sug- 8 gesting the need for more focused policy efforts in this area. 6 The adaptation of green technologies to percent local conditions is also critical for develop- 4 ing countries. Using green technologies ef�- ciently requires them to be more varied than nongreen technologies, given the signi�cant 2 variance of the underlying environment by locality. For instance, turbine designs need to 0 be adapted to work ef�ciently in India, where wind speeds are lower than in Europe. Such 03 04 05 06 07 08 09 10 00 01 02 20 20 20 20 20 20 20 20 20 20 20 year adaptations can yield important co-bene�ts, green exports (as share of total) close-to-green exports (as share of total) including more sustainable corporate cul- Source: Dutz and Sharma 2012, based on data from COMTRADE. tures (box 3.4). Fostering innovation The policy instruments relevant to promot- FIGURE 3.4 Green imports are vital worldwide ing the development, dissemination, and (imports of green goods and services, as a percentage of all imports, adaptation of green technologies will differ 2000, 2005, 2010) depending on the maturity of the technolo- gies and the market failures the policies seek 8 to address. No single green bullet exists, so countries will need to employ a mix of instru- ments (�gure 3.5). 6 Policies to foster innovation should aim to strengthen entrepreneurship and local � rm absorptive capacity, support new knowledge percent 4 creation and commercialization, and support diffusion and adaptation of existing knowl- edge to new local contexts. The importance 2 of each and the modalities used depend on a country’s level of technological sophistication and implementation capacity. 0 SAR AFR ECA EAP MNA LAC developing- high- country income- Strengthening entrepreneurship and average country absorptive capacity: The importance of 2000 2005 2010 average skills and the broader business environment Source: Dutz and Sharma 2012, based on data from COMTRADE and OECD List of environmental For � rms to understand and assimilate the six-digit harmonized system categories. Note: Developing regions are AFR (Africa), EAP (East Asia and Paci�c), ECA (Europe and Central Asia), discoveries of others as well as create new LAC (Latin America and the Caribbean), MNA (Middle East and North Africa), and SAR (South Asia). technologies, they need strong absorptive GREEN INNOVATION AND INDUSTRIAL POLICIES 73 BOX 3.4 Rapidly growing champions of “new sustainability� In principle, the home-grown green ideas of com- International Fund for Agricultural Development to panies to reduce costs, motivate workers, and shape reduce its risks when lending to smallholders. their business environments by forging new relation- Jain Irrigation Systems (Jalgaon, India) adapted ships should make it easier for their peers in devel- drip irrigation systems to meet the needs of small- oping countries to emulate such approaches. Several holder farmers. The company works closely with examples are described below. customers to teach “precision farming� (optimizing Century Energy (Colombia) develops small-scale the balance among fertilizers, pesticides, water, and hydroelectric power plants in Colombian river basins, energy to increase output) and uses dance and song diverting fast-rushing stream water without the need to explain the bene�ts of drip irrigation to illiterate for reservoirs and thus avoiding displacement. In the farmers. next 5 years it plans to develop up to 10 facilities, Natura Organic Cosmetics (São Paulo, Brazil) adding 250 megawatts of capacity to Colombia. worked transparently with rural communities and Energy Development Corporation (the Philip- local governments to adapt its formal business prac- pines) pioneered the use of watershed management tices to the local context. It tapped traditional knowl- and recharge reinjection in its geothermal power edge about how to extract raw materials sustainably plants as a way to extend the economic life of its facil- (receiving the Forest Stewardship Council certi�cate ities and reduce maintenance costs. These practices for these raw materials), and then educated suppli- have since been mainstreamed across the industry ers in sustainable sourcing and production practices and are now a regular part of industry regulation. (such as reusing, re� lling, and recycling packaging Equity Bank agricultural financial products and adopting a new green plastic derived from sugar (Nairobi, Kenya) worked with mobile telecom pro- cane, which is eventually expected to reduce green- vider Safaricom to create a mobile banking system house gas emissions by more than 70 percent). The on its existing platform. The system offers credit for company also gives bonuses to workers who find inputs and supports farmers throughout the value ways to reduce the � rm’s impact on the environment. chain of production, transport, processing, and Source: IFC 2010; World Economic Forum 2011, cited in Dutz and Sharma 2012; marketing. It has partnered with groups such as the and Russell Sturm (personal communication). capacity. Absorption is a subset of innova- commercialize, absorb, and adapt knowledge. tion that focuses on the use of new-to-the- They include the following: � rm technologies rather than the creation • Policies to overcome the stigma of fail- and commercialization of new-to-the-world ure and encourage opportunities for technologies. Absorption of existing tech- reentry and renewed experimentation. nologies can be improved by tackling the Making it easier to wind up businesses cross-cutting business environment con- is one of the best ways to get more peo- straints that impede experimentation, global ple to try new ideas, even though doing learning, and attracting and retaining tal- so involves difficult legal reforms and ent, as well as enhancing human capital in changes in attitude toward debt. Closing the public and private sectors. a terminally ill business takes fewer than An important starting point is to ensure 10 months and allows more than 90 cents that the business environment does not con- on the dollar to be recovered in Singapore, strain entrepreneurship and innovative behav- Tokyo, or Toronto. By contrast, in Mumbai ior, whether green or complementary to green. it still takes on average 7 years to recover Many cross-cutting policy measures are vital roughly 20 cents on the dollar (World Bank for creating a business environment that spurs 2012). Other policies include publicizing and enables entrepreneurs and �rms to create, 74 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T FIGURE 3.5 Snapshot of technology creation and diffusion Stimulate market pull voluntary (green) Technology-neutral demand market deployment competition TGC carbon trading (EU, ETS) Mature technologies (e.g., hydro) Low cost-gap technologies (e.g. wind onshore) Imposed market Continuity, RD&D, create market risk, guaranteed attractiveness but declining capital cost-incentives, investment tax market return credits, rebates, loan guarantees etc Prototype & High cost-gap technologies (e.g., PV) Stability, low-risk demonstration stage incentives technologies (e.g., 2nd price-based: FIT, FIP generation biofuels) quantity bassed : tenders Development Niche markets Mass market Time Source: IEA 2008 (Deploying Renewables: Principles for Effective Policies © OECD/International Energy Agency 2008, �gure 1, page 25). Note: FIT= feed-in tariffs; FIP = feed-in premiums; PV = photovoltaic; RD&D = research, development, and demonstration; TGC = tradable green certi�cate. innovative role models (such as India’s Learning networks were also critical in Tata Group’s awarding of an annual prize the development of China’s PV panel for the best failed idea) and reducing the industry. 5 Mexico’s Green Supply Chains sunk costs of trying to commercialize an Program—a public-private partnership idea, such as removing impediments to program—highlights a way to diffuse deeper rental and resale markets. eco-ef� ciency techniques to small- and • Policies to facilitate global connectivity medium-size enterprises.6 and learning. Here the emphasis should • Policies to increase the livability and be on linking up with international “stickiness� of cities to attract and retain consortia and helping firms insert into talent. Dense urban-industrial agglom- global value chains. International mobil- erations spur technological upgrading ity of workers was critical to the rapid and productivity growth by opening up development of wind energy capabilities opportunities and stimulating supplies in China and India. Suzlon, the lead- of capital and skills. China’s establish- ing Indian wind turbine manufacturer, ment of special economic zones, fol- established R&D facilities in Germany lowed by a range of support by national and the Netherlands to have its workers and local governments for further indus- learn from European expertise. Gold- trial deepening in its three major urban/ wind, the leading Chinese manufacturer, industrial agglomerations and in a sent employees abroad for training. 4 number of inland cities, highlights how GREEN INNOVATION AND INDUSTRIAL POLICIES 75 a mix of instruments can be used (Yusuf in the national R&D system than the higher and others 2008). education and government sectors. In the United States, four of �ve researchers work In addition, green innovation, like inno- in businesses. By contrast, in Chile, China, vation in general, depends on people who Mexico, Poland, the Slovak Republic, South are able to generate and apply knowledge Africa, and Turkey the number of research- in the workplace and society at large. ers per 1,000 employees in industry is less Required innovation skills include basic than 1. Developing country �rms need more skills (reading, writing), technical skills individuals with research and related creativ- (science, engineering), generic skills (prob- ity skills in the workforce if they are to play lem solving, multicultural openness, lead- a greater role in accessing green technologies ership), managerial and entrepreneurial and adapting them for local use. skills, and creativity and design skills.7 The Thus, policies are needed to strengthen green economy requires greater empha- market signals so that tertiary education insti- sis on design and multidisciplinary team- tutions and technical and vocational educa- work, strategic leadership and adaptability, tion and training systems are better attuned and knowledge of the sciences (CEDEFOP to � rm demands. These institutions should 2009; OECD 2011). ensure that the costs of skills upgrading are Even advanced developing countries are shared by students, employers, and the gov- far behind high-income countries in the share ernment in line with bene�ts, and that peri- of professionals engaged in creating knowl- odic independent and transparent national edge and managing research projects. High- assessments are adopted to ensure quality and income countries like Denmark and Finland consistency (OECD 2009). In West Africa an have about 15 researchers per 1,000 employ- effort to better monitor monsoon variabil- ees. By contrast, China, Mexico, and South ity and impacts illustrates solutions to build Africa each has fewer than 2 researchers per relevant skills in a developing-country set- 1,000 employees. And in developing countries ting (box 3.5). This case highlights the need the business sector plays a much smaller role to attract West African scientists trained in BOX 3.5 African monsoon multidisciplinary analyses West Africa is extremely vulnerable to weather and convened functional research teams to build new climate variability because of its dependence on rain- capacity for improved early-warning systems. These fed agriculture, on which 80 percent of the Sahel’s teams and programs will continue to train cohorts population relies. The African Monsoon Multi- of African specialists, thus cultivating a community disciplinary Analyses (AMMA) is a research proj- whose mutual interest in AMMA–related issues will ect funded by agencies from Africa, the European help ensure sustainability. Union, France, the United Kingdom, and the United AMMA has done fairly well in building a part- States to better monitor West African monsoon vari- nership between the international community and ability and the impacts on society and the environ- Africans in phase one (2002–10). The main chal- ment, including on climate. To do so, the AMMA lenge for phase two (2010–20) is clarifying the needs community was created in 2002. It now comprises of users (farmers, hydropower and flood managers, more than 600 people from 30 countries, includ- and health care professionals) and identifying what ing 250 in Africa, among them 80 African PhD science can offer. Stronger user demand should students. The AMMA community has established increase political support for scienti�c resources. local university research programs in climatology, agronomy, and related social science �elds, and has Source: Thorncroft 2011. 76 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T better-equipped universities in high-income support to R&D in wind power technology countries and the need to ensure enough local generated 0.82 new inventions, whereas the demand for established scienti�c and research same amount spent on demand-pull policies facilities. induced, at best, 0.06 new inventions (Deche- zleprêtre and Glachant 2011). Promoting frontier innovation: Approaches Consider carefully structured public- depend on extent of local technological private partnerships as only one of many sophistication measures to foster early-stage financing. Policies for frontier innovation include both Much of the investment needed for green supply-side “technology-push� elements growth will come from private business. (which reduce the costs of knowledge crea- Many of these investments face uncertain tion in advance of commercialization) and cash flows and require signi�cant risk tak- demand-side “market-pull� elements (which ing because they involve new technologies, increase revenues from sales after com- including new business models. Once new mercialization). Key recommendations to ideas with commercial potential have pro- guide the design of such policies include the gressed to the proof-of-concept stage, further following: � nancing and mentoring support for early- Limit local technology-push support stage technology development (ESTD) are to countries with enough technological required. capabilities. Government funding for early- The range of ESTD finance options stage and pre-commercialization technology includes both public and private resources. is a vital element of many innovation sys- At this early stage, private sources are typi- tems, including direct funding of public labs cally restricted to internal �nancing (personal and universities; grants, matching grants, savings and retained earnings), friends and and soft loans (which give the government family, angel investors (successful wealthy control over what research is conducted); entrepreneurs), venture capital (VC), private and indirect R&D tax subsidies (which allow equity, and private corporations (which fund � rms to choose the most pro�table research ideas developed in-house, operate their own opportunities, switching some marginal proj- VC units, and acquire young start-up com- ects from unpro�table to pro�table). All these panies; see box 3.6). Among these sources, tools have their drawbacks. Grants allow private equity and VC are uniquely suited to coordination of research efforts with little or �nance climate-friendly investments that are no duplication but may fail to integrate infor- risky and fairly small. Although they will not mation from markets about what consumers provide more than a fraction of the resources want and are willing to pay for. They also needed, they can � ll a key niche for driving run the risk of crowding out private R&D green innovation. funding and need to be transparently allo- However, developing the private equity cated. Tax incentives may promote distorting and venture capital market for climate- and tax avoidance rather than productive invest- environment-friendly investments in emerg- ment in countries with a weak tax enforce- ing markets is hindered by capital market ment system. and carbon market barriers. These barri- Despite these drawbacks, supply-push ers include high management expenses, a R&D support, through direct or indirect shortage of good fund managers, long time government funding, may generate new horizons for investment returns and regula- frontier innovations more effectively than tory uncertainties, and the uncertainty of demand-pull policies such as feed-in tar- raising capital and having profitable exit iffs and regulations—at least where local opportunities for new technologies with technological capabilities and good govern- no track record of historical returns. The ance mechanisms exist. For wind power, public sector and international financial the marginal million dollars spent on public institutions can assist in capitalizing such GREEN INNOVATION AND INDUSTRIAL POLICIES 77 BOX 3.6 “Pinstripe greens�: Private �nanciers making millions from clean-tech ventures Although global venture capital investment in green electrical and mechanical efficiency, batteries, energy declined with the 2008/09 recession and building materials, plastics and chemicals, agricul- shares in clean-tech businesses have recently under- ture, cellulosic alcohol, and advanced hydrocar- performed the wider market by a large margin, a bons. The portfolio also includes investments in world of U.S. solar titans, German wind moguls, a low-emission engine (with Bill Gates) and two- Brazilian biofuel magnates, and Chinese battery bladed wind turbines (with Goldman Sachs). tycoons has emerged over the past decade. One • Bloomberg New Energy Finance is a provider of often hears that green energy could be the biggest analysis, data, and news about clean-tech, including economic opportunity of the 21st century. In 2010 renewable energy, energy-smart technologies, car- the global clean energy sector (wind farms, solar bon, carbon capture and storage, renewable energy parks, and related technologies) attracted a record certificates, nuclear, power markets, and water. $243 billion in new investment, nearly 5 times the The company, founded by Michael Liebreich in volumes of 6 years earlier. Between 2000 and 2010 2004, has generated more than $1 billion in pro�ts the global market for solar and wind power rose in 2011. from $6.5 billion to $132 billion, the number of • Suntech is a Chinese company founded in 2001 hybrid electric car models jumped from 2 to 30, and by Dr. Zhengrong Shi and floated on the New the number of certi� ed green buildings grew from York Stock Exchange in 2005. It is the world’s 3 to 8,138. Examples of private green financing largest producer of solar panels, with solar mod- include the following: ules installed in more than 80 countries (and a low-carbon museum in Wuxi, west of Shanghai, • Khosla Ventures is a venture capital �rm founded opened by Al Gore). by Vinod Khosla in 2004. Its clean-tech portfo- lio spans utility-scale and distributed generation, Source: Dutz and Sharma 2012. funds by anchoring new funds, � nancing factors—such as government R&D expen- new fund development, supporting pioneer ditures, the extent of patenting by entrepre- investments, and supporting improved car- neurial firms, and national environmental bon payments. Even more important will deployment policies designed with the long- be helping with the structure, manage- term perspective of creating a market for ment, and exit routes for venture capital environmental technologies—appear to be investments—for example, by providing more important in affecting the amount of equity contributions to increase potential private �nancing of frontier innovation in the returns or reduce potential risks, which clean-tech sector.9 would play a helpful demonstration role if Provide global support for bottom-of- there is enough deal flow. 8 But experience pyramid and neglected technologies. It is suggests that the government role should be not advisable for countries with weak tech- restricted to that of � nancial backer, and nological capabilities and no comparative not manager, with funds administered pro- advantage in creating frontier technologies fessionally, free of bureaucratic burdens, to dedicate significant public resources to and independent of political interference this objective. But given the global nature of (Lerner 2009). bene�ts from many green innovations, stable, But capital market–based, arms-length long-term global public spending on R&D forms of �nance that structure and price each should be increased and channeled into pro- transaction on its merits require deep �nan- grams that facilitate the development and cial markets, which most developing coun- adoption of technologies applicable to devel- tries still lack. Moreover, a number of other oping countries. 78 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T Prize funds and advance market commit- machinery, and imported capital goods. ments—also called purchase guarantees— Some are knowledge-based processes or can be useful market-pull mechanisms for business models that diffuse through move- promoting R&D in neglected technologies. ments of people attached to multinational corporations or from the diaspora. Some • Prize funds are most appropriate when can be recreated by emulating imported �nal objectives can be well defined but the goods, copying lapsed patents, or studying technologies are unknown. They may be and inventing around patents that are still particularly relevant for promoting more in effect. Technology and skill transfer also radical green innovations likely to be fos- occur through the purchase of manufacturing tered not through the traditional linear equipment on global markets, because sup- R&D approach but rather through out- pliers usually provide worker training with of-the-box new knowledge, involving their equipment. This channel was critical in co-creation and codesign by scientists, the ability of Chinese producers to become engineers, entrepreneurs, producers, and world leaders in PV panel production (de la users from different disciplines. Tour and others 2011). • Advance market commitments work best Other underused policies to boost access when key characteristics of the desired to existing technologies include patent buy- technology are known and can be speci- outs, compulsory licenses, patent pools, and fied in a contract, typically for fairly open source approaches. A patent buy-out homogeneous technologies rather than increases access to existing or future products the more differentiated ones required for that already bene�t from adequate innova- green growth. Although to date they have tion incentives. Making it easier for countries been used to provide affordable access to to issue compulsory licenses under appro- health care in low-income countries, they priate circumstances can help ensure more may help stimulate innovations and access affordable access to patented green innova- to a few affordable green solutions—such tions by poorer households in low-income as a nutrient-forti�ed staple food crop or countries.10 improved storage technologies in con- Patent pools provide a one-stop voluntary texts of land and water scarcity, climate licensing service that combines multiple pat- change, and declining crop yields. ents and licenses them, with patent holders getting royalties on the sales of adapted, more Promoting catch-up innovation: affordable products, and generic manufac- Facilitating technology access and turers getting access to broader markets. An stimulating technology adoption example is the Medicines Patent Pool, funded Promoting green growth in developing by the international drug-purchasing facility countries is typically more about catch-up UNITAID, which increases access to HIV innovation and the diffusion and adaptation medicines in developing countries. In open of already-existing technologies than about source development, a body of original infor- frontier innovation. Relevant policies need mation is made available for anyone to use. to facilitate access to existing technologies, Usually, any party using the original material as well as stimulate their uptake. must agree to make its enhancements publicly Policies to facilitate access to green tech- available. Open source projects are inherently nologies. The best way to facilitate access to royalty free. Both of these approaches could green technologies is through openness to be used for neglected seeds for drought-prone, international trade, foreign direct investment, saline environments, or other green solutions technology licensing, worker migration, and for lower-income countries. other forms of global connectedness. Many However, and perhaps most impor- green technologies are embodied in technol- tant, countries should avoid imposing tar- ogy licensing agreements and in equipment, iffs on renewable energy technologies and GREEN INNOVATION AND INDUSTRIAL POLICIES 79 subsidizing fossil fuels, given that most stud- studies report that well- designed environ- ies show that these tools do more than pat- mental regulations stimulate innovation by ent protection to limit the transfer of clean �rms, as measured by R&D spending or pat- technologies (Barton 2007 and Copenhagen ents. That said, the induced innovation may Economics 2009, as cited in Hall and Hel- not be enough to fully overcome the added mers 2010). A World Bank (2008) study costs of regulation (Ambec and others 2011). finds that eliminating tariff and nontariff As for designing environmental regulations, barriers in the top 18 developing countries studies emphasize the need for stability, pre- ranked by greenhouse gas emissions would dictability, and a focus on end results rather increase imports by 63 percent for energy- than means—allowing firms to choose the ef�cient lighting, 23 percent for wind power most cost-effective approach to meet the end generation, 14 percent for solar power gen- result. eration, and 4.6 percent for clean coal Voluntary sustainability standards for technologies.11 products and processes can help local � rms Policies to stimulate adoption of green upgrade environmental practices, a form of technologies. Green technologies are often catch-up innovation for business practices. more costly for firms to adopt and are not Roundtables and other multi-stakeholder ini- always immediately more attractive to end- tiatives provide new ways to manage natural use customers. When feasible, ensuring that resources more sustainably and efficiently. prices reflect the environmental external- The best-known are international initiatives ity and removing subsidies that favor brown that group together producers, processors, technologies are the best tools with which to traders, and other actors in a commodity’s encourage the adoption and spread of green supply chain with banks and civil society innovation. groups concerned about the harmful impacts When prices cannot be adjusted, demand- of agriculture and aquaculture expansion. pull technology-deployment innovation They aim at building consensus and setting policies (standards, regulations, public pro- voluntary standards on what constitutes curement) are needed. Demand-side policies responsible production and processing, along include guaranteed feed-in tariffs for renewa- with promoting proven management practices bles, taxes and tradable permits for emissions to reach the set targets. Linking local � rms pollution, tax credits and rebates for consum- to the global value chains of multinational ers of new technologies (compact fluorescent corporations that have adopted sustainability light bulbs), comparison labeling (to inform standards helps leverage international market consumers about the relative efficiency of pressures (box 3.7). products), endorsement labeling (“CFC– Finally, a better financial infrastructure free�), government regulations (limits to pol- could significantly boost green technology luting emissions from industrial plants), and absorption. In a study on adopting ef�cient industry-driven standards (home and of�ce stoves, small biogas plants, and efficient building insulation). In contrast with radi- tobacco barns for commercial farmers in cal innovation, demand-side policies appear Malawi, Rwanda, and Tanzania, financing to be effective in spurring �rms to introduce emerged as the main stumbling block for all incremental environmental innovations and projects because of high start-up costs (Barry adopt existing technologies. and others 2011). A study of low-income Indeed, European Union surveys show countries �nds that higher �nancial interme- that firms in most countries identify exist- diation signi�cantly helps non-hydroelectric ing or future environmental regulations, fol- renewable energy generation per capita, lowed by market demand from customers, because investment in renewable energy is as the main driver behind adopting incre- constrained in environments where access mental processes (Dutz and Sharma 2012). to long-term loans is limited (Brunschweiler In high-income countries as a whole, most 2010). Regarding China, a study cites access 80 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 3.7 Voluntary standards support the sustainable management of South African deep-sea �shing and Indonesian palm oil A highly visible and credible certi�cation that deep-sea added potential reputation risk issues, affecting the hake �shing was sustainably managed by the interna- availability and pricing of Bank � nancing. Thanks to tional nongovernmental standards organization (the guidelines issued by the Roundtable on Sustainable Marine Stewardship Council) constrained local regu- Palm Oil (RSPO)—supported by the Indonesia Palm lators in South Africa from allowing excessive new Oil Producers Association, Unilever, the Hong Kong entry of �shers, which would have depleted stocks. and Shanghai Banking Corporation, the World Wild- It also led to restructuring of the equity structures life Federation, Oxfam, the International Finance of companies to meet the country’s Black Economic Corporation, and other key members—the share of Empowerment goals. RSPO-certi� ed palm oil has risen to 11 percent of For palm oil there was no comprehensive, the total market. To raise this share to the next level, agreed-upon sustainability standard that producers broader government support in the consuming coun- could adopt, despite the crop’s impact on deforesta- tries is needed to complement achievements driven tion and biodiversity loss. On top of environmental by consumer activism. and social risks, this uncertainty raised the cost of Source: Levy and others 2011; IFC 2010; RSPO 2012. World Bank loan preparation and monitoring and to � nancial credit and quality of after-sales role in the rise of Japan and other Asian service as key barriers to adopting solar home countries (Chang 2006); others consider this systems (D’Agostino and others 2011). And a catch-up a consequence of large investments study on Europe’s reconstruction after World (and a catch-up in capital intensity) in coun- War II emphasizes that the largely bank- tries with high levels of education and insti- based, relationship-based � nancial systems tutional capacity (Krugman 1994). Whatever provided vital support for lower-risk technol- the case, it is critical to not blindly apply the ogy absorption by �rms (Wolf 2011). lessons from East Asia to countries with very different characteristics, including low educa- tion levels and weaker institutions. Green industrial policies: Whether even Asia’s industrial policies Ensuring that the standard would have passed a cost-benefit analysis caveats apply is unclear (Harrison and Rodríguez-Clare Many countries include green industrial pol- 2009; Noland and Pack 2003). But because icies that target industries, � rms, or technol- green industrial policies offer environmental ogy-speci� c innovation and production in benefits, they could be desirable even with their environmental policy mix, from feed-in no net positive impact on growth or job cre- tariffs for PV solar energy to tax breaks for ation. For instance, whether or not Brazil’s innovative � rms in speci� c environmental ethanol policy accelerated economic growth industries and green procurement (box 3.8). or created jobs, there is little doubt that it But given that this approach is vulnerable to led to the creation of a dynamic biofuel sec- powerful lobbies, rent-seeking behavior, and tor that would, in the absence of that policy, costly mistakes caused by information asym- probably not exist (or would at least be much metries, there is no consensus on whether it smaller; Karp and Stevenson 2012). For their is desirable. part, the biofuel policies of Europe and the Moreover, while industrial policies can United States can be considered examples of transform an economy’s structure, the debate green industrial policies that failed to gener- over whether they are effective instruments ate even an environmental benefit, as they for accelerating growth continues. Some are generally considered to have harmed the argue that industrial policies played a key environment. GREEN INNOVATION AND INDUSTRIAL POLICIES 81 BOX 3.8 The role of green procurement When governments look for ways to influence the similar products will also be educated to use greener economy to achieve greener growth, public pro- products. In addition, the dynamic market develop- curement stands out as a viable tool. For this rea- ment may lead to signi�cant economic competitive- son, both industrial and developing countries are ness in such technological domains. For instance, a now pursuing green public procurement. In recent French company that invested in R&D to develop years many countries—Brazil, China, the Republic an environment-friendly paint for public road signs of Korea, Turkey—have implemented green initia- also developed other paint products that now lead tives to protect the environment and mitigate emis- the market (OECD 2007). sions (OECD 2010; Thomson and Jackson 2007). Governments can take advantage of standard- Green procurement is estimated to have accounted raising demonstration effects and the provision of for 6 percent (Korea) to 60 percent (Sweden) of total a guaranteed demand to foster markets of green public procurement in 2005 (OECD 2007). products, change technological standards, generate The preferences of governments for green prod- green jobs, adapt public assets (such as buildings ucts in the early stages can help � rms reduce produc- and infrastructure), and take a lead in educating tion costs. They can also have dynamic effects in rel- consumers and � rms to engage in more sustainable evant markets. New companies can be motivated to consumption and production. From a global welfare enter the market, leading to further market develop- and climate change perspective, such procurement ment. If the market evolves rapidly, private users of should not discriminate against foreign suppliers. Whether green environmental policies are standard market failures that hamper new desirable, many countries, mostly middle and industries (such as increasing returns, coordi- high income, are actively engaged in policies nation failures, and underdeveloped �nancial that support speci�c industries. Some of these markets). policies aim to provide direct environmental Even if prices were to fully reflect the bene�ts (biofuel production in Brazil, concen- environmental externality, current and new trated solar power in Morocco). Others aim green industries would face many chal- to produce related upstream goods and serv- lenges. Pricing policies are politically vul- ices (solar PV panels in China, high-speed nerable, and the lack of credible long-term trains in Europe). It is worth exploring the commitments and regulatory uncertainty motivations for green industrial policies and discourages the private sector from making the lessons from past experience with stand- long-term investments in green industries. ard industrial policies. Witness the European carbon emission trading scheme, which effectively created a carbon price but did little for environmen- What role for green industrial policies? tal innovation (Borghesi and others 2012; Green industrial policies can be implemented Rogge and others 2011). When long-term for multiple reasons. All these reasons are innovation, deployment, and production linked to different market failure or policy scale-up is needed, pricing policies may need objectives. to be complemented by innovation and more Compensate for the uncertainty in future targeted industrial policies (Vogt-Schilb and environmental policy and promote new Hallegatte 2011), as with PV solar energy in industries and technologies. Most countries Germany and China (box 3.9). that adopt green industrial policies claim to Level the playing � eld. The risk of pol- do so to take advantage of a latent compara- lution leakage from countries with strict tive advantage, create jobs, and pursue new environmental regulations to laxer coun- sources of growth. The underlying argument tries has been used to justify green trade- is that prices are not enough to address the based industrial policies.12 The fear is that 82 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 3.9 Comparison of photovoltaic support policies in Germany and China Germany and China are emerging as leaders in the China nor Germany links investment support to global photovoltaic (PV) market, thanks to devel- speci�c innovation requirements. oping a dual industry composed of vertically inte- Striking the right balance among the three forms grated firms and segment specialists (Grau and of support is critical for reducing costs. But support others 2011). Public support aims to trigger cost schemes are further complicated by information reductions through economies of scale and addi- asymmetries between the industry and the govern- tional technological innovation. It is directed at ment and by market power exerted by different three activities: actors in the industry. • Direct R&D to support innovation. Both China Has public support made a big difference? There and Germany provide support to R&D, especially is little doubt that it helped achieve the large reduc- to promote radical innovation that is not the tion in solar panel costs, which yielded global bene- usual focus of the private sector. But this support �ts. But there are growing concerns that this support remains limited, with only 1 percent (in China) is increasingly focused on the interests of domestic and 3 percent (in Germany) of the total support producers rather than global welfare objectives. these countries provide to PV panel production In Germany the issue is whether hefty feed-in (Grau and others 2011). tariffs mainly benefit Chinese PV manufacturers • Standard environmental policies to support who export to Germany. But Chinese producers are deployment. Both China and Germany are using concentrated in the downstream segments of the PV feed-in tariffs to support the large-scale deploy- panel supply chain, which are highly labor-intensive ment of PV modules. The German example points and are where the country has a comparative advan- to the inherent risks resulting from a stable, long- tage (de la Tour and others 2011). These down- term commitment to buy electricity from PV. stream segments have limited margins and small When the price of PV modules dropped in 2009, profits compared with upstream segments, such the sudden surge in pro�tability led to a rush to as silicon production, where industrial countries, install PV modules, inflating the total cost of the including Germany, still dominate. (Germany also program and jeopardizing its existence. manufactures some of the machinery used in China • Investment to support manufacturing plants. for PV production.) In China the issue is whether Investment to support manufacturing plants the policy leads to the import of mature technology, embraces direct subsidies, reduced taxes, public thus preventing the takeoff of an internal innovation guarantees, and reduced-interest loans. Neither capacity for more radical technology changes. stricter environmental regulations in one competitiveness remains limited. Quirion country may cause “dirty� industries to and Hourcade (2004) calculate that in the move to pollution havens rather than adopt European Union, a €20-per-ton CO2 tax cleaner processes. There is little support for has a lower impact on marginal cost than this argument in the current context. Pollu- interannual exchange rate variations, even tion abatement costs represent only a small in energy-intensive industries and without fraction of production costs for most indus- tax revenue recycling. Econometric studies tries. And while environmental regulation found no negative impact of the EU Emis- may cause � rms to move from a particular sions Trading System (ETS) on net imports location, the destination location chosen in the aluminum, steel, and cement indus- likely has other draws (skilled labor, good tries (Ellerman and others 2010; Quirion business environment, and a well-developed 2011; Sartor 2012). Anger and Oberndor- � nancial sector). fer (2008) reach the same conclusion on And studies show that the impact of German � rms and the EU ETS. Panel data current environmental regulations on � rm from the U.K. production census suggest GREEN INNOVATION AND INDUSTRIAL POLICIES 83 that the climate change levy (an energy tax) industrial policies requires that the govern- had a signi� cant impact on energy inten- ment be able to identify and analyze market sity but no detectable effects on economic failures (Pack and Saggi 2006). To do so, the performance or on plant exit (Martin and government may need information on which others 2009). firms and industries generate knowledge Empirical evidence fails to support the spillovers or bene�t from economies of scale notion of “pollution havens� (Copeland and dynamics effects (for example, learning 2012), though this could change if environ- by doing). Without a clear understanding of mental policies, such as carbon taxes, become the market failures that need to be corrected, much stricter. Should this happen, trade poli- innovation and industrial policies will be cies may become an important complement inef�cient or detrimental, particularly if they to environmental policies: speci�c trade pol- are used as a substitute for an enabling busi- icies—from bilateral and multilateral agree- ness environment. ments on environmental regulation to border Second, horizontal (or output-based) poli- tax adjustments, with or without revenue cies should be favored over vertical policies transfers to the exporting country—can help (“picking winners� or at least the winning level the competitiveness playing �eld. technology) when possible. Vertical policies Smooth the transition. Countries may opt should be contemplated only when technolo- to use industrial policies to support ailing gies or solutions have been demonstrated in industries to facilitate the political economy other contexts or are justi�ed by industry or of a green transition. Japan supported declin- technology-speci�c characteristics. ing traditional industries to make the tran- But applying this recommendation to sition toward high-productivity, high-skill green growth policies may be challenging. industries more acceptable for the popula- For example, absolute technology neutral- tion. In the same manner a green strategy ity hardly applies as a guiding principle of may need to include some transitional sup- climate policy (Azar and Sanden 2011). An port to (declining) energy-intensive indus- example is feed-in tariffs (payments of a tries. This component of the green growth cost-based rate to energy producers for the package can be a requirement for its political electricity they generate from renewable acceptability, despite its cost. The aim of such resources), which can be designed to offer support would be to smooth the transition, the same premium for any low-carbon elec- help businesses adjust their production tech- tricity, thereby freeing electricity producers nologies, and help workers adapt by moving to choose the technology. But in the pres- to other industries—while ensuring that any ence of learning-by-doing, a higher feed-in public support remains transitory, with clear tariff may be desirable for the technology sunset clauses. whose potential is estimated to be larger (del Rio Gonzalez 2008; Johnstone and oth- ers 2010). Heeding the lessons of the past In the early 2000s, advocates of feed-in The desirability of innovation and industrial tariffs to support PV electricity production policies—green or not—cannot be assessed (rather than other carbon-free technologies, without analyzing a country’s economic sit- such as wind power) pointed to the large uation, the bene�ts it can expect from these potential of this technology, its fairly high policies, and its ability to avoid capture by initial cost, and the improvements expected vested interests. Experiences around the from learning-by-doing, which made it world with these policies show that the fol- unlikely to be picked up under horizontal lowing six lessons are key. support to any carbon-free electricity produc- First, the relevant policy intervention tion technology. depends on what market failure needs Fortunately, picking winning technologies addressing (Baldwin 1969). Designing may be less risky for developing countries 84 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T implementing green growth, as they may be business fails. One option is to make sup- able to choose environmental technologies port conditional on some market test. East already developed and tested in high-income Asian countries used export competitive- countries. This fact may partly explain why ness, an indicator dif�cult to manipulate by developing countries adopt environmental local � rms. They were fairly ruthless in ter- regulations at earlier stages of development minating support to underperformers and and at lower cost than developed countries made continued protection in the domestic (Lovely and Popp 2011). Examples include market contingent on export performance technologies with large potential for econo- (World Bank 1993). mies of scale (such as solar PV) and technolo- Subjecting green policies to a market gies broadly used in industrial countries (such test is more challenging than with stand- as low-sulfur fuels or wastewater treatment ard industrial policies (Karp and Stevenson technologies). Technology support may also 2012). When the market does not price the be less risky when a latent (that is, future environmental externality—that is, in the rather than current) comparative advantage absence of complementary price policies— can be observed in an objective manner—for a market test cannot be used to decide instance, renewable energies that depend on whether the supported technology is the natural endowments, such as the potential appropriate one. For instance, R&D sub- for solar energy in North Africa and hydro- sidies or feed-in tariffs that help the solar power in Central Africa. panel industry reach scale and technology Third, the desirability of innovation and maturity may need to be permanent to make industrial policies depends on the balance the industry competitive in the absence of a between market failure and government carbon price. The pro�tability of the low- failure. These policies need strong institu- sulfur refining industry will depend on tions, because they are vulnerable to capture permanent subsidies in the absence of reg- and rent seeking and to inefficient micro- ulations on vehicle sulfur emissions. Con- management of the innovation and invest- trary to classical industrial policies, which ment process (Laffont 1999; Rodrik 2005). are supposed to be temporary because they In climate policy, rent-seeking behavior is correct temporary market failures (such as likely to influence policies even in countries increasing returns to scale), green industrial with high institutional capacity and appro- policies may need to be permanent if they priate “checks and balances� (Anthoff and are supposed to correct permanent market Hahn 2010; Helm 2010). Neven and Röller failures (such as an environmental exter- (2000) identify factors that make such prob- nality). To avoid this issue it is preferable lems more likely: sharply partisan political to use price-based instruments to correct systems, weak governments, and absence of permanent environmental externalities and transparency. But rent capture remains pos- industrial policies to cope with transient sible even in the most efficient, balanced, externalities. and transparent country, because industrial Fifth, the benefits from innovation and lobbies are powerful actors in any economy industrial policies vary depending on the (box 3.10). scale of assessment. When these policies Fourth, successfully using innovation make it possible to create a domestic industry and industrial policies requires the capacity with signi�cant market share, local bene�ts to remove support when it is no longer jus- can be large in terms of jobs and income. But ti� ed, especially if one technology proves the assessment can be completely different at less promising than expected. Regardless the global scale if market shares are gained of their ability to “pick the winner,� there thanks to public support at the expense of are plenty of political economy reasons more ef�cient foreign producers. The desir- to explain why governments find it diffi- ability of these policies should be evaluated cult to interrupt support when a project or in view of trade-offs, especially if ambitious GREEN INNOVATION AND INDUSTRIAL POLICIES 85 BOX 3.10 Lessons from a “green� industrial policy: U.S. biofuels In recent decades, concerns about national energy In the United States the corn-based ethanol tax security, dwindling reserves of easily recoverable credit has been complemented by an import tariff petroleum (and oil price hikes), and health and on all sources of ethanol, with the tax credit work- safety have prompted many industrial countries to ing with federally mandated blending minimums to look for renewable energy alternatives, including ensure a domestic market for ethanol. U.S. ethanol biofuels. The U.S. biofuels program offers useful subsidies are estimated to have cost taxpayers $6 bil- lessons on green industrial policies—two of which lion in 2009 (Karp and Stevenson 2012). They likely appear particularly relevant for developing-country imposed signi�cant costs on developing-country sup- policy makers. pliers that are more ef�cient—such as Brazil, which First, biofuel industrial policies have mixed con- uses sugar cane as a feedstock (though in 2009/10, sequences for competition among technologies. The Brazil imported small amounts of ethanol from the relationship between � rst-generation (ethanol, pri- United States due to high food demand for sugar marily from corn and sugar) and second-generation and competing crops worldwide). The subsidies (or cellulosic) biofuels, which are being developed to sharply pushed up corn prices, though part of that prevent higher food prices and land use changes, has increase could have been avoided if the U.S. market long been viewed as a cooperative process. By devel- had been open. oping an infrastructure for handling large volumes The phasing out of the U.S. tax credit (and tariff) of biomass and constraining fuel re� ners to blend at the end of 2011 marked the end of the taxpayer’s increasing quantities of biofuels in fossil fuels, pro- support to biofuels. But the support by the consumer ducers of � rst-generation biofuels would naturally still remains, through the blending requirement of pave the way for a new generation of biofuels. But increasing amounts of ethanol. What is worrisome a recent study suggests that � rst-generation biofuels is that the consumption mandates appear far more would be a tough competitor for the nascent indus- difficult to reverse than direct subsidies—which try of next-generation biofuels (Babcock and others were subject to annual review by legislative bodies 2011). And the dif�culty of the nascent technology is in the United States and in most European Union heightened by the fact that “declining industries are member states. With consumption mandates, biofuel generally more successful in forming lobby groups policies are less susceptible to public � nance pres- and securing policy concessions from governments� sure. Although the amounts at stake are substantial, (Damania 2002). the fact that the burden is spread across millions of Second, the reversibility of a policy (and thus consumers reduces the political pressure to relieve the risk from capture) depends on the instrument it. Indeed, substantial coordination would be needed used. Producers of biofuels used to be supported on the consumer side to stand up against the man- through subsidies (or, equivalently, tax breaks). dates if warranted from a cost-bene�t perspective. policies in a few countries lead to escalating In sum, a balanced view of costs, potential support globally, beyond what is justi�ed by bene�ts, side-effects, and risks is needed to market failures. analyze the desirability of green innovation Sixth, green growth is about synergies and industrial policies. The fact that these between economic growth and environmen- policies have influenced the structure of sev- tal protection. And more targeted innova- eral economies suggests that they are options tion and industrial policies represent a way for transforming economies and bringing to capture these synergies. Indeed, if and them toward more environment-friendly where these policies can promote growth patterns. But the potential for costly failure cost- effectively and provide environmental and waste of scarce public resources always bene�ts, it is possible that they can be devel- needs to be factored into any policy decision. oped to generate synergies between economic In the following three chapters, we explore and environmental objectives. the three key inputs in a greener production 86 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T function—human, natural, and physical participant generated a project with a net capital—beginning with labor markets and present value of more than $150,000, saved whether green growth creates jobs. 1,900 cubic meters of water and 42,000 Kwh per year of electricity a year, reduced CO2 emissions by 61 tons a year, and cut waste Notes disposal by 1,455 tons. 7. Chapter 4 addresses the labor market–related 1. This section is based on Dutz and Sharma questions concerning skills. (2012), a background paper produced for 8. See chapter 4 of Zhang and others (2009) for this report. an overview and recommendations of policies 2. Indicators of technological sophistication to strengthen the ecosystem for the venture (R&D personnel per capita) as well as the scale capital industry in China, and see chapter 7 of the R&D sector (total R&D personnel) were of Dutz (2007) for India. considered in making this distinction. 9. Regression results (based on comprehensive 3. Hausmann and Klinger (2006) show that as deal-level data on high-growth �nancing and countries change their export mix, there is enterprises seeking investment in the clean- a strong tendency to move toward related tech sector over 2005–10 in 26 countries goods rather than to goods that are farther including Brazil, China, the Czech Republic, away, where “relatedness� or “proximity� of and India) suggest that deployment policies products is de�ned at the global level. such as feed-in tariffs and tradable certi�cates, 4. See Popp (2012), who highlights the work of government R&D, and �rm-level patenting Lewis (2007) documenting how both coun- are associated with higher levels of investment tries went from having no wind turbine man- in clean-tech industries than short-term �scal ufacturing capacity to having almost com- policies such as tax incentives and rebates. plete local production in fewer than 10 years. No signi�cant correlation is found between Sauter and Watson (2008) highlight this as a public investment loans or public �nancing case study of “environmental leapfrogging,� of venture capital and the amount of private explaining how the adoption of cutting-edge �nancing of innovative ventures (Criscuolo technologies was facilitated by the creation of and Menon 2012). learning networks. 10. Henry and Stiglitz (2010) document how 5. See Popp (2012), who highlights interna- the United States used the threat of a com- tional mobility of workers as a more impor- pulsory license to manufacture Cipro dur- tant source of information than foreign direct ing the anthrax scare following September investment or licensing, and de la Tour and 11, 2001. others (2011) for the underlying analysis. 11. The assessment is based on �rst-round 6. The initiative, led by the Commission for approximations rather than full general equi- Environmental Cooperation, established by librium effects. the North American Free Trade Agreement, 12. This is a different issue from the rise in included the environmental authority of imported emissions to high-income countries the state of Queretaro and the Global from developing countries, which is associ- Environmental Management Initiative, a ated with their general deindustrialization. nonpro�t organization of leading U.S. mul- In 2008, China emitted about 1,400 MtCO2 tinational corporations focused on envi- through its production of exported goods; ronmental sustainability. 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Nabeshima, and S. Yamashita. in C hin a. Di rec tions i n Development. 2008. Growing Industrial Clusters in Asia: Washington, DC: World Bank. Serendipity and Science. Washington, DC: World Bank. Human Capital: Implications of Green Growth Policies for Labor 4 Markets and Job Creation Key Messages • Green growth cannot substitute for good • To smooth the impacts on labor markets of growth policies, and employment is no the transition to green growth, policy mak- exception: shortcomings in labor markets ers need to tackle potential skill shortages will not disappear with the adoption of envi- and impediments to worker mobility—both ronmental policies. of which have constituted barriers to other • But even if green jobs will not be a panacea, types of economic adjustment, such as trade environmental regulation need not kill jobs liberalization. either, and the net balance can be positive. F or many countries the promise of new the main barriers to pursuing green growth. sources of growth and job creation is They worry that tightening environmental what lies behind the attractiveness of policies could lead to industries relocating green growth. They look at Brazil, China, in countries with laxer environmental poli- Denmark, India, and Japan—world leaders cies (so-called “pollution havens�)—and that in exports of green products, who created these policies will lead to trade wars. entirely new industries in wind, solar, and Yet, to some extent, this is an old biofuels. They hear about the promised dou- debate—one that centers on the complex ble dividend of a green �scal stimulus that can relationships between environmental regu- create jobs in the short run while laying the lation and competitiveness, and the ensuing foundations for a more sustainable future. job impacts. The topic of “green jobs� is just For others the fear of diminished com- the latest round, prompted by global eco- petitiveness and job losses remains one of nomic worries. This chapter is based on Bowen (2012), except section “. . . and Learn from the Lessons of Trade Adjustment,� which draws from Porto (2012). 91 92 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T Does green growth create jobs? The sup- good growth policies. But while green growth porters argue that green policies are “a new may not be the answer to chronic unemploy- engine of growth� and “a net generator of ment and low competitiveness, fears that decent jobs� (UNEP 2011). The recent glo- environmental regulations would result in bal economic downturn triggered many pro- job losses and lower competitiveness are mis- posals for “green� �scal stimuli to promote placed—indeed, odds are that the impacts growth and job creation (Pollin and others will be quite moderate. Meanwhile, better 2008). The Organisation for Economic Co- regulations (particularly those supported by operation and Development (OECD) also training) support for R&D, and tax recycling suggested that investing in green activities has (that is, using revenues from environmental substantial potential to create jobs (OECD taxes to reduce other taxes) will help mini- 2011b). Chinese analysts estimate that meas- mize the risks posed by green growth policies ures to save energy, protect the environment, and maximize co-bene�ts. and replace polluting industries with high- tech firms would lead to the net creation of some 10 million jobs over the next 5–10 Green policies may create jobs, years, and that exports of green goods could but are no substitute for sound create some 4–8 million jobs (CCICED 2011, labor markets cited in World Bank and DRC 2012). A � rst hurdle in framing the debate is that But the critics claim that the potential there is no agreement on how to define is overestimated and that environmental “green� jobs, even among economists. This policies may actually hurt labor markets lack of de� nition matters because it compli- (Michaels and Murphy 2009; Morriss and cates the debate on the desirability of green others 2009). A recent study of South Africa policies. �nds that while developing green industries is appealing, it has little chance of succeeding unless structural problems (regulatory obsta- De�ning green jobs… cles to creating small enterprises, a lack of As “employment in ‘green’ industries� skilled workers) are addressed (World Bank Some de�nitions of green jobs are fairly nar- 2011a). Similarly, investments to promote row, including only jobs with an identi�able research and development (R&D) in green environmental focus or employment in indus- industries will do little if educational and tries (or specific projects) whose products � nancial systems produce few skilled work- are deemed to be of environmental bene�t. ers and little risk capital. This would include employment in renewable To shed light on this debate, this chapter energy, energy ef�ciency, and environmental explores the net impact of green job crea- services or in developing less carbon-intensive tion—that is, whether more jobs will be cre- products (such as building railways). ated than lost—and the relationship between For the United Nations Environment Pro- labor markets and green growth policies. It gramme (UNEP), job content, as well as the � rst discusses what exactly green jobs are, characteristics of industry goods and services, then moves to the factors that influence also matters (UNEP 2008). UNEP defines whether green growth policies lead to job green jobs as creation, and � nishes with measures needed to smooth the transition to greener growth work i n ag ricu lt u ral, ma nu fac t u r- paths for labor markets. ing, R&D, administrative, and service The key �nding is that environmental poli- activities that contribute substantially cies will lead to substantial job creation only to preserving or restoring environmental if other inefficiencies—including those of quality. Speci�cally, but not exclusively, labor markets—are tackled. In other words, this includes jobs that help to protect green growth policies are no substitute for ecosystems and biodiversity; reduce HUMAN CAPITAL 93 energy, materials, and water consumption and destroyed across the whole economy. through high-efficiency strategies; de- In effect they try to answer the question, carbonize the economy; and minimize or “What are the employment consequences altogether avoid generation of all forms of introducing green policies (such as cap of waste and pollution (UNEP 2008).1 and trade) relative to a baseline case?� This approach requires implicit or explicit eco- This de�nition takes a broad industry per- nomic modeling of the policies. spective, extending beyond employment in Some studies in this vein count only jobs narrowly de� ned environmental services. In directly created by the policies—that is, principle it embraces employment in produc- “direct� employment effects. They focus on ing any goods and services that have smaller the speci�c labor requirements of technolo- adverse environmental impacts than close gies (“bottom-up� estimates, using simple substitutes. spreadsheet-based analytical models in con- Some de� nitions focus on industries pro- junction with engineering estimates). 3 An ducing environmentally desirable outputs. important issue is the timing and duration The OECD/Eurostat de�nes the environmen- of job creation. There is a key distinction tal goods and services industry as “activities between construction, manufacture, and that produce goods and services to measure, installation—where jobs may be fairly short- prevent, limit, minimize, or correct envi- lived—and ongoing operation, maintenance, ronmental damage to water, air, and soil, as and fuel processing—where the length of well as problems related to waste, noise, and jobs depends on the durability of the relevant ecosystems. This includes technologies, prod- plant. ucts, and services that reduce environmental Other studies include both jobs created risk and minimize pollution and resources� and jobs destroyed in sectors disadvantaged (OECD 1999). For example, air and resource by green policies—that is, indirect and net pollution management would qualify. employment effects. This net concept of Using the OECD’s de� nition, green jobs employment change is crucial for evaluat- constitute a small but signi� cant share of ing the overall labor market impacts of envi- total employment—about 1.7 percent of ronmental policies. It can be done through total paid employment in Europe (European input-output tables or general equilibrium Commission 2007). That is probably a modeling. They include jobs created by the higher fraction than a global estimate along aggregate demand generated by the extra UNEP lines would suggest; as UNEP notes, direct and indirect employment (“induced� much of the documented growth in green employment effects). This approach allows jobs has so far been in developed countries. 2 jobs to be counted as green if they are cre- Employees in many jobs might find that ated by green policies, even if they are in sec- their jobs are not counted as “green� despite tors with no obvious direct relationship to the nature of the goods and services that environmental objectives (such as communi- they help produce. For example, jobs in the cation) or with only a secondary relationship car industry are excluded, even though some (such as � nancial services). It also includes may be devoted to developing low-carbon other economic feedbacks and mechanisms vehicles. triggered by environmental policies, thus hopefully capturing jobs lost owing to higher As “the employment consequence of prices and lower real wages, lower final green policies� demand, and lower investment. But many Some de� nitions of green jobs follow a dif- studies do not follow through with this ferent track, focusing on what happens netting-out process. when public policies to correct environmen- Another approach considers different time tal externalities are introduced—opening horizons—the further the time horizon, the the possibility of including jobs created more economic variables can be adjusted. 94 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T For example, a study of the impact of car- particular can generate considerable extra bon price policies on U.S. industry consid- employment: ers outcomes along four time scales (Ho and • In South Africa, a study finds that an others 2008): “energy revolution� scenario—that is, a • The very short run, where � rms cannot scenario with a strong transition toward adjust prices and pro�ts fall accordingly. renewable energy—creates 27 percent • The short run, where firms can raise more jobs than the International Energy prices to reflect the higher energy costs, Agency’s business-as-usual scenario and with a corresponding decline in sales as a 5 percent more than the growth-without- result of product or import substitution. constraints scenario (Rutovitz 2010). • The medium run, when in addition to • In India, a study finds that low-carbon the changes in output prices, the mix employment is one of the key co-bene�ts of of inputs may also change, but capital promoting the renewables sector. It notes remains in place, and economy-wide that solar power is more labor-intensive effects are considered. than wind power and better able to meet • The long run, when capital may be real- India’s requirements for small-scale, off- located and replaced with more energy- grid power. Biomass, green transport, and ef�cient technologies. public works in water and forest manage- ment are also attractive ways of achiev- It concludes that employment conse- ing both employment and environmental quences of green policies differ strongly, objectives (GCN 2010). depending on the time horizon. Short-term • In China, a study emphasizes the possi- employment losses mirror output declines ble employment losses from the planned and are substantial in energy-intensive sec- sharp reduction in the energy intensity of tors, but gains in other industries would fully Chinese industry, but notes that this could offset those losses in the longer term. be outweighed by increased employment But few studies account for labor market in renewables and—quantitatively, much rigidities and other obstacles to job creation, more important—the shift of the Chinese and yet they may impair any positive effect economy toward services and away from of green policies. As the World Bank study heavy industry (GCN 2010). on South Africa (World Bank 2011a) noted, • In Brazil, a study argues that renewable green policies cannot correct all the problems energy sources have a stronger potential holding back job creation—such as skill mis- in Brazil than is envisioned in official matches and the dualism (insider-outsider) of studies and government policies, both in the job market. Thus, the scope for green job contributing to CO2 mitigation and gen- creation is limited in the absence of parallel erating jobs (GCN 2010). economic policy changes. What is the record of green �scal stimuli on job creation in developing countries? The Evaluating the impact of green policies evidence is scant, but a few studies do show on jobs: Gross versus net job creation some job creation, with substantial variation in jobs created per dollars spent. What is the overall job creation impact of green policies in developing countries? Few • In the Republic of Korea, forest resto- studies have explicitly focused on this, and ration generated nearly eight times as those that have suffer from many defini- many jobs per dollar as the least labor- tional issues, making comparisons dif- intensive green objective, “vehicles and � cult.4 They also fail to look at economy- clean energy� (Barbier 2009). wide effects. That said, the few that do • In China, biomass spending was found exist suggest that climate-change policies to be nearly 30 times more effective in in general and renewable energy policies in generating jobs per dollar than wind HUMAN CAPITAL 95 power (UNEP 2008). That suggests that with lower capital intensities than either the focus on renewable energy and low- conventional or renewable energy—such as carbon manufacturing prevalent in stud- reforestation programs or even education ies for Europe and the United States may and health services—may be more effec- miss the opportunities for employment tive. But there may be tradeoffs between creation from changes in land manage- rapid employment creation and “green- ment and agriculture in developing coun- ness.� Road building, for example, is fairly tries, where these economic sectors are labor-intensive and can help to provide valu- fairly more important. able infrastructure, but it is not particularly • In Latin America, water network reha- green. And some sectors, such as energy, bilitation and expansion in Honduras is will not top the list for sustainable rapid job much more effective (by a factor of more creation, given that they require a long lead than 10) in creating jobs than hydro- time for replacing capital. electric schemes in Brazil, with rural And programs that yield larger employ- electri�cation in Peru falling in between ment effects tend to lead to more employment (Schwartz and others 2009). gains for largely lower skilled workers, so that the long-term growth effects are fairly small. While useful, these studies have limita- Long-term development, including sustaina- tions. They do not discuss the capital con- ble development, requires more of a focus on straints that may hamper the (public or growth-enhancing infrastructure investment, private) investments needed to create the which is not necessarily labor-intensive. green jobs. They assume people will move More analysis is needed of how global seamlessly from one sector to another and markets will affect job creation—leakages of ignore labor market rigidities. They tend to green jobs and spending to other countries focus narrowly on the energy sector when depend on endowments of skills, existing green growth options (even when limited to industry structure, the nature of the tech- climate change concerns) exist in other sec- nologies newly deployed, and the ways that tors that may be more labor-intensive. And comparative advantage is exploited (GCN they do not always distinguish between 2010). substitution (using more labor and less The last point is a useful reminder that capital, energy, and other inputs) and lower general equilibrium effects matter. Yet these productivity (using more inputs to produce are largely ignored in the green jobs litera- the same amount of output). This distinc- ture. That may be particularly misleading tion matters because capital-labor substitu- for developing countries, as the next section tion is desirable, at least for countries with discusses. excess labor supply, large unemployment, and limited access to capital; lower produc- tivity is not. The effect of green policies on A not her quest ion wor t h ask i ng is employment depends on labor market whether green spending is a good way of structure and the speci�c policy creating short-term employment during a considered crisis. The argument in favor of green � scal stimuli is that they can both create jobs and The problem with studies that discuss job lay the foundations for more sustainable markets is that they tend to either model growth. But experience suggests the need them as perfectly competitive, and thus to look across the range of possible green adapting instantly to all shocks with no works (from renewable energy to reforesta- involuntary unemployment (the neoclassi- tion) as not all are equally labor-intensive cal model)—or as having involuntary unem- and “shovel-ready.� ployment that could be cleared with a �scal To begin with, if employment creation stimulus (the Keynesian model). The � rst set is the objective, higher spending in sectors of assumptions implies that green jobs are 96 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T likely to displace as many jobs elsewhere in Indeed, underemployment can have multiple the economy. 5 The second, that there will causes, and the consequences of green poli- be no crowding out of jobs by green � scal cies will differ depending on these causes. It stimuli. thus helps to consider the implications of a Neither approach is realistic. Most wider range of theories of underemployment developing countries have surplus labor and labor market adjustment in different economies, so estimates limited to direct types of economy (box 4.1). employment creation in the green jobs literature might be less misleading for developing countries than for industrial But environmental regulation economies closer to full employment. But need not kill jobs either it is more complicated in “dual� economies A major fear being voiced in the green jobs with modern and traditional sectors or in debate is that environmental regulation— three-sector economies with a traditional needed to price externalities and encourage rural sector and both formal and informal � rms to change their production processes— urban sectors characteristic of many devel- will destroy jobs. oping countries (Harris and Todaro 1970; Mazumdar 1976). In that case the (skilled) A tale of two antithetical hypotheses: formal urban labor market is often very the “pollution haven� and “Porter� shallow and green job creations can have hypotheses crowding-out effects on other activities. So knowing how best to model how the For the past 20 years the debate on the aggregate labor market works—and, indeed, implications of environmental policies on how the macroeconomy as a whole works—is competitiveness (and jobs) has revolved crucial to properly assess overall (net) job cre- around two antithetical hypotheses: the ation. Babiker and Eckaus (2007) illustrate “pessimistic� pollution haven hypothesis, the value of the implicit or explicit macro- which contends that � rms will flee locations economic framework, showing how climate with strong environmental regulations; and policy could increase unemployment in the the “optimistic� Porter hypothesis, which presence of real wage rigidities or barriers to argues that environmental regulation will the sectoral reallocation of labor. Guivarch lead to innovation (Porter and van der Linde and others (2011) highlight that climate pol- 1995). In the latter, innovation reduces the icy costs depend signi�cantly on labor mar- cost of regulation (weak Porter hypothesis) ket rigidities and that policy cost estimates and may lead to increased competitiveness are much higher in models with imperfect and pro�tability (strong Porter hypothesis). labor markets. Overall, labor market impacts What is the latest thinking on this issue? can also be influenced by how the revenues As chapter 3 reported, there is no evidence from other environmental taxes are used, as that environmental policies have systemati- the literature on the “double dividend� from cally led to job losses because of an exodus environmental taxation shows (Fullerton and of �rms to pollution havens. Tighter environ- Metcalf 1997; Sartzetakis and Tsigaris 2007). mental regulation may cause � rms to relo- Studies tend to show that if tax revenues are cate, but they will choose locations that are used to reduce payroll tax—a tax on labor more attractive overall, as pollution abate- supply—employment will fall by less or even ment costs represent a small share of pro- increase. duction costs for most industries (Copeland The key point is that the overall effects of 2012). Factors such as availability of capital, green policies on employment depend on the exchange rates, labor abundance, location, characteristics of the economy’s labor markets institutions, and agglomeration effects are and the nature of the policy interventions, more important than environmental policy including their funding, not just the input in determining firm location and competi- requirements of rival energy technologies. tiveness. Empirical evidence from existing HUMAN CAPITAL 97 BOX 4.1 A framework to estimate the impacts of green policies on jobs How can policy makers determine if green policies the dirty sector, given that the tax raises production will create jobs? The following provides a frame- costs with the dirty technology and the price of these work to assess labor market consequences, explor- goods rises. As a result, demand for the clean substi- ing what would happen in an economy with two sec- tute good rises and employment in the clean sector tors: a clean one and a dirty one. The products are increases—imparting incentives to reduce the exter- imperfect substitutes that are produced with many nality either through new production techniques or inputs, including labor. The � rst two cases explore end-of-pipe abatement, which would boost jobs in the impact of green growth policies that focus on pollution abatement. the demand side, and the rest deal with policies that This scenario suggests that overall employment focus on the supply side. would increase when there exists a close and clean substitute produced with more labor-intensive tech- Case 1. Demand de�cit and a green stimulus nology or when abatement is feasible and more labor- In this case the economy is typified by “Keyne- intensive than dirty production (on the margin). This sian� unemployment—that is, with insuf�cient overall situation might apply to economies such as Japan’s or demand. The green policy involves a �scal stimulus the Republic of Korea’s that are well endowed with with spending focused on the clean sector. What labor skills and technology for cleaning up. would happen? Greater demand for the clean sector’s product would stimulate greater employment in the Case 4. Pollution regulation with immiserizing clean sector, in turn pushing up wages in this sector, initial conditions and thus increasing �nal demand. Increased demand This is similar to the previous case but with two in the labor market would put upward pressure on key differences: no clean substitute for the dirty wages throughout the economy, possibly causing a good, and pollution abatement is either far too slight decline in employment in the dirty sector. Over- costly or unavailable, or is highly capital intensive. all, employment would be expected to rise as long as Production and employment in the dirty sector job creation in the clean sector outweighs the (indirect) would decline, with little or no offsetting increase job losses elsewhere, facilitating a virtuous outcome. in cleaner jobs. This situation most likely applies to economies reliant on extractive industries—such as Case 2. A green paradox: demand de� cit and a artisanal mining, where pollution abatement is typi- green stimulus meet a skills de� cit cally far too costly for the small producers and there Here again we have a Keynesian economy, but is no clean substitute available for the mineral. there is a skills de�cit in the clean sector. The green policy involves a fiscal stimulus with spending Case 5. Renewable resource regulations—restore focused on the clean sector. Higher demand for the rents but not necessarily jobs clean sector’s products would feed into higher wages Here we have a classic open-access common- across the economy, because employment in the clean property resource such as a fishery. Entry occurs sector cannot expand, but overall employment levels until the payoffs from harvesting decline to zero (or would not expand much, and may even decline. Thus, to the opportunity cost). If there is a tax or restric- the green fiscal stimulus would be largely ineffec- tion on harvesting, this would lower employment but tual, generate higher wages, and create little (if any) increase resource stocks and the payoffs. Thus, while additional employment. (In an open economy the employment may decline, economic returns increase green stimulus may trigger imports, in which case it and environmental bene�ts accrue. Conversely, if the would have little impact on employment.) policy were accompanied by expenditure on ecosys- tem restoration, there would be offsetting changes in Case 3. Pollution regulation with virtuous initial employment, with ambiguous net impacts. conditions The bottom line is that the labor market conse- Now the green policy involves a pollution tax to quences of green policies depend on the policy under correct a pollution externality in the dirty sector, and consideration, technological parameters, and the there are no wage or price rigidities in the economy. state of the economy. There are cases where a given Faced with an emissions tax, the optimum response policy can create jobs, and other circumstances would be a contraction of output and an investment when it can destroy jobs. in pollution abatement. What would happen? The regulations would be expected to destroy jobs in Box text contributed by Richard Damania. 98 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T regulation or environmental taxes con� rms to evaluate the impact, giving the � rm more this result (Anger and Oberndorfer 2008; time to adapt). Ellerman and others 2010; Martin and others Thus, the overall effect of environmental 2011; Morgenstern and others 2002; Quirion regulations on jobs is likely to be limited. 2011; Sartor 2012). But this evidence is based In the United States, an econometric study mostly on existing regulations in developed of highly regulated industries � nds that the countries, and future research needs to ascer- impact of stringent environmental regulations tain whether these results extend to develop- on U.S. jobs was negligible in most cases— ing countries and to more ambitious envi- across all industries, 1.5 jobs were created per ronmental policies than have been applied to $1 million spent in additional environmental date. spending, with a standard error of 2.2 jobs For sectors intensive in natural capital— (Morgenstern and others 2002). with which many developing countries are well endowed—the pollution haven hypothe- Types of adjustment needed across sis is even less likely. After all, without sound countries environmental policies, the increased pres- sures coming from trade could rapidly deplete There is much variation across developing natural capital, and then the short-term ben- countries in the likely ease of transition to efits from increased trade would be wiped a low-carbon growth pathway. Chapter 3 out by the subsequent collapse of the resource shows that developing a comparative advan- base of the activity (Copeland 2012). tage in the production of equipment for low- The reality is that stringent environmen- carbon electricity depends on the manufac- tal provisions are essential for guaranteeing turing base of the country and on whether the long-term sustainability of the economic there are scale and learning economies in the activities (and jobs) that depend on natu- technology. Some countries have a compara- ral capital. If a natural resource base is well tive advantage in particular renewable energy managed, it can be used to create jobs (mov- sources because of natural endowments. ing up the value chain by creating a down- Brazil has the right climatic conditions and stream processing sector, for instance) and soils to give it a substantial cost advantage seize opportunities in global markets. in biofuels, though other characteristics of At the firm level, studies show that the the Brazilian economy also help, in addition impact of more stringent environmental regu- to being very well endowed in hydroelectric lation on productivity and competitiveness is potential (Kojima and Johnson 2005). modest and sometimes even positive, thanks Developing countries that produce a high to innovation (Ambec and others 2011). The level of greenhouse gas emissions per unit of large body of literature triggered by the semi- GDP face a more dif�cult challenge of struc- nal paper by Porter and van der Linde (1995) tural adjustment. They are the ones in which supports the weak version of the Porter more labor is likely to have to be reallocated hypothesis: innovation does reduce costs. from greenhouse gas–intensive activities, Further, recent studies have found an either by switching technologies within an increasing number of cases where environ- industry or by moving labor between indus- mental regulation had positive impacts on try sectors. Given the importance of CO2 pro�ts (Ambec and others 2011). This may be emissions from energy production, energy- due to the fact that regulators have become intensive economies will compose a large part better at designing smart regulatory policies, of this group. as well as that the models used to assess the Endowments of fossil fuels combined with effects of environmental regulation on inno- industrial development strategies that have vation and competitiveness were re� ned to favored carbon-intensive industry make a account for the lagged structure of innova- transition to low carbon much more chal- tion (essentially they wait a few more years lenging (EBRD 2011). If such economies HUMAN CAPITAL 99 impose a carbon tax, the standard economic to the coal industry—which employs many policy instrument to internalize the green- low-skill workers in developing countries— house gas externality, the relative returns to the oil and gas industries tend to have fairly different factors of production are likely to well-paid workers and a large proportion of change. The few empirical studies focusing highly quali�ed engineers and technicians. on how carbon taxation might affect factor Perhaps the most thorough study of green returns suggest that the incidence of a carbon growth and skills so far is ILO/CEDEFOP tax is likely to be regressive when emission (2011), which reports and synthesizes the abatement measures are capital-intensive, results of 21 country reviews. It notes that the requiring complementary policies (Fullerton demand for skills is being affected in three and Heutel 2007, 2010). Countries such as ways by the transition to green growth: Kazakhstan and Mongolia, with a much 1. Induced structural change across indus- larger-than-average proportion of the labor tries increases the demand for skills force in mining and energy supply, are more speci� c to expanding industries such as likely to suffer as a result of this adjustment renewable energy and reduces the demand and also from the dif�culties of reallocating for skills such as those for coal mining. displaced labor to other sectors. Chapter 3 2. Some new occupations are emerging— discusses how industrial and other sector- such as photovoltaic (PV) fitters and speci�c policies can facilitate this transition. carbon-footprint assessors—though there appear to be fairly few unique green skills. Smoothing the transition to 3. The content of many jobs in current indus- greener growth paths for the tries is changing, as companies focus on labor market achieving better energy ef�ciency, switch- Policy makers need to worry about skills ing from fossil fuel sources to renewable that can limit job creation… energy, and producing capital equipment for expanding green industries. In agri- To what extent are the skills needed in the culture, low- and no-till agriculture and labor force for greener growth being altered? reduced use of fertilizers and pesticides This matters because if the skills required will entail changes in farmers’ practices, are unavailable, that could place a major as will increased production of bio- obstacle in the way of the transition to green fuel crops and efforts to increase forest growth. cover—a development likely to have the Overall, “green restructuring� brings most pervasive effects on labor markets, with it the usual challenges to policy makers particularly in developing countries. trying to facilitate restructuring and reduce the labor market adjustment costs, includ- What is worrisome is that skill shortages ing those from a changing skill mix. Many may already be impeding the transition to of the expanding industries are likely to be green growth (box 4.2). In 2011 the OECD using new products and processes, reflecting (2011a) drew attention to widespread skill the transition to low-carbon technologies, shortages in energy-efficient construction so the generic skill requirements of many of and retrofitting, renewable energy, energy the newly created jobs are likely to be higher and resource efficiency, and environmen- than average, as they have to allow for tal services. Many countries have reported assimilation of unfamiliar tasks and work- speci�c bottlenecks, such as the shortage of ing methods and “learning-by-doing.� But skilled PV workers in Germany and the lack a larger proportion of jobs in the renewable of design engineers for smart grids in the energy sector and in energy efficiency are United Kingdom. Karp and Stevenson (2012) lower skilled than in the fossil fuel energy identify similar shortages in developing coun- sector (Pollin and others 2009). Contrary tries. In India, maintaining and operating the 100 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 4.2 Shortage of skills and inadequate training provisions can undermine green programs The problems that can arise when training provi- fitters’ deaths, and reports of fraud undermined sion is not up to the challenge of the induced struc- public con�dence, and the program was canceled in tural change are illustrated by Australia’s experience February 2010. A subsequent sample of inspections with a new Home Insulation Program introduced in revealed that nearly 30 percent of installations had February 2009 as a key part of the government’s �s- some level of de�ciency. Investigations showed that cal stimulus. low skill levels in the industry, inadequate provision The program was designed partly to generate of training, and poor management of the program jobs for lower skilled workers in the housing and were among the factors responsible. construction industries. At the start of the program The importance of competent project manage- only supervisors were required to satisfy one of three ment and national policy making in this case is a minimum competences—prior experience in the insu- reminder of the key role of higher level management lation industry, quali�cations in an approved trade, and planning skills in a policy-induced transition to or insulation-speci�c training. The program proved green growth that is likely to take sustained effort popular. At its peak, demand was running at almost and policy credibility over a long period. 2.5 times the anticipated level and some 1.1 million roofs of 2.7 million eligible were insulated. But �res, Source: Australian National Audit Office 2010. renewable energy systems deployed by the in developing the transferable skills of their Remote Village Electri�cation is complicated workforces, the lack of access for the disad- by the lack of skilled workers (IEA 2010). vantaged to time and finance for training, In 2001 China started the Township and the stickiness of relative pay rates. Electri�cation Program to bring electricity Fortunately, there is a potential for syn- to rural communities using solar PV, small ergies between green policies aimed at skill hydro, and wind. While installation appears development and growth policies aimed at to be working well, there are problems with increasing labor capital, worker education, maintenance and operation, partly because and labor productivity. Figure 4.1 shows that of a lack of quali�ed electricians. Reasons many developing countries need to increase for these reported shortages include the their enrollment in technical tertiary edu- underestimation of the growth of certain cation. Such an increase would accelerate green sectors, the general shortage of sci- growth and help with skill limitations created entists and engineers, the low reputation by green policies. and attractiveness of some sectors impor- tant for the green transition such as waste …and learn from the lessons of trade management, and a shortage of teachers adjustment and trainers in environmental service (ILO/ CEDEFOP 2011). Green growth is about transforming our Many of the skill shortages already production and consumption processes reported in connection with green growth from a dirty, environmentally unsustainable strategies appear to result from generic fail- model to a sustainable one. Like any struc- ings in education and training. And they tural transition it inevitably entails transition reflect long-standing issues such as the lack costs, which green growth policies must seek of functioning universities and research to minimize. As such, the trade literature, centers, the mismatch between students’ which has extensively documented adjust- choices of discipline and the needed skills, ment costs associated with trade liberaliza- the lack of incentives for employers to invest tion, offers interesting insights. HUMAN CAPITAL 101 Adjustment costs, whether stemming FIGURE 4.1 Many developing countries need to increase their from trade shocks or a transition to green enrollment in technical tertiary education growth, are fundamentally driven by factor (enrollment in engineering, manufacturing, and construction in tertiary immobility—sluggishness in capital or labor education as a percentage of the total population, 2009) market adjustments.6 These costs would be 1.8 zero were workers able to adjust instantly to the changing demand for skills (moving 1.6 instantly from one industry to another) and 1.4 were firms able to instantly modify their fixed capital following changes in carbon 1.2 prices or pollution standards. percent 1.0 In the real world, labor markets are slug- gish, as experience with trade liberaliza- 0.8 tion shows. Trade liberalization creates and 0.6 destroys jobs within industries. But the flow of labor across sectors—from shrinking to 0.4 expanding ones—is slow. In Brazil it took several years for workers displaced from de- 0.2 protected industries to be absorbed by sec- 0.0 tors with comparative advantages (Muendler 0 5,000 10,000 15,000 20,000 2010). In addition, large wage differences GDP per capita ($,PPP) persist among workers with similar quali�ca- Source: Authors based on UNESCO Institute for Statistics, http://stats.uis.unesco.org/unesco/ tions and status across industries, suggesting ReportFolders/ReportFolders.aspx (accessed March 18, 2012); World Bank 2011b. Note: PPP = purchasing power parity. limited mobility of workers across industries (if workers were mobile, they would switch to the highest paying industry until wages equal- ized). This “industry-effect� explains a large As for capital stocks, a shift toward fraction of wage differences across workers, greener production processes is likely to and prevails in both developed and develop- require substantial changes, as firms may ing countries, for skilled and unskilled work- need to invest in new product lines, machines, ers (Krueger and Summers 1989). and equipment. Yet, as experience with trade What does this sluggishness stem from? adjustment shows, the process may be quite Slow labor market adjustments reflect costly—for example, following Argentina’s demand-side (industries requiring specific trade reform, the required capital adjustment skills) and supply-side (worker characteris- averaged 14.5 percent of � rms’ capital stock tics) factors. Whether sector-speci�c knowl- (Bet and others 2011). Thus, the capacity of edge and training are a bigger impediment economies to adjust to green policies may be to mobility than labor market frictions (the limited by capital constraints, which could time and costs associated with search and affect labor demand. matching) depends on the extent to which Because adjustment costs are a direct func- worker experience is speci�c to each sector tion of factor immobility, efforts to increase (Cosar 2010; Dix-Carneiro 2010). And there labor or capital mobility will be critical. And appears to be significant variation in the support policies should be targeted to facili- mobility of different types of workers, with tating the transition rather than cushioning lower adjustment costs for younger workers potential losses. Simple unemployment insur- and skilled workers. The policies needed to ance tends to hamper reallocation and skill help transition may thus differ by country formation. But employment subsidies can be (depending on the nature of the adjustment) useful if made conditional on working in the or by affected worker categories (depending export-oriented (or green) sector (a form of on age, skill, and so on). industrial policy; see chapter 3). 102 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T Ultimately, the cost of the transition will the revenues from carbon pricing are used as depend on the overall economic policy frame- in a study of the potential implications of a work and the extent to which it facilitates the cap-and-trade system for the United States, emergence and growth of new sectors and which found signi�cant reductions in labor input in 29 of 35 U.S. industries without rev- �rms. So the ability to carry out and reap the enue recycling (Goettle and Fawcett 2009). bene�ts of a green growth policy will depend 6. For instance, Guivarch and others (2011) on good economic policy. model economic transaction costs due to a In sum, fears that environmental regula- climate policy with different levels of rigid- tions will lead to massive job losses or loss of ity in the labor market, �nding that mitiga- competitiveness are probably as unfounded as tion costs are much larger when labor market the hope that green jobs will single-handedly imperfections are considered. solve countries’ employment problems. That said, it is vital to invest in human capital to accelerate growth and to green growth. This References is one of the inputs to economic production. Ambec, S., M. A. Cohen, S. Elgie, and P. Lanoie. Natural capital is another critical input, and 2011. “The Porter Hypothesis at 20: Can the next chapter will look at why it is impor- Environmental Regulation Enhance Innovation tant to invest in this domain, too. and Competitiveness?� Discussion Paper 11-01, Resources for the Future, Washington, DC. Notes Anger, N., and U. Oberndorfer. 2008. “Firm 1. UNEP also includes a provision that “green Performance and Employment in the EU jobs need to be decent jobs� (UNEP 2008). Emissions Trading Scheme: An Empirical 2. At the same time developed countries are Assessment for Germany.� Energy Policy responsible for, by far, the largest share of 36: 12–22. the stock of greenhouse gases in the atmos- Australian National Audit Of�ce. 2010. “Report phere. They have also probably made a on the Home Insulation Program.� Auditor disproportionate contribution to long-lived General Report 12, 2010–11, Canberra. solid waste. So some of the green jobs reflect Babiker, M. H., and R. S. E ckaus. 20 07. the unsustainability of developed-country “Unemployment Effects of Climate Policy.� economies. Environmental Science & Policy 10: 600–9. 3. See Kammen and others (2004) and Wei and Bacon, R., and M. Kojima. 2011. “Issues in others (2010) for a review. Estimating the Employment Generated by 4. Further, studies use a range of methods, Energy Sector Activities.� Background paper reflecting the different de�nitions of green job for the World Bank Group energy sector creation discussed above, differ in coverage of strategy, World Bank, Washington, DC. countries and sectors and as to whether they Barbier, E. B. 2009. “A Global Green New Deal.� include gross or net effects and whole value Policy Brief, United Nations Environment chain effects, and make varying assumptions Programme, Geneva. concerning economic growth and business- Bet, G., I. Brambilla, and G. Porto. 2011. “Trade as-usual scenarios (Bacon and Kojima 2011; Reforms, Wages and Employment with Labor Fankhauser and others 2008; GCN 2010; Mobility and Capital Adjustment Costs.� GHK 2009; Kammen and others 2004; Wei Working Paper, Universidad Nacional de La and others 2010). The few studies of develop- Plata, Buenos Aires. ing countries conclude to signi�cant job crea- Bowen, A. 2012. “Green Growth, Green Jobs, tion, but offer no analysis of the net impact and labor Markets.� Policy Research Working (see box 4.2). Paper 5990, World Bank, Washington, DC. 5. In such models implementing carbon pricing CCICED (China Council for International will tend to both redistribute labor to low- Cooperation on Environment and Development). carbon activities and reduce overall labor 2011. “Development Mechanism and Policy supply due to the higher relative price of Innovation of China’s Green Economy.� carbon-intensive goods and services. There CCICED Task Force Report, CCICED Annual can be net job destruction, depending on how General Meeting, November 15–17. HUMAN CAPITAL 103 Copeland, B. R. 2012. “International Trade Policy.� Energ y Economics 31 (Special and Green Growth.� Paper presented at the Supplement 2): 244–53. 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Adjustment Costs.� Paper prepared for the “Seizing the Opportunity of Green Development Green Growth Knowledge Platform inaugural in China.� Supporting Report 3 for China conference, Mexico City, January 12–13. 2030: Building a Modern Harmonious, and Quirion, P. 2011. “Les quotas échangeables Creative High-Income Society. Washington, d‘émission de gaz à effet de serre: éléments DC: World Bank. Natural Capital: Managing Resources for Sustainable Growth 5 Key Messages • Sustainable management of natural capital • The elements of natural capital cannot be underlies green growth in key sectors—such regarded in isolation. Integrated landscape as agriculture, manufacturing, and energy— approaches can increase production of both and is vital for resilience and welfare gains. “regulating� and “provisioning� services of • Different resources require different types natural capital. of policies. For extractable but renewable • In some cases, growth and green outcomes— resources, policy should center on de�ning such as cleaner air, cleaner water, less solid property rights and helping �rms move up waste, and more biodiversity—will involve the value chain. For cultivated renewable tradeoffs. But not all of these tradeoffs are resources, policy should focus on innovation, inevitable: innovation, which can be sup- ef�ciency gains, sustainable intensi�cation, ported through smart subsidies, can help and “integrated landscape� approaches. minimize or eliminate some of them. M eeting peoples’ needs for food, agricultural lands; subsoil assets (oil, gas, coal, fuel, and �ber depends on sound and minerals); forests; water; �sheries; and the m a n agement of t he n at u ra l atmosphere.1 Goods and services provided by capital—agricultural lands, forests, water, natural capital underpin conventionally meas- fisheries—on which production of these ured economic growth by providing inputs to goods depends. Manufactured goods also agriculture, manufacturing, and services and depend on sustained production from natu- by increasing the productivity of agriculture ral capital, such as subsoil assets. and the reliability of infrastructure services But what exactly is natural capital? The through climate control. term refers to the stock of natural resources Complementing natural capital with that provides flows of valuable goods and human, physical, and social capital greatly services. Major types of natural capital include increases its productive capacity. But the 105 106 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T extent to which other forms of capital can The key � nding is that sustainable man- substitute for natural capital is bounded, agement of natural capital is essential for because people require water, food, and air green growth in key sectors—such as agricul- to live, and demand for water and food will ture, manufacturing, and energy—and is vital increase as population and incomes rise. for resilience and welfare gains. The type of How can better management of natu- measure (both price and nonprice) needed will ral capital lead to green growth? Sustain- vary with the type of resource being targeted: able management of capture fisheries can • For extractable but renewable resources, increase economic returns. Restoration and policy should center on defining prop- enhancement of watershed services can erty rights and helping � rms move up the enhance agricultural productivity. Conser- value chain. vation of biodiversity can generate economic • For cultivated renewable resources, policy returns through nature-based tourism and should center on innovation, efficiency bioprospecting. Rents accrued from mineral gains, sustainable intensification, and extraction can be invested in infrastructure “integrated landscape� approaches that and human capital, thus generating economic can lead to productivity gains without returns. damaging the environment.3 But achieving these outcomes is not easy, • For nonprovisioning services, efforts given the myriad market and institutional should concentrate on increasing knowl- failures at play. What is needed, therefore, edge of the economic value of these serv- is a package of measures encompassing both ices and incorporating these values in price and nonprice interventions to enhance policy decisions. the management of natural capital. Reaping • For nonrenewable resources, the focus higher economic returns from natural for- should be on minimizing environmen- ests, for example, requires aligning policies, tal damage and recovering and reinvest- incentives, capacity, and governance. Reap- ing rent optimally for broader economic ing higher returns from mineral extraction development. requires policies that increase production ef�ciency, �scal policies that are fair to both Second, the elements of natural capital the government and investors, and public cannot be regarded in isolation. Integrated expenditure policies that encourage the rein- landscape approaches can increase produc- vestment of income for broader development tion of both “regulating� and “provisioning� gains. services of natural capital—for example, by This chapter explores how better man- integrating the production of crops, trees, and aging natural capital can promote green livestock on the same land area or by manag- growth. It looks at four broad categories: ing animal waste to enhance soil fertility and (1) extractable renewable resources (capture produce energy rather than contributing to fisheries, natural forests, soil, and water); pollution. But solutions need to be adapted to (2) cultivated renewable resources (crops, local circumstances and need to include the livestock, aquaculture, and forest planta- right policy measures to provide incentives tions; (3) nonrenewable resources (oil, gas, for innovation and adoption. coal, and minerals); and (4) ecosystems Third, in some cases, growth and green that provide regulating services (watershed outcomes—such as cleaner air, cleaner water, management, climate regulating services, less solid waste, and more biodiversity—will and nature-based tourism). The � rst three involve tradeoffs. These tradeoffs are most categories provide “provisioning� services common in current cultivation practices in (those that directly produce goods and serv- agriculture, livestock, aquaculture, and plan- ices, such as food and water); the fourth tation forests. But not all of these tradeoffs embraces “nonprovisioning� services (those are inevitable: innovation, which can be sup- that provide regulating services, supporting ported through smart subsidies, can help services, and cultural services). 2 minimize or eliminate some of them. NATURAL CAPITAL 107 Extractable renewable resources: and overexploitation. Because of a shrinking De�ning property rights and resource base, the growing number of �shers moving up the value chain and �shing overcapacity, the catch per �sher and per vessel has been declining globally— Extractable renewable resources (capture despite signi�cant technological change and �sheries, natural forests, soil, and water) are investments in vessel capacity (figure 5.1). often, though not always, common property The prevalence of subsidies has reduced the resources—goods from which it is dif�cult cost of �shing below its economic cost and to exclude potential users, whose consump- has contributed both to overfishing and tion precludes consumption by others. The resource depletion and to the economic waste inability to exclude users often leads these associated with overcapacity (World Bank resources to be managed under open access and FAO 2009). property rights regimes, under which no eco- The good news is that well-managed �sh- nomic returns or rents accrue to the scarce eries could accrue rents as high as $50 bil- natural capital. Under such a scenario, more lion (World Bank and FAO 2009), which factors of production are employed in the could be used to build wealth or increase extraction of the resource than is ef�cient, productivity. Establishing property rights and more of the resource is extracted, accel- would help unlock the potential economic erating its depletion. value of � sheries. But de� ning and enforc- If property rights were established, total ing these rights remains a challenge. High- output would increase (perhaps after a lag sea capture � sheries (beyond the exclusive during which the resource regenerates itself), economic zone) are dominated by large and rents would accrue to the scarce natural commercial vessels, which are often largely resource. Some factors of production, such unregulated, overcapitalized through subsi- as labor, could, however, be worse off once dies, or both.4 property rights were established, unless For their part, inshore capture fisher- the rents were redistributed (Weitzman ies have long been used as a safety net 1974). The fact that establishment of prop- erty rights can reduce the returns to labor may explain the resistance to introducing such rights. These potential losses should FIGURE 5.1 Current �shery practices are not sustainable be weighed against enhanced productivity, (productivity of global fishing fleet, 1970–2005) which can improve overall economic welfare catch per vessel (tons); catch per unit capacity (tons) and, with a supportive policy environment, 3.5 140 can enhance opportunities for moving up number of decked vessels (millions); fleet capacity index (�shing power) the value chain (by shifting from extraction 3.0 120 alone to downstream processing), providing 2.5 new job opportunities. 100 2.0 80 Capture �sheries 1.5 60 Globally, capture �sheries added $80 billion 1.0 in gross value and provided direct and indi- 40 0.5 rect employment to more than 120 million people in 2004 (World Bank and FAO 2009). 0 20 But because �sh are mobile, marine capture 70 80 85 90 95 00 05 19 19 19 19 19 20 20 �sheries are very dif�cult to manage: only a decked vessels (number) fleet capacity index (�shing power) handful of �sheries are being managed rea- catch per vessel (tons) catch per unit capacity (tons) sonably ef�ciently. Source: World Bank and FAO 2009. The open access nature of capture �sher- Note: The fleet capacity index is the relationship between the capacity of a �shing fleet to catch a ies has led to overcapitalization, rent loss, particular quantity of �sh and the quantity of �sh it actually catches. 108 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T for the rural unemployed; for this reason, it is projected to rise to 2.6 billion cubic policy makers resist altering the status quo. meters by 2030, with most of the increase Success stories suggest that policy inter- coming from Asia and Eastern Europe ventions that directly address the job loss (FAO 2011). 5 associated with defining property rights How will this growing demand be met can make green growth politically feasi- given that natural forests are often not ble (box 5.1). In addition, moving up the well managed? The global rate of defor- value chain can help create jobs that are estation remains high, especially in tropical more productive. However, such “indus- regions, with deforestation averaging about trial� policies may not reflect the country’s 1 percent a year in Latin America and Africa comparative advantage and would need to over the 1990–2010 period. The encourag- be justi� ed on a case-by-case basis (Haus- ing news is that the rate of deforestation has mann and others 2008). been declining since 2000 (FAO 2011), with impressive declines in some key countries such as Brazil. Moreover, some areas—such as Natural (including managed) forests temperate and boreal zones and some emerg- Natural forests (including natural forests ing economies—have witnessed increases in that are actively managed) provide a range forest area through both natural forest recov- of extractable commodities (from timber ery and reforestation. Indeed, more than 80 to wood fuel to various nontimber forest percent of traded timber is produced in tem- products) and a range of ecosystem serv- perate countries. ices (from regulation of soil, water, and the A problem for the world’s forests— climate to sequestration of carbon and pro- 80 percent of which are publicly owned—is vision of habitats). In Africa alone, forests poorly defined property rights. In many account for 65 percent of the total primary developing countries, forests are often energy supply. Nontimber forest products treated as de facto open access areas. Signi�- (fruit, nuts, medicinal plants, and game) are cant progress has been made in recent years an important source of rural livelihoods. toward devolving full or partial forest man- Global demand for industrial wood was agement to local communities to deal with about 1.8 billion cubic meters in 2010, and the problems associated with open access BOX 5.1 Job creation and revenue generation from off-shore capture �sheries in Namibia Soon af ter gaining independence from South value added (although it also created considerable Africa in 1990, the new Namibian government processing overcapacity). declared an extended economic zone, established a With an average catch of 500,000–800,000 tons coherent � sheries policy, and enacted comprehen- a year (in 2003 the total catch was about 636,000 sive � sheries legislation based on long-term � shing tons), the fisheries sector’s contribution to gross rights (rights-based management) and payments domestic product rose from about 4 percent at inde- for these rights. At the same time, it focused on pendence to 10.1 percent in 1998. About 95 percent the “Namibianization� of the processing sector. of Namibia’s total �sh production is exported, yield- Before independence, all fish were exported (or ing about $375 million in foreign exchange in 2005. transshipped at sea) whole and frozen for later About 14,000 people were employed in the �sheries processing into value-added products abroad. By sector in Namibia in 2003, about half of them in investing in local processing capacity, Namibia onshore processing. created many jobs and increased the industry’s Source: http://www.fao.org/�shery/countrysector/FI-CP_NA/en. NATURAL CAPITAL 109 BOX 5.2 Reform of forest tenure in Albania and China In Albania serious degradation of the forests and pasture and forest productivity), created jobs, and pastures was observed in the early transition years. reduced poverty. To address the problem, the government reformed In China, the government has made substantial a nd decent rali zed national i nstit utions a nd investments in tree planting across the country over increased support to pasture and forest management the past 25 years to restore environmental bal- at the local level. Reforms transferred management ance and secure supplies of raw materials. It has rights of forests and pastures to local communities. also reformed forest user rights to collective forests To deal with � re management and control illegal (forests under the control of provinces and other logging, the government adopted a cross-sectoral subnational authorities). Like reforms to property approach. It provided local investment support for rights of agricultural lands, these reforms sought the restoration of watersheds, forests, and pasture to harness the productive energies of rural house- land using participatory planning approaches. This holds and communities. They amount to the larg- support included small-scale investments in the est transfer of forest wealth ever recorded. Most planting of forests and orchards in degraded lands, reforms involve provisions that offer individual the thinning and cleaning of degraded forests and households a large degree of economic autonomy pastures, and measures to control erosion and graz- and independence to manage the forests, with ing. This mix of policy, social, and natural capital households and farmers’ groups receiving certi� - investments enhanced resilience (erosion control cates of use rights. and soil restoration), yielded environmental bene�ts Source: World Bank 2010b, 2010c. (carbon sequestration), increased ef�ciency (greater regimes (box 5.2). But there have been few Where these assessments do exist, they sug- assessments of the impact of changes in gest that a number of factors limit the value forests management regimes on the rate of added from these resources. A meta-study of deforestation or the productivity of forests. 61 case studies of production of and trade in A review of 42 studies on community forest nontimber forest products in Africa, Asia, management concludes that little is known and Latin America � nds that, by and large, about the effect of community forest man- commercialization has not helped reduce agement on improving the productivity of poverty, for four reasons: forests or reducing poverty (Bowler and oth- • Resources are often collected under open ers 2010). access regimes, where overexploitation is Another problem is that assessments common, leading to rent dissipation. of the economic value of forests are rare, • Access to markets tends to be poor, limit- especially in developing countries, particu- ing economic returns. larly when it comes to valuing the economic • Fluctuations in quantity and quality make contribution of nontimber forest products. commercialization of nontimber forest These products are undervalued because, products dif�cult. in many countries, they are not reflected in • Middlemen often capture the bulk of national accounts systems, in part because added value (Belcher and others 2005). they are produced informally. For example, in Europe, where these products are eco- As with capture � sheries, increasing the nomically marginal, they were valued at $7 economic returns from natural forests sus- billion in 2010. In contrast, in Africa, where tainably requires a package of measures that they are much more important economi- includes strengthening property rights; assess- cally, they totaled only an estimated $0.5 ing the economic value of forests; and adopt- billion (FAO 2011). ing measures, such as better market access 110 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T and improved product quality, that increase 2001; López 2002) and on the way costs economic returns and reflect the full value of and bene�ts are shared. Costs, for example, the service. are often borne only by the farmer, whereas environmental bene�ts accrue to society as a whole. Soil Well-defined, transparent, and secure Soil quality reflects how well a soil per- land tenure systems are essential if farmers forms the functions of maintaining biodi- are to undertake the long-term conserva- versity and productivity, supporting plants tion that underpins agricultural production and other structures, and providing a slew and investments to improve natural capital of other nonprovisioning ecosystem serv- and productivity. In Rwanda, for example, ices. Land degradation includes deteriora- land tenure reform led to a rapid doubling tion of soil quality, vegetation, and water of investment in soil conservation, with resources (Nkonya and others 2011). It is even larger increases for plots managed a process that affects all agroecological by female farmers (Ali and others 2011). zones, potentially reducing GDP (table 5.1). Secure land tenure also leads to the devel- A quarter of the world’s agricultural land is opment of land markets, which improves estimated to be seriously degraded (Bai and overall allocative ef� ciency and the possi- others 2008). bility of using land as collateral in formal Factors leading to land degradation credit markets. That said, land registra- include poor agricultural and grazing prac- tion and tenure systems must be adapted tices and forest degradation as well as fac- to local conditions and customs (Deininger tors outside the renewable natural resource and Feder 2001). In Africa, approaches to sector, including poorly designed infra- land use rights increasingly recognize that structure and mining activities. Land deg- customary and modern systems may exist radation can, in turn, affect the operation side by side. of infrastructure installations by silting up On-site approaches, such as conserva- key facilities such as ports and hydroelectric tion agriculture, can be tapped to foster power generation facilities. natural ecological processes to increase Land users need to be given the right eco- agricultural yields and sustainability. This nomic incentives to invest in preventing or approach, which dates back to the 1930s, mitigating land degradation. The strength is based on three main principles: continu- of these incentives depends on the nature of ous minimum mechanical soil disturbance; land tenure regimes (Deininger and Feder permanent organic soil cover; and diversi�- cation of crop species grown in sequences, associations, or both (FAO 2001). Its use TABLE 5.1 Poor soil quality and land degradation hurt economic yields environmental benefits (decreased growth nutrient pollution of waterways, increased Percentage of carbon sequestration in soils), increases the Country Type of degradation GDP lost ef�ciency of production (through the use of Central African Republic Cropland and soil 1.0 lower levels of energy inputs), increases resil- Colombia Land 0.8 ience (through frequent crop rotation), and Egypt, Arab Rep. Soil 1.2 increases long-run agricultural productivity Ghana Agricultural soils, forests, and 5.3 (through decreased erosion and enhanced savanna woodlands soil structure). Local conditions should dic- Pakistan Soil salinity and erosion 1.2 tate the technology (box 5.3). Tajikistan Land, including soil erosion 3.7 Conservation agriculture tends to involve and salinity up-front costs (for new machinery necessary Source: Country Environmental Analyses conducted by the World Bank (World Bank 2005a, 2006a, 2006b, 2007c, 2008b, 2010a). for direct seeding or for tree seedlings in NATURAL CAPITAL 111 BOX 5.3 Conservation agriculture in Brazil and Zambia Conservation agriculture � rst emerged in the 1930s dues, concentrating tillage and fertilizer applica- during the severe dust storms in the United States. tion in a permanent grid of planting basins or series It has been gaining momentum worldwide since the of planting rows, completing land preparation in 1990s, when it was employed to deal with soil ero- the dry season, weeding aggressively to reduce sion crises in southern Brazil. Its use is now wide- plant competition, and intercropping or rotating spread globally. By 2007, for example, zero-tillage nitrogen-� xing legumes on up to 30 percent of cul- practices were in use on about 43 percent of arable tivated area. land in Latin America (World Bank 2007a). Many farmers also incorporate nitrogen-� xing In Brazil, conservation agriculture relies on a trees, which provide fodder and fuelwood. As of variety of technologies, depending on the region. 2010, Zambia had restored 300,000 hectares in an One approach supports a mixed livestock and crop effort that involved more than 160,000 households. system, rotating pastures with crops. The zero- Conservation agriculture practices doubled maize tillage system supplies residual nutrients for cheap yields over those achieved with conventional plow- pasture, thereby reducing pests, weeds, and diseases. ing systems, and increased cotton yields 60 percent. The most common rotations are soybeans, cotton, A recent study finds returns of $104 per hectare and maize, followed by 1–3 years of pasture. These for plots under conservation agriculture in Zam- practices have increased pasture stocking rates and bia—5.5 times the $19 per hectare of plots under have reduced soil degradation and water runoff. conventional tillage (FAO 2010a). In Zambia, five basic conservation farming technologies are being used: retaining crop resi- Source: Landers 2005; FAO 2010a; Scherr and others 2011. agroforestry systems) and short-term yield Water reductions as farm systems are changed. The sustainable management of water Bene�ts may materialize only in the medium resources is becoming more urgent than to long run. Smart subsidies and access to ever as several global trends collide. 6 In long-term � nancial markets can help cover developing countries, growing populations short-run costs and increase adoption. are increasing demand for water to pro- Focusing public support measures on duce essential commodities like food and soil fertility can yield impressive results. energy. Higher rates of urbanization fuel In Brazil—where state support of agricul- demand for water for domestic and indus- ture is just 5 percent of aggregated gross trial uses, putting stress on existing raw farm receipts compared with an average of water sources. Exacerbating matters, cli- 18 percent in Organisation for Economic mate change increases the risks of greater Co-operation and Development (OECD) water variability. countries in 2010 (OECD 2011)—the gov- One big worry is water scarcity. Develop- ernment has concentrated on investments ing countries account for 71 percent of glo- in soil fertility enhancement, land and bal water withdrawals, and their demand is water management systems, and crop and expected to increase by 27 percent by 2025 livestock breeding for varieties adapted to (from 2010). In 2010, about 44 percent of Brazil’s climate and ecosystems. Brazil’s the world population lived in areas of high public support of research and soil fertility water stress, and projections indicate that has paid off handsomely, helping transform an additional 1 billion people will be living the country from a net food importer into a in areas with severe water stress by 2030 global food exporter. (OECD 2008). And many countries in Asia 112 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T and North Africa are exhibiting moderate could increase per capita income by or extreme scarcity, which is expected to 1.5 percent a year between 2000 and increase in the future. 2060 (Fang and others 2006). Another worry is poor water quality, • Expand the use of water pricing mecha- which sets back growth because it degrades nisms to manage demand. The price of ecosystems; causes health-related diseases; most water services does not include invest- constrains economic activities (such as agri- ment, operation, and maintenance costs or culture, industrial production, and tourism); the scarcity value of the resources. Pricing reduces the value of property and assets; and could be used as an effective instrument to boosts wastewater treatment costs. For exam- ensure the resource’s optimal allocation. ple, the annual costs of poor water quality Most countries fail to use it because of the stand at 0.6 percent of GDP in Tunisia and political and social sensitivities of water 2.8 percent of GDP in the Islamic Republic of management, particularly the need to Iran (World Bank 2007b). ensure affordability for the poorest com- Yet another worry is natural hazards—the munities. Most countries allocate surface vast majority of which involve water—which and groundwater by assigning �xed quotas affect almost everyone and retard growth. to major sectors and activities. Although Kenya, for example, was hit by several dis- far from effective, these quotas have been asters over a 3-year period that undid years politically and socially acceptable. In the of economic growth (an extreme flood cost short term, they seem to be a more realis- its economy 16 percent of GDP, and extreme tic option than full cost pricing. drought 11 percent of GDP) (World Bank • Create new markets. Tradable water 2004). And when these natural hazards rights are an effective water management strike, it is the poor who suffer most, because instrument in the long term but have of their locations, low incomes, insuf�cient proven dif�cult to implement in the short infrastructure, and greater reliance on cli- term in most developing countries— mate-sensitive sectors like agriculture. partly because success depends greatly on What can policy makers do to better man- sound design and partly because it takes a age water resources? Four green growth long time to establish the necessary insti- water policies—none of them easy to design tutions (World Bank 2010d). Thus, in the or implement—can be adopted: short term, it is imperative to ensure that the proper institutional arrangements and • Correct distortions in water allocation capacities are in place. decisions. New mechanisms for allo- • Strengthen the framework for analyzing cating water resources should embrace the relationship between growth and economic principles of allocative effi- water. There have been few attempts to ciency to correct for market failures analyze and quantify the relationship and imperfections. These failures are between water and economic growth compounded by the sector’s political and development because of the com- economy and the fact that more ef�cient plex spatial and temporal dimensions water pricing boosts costs for some ele- of water and its management. There is a ments of society more than others. Deci- need to strengthen this analytical frame- sion makers need to devise ef�cient and work by examining regional differences flexible ways to allocate water among in growth within a country or group of competing quantity and quality demands countries. This information would allow for human use (energy, agriculture, � sh- more informed decision-making processes eries, and urban consumption) and eco- by providing a clear understanding of the systems health (forests and wetlands) economic tradeoffs of policies in different (World Bank 2010d). A study of China sectors (such as energy, agriculture, urban, finds that improving water allocation land use, environment, and health). NATURAL CAPITAL 113 Cultivated renewable resources: linked. There are synergies and tradeoffs Innovation, sustainable between maximizing production of food at intensi�cation, and integrated low cost and conserving the environment. landscape approaches These synergies need to be maximized and the tradeoffs managed. Food production will need to increase by Strategies in support of a green growth 75 percent between 2010 and 2050 to cope agenda for agriculture need to differentiate with rising demand caused by population between agriculture-dependent, transition- and income growth and changes in the ing, and urbanized economies and between structure of demand. As incomes increase, land and water–dependent and land and demand for higher-value horticultural and water–abundant ecosystems and countries. livestock products is likely to increase by In agriculture-dependent countries, agricul- more than direct demand for staples; demand tural productivity and inclusive growth are for livestock products will likely increase closely related: GDP growth in these sectors 85 percent between 2010 and 2030 (Foresight is estimated to bene�t the poor two to four 2011). Yet hunger remains a challenge: times as much as GDP growth in other sec- 800 million people in the world remain food tors (World Bank 2007a). Four elements may insecure. Improving agricultural productiv- be considered in a green growth strategy for ity and access to food remain core elements agriculture. of an inclusive growth agenda. Increasing productivity while improv- For cultivated renewable resources, ing land and water m an age me nt. the main policy challenges are to support Intensi�cation—producing more with less— sustainable increases in productivity and has been responsible for the dramatic rise in resource-efficient production by focusing global cereal yields in recent decades. From on innovation, increasing ef�ciency in input 1960 to 2010, rice yields rose 250 percent use, regulating pollution, and ensuring that (from 1.8 to nearly 4.5 tons per hectare smallholder farming more fully realizes its [Dobermann and others 2008; Interna- potential, especially in lower-income devel- tional Rice Research Institute data]), while oping countries. In the future, a larger share between 1965 and 2000 cultivated land of �sh and wood products is likely to come area increased by just 20 percent (from 125 from aquaculture and plantation forestry million to 150 million hectares [Khush and than from natural forests or wild � sheries, Virk 2005]). Attaining the same production further increasing the importance of sus- increase with no growth in yields would tainable management of cultivated renew- have required increasing the area planted able resources in meeting green growth with rice to 300 million hectares, reduc- objectives. ing further land availability for wetland or watershed protection functions. Extensive, poorly managed agricultural and grazing Agriculture, including livestock systems, often related to poverty and lack of Agricultural production is strongly affected access to � nance or knowledge, contribute by how natural capital—especially energy, to the land degradation and loss of soil fer- land, water, forest, marine, and coastal tility described above. Sustainable intensi�- systems—is managed. Agriculture, including cation can protect biodiversity, reduce defor- livestock, accounts for 70 percent of fresh estation, save water, and reduce greenhouse water consumption and 40 percent of land gas emissions. By integrating improved land, area. Many agricultural systems depend soil, and water management measures into heavily on fossil fuels for nitrogen fertilizer, production systems, such intensive systems crop husbandry, harvesting, transport, and can also increase productivity while main- pumping water for irrigation. Thus, food taining and even enhancing the value of and fossil fuel energy prices are closely natural capital. 114 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T In a number of agricultural systems inten- 20 percent of animals are cross-bred; dou- si�cation has been accompanied by negative bling productivity would halve greenhouse environmental consequences. Excessive and emissions per cow. poorly managed fertilizer and agrochemical But in Colombia, a mix of policies has use has polluted water bodies and soils; run- supported sustainable productivity increases off has created “dead zones� in coastal areas for livestock by encouraging landscape- that cover about 245,000 square kilometers based, mixed agro-sylvi-pastoral systems. worldwide, mostly in OECD countries.7 Agri- The aim is to introduce trees and better cultural run-off from intensive farming is the pasture in grazing lands, provide improved single greatest water polluter in China and fodder and shade, and reduce heat stress for other intensively farmed countries, including animals and soil degradation. The results are Denmark, the Netherlands, and the United impressive—including increased meat and States (Chinese National Census of Pollution milk yields as well as improved water in� l- 2010; Scheierling 1996). tration, increased bird populations, reduced Similar tradeoffs are linked to live- methane generation, and improved carbon stock production. In the United States, for capture (López 2012). This livestock policy is example, production ef�ciency in the dairy part of a broader land use policy intended to industry soared over the past 60 years. In support sustainable intensi�cation together 2007, producing 1 billion kilograms of with forest and landscape restoration. These milk required just 10 percent of the land, approaches have helped achieve “triple wins� 21 percent of the animals, 23 percent of the of increased productivity, enhanced resilience feed, and 35 percent of the water used to do to climate variability, and reduced carbon so in 1944. But there were plenty of nega- emissions (“climate-smart agriculture�). tives, including the geographical concentra- Some agricultural subsidies exacerbate the tion of livestock waste, increased water and negative effects of intensification. In land- air pollution, and reduced animal welfare. scarce, intensely farmed agricultural systems These problems could be avoided with the with already high levels of inputs, subsidiza- right mix of incentives and regulation to tion of inorganic fertilizer encourages over- protect water bodies and manage waste. use, with deleterious effects on the environ- Productivity increases, innovation, and ment (box 5.4). However, in countries with genetic improvements are a “low-hanging low-input/low-output systems, a fertilizer fruit�: in India, average milk yields are only subsidy may initially be justi�ed to increase 3.4 kilograms per day compared with the yields and enhance vegetative growth and world average of 6.3 kilograms, and only soil carbon. BOX 5.4 The use and misuse of agricultural input subsidies in India In India, fertilizer and other input subsidies and Harayana originates from overexploited aqui- contributed to rapid development of irrigation fers), requiring pumping water from ever-deeper and more intensive farming methods, resulting aquifers and salinization of aquifers in some areas. in increases in yields and food security: by 2010, In addition, the fertilizer subsidy—which cost irrigated wheat yields in some provinces averaged the government $30 billion (2 percent of GDP) in 4.5 tons per hectare, up from 1.5 tons per hec- 2008—is contributing to excessive use of nitrogen tare in 1975. However, subsidized energy is now compared with phosphorus and potassium, exacer- contributing to excess groundwater withdrawals bating nitrate pollution of rivers and aquifers. (about 75 percent of groundwater used in Punjab Source: Prince’s Charities’ International Sustainability Unit 2011. NATURAL CAPITAL 115 Increasing ef�ciency and reducing waste. proportion of household expenditure in Reducing food waste involves some of the OECD countries (11 percent in Germany, same issues encountered in increasing energy 7 percent in the United States), there is lit- ef�ciency: even where the saving potential is tle price incentive to avoid waste. However, huge, many barriers, including transactions new technologies, such as enhanced sensor costs, prevent ef�ciency-increasing investments technologies to monitor the edibility of food, from being made. The problem has been rec- could help reduce wastage. The main chal- ognized for decades, but limited progress has lenge is changing consumer behavior. been made. In both agriculture-dependent and Harnessing technology. Technological OECD countries, up to one-third of food is innovation plays a key role in green growth lost or wasted. The reasons for this waste— strategies for agriculture. It can be used to and the solutions to the problem—vary with increase input efficiency, as is the case in the settings (Foresight 2011). irrigation water management, where advances In agriculture-dependent countries, where in the use of remote sensing technologies per- food accounts for a large share of household mit estimation of crop evapo-transpiration expenditure (46 percent in Pakistan), there is (the sum of evaporation and plant transpira- little household waste, despite lack of refrig- tion to the atmosphere) on farmers’ �elds and eration at home. But 15–30 percent of food facilitate improvement of water accounting produced is lost before it reaches markets, at the regional and basin-wide levels. China because of postharvest losses caused by poor is adopting this approach with its Xinjiang storage and inef�cient transport systems. The Turpan Water Conservation Program, in problem is compounded by food quality and an arid part of the country (World Bank food safety issues, which may preclude poor 2010c). This program monitors basin-wide farmers from participating in value chains evapo-transpiration with remote sensing (Gómez and others 2011). For low-income and supports a combination of engineer- countries, the following strategies could ing, agronomic, and irrigation management reduce food waste: measures to increase agricultural productiv- ity measured in terms of evapo-transpiration. • Diffusing existing knowledge and tech- Innovation includes developing agricultural nology in storage and investing in trans- products that feature improved characteris- port infrastructure. tics, such as being drought resistant, requiring • Investing in new technologies to reduce less fertilizer, and being resistant to common postharvest waste. pests and diseases (which reduces the need • Using information and communication for pesticides)—as India is doing with better technology to improve market informa- backyard chickens (box 5.5). tion, helping match supply and demand Innovation can also be used to increase in local markets. access to weather and climate information • Investing in capacity building, infrastruc- services for farmers, which improves resil- ture, and regulatory improvements in ience, increases ef�ciency, and raises income. food quality and food safety. In Florida, a timing tool helps farmers reduce OECD countries have developed ef�cient the quantity of fungicide they use, reducing supply chains from farm to market, with low the harmful effects on the ecosystem and sav- spoilage rates and effective transport sys- ing them money (Pavan and others 2010). But tems. But about one-third of food supplied is in many developing countries and transition nevertheless wasted through losses in super- economies, investment and expenditure in markets (food thrown away because it is the classic public goods of weather and cli- not sold by the sell-by date), losses in homes mate information generation and services (food discarded before it is used), and plate is far too low (World Bank 2008a). A 2010 waste (food that is served but not consumed). study by NetHope in Kenya indicates that Because food accounts for a relatively small farmers gain access to information through a 116 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 5.5 Producing a better backyard chicken in India Kegg Farms in India has bred a robust and improved An independent assessment indicates that the dual-purpose backyard chicken. The “Kuroiler� average gross revenue generated per Kuroiler chick lays 100 –150 eggs a year (many more than the (as eggs and meat) is $3.10. With some 16 million 40 eggs a year the Desi chicken lays) and grows to chicks distributed annually, total output is about 2.5 kilograms in about half the time a Desi chicken $50 million, with a net pro�t of about $10 million. reaches 1 kilogram. The chickens typically com- Profits from the Kuroiler are significantly higher mand a premium of about Rs 60 per kilogram over than pro�ts from the Desi bird. The Kuroiler birds other broiler chickens, because the meat is darker contribute significantly to household cash flow. and more flavorsome. Women have maintained control over their chicken- Kegg Farms produces about 16 million day-old growing enterprises as the business has become more chicks a year, which it sells to 1,500 small enterprises commercial. that raise the chicks for about two weeks before inoc- The success of Kegg Farms reflects several factors. ulating them and selling them to about 6,500 bicycle Its chickens are more robust than other chickens, are salespeople, who sell them to some 800,000 farmers, better able to scavenge food, and have higher food most of them women, many located in some of the conversion ratios. The company’s business model remotest parts of the country. The turnover in sales features a devolved, rural-based distribution system of chicks is about $5 million a year, with another with in-built incentives. $5 million turnover by the thousands of small, rurally based businesses that grow and sell the chicks. Source: Isenberg 2006. range of methods, including SMS (cell phone on farms (FAO 2010b). By 2030, this �gure messaging), radio, newspapers, and extension is expected to rise to 140 million tons. Cap- of�cers.8 ture �sheries are not expected to support the Changing the structure of support policies. higher demand, leaving aquaculture to meet Changes in the structure of support policies shortfalls in supply. can also help manage potential tradeoffs. In As in the livestock industry, competition, the European Union (EU)—and to a lesser economies of scale, and economies of agglom- extent the United States—the past 20 years eration have increased productivity but have have been characterized by a shift away from pushed some systems into potentially damag- highly distortive price and quantity instru- ing environmental practices. Farms tend to ments (target prices, export subsidies, and concentrate where there is expertise, good quotas) toward lump-sum payments. The land, water resources, and marketing infra- policy change has weakened the incentives structure. This crowding has sometimes led for farmers to use polluting inputs, such as to overuse of ecosystems services, pollution, fertilizers and pesticides. Between 1991 and and massive �sh kills. Agglomeration in the 2006 fertilizer use decreased in most EU Norwegian salmon farming industry, for member countries, though it increased in new example, has reportedly improved the trans- member countries (Eurostat 2011). Moreover, fer of knowledge and increased the supply as agricultural transfers became decoupled of specialized production factors, but it has from production, they became increasingly also helped spread �sh disease (Tveteras and subject to environmental provisions.9 Battese 2006). There are two approaches to greening aquaculture. The first is zoning—that is, Aquaculture leaving adequate space between farms and In 2009, humans consumed 117 million tons interspersing a variety of aquaculture systems of �sh—almost half of which was produced (including a mixture of species at the farm NATURAL CAPITAL 117 or watershed level) and water uses between under plantation forests has increased and major centers of production. This approach because productivity has risen. Areas under would hinder disease transmission, moder- bamboo and rubber plantation are also ate negative impacts on wild �sh populations, increasingly being used to provide timber and reduce the contribution of aquaculture to products, providing an important source of water eutrophication. income for rural households. Reforestation The second approach is creating synergies and restoration of degraded woodlands also with other economic activities in the water- play a role in plantation forestry. shed. The farming of aquatic plants (such Whether plantation forests help or hurt the as seaweed) and the filter feeding of detri- environment depends on the land use systems tivorous organisms (such as mussels, clams, they replace. In China, for example, bamboo and sea cucumbers, which together represent plantations have helped control soil erosion about 40 percent of total global aquaculture) by replacing agriculture on steep slopes. But reduce nutrient loading from livestock, agri- in some provinces, where plantations have culture, and other sources. Fish production in replaced natural forests in areas not well cages or culture-based �sheries can be con- suited to bamboo, soil erosion has increased. ducted in reservoirs and irrigation systems to The Chinese government has tried to address amortize costs, improve water quality, reduce these negative environmental effects by estab- weeds, and replace wild catch where dams lishing environmental regulations, but these have destroyed indigenous �sh stocks. Mixed regulations have been resisted in some cases fish and rice production systems are wide- (Ruiz-Perez and others 2001). More recently, spread in low-lying areas and flood plains, China has supported programs with species taking advantage of synergies between the better adapted to local ecosystems (World water and land management approaches. Bank 2010c). Although dispersing �sh farms is good for Agroforestry systems, in which trees are the environment, it does raise costs, in part incorporated into the broader production because of the losses from agglomeration. landscape, are widespread in some areas. Thus, green growth strategies will require They can yield the “triple wins� of climate- practical � nancial and market incentives to smart agriculture by enhancing productivity, support spatial dispersing, technical guide- resilience, and carbon sequestration, as they lines on green technology, and government have in Kenya and the Sahel (Liniger and policies that encourage investors to avoid the others 2011). traditional practice of copying successful pro- duction/ market models and instead explore new partnerships at the watershed level. Nonprovisioning services: Creating knowledge and markets for economic valuation Plantation forests In addition to ecosystems that provide food Afforestation—the planting of forests and water (“provisioning services�) are eco- in areas that were not forested in recent systems that regulate, support, and offer times—is expected to meet an increasing cultural services (“nonprovisioning� serv- share of the demand for wood and �ber, pos- ices). This group includes nature-based tour- sibly reducing pressure on primary and nat- ism supported by biodiversity, watershed ural forests. In 2010, the global area under services, and climate-regulating services. plantation forests (forested areas arti�cially The main challenge in this area is to cre- created by planting or seeding) accounted for ate markets for these services so that they 7 percent of total forest area and 40 percent become part of the visible economy and are of industrial timber production (FAO 2011). ef�ciently provided. Plantation forests provide a growing share Another challenge is coping with the tim- of industrial timber, both because the area ing of bene�ts. Although efforts to reduce the 118 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T loss of ecosystem services are likely to boost Nature-based tourism. Nature-based growth in the near term, efforts to restore tourism (or ecotourism) is defined by the these services take a long time and are unlikely International Ecotourism Society as “respon- to do so in the near term (Vincent 2012). sible travel to natural areas that conserves the environment and sustains the well-being of local people.� It is one of the fastest- Biodiversity growing sectors in the tourism industry, Biodiversity refers to the degree of vari- with annual growth rates of 10–12 percent ation of life forms, including all animals, (TIES 2006). Nature-based tourism aims to plants, habitats, and genes. It matters combine stringent environmental provisions because genetic diversity provides the basis with the generation of local economic rev- for new breeding programs, improved enues, thus concurrently triggering positive crops, enhanced agricultural production, development impacts and incentives to con- and food security. When species become serve natural capital. extinct or habitats are threatened, biodi- Nature-based tourism can be a sig- versity is reduced; according to the Interna- ni� cant source of employment, economic tional Union for Conservation of Nature, growth, and revenue (including foreign 875 species went extinct (or extinct in the exchange) (Aylward and others 1996; wild) in 2008. Ecosystem fragmentation Wunder 2000). A study of nature-based can contribute to species loss, especially for tourism in Zambia estimates that eco- large predators, leading to a cycle of habi- tourism generated 3.1 percent of GDP in tat degradation. 2005 (agriculture contributed 6.5 percent, Tropical, temperate, and boreal forests mining 8.6 percent, and manufacturing (forests in northerly latitudes) are home to 10.6 percent) (World Bank 2007d). Poten- the vast majority of the world’s terrestrial tial tradeoffs between rural livelihoods and species. They play a major role in biodiver- nature-based tourism need to be managed sity and provide cultural, recreational, and by involving local communities. Indeed, the other supporting services, such as soil and success of a nature-based tourism initiative water conservation. For this reason, 12 per- is often linked to such involvement, which cent of the world’s forests are designated requires establishing incentives for local peo- for the conservation of biodiversity—an ple to effectively protect their community’s increase of more than 20 percent since the natural capital (box 5.6). Tourism revenues 1990s (FAO 2010a). are only a partial solution, however, as many A key reason why the world has experi- important ecosystems have only limited enced such a dramatic loss in biodiversity is appeal for tourists. the dif�culty of valuing it, given knowledge, Bioprospecting. Bioprospecting is the time, and spatial asymmetries. Building a search for genetic material from plants or road around, rather than through, a frag- animal species that can be used to develop ile ecosystem increases its cost by a known valuable pharmaceutical (or other) products. amount, payable immediately; the benefit It represents a second example of how the of protecting the ecosystem and its inherent creation of a market can provide incentives biodiversity is much more dif�cult to value to protect biodiversity, although in practice it and accrues only over time. At the global is hard to achieve (Polasky and others 2005). level, many efforts are under way to protect Returns to bioprospecting are often too low biodiversity, dating back to the 1992 Con- to provide suf�cient incentives to conserve vention on Biological Diversity. At the local biodiversity, and disputes arise over the dis- level, the incentive could come in part from tribution of rents resulting from discoveries. the economic returns that biodiversity can The Access and Bene�t Sharing provisions of generate through nature-based tourism and the Convention on Biological Diversity may bioprospecting. help alleviate this problem.10 NATURAL CAPITAL 119 BOX 5.6 Involving local communities in nature-based tourism in Indonesia The Komodo National Park is a protected marine alternative and sustainable livelihoods for the local area in the Lesser Sunda Islands of Indonesia. This communities. World Heritage Site was established in 1980 to pro- PNK, which is the exclusive manager of the ven- tect the habitat of the Komodo dragon. Since then, ture, has invested $1 million in helping people in the its goals have expanded to include protection of park develop new activities, such as woodcarving the area’s many coral species and nearly 1,000 � sh and textile weaving. It has also provided them with species. technical assistance to develop sustainable seaweed In 2005, a nonpro� t joint venture, Putri Naga farms, as well as facilitate the breeding of high-value Komodo (PNK)— comprising The Nature Con- reef �sh to substitute for threatened wild �sh. These servancy, a local tourism company, and the Inter- efforts notwithstanding, a recent evaluation report national Finance Corporation—was set up to run (Agardy and others 2011), while acknowledging the the area. The aim is to protect biodiversity and project’s positive impacts, raises concerns about the enable local communities to bene�t from the park sustainability of the results, given the difficulties in a sustainable way—through carefully managed encountered in making this public-private partner- nature-based tourism, alternative livelihoods for ship work. local people, and collaborative protection strate- Source: The Nature Conservancy website (http://www.nature.org/); Catherine gies, such as antipoaching patrols. All proceeds Cruveillier-Cassagne (personal communication). go toward stewarding biodiversity and developing Watershed services harvesting, and agricultural productivity support measures. At lower altitudes in irri- Watersheds—that is, the area of land where gated landscapes, they often include support all of the water that is under it or drains off it for improved irrigation water management, goes into the same place—provide a range of drainage, and salinity control. Such inte- ecosystem services, supplying water and hydro- grated programs have been supported to scale electric power, regulating water flows and in a number of countries and include a mix of floods,11 controlling soil erosion, and creating private and public investment measures. habitats for wildlife. Because of spatial trade- In Turkey, better land management offs—and in some cases open access regimes— practices—promoted through investments the market often underprovides these services, in watershed rehabilitation and landscape creating the need for public intervention. To restoration and reforestation programs, as correct this market failure, governments have well as profound changes in agricultural been investing directly in the restoration and policy—have led to greening in the interior enhancement of watershed services through of the country, despite declining rainfall and initiatives such as watershed development increased temperatures in these areas. How- programs. Payments for such environmental ever, it is unclear whether this “regreening� services are a recent policy innovation to cre- also led to increases in rural incomes and ate markets and provide incentives to conserve employment. or generate these services. In India, where several watershed develop- Support for investments in soil and water ment programs have been tried in semiarid conservation. Investments in soil and water rain-fed regions of the country, the verdict conservation normally include support for is still out. These programs seek to increase a mix of measures adapted to local condi- agricultural productivity by controlling tions, including landscape restoration, ero- soil erosion, preventing siltation of water sion control, grazing management, water 120 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T bodies, and improving the reliability of water the poverty reduction effects of payment pro- resources. They also hope to provide employ- grams is thin (Pattanayak and others 2010). ment opportunities and improve the availabil- In China’s Sloping Land Conversion Pro- ity of drinking water, particularly during the gram, average household incomes remained summer. Between 1996 and 2004, the gov- unchanged, although incomes increased for ernment of India spent more than $6 billion some households and decreased for others. In on watershed development (WRI 2005), but addition, increased availability of fodder to no systematic, large-scale assessment of the improve income from livestock rearing, and impact of these programs has been conducted extension services to improve agricultural (Joshi and others 2004). productivity have helped compensate house- There are nevertheless some positive holds for the loss of agricultural incomes results for integrated landscape approaches. from the conversion to forests. In Ecuador, In Kazakhstan, the Syr Darya/Northern Aral Costa Rica, and Mexico, large-scale payment Sea Control program in the lower Syr Darya for ecosystem services schemes (table 5.2) watershed supported innovations in water may have bene�ted the poor, although assess- management, combining “soft� and “hard� ments remain to be done. infrastructure solutions and flood manage- Whether the poor are helped will no ment, which helped restore river functions doubt depend on the scheme’s design. Those and the Northern Aral Sea, leading to recov- based on land diversion (from current use ery of grazing lands, ecosystems, and �sher- to a use that is more oriented toward the ies (World Bank 2011b). In Rwanda, the land provision of environmental services) are husbandry, water harvesting, and hillside likely to bene�t the landed, some of whom irrigation programs have already increased are poor— although they could also hurt yields and incomes and have reduced soil poor households, especially the landless, by losses (World Bank 2011a). reducing access to key natural resources. Payments for ecosystem services. The Those based on working lands are likely Pago por Servicios Ambientales (PSA) pro- to increase the demand for labor and may gram, implemented in Costa Rica in 1997, thereby bene�t the poor. However, schemes was one of the first schemes to pay people expected to meet poverty reduction goals to provide ecosystem services. Under this may be less effective in meeting environmen- program, private landowners and communi- tal goals (Jack and others 2008). Where the ties receive payments for conserving the for- poverty reduction impacts are likely to be est and helping protect water quality down- small, it may be better to design schemes to stream. Financing for the scheme comes from be as effective as possible in achieving envi- donor grants, earmarked taxes, and buyers ronmental goals and draw on other instru- of ecosystem services, including municipal ments to reduce poverty (Bond and Mayers utilities. Other examples of payments for 2009; Wunder 2008). ecosystem services include schemes estab- lished to eliminate or reduce animal waste Climate-regulating services and agricultural chemical residues to pro- tect water reservoirs, payments to landown- Natural capital—including the oceans, land, ers to encourage conservation, and REDD+ and their living organisms—plays a key role schemes, under which payments will be made in climate regulation.13 However, the value for carbon sequestration services and to pro- of these key regulating services is not ade- vide an incentive to reduce deforestation and quately captured through markets, and val- forest degradation.12 uing them is dif�cult. In some developing countries, policy mak- One of the most important services that for- ers have tried to design payment for ecosys- ests, soils, and water provide is storing carbon. tem services programs to bene�t the poor, but Indeed, out of the 9 gigatons (Gt), or billion the evidence on both the environmental and tons, of CO2 emissions released in 2007, the NATURAL CAPITAL 121 TABLE 5.2 Impacts of payment for ecosystem services schemes on poverty reduction Country/study Scheme Seller characteristics/results Payment Impact on income China/Bennett Sloping land Tens of millions of rural Annual in-kind payment of grain Mixed results: in Gansu, 50% (2008) conversion households; 9 million ha of (1,500–2,250 kg per ha), cash of participants lost 8% of 1999 program marginal sloping lands converted subsidy ($36 per ha), and free household net income; in from agriculture to forests, seedlings. Length of subsidy Sichuan, 30% lost 11% of net 4.92 million ha of degraded depends on type of forests. income; in Shaanxi, 7% lost lands reforested Income from forests and 33% of net income; estimates grasslands tax free do not include net present value of future income from trees and grasses Costa Rica/ Payments for Private landowners, indigenous $64 per ha per year for forest Bulk of bene�ts goes to larger Pagiola (2008) environmental communities; 270,000 ha conservation and $816 per ha for and better off farmers, but services enrolled in 2005 10 years for timber plantation no assessment of impact on (15% of which goes toward poverty reduction transactions fees) Ecuador/Wunder PROFAFOR 109 private landowners (50- ha $100–$200 per ha to cover Upfront payment of $60–$635 and Albán (2008) minimum contract size), plantation costs; 70–100% value per household (6–50% of 43 communities. of harvested wood, 100% of household expenditure); nontimber forest products income of $7–$2,481 per household from harvesting oceans absorbed about 2Gt and terrestrial • Integration of trees into agricultural pro- ecosystems about 2.7Gt. The remaining half duction systems builds climate resilience. remained in the atmosphere, increasing the However, ecosystem losses reduce their concentration of CO2 and contributing to glo- effectiveness as carbon sinks and their role bal warming (World Bank 2010d). Maintain- in adaptation. Under current management ing and, where possible, increasing the seques- regimes, land-based ecosystems in some coun- tration capacity of terrestrial, coastal, and tries contribute signi�cantly to greenhouse marine ecosystems thus plays an important gas emissions: emissions from agriculture, role in mitigating climate change. land use change, and forestry (deforestation, Healt hy ecosystems t hat sequester degradation, and �res) account for more than carbon also function better in flood and 30 percent of greenhouse gas emissions (for- erosion management, increasing the adap- ests account for about 17 percent and agricul- tive capacity of ecosystem services such as ture another 14 percent) (UNFCCC 2007). agriculture, forestry, and fisheries in the Overall, more progress has been made following ways: in recognizing the importance of terrestrial • Coastal ecosystems (including mangroves ecosystems in climate regulation than in and wetlands) reduce erosion and flood- marine ecosystems, and more progress has ing and provide spawning grounds for been made in recognizing the role of forests marine species. in climate mitigation than of soils (UNEP • Freshwater wetlands and floodplains and others 2009). Total carbon stocks in maintain water flow and quality, acting vegetation and in the top meter of soils are as floodwater reservoirs and water stor- estimated at 466Gt (vegetation) and 2,011Gt age facilities in times of drought; they (soil) (Ravindrah and Ostwald 2008; Watson also provide grazing land for livestock and others 2000). The top meter of soil is and aquatic habitats. important because annual crops depend on • Forests and vegetation stabilize slopes, its quality and organic content for growth. control erosion and flash floods, and con- For tropical forests, nearly half of the 428Gt serve soil fertility for agriculture. of carbon stocks is from above-ground 122 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T vegetation; in tropical savannahs, 80 percent or sequestered, potential tradeoffs between of the 330Gt of carbon stocks is from soil. conservation and development, the rights of Much work remains to be done to incor- indigenous people and forest-dependent com- porate agricultural and grazing land and munities, and the tradeoffs between carbon soils into climate change regimes. Only one sequestration and other ecosystem services, pilot program in Africa, the Agricultural Soil such as biodiversity. Carbon Project, has benefited from finan- Increasingly, countries are weighing cial support from carbon finance through co-bene�ts from adaptation and local income the BioCarbon Fund.14 The project supports generation as they develop REDD+ strategies increased agricultural productivity, agro- (box 5.7). However, given the modest devel- forestry, and sustainable land management opment of international carbon markets, it is practices on more than 65,000 hectares in important to manage expectations regarding western Kenya; farmers bene�t from selling potential revenues from these sources over carbon sequestered both in and above the the next few years (FAO 2010a). soil as a result of improved farming practices The role of marine ecosystems in adapta- (World Bank 2011a). The Clean Develop- tion and mitigation has received relatively ment Mechanism recognizes emissions from little attention, partly because of their com- livestock and paddy rice as major sources of plexity, their status as an international com- emission, especially in more intensive farming mon property resource, and the absence of systems in East Asia and OECD countries.15 robust mitigation metrics. Focusing first Lessons can be learned from the progress on coastal ecosystems in relatively shallow made on forests, including the work on waters, where restoration approaches are well REDD+. As countries prepare REDD+ strat- known, would be a low-risk, shorter-term egies, they must address carbon monitoring, strategy that could restore their capacity in reporting, and verification as well as chal- oxygenating coastal waters, provide nurseries lenges regarding tenure rights to carbon stored for �sh stocks, and shelter coastal settlements BOX 5.7 Scoring a triple win in Ethiopia by restoring the landscape The overexploitation of forest resources in Ethiopia has increased household revenues. Improved land has left less than 3 percent of the country’s native management has also stimulated grass growth, pro- forests untouched. In Humbo, near Ethiopia’s Great viding fodder for livestock that can be sold as an Rift Valley, deforestation threatens groundwater additional source of income. Regeneration of the reserves that provide 65,000 people with pota- native forest is expected to provide an important ble water. It has caused severe erosion, resulting habitat for many local species and reduce soil ero- in floods and mudslides. With a population that sion and flooding. depends heavily on agriculture, exacerbation of The forest now acts as a carbon sink, absorbing droughts and floods creates poverty traps for many and storing nearly 0.9 million tons of CO 2 over households, thwarting efforts to build up their assets the project life. The project is the � rst large-scale and invest in a better future. reforestation project in Africa to be registered Under the Humbo Assisted Natural Regeneration with the United Nations Framework Convention Project (implemented with the help of World Vision), on Climate Change. The operation is regarded farmer-managed regeneration of the natural forest as a model for scaling up under a broader green encourages new growth from felled tree stumps that growth and landscape restoration strategy for are still living. The regeneration of nearly 3,000 hec- Ethiopia. tares has resulted in increased production of wood and tree products, such as honey and fruit, which Source: Brown and others 2011. NATURAL CAPITAL 123 from storms while additional scienti�c work Early explanations of the resource curse is undertaken on assessing technical strate- focused on economic factors, such as the dif- gies for using oceans as potential carbon �culty of managing revenue volatility or the sinks (UNEP and others 2009). negative impact of exchange rate appreciation on the more technologically sophisticated manufacturing sector (Dutch disease). Such Nonrenewable resources: analysis left open the question of why some Promoting rent recovery and countries were able to overcome these eco- reinvestment nomic hurdles. Economic growth in countries with non- The current consensus is that the resource renewable resources is a process of extract- curse is the result of weak governance (insti- ing resources efficiently and investing tutional capital) and human capital (Gelb and revenues from these resources in other forms Grasmann 2010). Concentrated resources, of productive capital that can continue to coupled with very large investments, are easily produce income after the nonrenewable subject to capture. Instead of directing their resources are depleted. Only in this way can energies toward productive activities and the these resources be used to promote sustain- development of the institutions needed in a able development. market-oriented economy, political and eco- Some nonrenewable resources are essen- nomic elites engage in “rent seeking,� using tial for green growth. The generation of solar their proceeds to reward their supporters and power uses silicon; devices that control vehi- stifle dissent by potential reformers. During cle exhaust and re�ning processes for clean- downturns, the government � nds it dif�cult ing fuels require precious metals to act as to adjust to lower levels of spending, because catalysts; wind turbines, semiconductors used the survival of the regime may depend on in smart grids and other computer applica- rent allocation. In short, resource rents are tions, and batteries for hybrid vehicles require used not to develop other forms of productive rare earths; and almost all processes require capital but to perpetuate the political regime steel, which is made from iron, carbon, and and its inefficient economic policies. Once alloying elements. Natural gas is a relatively trapped in the resource curse, it is dif�cult to clean fuel; because it can readily generate escape, because the elite have little incentive power on demand, it complements solar and to do so. In the extreme case, the resource wind power well. curse can lead to armed conflicts as a way to determine access to the rents. Not all resource-rich countries get Avoiding the natural resource curse trapped by the resource curse. Some (like One major problem for countries with Australia, Botswana, Canada, Chile, and abundant natural resources is what is Kazakhstan) have managed to avoid it known as the natural resource curse. This altogether. Others (like Ghana, Peru, and phenomenon refers to the economic obser- Zambia) suffered the resource curse earlier vation that countries rich in natural assets— in their development but went on to enjoy particularly oil, gas, and minerals—often steady growth in the past 10 –15 years. fail to use these resources as a platform for Moreover, many of the fastest-growing sustainable growth and actually grow less countries in the world in the past decade rapidly than similar countries without such have been mineral-rich countries, some of assets. These countries—such as the Demo- which were once victims of resource curse, cratic Republic of Congo, Guinea, Nigeria, although the sustainability of such growth and República Bolivariana de Venezuela— has not been tested by a signi�cant drop in fail to transform natural capital into other resource prices or production. types of capital, such as human capital and Given that most of the fastest-growing infrastructure. countries in Africa since 2000 have large 124 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T extractive industries—with major invest- resource rents to help overcome market ments ongoing or planned—it is particularly failures or de�ciencies—such as inadequate important that these countries act now to skills, poor health and social protection, avoid the resource curse. History shows lack of infrastructure (especially electric- that countries that have successfully man- ity), and high business transactions costs. aged concentrated natural resources for Third, they can avoid using these rents to economic development have tended to have promote industries in which their country a cadre of strong technocrats, pointing to has no or little comparative advantage. the importance of developing human capi- The World Bank’s comprehensive wealth tal. Countries that have recently become accounts—notably, its adjusted net sav- resource abundant, such as Mongolia and ings (A NS) indicator — assess whether Mozambique, need to be as transparent countries rich in subsoil assets are using with their rents as possible (through the their natural capital to support sustain- Extractive Industries Transparency Initia- able development through rent capture and tive and other means); set up a means of reinvestment (World Bank 2005b, 2010b). smoothing volatile revenue, such as a � s- These accounts can help countries assess cal stabilization fund; and focus on policies whether they are on a sustainable develop- and programs to build human capital and ment path. Unlike national accounts, which competitive industries. measure gross savings and depreciation of Even where growth has been rapid, the produced capital but do not record changes presence of nonrenewable resources can in the stocks of human and natural capital, skew income distribution in undesirable ANS measures the change in a country’s ways. In Equatorial Guinea, for example, national wealth. Since 2000, many low- one of the richest and most resource- income, resource-rich countries have failed dependent countries in Africa, 77 percent to leverage their nonrenewable resources of the population lives on less than $2 per for broader development. In fact, their day (Goldman 2011). Institutional innova- ANS indicators were negative for several tions can help countries avoid this outcome. years and were relatively low when posi- Botswana and Norway, which have strong tive, suggesting that they may be running institutional capacity, have managed their down their total wealth (�gure 5.2). High- resource rents well. That even countries income non- OECD countries are also with a history of political instability—such exhausting their natural resource wealth. as Chile, Indonesia, and Malaysia—have The Wealth and Valuation of Ecosystem used resource rents effectively for economic Services Initiative is being used to pilot development suggests what can be achieved incorporation of natural resource deple- (Gelb and Grasmann 2010).16 tion or restoration, including renewable natural resources, into national accounts in a number of OECD and developing Managing resource revenues countries. How can policy makers promote ef� cient production, rent recovery, and rent rein- Practicing sustainability in mining vestment in ways that support broader economic growth? First, they can adopt The largest source of employment in non- saving mechanisms, such as fiscal stabi- renewable industries comes from artisanal lization funds and saving funds, which and small-scale mining. This sector con- help smooth expenditure and ensure that tributes to livelihood development, creating funds are used only when the country has tens of thousands of jobs in many countries the capacity to absorb the new investment. and hundreds of thousands in several coun- Second, they can use the nonrenewable tries (including the Democratic Republic of NATURAL CAPITAL 125 FIGURE 5.2 Not enough wealth creation from natural capital (adjusted net savings of resource-rich countries, by income group, 2000–08) 15 % gross national income 10 5 0 –5 –10 –15 00 01 02 03 04 05 06 07 08 20 20 20 20 20 20 20 20 20 low income lower middle income upper middle income high income: non-OECD high income: OECD Source: World Bank 2010b. Note: Adjusted net savings (ANS) measures the change in a country’s national wealth. A positive ANS indicates that the country is adding to its wealth; a negative ANS indicates that the country is running down its capital stocks. Congo and Ghana). But for the sector to be sureties are increasingly being used to sustainable, there needs to be a long-term deliver sustainable benefits to communi- commitment by the government and strong ties. These two instruments help mining local institutions. contribute to broader economic develop- Artisanal and small-scale mining is often ment while providing environmental pro- a highly destructive industry that causes sig- tection (box 5.8). nificant environmental damage, including Sustainable management of natural capi- mercury pollution and extensive riverbed tal underlies green growth in other sectors, destruction. The struggle to obtain control including agriculture and manufactur- of the resources in remote, largely lawless ing. It is also key to resilience and welfare areas also creates social tensions. Although gains. Well-managed, nonrenewable natu- continuation of the current mode of arti- ral capital can provide both jobs and rev- sanal and small-scale mining is damaging, enues for investment in human capital prohibiting it would immediately throw and infrastructure. Well-managed, renew- many miners and their families into poverty. able natural capital protects people and key For this reason, there is a consensus that the infrastructure from floods and drought, way forward is to recognize the role of this provides key productive and cultural type of mining in development and to sup- services, and is the basis for important tour- port improved management and livelihood ism-based activities. Innovation, ef� ciency development through formalization of the gains, and enhanced human and physical sector, registration of both miners and trad- capital all play roles in achieving natural ers, adoption of technological good practice, capital outcomes that are consistent with strengthened health and safety standards green growth. In turn, as the next chapter and their enforcement, economic diversi�ca- illustrates, the infrastructure agenda and tion, and adequate protection for female and investments in physical capital can sup- child labor. port or undermine green growth, depend- For med iu m- a nd la rge - scale m i n- ing on management, policy, and investment ing projects, foundations and financial choices. 126 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 5.8 How the mining sector is investing in communities Medium- and large-scale mining projects typically plexity should be proportionate to the funding and leave a large environmental footprint, resulting in capacity of the operating environment, and its oper- the destruction of land, loss of natural habitats, ations should be integrated with local and regional damage to ecosystems, and the reduction of water development plans. and air quality. To reduce these negative externali- ties and produce sustainable bene�ts for the com- munity, mining companies are increasingly estab- Financial sureties lishing foundations—there are now more than 60 Over the past 20 years, it has become the norm for worldwide—and � nancial sureties (a sum of money mining companies to be legally obligated to set up or a guarantee by a third party that a � nancial lia- � nancial sureties. These instruments reduce the neg- bility will be met). ative externalities associated with mining by ensur- ing that there will be suf�cient funds to pay for site rehabilitation and postclosure monitoring and main- Foundations tenance at any stage of a mining project, including Mining companies often set up foundations for early or temporary closure. Funding should be based larger mining operations; a few countries, includ- on a cash accrual system or a � nancial guarantee ing Canada and South Africa, require that they be provided by a reputable � nancial institution. Mine established. These entities increase the bene�ts of closure requirements should be reviewed annually mining by developing skills (for mining-related jobs and the closure funding arrangements adjusted to and alternative livelihoods) and providing funds that reflect any changes. Financial sureties should not can provide a bene�t stream once a mine is closed. be regarded as a surrogate for a company’s legal They are usually funded by one or more mining liability for clean-up but rather as a buffer against operations, which contribute 0.25–1.0 percent of the public having to shoulder costs for which the their gross revenues. The funds are used to deliver operator is liable. Closure costs vary enormously but community investment programs for companies, tend to range from $5–$15 million for medium-size facilitate the use of government payments to local open pit mines to more than $50 million for large areas, and manage compensation funds. A criti- operations. Some sureties include socioeconomic cal condition for success is adaptation to the local obligations, making their goals similar to those of context, which should be subject to extensive social foundations. assessment to de� ne the foundation’s vision, ben- e�ciaries, and project types. The foundation’s com- Source: Sassoon 2009; Wall and Pelon 2011. Notes 2. Following the Millenium Ecosystem Assess- ment (2003), ecosystem services can be classi- 1. By and large, natural capital is the form �ed into “provisioning services� (services that of capital that is not created by deliberate produce goods and services, such as water, investment, although investments may be food, fuel, �ber, and fodder) and “nonprovi- needed to restore it (by removing pollutants sioning services.� Nonprovisioning services or reversing soil erosion, for example) or include services that provide regulating serv- enhance it (by building water storage struc- ices (such as watershed management and cli- tures to enhance the water retention services mate regulation), supporting services (such as of watersheds, for example). This chapter nutrient cycling and soil formation), and cul- considers the role of natural capital as a fac- tural services (including services that embody tor of production. Its role as a sink and the recreational and spiritual values). The report relationship to growth is covered in other states that biodiversity and ecosystems are chapters. closely related concepts. Biodiversity is the NATURAL CAPITAL 127 variability of living organisms from all types acknowledge and respect their reciprocal of ecosystems. obligations. 3. Landscape approaches integrate management 11. The evidence on the role of forests in regu- of land, agriculture, forests, �sheries and lating water flows and floods is mixed, as water at local, watershed and regional scales Vincent (2012) notes. The evidence that to ensure that synergies are captured. forests mitigate large floods is scant, and it 4. Exclusive economic zones—referred to in the appears that their effect on low flows can go preamble to the United Nations Convention in either direction, depending on the balance on the Law of the Sea Treaty (1982)—are between in�ltration and evapo-transpira- de�ned as waters that are 200 nautical miles tion. or less from the coastline of a sovereign state. 12. REDD stands for “reducing emissions from Within these areas, the state has exclusive deforestation and forest degradation.� To economic rights concerning management of this, REDD+ adds conservation, sustainable all natural resources. management of forests, and enhancement of 5. Projections vary widely, depending on forest carbon stocks. assumptions about recycling and the move 13. This section does not address nonrenewable from paper to electronic communication natural capital from subsoil assets (fossil fuels), formats. which are dealt with in other chapters. 6. In the case of aquifers, in which the actual 14. The BioCarbon Fund, housed within the recharge rate is negligible, water can be con- World Bank’s Carbon Finance Unit, is a pub- sidered as a nonrenewable resource. A study lic-private initiative mobilizing resources for of China estimates the annual environmen- pioneering projects that sequester or conserve tal cost of the depletion of nonrechargeable carbon in forest and agro-ecosystems, miti- groundwater in deep freshwater aquifers to gating climate change and improving rural be on the order of 50 billion yuan (World livelihoods. Bank 2007b). 15. The mechanism, de�ned in Article 12 of the 7. Dead zones are areas in which oxygen concen- Kyoto Protocol on Climate Change, allows a trations are less than 0.5 millimeters per liter country with an emission-reduction or emis- of water. These conditions usually lead to sion-limitation commitment under the 1997 mass mortality of sea organisms. Kyoto Protocol (mostly high-income coun- 8. Nethope is a Kenya-based organization that tries) to implement an emission-reduction brings together 33 nongovernmental organi- project in developing countries. Such projects zations, with the mission of improving con- can earn saleable certi�ed emission reduction nectivity and access to information. credits, each equivalent to one tonne of CO2, 9. EU farmers receiving direct payments must which can be counted toward meeting Kyoto respect mandatory cross-compliance pro- targets. visions, which require them to ful�ll the 16. Chile had the highest human development requirements of 19 European legislative index of all South American countries in acts related to the environment, public and 2010 (UNDP 2010). animal health, pesticides, and animal wel- fare. Farmers who do not comply face par- tial or total withdrawal of their Single Farm References Payment. Bene�ciaries of direct payments Agardy, T., Hicks, F., and A. 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Physical Capital: The Role of Infrastructure in Green Growth 6 Strategies Key Messages • Infrastructure policies are central to green “building right� and “building more,� particu- growth strategies, because of the huge poten- larly given �nancing and �scal constraints. tial for regret (given the massive infrastruc- • A framework for green infrastructure must ture investments required and the inertia build on efforts to address overall con- they create) and substantial potential for straints on infrastructure finance (includ- co-bene�ts (given the current gap in infra- ing cost recovery issues) and must develop structure service provision). strategies to both minimize the potential for • The infrastructure gap offers opportunities to regrets and maximize short-term co-bene�ts “build right� and leapfrog; but huge unmet to address social and political acceptability needs also can imply dif�cult trade-offs between constraints. G etting infrastructure “right� is at the fact that much remains to be built creates heart of green growth. It is critical an opportunity to build right; the fact that because infrastructure choices have needs are so large implies important trade- long-lived and dif� cult-to-reverse impacts offs between “building right� and “build- on the carbon, land, and water intensity ing more.� While the additional costs of of future patterns of development. Infra- building green are relatively modest, they structure also offers substantial co-bene�ts: occur in a context of frequently binding many investments needed for growth and � nancing and � scal constraints. Compli- improved living conditions are also good for cating matters is the dramatic rise in popu- the environment. lation and growing urbanization. As such, The challenges and opportunities of a framework for green infrastructure needs greening infrastructure in developing coun- to offer strategies to minimize the potential tries must be understood in the context of for regrets and maximize short-term local the huge unsatis�ed needs that remain: the benefits; and it must build on efforts to 133 134 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T address overall constraints on infrastruc- extremely costly if it results in a lock-in into ture � nance. technologies that turn out to no longer be This chapter focuses on long-lived infra- appropriate (because of their excessive car- structure systems such as energy, water, sani- bon, land, or water intensity) or settlement tation and transport infrastructure, although patterns that prove vulnerable to chang- it recognizes other infrastructure—for exam- ing climatic conditions. The infrastructure ple, buildings—also play a key role in driving already in place now will raise global tem- the demand for infrastructure services (irri- peratures by 1.3°C–1.7°C unless it is retro- gation is covered in chapter 5). �tted or retired before the end of its useful life (Davis and others 2010; Guivarch and Hallegatte 2011). Infrastructure as the heart of Inertia is particularly evident in urban green growth policies and the transport-related decisions Infrastructure policies are central to green that shape cities. The consequences of these growth strategies because of their unique decisions are illustrated by the contrast characteristics, namely the large poten- between Atlanta and Barcelona, two cit- tial for regret (linked with the large inertia ies with roughly the same population and embodied in infrastructure investments) income but dramatically different densities and the substantial potential for co-bene�ts and, hence, dramatically different options (linked to the current gap in infrastructure in terms of urban transportation and hous- service provision). ing (�gure 6.1). Once a city is developed, it is dif�cult to change its form. This irrevers- ibility makes the idea of “growing dirty and A massive potential for regret cleaning up later� inapplicable in this domain Infrastructure decisions are long-lived (table (box 6.1). 6.1). They influence the purchase of con- The consequence of the inertia in infra- sumer durables and the location choices of structure development is an enormous households and � rms. As such, they create potential for regret if decisions are made substantial inertia in socioeconomic sys- without adequate consideration of how tems. Because the economic system reorgan- conditions—socioeconomic, environmental, izes itself around infrastructure, this inertia and technological—will change over time. can even exceed the physical lifetime of spe- The potential for regret has always been a ci�c infrastructure investments. A delay in challenge for infrastructure policy; it is made greening investments may therefore prove much more complex by climate change, which introduces deep uncertainty about future climatic conditions, technologies, and TABLE 6.1 Sectors in which inertia and sensitivity to climate environmental standards and prices. conditions are great Uncertainty about future climatic con- ditions. This complicates decision making, Time scale Sector Example (years) given the importance of weather and cli- mate conditions for infrastructure design Water Dams, reservoirs 30–200 and performance (Hallegatte 2009). In Land-use planning New development in flood plain >100 or coastal areas the energy sector, weather directly affects Coastal and flood defenses Dikes, sea walls >50 demand (which varies with temperature) Building and housing Insulation, windows 30–150 and supply. Water availability affects elec- Transportation Port infrastructure, bridge, roads, 30–200 tricity production from hydropower and railways thermal plants (because of cooling needs), Urbanism Urban density, parks >100 and wind and nebulosity determine wind Energy production Coal-�re plants 20–70 and solar power. Electricity networks are Source: Hallegatte 2009. also highly vulnerable to extreme events PHYSICAL CAPITAL 135 FIGURE 6.1 Urban densities determine cities’ options for greening (built-up areas of Atlanta and Barcelona, represented at the same scale) Source: Bertaud 2003. (such as strong winds and snowstorms, as fear of being stuck with an older and uncom- illustrated by the January 2008 snowstorm petitive technology. that left millions of people stranded across Uncertainty about environmental poli- China or the repeated power outages caused cies and prices for energy, oil, or carbon. by heavy snow in the United States). Trans- Energy-intensive development may create port infrastructure, which affects urban deep vulnerabilities and loss of competitive- development and land use, including in ness in a future with high carbon or energy flood-prone areas, must also account for prices (Rozenberg and others 2010; World long-term climate changes. Bank 2010). Dense cities are less vulnerable Uncertainty about how technologies to shocks in energy—hence transportation— evolve. This has a particularly important prices (Gusdorf and Hallegatte 2007). effect on cities. With current technologies, The combination of sensitivity to uncer- low-density single-home suburban develop- tain parameters and the high level of inertia ments lead to high carbon emissions. But they creates a high risk of lock-ins into situations may become sustainable in terms of emissions that will be undesirable in the future. Avoid- (albeit maybe not in terms of water and land ing these lock-ins—and the corresponding consumption) with ef�cient electric vehicles, regret or retro�tting costs—should be a pri- decarbonized electricity production and low- ority for decision making on infrastructure energy-consumption houses (box 6.2). Uncer- (see chapter 7). tainty about the evolution of energy technol- ogy costs complicates the design of energy The vast potential for co-benefits policy (Kalkuhl and others 2011). Anecdotal evidence suggests that uncertainty is also The second reason why infrastructure will leading investors to postpone investments for play a key role in green growth strategy is that 136 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 6.1 The case for immediate action in the transport sector Transport is a major contributor to CO 2 emis- given expected economic growth and past patterns sions. It is also one of the fastest-growing sources of of motorization (Chamon and others 2008). With- emissions. Not surprisingly given the 1 billion cars out policies to encourage high-density urbanization already on the road, road transport accounts for and public transport, high reliance on individual car about two-thirds of total transport emissions. transport will ensue. Developing countries, which still face a huge If public transport is included as a major part transport infrastructure gap, have the opportunity of modal structure in urban transport, there is no to choose their transport development path: low- conflict between a low emission transport sector emission transport or car-dependent transport (box and rapid growth or high income. In fact, economies figure B6.1.1). Experience suggests that demand with some of the lowest ratios of energy consump- for car ownership increases dramatically at annual tion to gross domestic product (GDP) in the world— household incomes of $6,000–$8,000. If history including Japan, Singapore, and Hong Kong SAR, repeats itself, an additional 2.3 billion cars will China—have experienced extraordinary develop- be added by 2050, mostly in developing countries, ment over the past few decades. FIGURE B6.1.1 As income rises, will countries choose low energy consumption in road transport? (relationship between per capita income and energy consumption from the road sector) 2.2 Qatar 2.0 1.8 United States 1.6 1.4 United Arab Emirates kiloton of oil equivalent Canada 1.2 Saudi Arabia 1.0 Iceland 0.8 Switzerland Norway 0.6 Japan Iran, Islamic Korea,Rep. Israel Singapore 0.4 Rep. 0.2 Hong Kong SAR, China Cuba 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 GDP per capita ($2000) Source: World Bank 2011d. PHYSICAL CAPITAL 137 BOX 6.2 The impact of technologies on transport policies—not enough? Given the signi�cance of emissions from road trans- average bus emits only half as much CO2 equivalent port, the green growth path of transport depends on per passenger kilometer as a small car. For travel how rapidly vehicle technologies develop. If low- or between distant cities, railways are even more eco- zero-emission vehicles become available in the near friendly than buses: emissions from light-rail transit future, relatively small changes in existing transport can be as much as half of average bus emissions. But infrastructure stock would be required. People could the ef�ciency and feasibility of modal shifts depend continue relying on individual cars without harming on urban forms, with mass transit requiring mini- the climate. But this may not be realistic. mum levels of density, and on tackling market struc- Technical standards in transport can also help ture and coordination failures. reduce emissions in the sector. Emissions per kilo- Modal shifts will also imply addressing con- meter of new cars have historically been reduced sumer preferences, and here the “nudging� and through better gasoline and diesel internal combus- social marketing campaigns discussed in chapter tion engines, better lighting and air conditioning, 2 are an important complement to price incentives and better tires. The aviation fleet has also reduced and supply-side interventions. In a world in which emissions in accord with international efficiency major automobile companies spent some $21 billion agreements. There is also an opportunity to reduce worldwide on advertising in 2009—an increasing emissions levels through Intelligent Transport percentage of which is aimed at emerging markets— Systems—for instance, by allowing drivers to access public transport agencies across Africa, Europe, timely traffic reports, identify available parking and North and South America are beginning to spots, and optimize routing. apply to public transportation the same marketing But technical standards are unlikely to lead approaches used by the auto industry to bolster sales to massive reductions in emissions, so barring the to shift demand for public transportation (Weber rapid emergence and global adoption of low-carbon and others 2011). engine technologies, modal shifts will be needed. An infrastructure is a domain in which substantial true for energy. When reliable network elec- synergies exist between economic growth and tricity is available, pollution is reduced and the environment. Infrastructure systems are competitiveness increases, as � rms no longer indeed designed to provide welfare-improving need to rely on expensive back-up diesel gen- and productivity-enhancing services, which erators. Photovoltaic (PV) solar systems are are critical for development, but they also optimal solutions for isolated, low-density often provide environmental bene�ts. areas; hydroelectricity is the cheapest and Providing service to the unserved— most reliable energy source for some coun- who usually pay a higher price for water tries (box 6.4). Better public urban transport and energy than connected households— reduces congestion and air pollution, with provides both social and environmental ben- large economic and health impacts.1 e�ts (box 6.3). Universal access to water and An additional source of co-benefits is sanitation is good not only for welfare and linked to distributional effects. Infrastructure economic growth—with impacts on health consumption subsidies are both regressive and and human capital, especially for the poor— bad for the environment (Komives and oth- but also for the environment. (For instance, ers 2005). Subsidies not only distort demand, providing sanitation services to the slums with financial and environmental conse- surrounding the Guarapiranga Lake helped quences, they also often fail to reach the very slum dwellers but also preserved the water poor they are supposed to help (see chapter 2). source of 25 percent of São Paulo’s 18 million The poor do not own cars and often are not inhabitants in the early 1990s.) This is also served by utilities; if they do, they consume 138 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 6.3 Benefits from using photovoltaic electricity in rural areas Power grids in Africa are available only in cities and Africa offers a huge market for modern, energy- high-density areas. In most rural areas, kerosene efficient lighting products. Although the market and candles are the main source of lighting, while has a low pro�t margin, its strength is in the high dry cell batteries are used to power radios. All are number of clients (if the right product for the right expensive (1 liter of kerosene can cost more than price can be offered). The GTZ-sponsored pico-PV $0.80 and provides about 20 hours of light). PV program and the World Bank Group’s Lighting systems are superior solutions. For example, a solar Africa are examples of two initiatives that aim to home system may be sized to power a refrigerator transform the lighting market from fuel-based prod- and television (costing $1,000); a large television ucts to clean, safe, and efficient modern lighting and three lamps (for $250); a small television, three appliances. lamps, and a radio (for $100); or a lamp, radio, and Source: ESMAP 2009. cell phone charger (for as low as $50—about the same cost as a cell phone). BOX 6.4 Hydropower as a green choice for lower-income countries For lower-income countries, sustainable hydropower and made viable. None of this is easy or cheap, but it represents an important clean energy source—and is essential, because well-managed hydro projects can one that will assume a larger share of the world’s generate an array of bene�ts, including flood control, energy production as these countries develop fur- drought management, provision of water supply, and ther. Africa is exploiting only 7 percent of its hydro- environmental bene�ts. power potential; if the region developed it to the Storage facilities for hydropower are essential to same extent that Canada has, its electricity supply adapt to changes in the hydrological cycle that are would be multiplied by a factor of 8. expected to occur as a result of climate change. With The reality, however, is that hydropower projects increasing water scarcity in some regions, there is a are complex—with impacts on agriculture, water need to develop multiyear storage that is economi- management, irrigation, food production, climate cally, environmentally, and socially feasible. Where change, and the sustainability of communities. They the intensity and frequency of floods increases, require detailed planning and studies before a shovel storage is required to manage flows. Multipurpose breaks the ground. Social and environmental impacts storage facilities can also provide water services to have to be assessed and addressed, consultations agriculture, water supply, and environmental flows. must be held, and regulations need to be developed. In some cases, new institutions have to be created Box text contributed by Diego Rodriguez. small quantities of water and electricity or direct environmental footprint. Building the transport fuel. The lion’s share of consump- infrastructure that is needed for develop- tion subsidies bene�ts wealthier segments of ment will have detrimental impacts on natu- the population (Arze del Granado and others ral areas, biodiversity, and the environment 2010). The urban poor may enjoy some spill- (Geneletti 2003). Another trade-off is linked overs, but the rural poor seldom do. to the fact that building better (cleaner, more There are also trade-offs between infra- resilient, or both) can be more expensive. structure development and the environment. This trade-off raises the fear that countries A � rst trade-off is related to infrastructure’s faced with severe � nancing constraints may PHYSICAL CAPITAL 139 need to choose between “building right� TABLE 6.2 Gaps in access to infrastructure in developing countries (which may make both economic and envi- remain large, particularly in Africa ronmental sense) and “building more� (which All developing may be what is required socially). countries Africa But the additional cost of building greener Percentage of households with access to electricity 75 31 infrastructure should not be overstated. In Improved water source 89 61 some sectors, green infrastructure is more Improved sanitation facilities 63 31 expensive—where electricity grids are present, Percentage of rural population with access to an solar or wind energy is more expensive than all-weather road 70 33 electricity produced from coal, for example. Telecom: mobile and �xed lines per 100 inhabitants 85 46 But thanks to innovation and economies of Source: Roberts and others 2006 for roads; World Bank 2011d for telecom; IEA 2011 for electricity; scale, the difference in cost is narrowing rap- and WHO-UNICEF 2012. Note: Road access data are for 2005 or the latest year available up to that date; telecoms, for 2010; idly, and green energies are now competitive in water and sanitation data are for 2010. Averages are weighted by country population. The road some contexts (where the hydropower endow- access indicator measures the share of the rural population that lives within 2 kilometers of an all-season road. ment is large, where electricity is produced off-grid, or where carbon is priced). In the transport sector, providing public transport is of unmet needs is particularly great in Sub- more expensive than building roads, but pub- Saharan Africa, where less than a third of lic and individual transports are imperfect households have access to electricity. Con- substitutes: in highly congested cities, public nectivity also remains low in the developing transportation becomes necessary for eco- world, particularly in rural areas, where only nomic reasons, and the environmental ben- 70 percent of the population has access to e�ts can be reaped with no or little additional an all-weather road (33 percent in Africa). cost. In the construction sector, the additional Access to water has increased, but 780 mil- cost to build lower-energy buildings—thanks lion people still lack access to an improved to better insulation and more ef�cient heating water source (WHO-UNICEF 2012). systems—may not exceed 5 percent, and this Globally, the challenge is greater for sani- additional investment cost is rapidly recouped tation than for water supply. The percentage by reduced energy bills. of the population with adequate access to One case in which additional costs may potable water increased from 74 percent in create trade-offs is the retro�t of existing build- 1990 to 89 percent in 2010. Sanitation �g- ings. Indeed, retro�tting the lowest-ef�ciency ures are much lower, having increased from buildings into average-efficiency build- 44 percent in 1990 to just 63 percent in 2010 ings costs €500 per square meter in France (WHO-UNICEF 2012). The difference partly (Giraudet and others 2011). However, energy reflects the greater “public good� and “exter- savings can pay back upfront costs in many nality� element of sanitation and sewerage— instances. The main constraint is thus one of that is, individuals feel the welfare impacts access to capital rather than �nancial or eco- of inadequate access to water, whereas other nomic viability, as many green investments pay sectors and members of society feel the effects for themselves over the medium to long term. of inadequate sanitation (through impacts on water quality and corresponding health and productivity impacts). Estimates of the Recognizing the need for costs of inadequate water and sanitation in efficiency: Meeting large the Middle East and North Africa are about unsatisfied infrastructure needs 1 percent of GDP in the Arab Republic of within tight fiscal constraints Egypt and 2.8 percent in the Islamic Repub- Developing countries are characterized by lic of Iran (Hussein 2007). With 2.5 billion large unsatis�ed needs, including needs met people lacking access to improved sanitation, by infrastructure such as drinking water the achievement of the Millennium Develop- and reliable electricity (table 6.2). The scale ment Goal (MDG) on sanitation is unlikely.2 140 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T Filling the infrastructure gaps in develop- the level actually spent (Foster and Brice- ing countries—to address household needs ño-Garmendia 2010). Moreover, given the and expanding infrastructure so that � rms constraints on poor households’ budgets, have access to the kind of energy and trans- increases in infrastructure services need to be port services they need to compete—will provided in a way that is affordable. cost an estimated $1.0–$1.5 trillion a year, In the energy sector, the challenge is to or 7 percent of developing-country GDP (Fay provide all people with modern energy to and others 2010).3 Developing countries are meet their basic needs at affordable costs currently investing about half that amount, while ensuring the sustainable growth path although the amount varies dramatically by of energy consumption (through conserva- region and income level. In Africa, infrastruc- tion and greater energy ef�ciency) and mak- ture needs were projected to reach 15 percent ing energy sources more environmentally of the region’s GDP in 2008, about twice sustainable (box 6.5). Thus, the goals of the BOX 6.5 The energy challenge: Expanding access and increasing supply in an efficient, clean, and cost-effective manner How will countries meet the goal of the United reduce energy consumption 30–40 percent across Nations Sustainable Energy for All initiative of pro- many sectors and countries. For instance, 70 percent viding universal energy access at affordable costs of lighting (which consumes 20 percent of total global while ensuring environmental sustainability through electricity consumption) can save 50 percent of energy improved ef�ciency and an increased role for renew- use just by using current technologies alone. A prob- ables? The answer is through a portfolio of technol- lem is that the transaction costs for energy-ef�ciency ogies (World Bank 2010). projects tend to be high, compared with their rela- To achieve universal access to electricity by 2030, tively small amount of investment. Relatively long countries need to develop not only grid systems pay-back periods may still be a considerable barrier to but also off- and mini-grid power systems, at least �nancing these projects (World Bank forthcoming). as a transition solution. The International Energy Among renewable sources of energy, large-scale Agency estimates that about 45 percent of electric- hydropower tends to be the least expensive. It can ity will come from national grids, 36 percent from be competitive with conventional thermal genera- mini-grid solutions, and the remaining 20 percent tion. Geothermal energy can also be cost competitive, from isolated off-grid solutions serving remote and making it another suitable candidate. Both types of low-density areas. Off- and mini-grid technologies energy involve large upfront costs and long lead-times can be complemented by other solutions at the end- for development, however. At the opposite end of the user level. For instance, the Lighting Africa initiative spectrum, solar energy is more expensive, but it may lowers entry barriers to the off-grid lighting mar- still be the least-cost option in remote, isolated areas. ket by establishing quality standards, developing a One challenge in developing renewables is the good investment climate, and supporting product temporal variation in the availability of electricity. development while educating consumers on the ben- Demand for electricity varies continuously, with e�ts of solar lighting products. In 2010, more than large fluctuations during the day and even larger 134,000 solar portable lamps that had passed Light- variation from season to season. Rapid variability of ing Africa quality tests were sold in Africa, provid- some renewables can add to the challenge of main- ing more than 672,000 people with cleaner, safer, taining a balance between supply and demand at all better lighting and improved energy access. times. A proper mix of generation technologies with Energy-ef�ciency policies could potentially con- varied output control characteristics (for example, tribute a quarter to a third of averted greenhouse gas hydropower with storage and fast-responding gas emissions by 2050 (World Bank 2010). Technologies units), well-developed transmission systems, and that increase energy ef�ciency are typically not costly improved forecast and grid operations capacity will or innovative: existing technologies alone could help cushion the effects of variability. PHYSICAL CAPITAL 141 United Nations Sustainable Energy for All energy efficiency and reduced operating (UN SE4ALL) initiative are to achieve uni- costs.) These additional investment needs versal access to modern energy, doubling are significant, but they remain a small the global rate of improvement of energy share of total world investments, at least for ef�ciency, and doubling the global share of the 550 ppm target. They do not include the renewable energy. cost of adapting infrastructure to a changed And providing modern energy services to climate, which could cost developing coun- all does not need to be done at the expense of tries an additional $15–$30 billion a year by the environment—in fact, the environmental 2050 (World Bank 2010). impacts are likely to be modest to positive, even when using brown technologies. This is Financing infrastructure: because the poor consume little even when Efficiency and cost recovery to they are connected to modern infrastructure improve access and sustainability services, particularly in comparison to the rich. For instance, the additional emissions Investment in infrastructure in the devel- produced by providing electricity using stan- oping world is inadequate partly because dard technologies to the 1.3 billion people infrastructure is expensive and “lumpy�— who currently lack service could be offset capacity can be increased only in large incre- by a switch of the U.S. vehicle fleet to Euro- ments, not through a continuous process. In pean standards (World Bank 2010). Green- addition, when investments require public ing, infrastructure does not need to come funding, the �nancing gap is linked to limits at the expense of universal access—in fact, to the borrowing capacity. Even when a proj- universal access is likely to be good for the ect is economically bene�cial and will gen- environment. erate suf�cient tax revenues to pay back the In the water sector, developing countries upfront cost, it is dif�cult to mobilize private will need to invest an estimated $72 billion a � nance because of information asymmetry, year to reach the MDG targets on improved long return on investments, and political water supply and sanitation, 75 percent of risks. Doing so would require shifting the which is needed just to maintain existing risk-adjusted return upward, by increasing facilities (Hutton and Bartram 2008). returns or reducing risks, so that proposed projects can compete with other categories of investment. Meeting infrastructure needs, Another reason for the insufficiency of protecting the environment investment in infrastructure is that economic Even with significant synergies between and fiscal sustainability has long been a infrastructure service development and major challenge in the infrastructure sector. environmental consideration, greening Full-cost pricing continues to be an elusive growth will increase investment needs in goal, and infrastructure often involves signif- the infrastructure sector. As an illustration, icant technical and nontechnical inef�ciency. an analysis of mitigation scenarios from Colombia grappled with both issues success- four models suggests that the global energy fully (box 6.6). In Africa, quasi-�scal de�cits investment needed to achieve a greenhouse caused by underpricing, technical losses, and gas concentration of 450 ppm CO2-eq (parts nonpayment amount to about 2 percent of per million CO2 equivalent) could amount GDP. Eliminating these problems could offset to $350 billion–$1.1 trillion a year by 2030 about a third of the � nancing gap (Briceño- (�gure 6.2). A 550 ppm target appears much Garmendia and others 2008). In South Asia, easier to achieve, requiring $50–$200 billion more than 20 percent of electricity produced of additional annual investments. (These �g- is lost because of technical and nontechni- ures are gross investment costs; they do not cal reasons, including illegal connections take into account the bene�ts from higher (World Bank 2011d); 30–45 percent of water 142 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T FIGURE 6.2 Upfront investment costs for energy supply and tariff setting and collection. The cost of greater energy efficiency could be substantial energy imports and power generation can (additional investment needs in the energy sector projected by four be volatile; it needs to be passed on to con- global models and for two climate objectives) sumer prices, although smoothing mecha- 1,200 nisms may be required. Adjusting tariffs will greatly improve the � nancial sustainability additional annual investment in 2030 ($billion) 1,000 of utilities. But utilities will also have to take measures against illegal connections and 800 nonpayers. Chapter 2 discusses the difficulties in 600 eliminating subsidies to infrastructure serv- ices. It suggests complementary actions to 400 mitigate undesirable distributive impacts of these measures (such as connection subsidies 200 or targeted cash transfers). Another measure in the arsenal may 0 be cross-country collaboration. Because 550 ppm 450 ppm 550 ppm 450 ppm 550 ppm 450 ppm 450 ppm MESSAGE TIAM-WORLD REMIND IEA infrastructure exhibits significant econo- mies of scale and scope, cross-country Source: Authors’ compilation based on following sources: MESSAGE: van Vliet and others 2012; collaboration—for instance, through regional REMIND: Luderer and others forthcoming; TIAM-World: Loulou and Labriet 2008; IEA: IEA 2011. Note: The targets 450 ppm and 550 ppm are in CO2-eq (parts per million CO2 equivalent) which power pools—is generally helpful, particu- measures the concentration of all greenhouse gases using the functionally equivalent amount or larly for small countries. concentration of CO2 as the reference; 450 ppm CO2-eq is the concentration is needed to maintain a 50 percent chance of not exceeding global warming of more than 2°C above preindustrial tempera- In Africa, where many countries are too tures. IEA 2011 does not provide estimates for a 550 ppm scenario. small to build national power plants at an efficient scale, $2 billion of energy invest- ment could be saved if trade in power trade is leaked from the network or not accounted was fully exploited (Foster and Briceño- for (IBNET 2011). Garmendia 2010). Regional power pools What can be done? Addressing these (for example, in West and East Africa) can inefficiencies would help improve both help capture bene�ts from economies of scale infrastructure coverage and the greening of and smooth the intermittency of solar and infrastructure. Strengthening cost recovery wind energy. Trade and cross-country coor- would not only contribute to the � nancial dination also help countries manage natural sustainability of energy sector develop- resources (such as shared water resources) ment, it would also encourage consumers and improve reliability. to use energy wisely. Ef�cient management Hydro-meteorological services also bene�t of metering, billing, and collection would from cross-country collaboration. An analy- improve the � nancial performance of service sis of South Eastern Europe estimates that providers. New metering technologies based the � nancing needed to strengthen national on information and communications tech- hydro-meteorological services in seven coun- nology are facilitating this activity in many tries without regional cooperation and coor- places, including small, off-grid private serv- dination would be about €90 million (ISDR ice providers and large publicly owned dis- and others 2011). With deeper cooperation, tribution utilities. And more ef�cient man- the cost would be 30 percent lower. agement of utilities would eliminate waste and reduce environmental impacts. In addition, incentive mechanisms should Managing demand be tightened at the utility and end-user levels. I mproving the delivery of infrastruc- The biggest hurdles to doing so are account- ture services is critical. But in infrastruc- ability and enforceability in implementing ture, increased supply often translates into PHYSICAL CAPITAL 143 BOX 6.6 Pairing cost recovery with deregulation in Colombia In 1964, only 50 percent of people in Bogota FIGURE B6.6.1 Access to basic infrastructure services has and other large cities had access to electric- risen dramatically in Colombia ity, water, and sanitation. And coverage (access to services, by city size, 1964–2005) rates were even worse in smaller cities (about 40 percent for water and electricity and a. Access to electricity 20 percent for sanitation). Today, Colombia 100 has almost universal access to basic services in cities of all sizes. But achieving convergence 75 took more than 40 years (box �gure B6.6.1). How did Colombia achieve near uni- percent versal coverage? The key was a series of 50 policy reforms in the 1990s that brought tariffs toward cost recovery levels. In the 25 water sector, average residential tariffs per cubic meter were increased from $0.33 in 1990 to $0.78 in 2001 (World Bank 2004). 0 t With almost 90 percent of households hav- ge a es lar got all st Bo ing metered connections, the price increase sm city size triggered a decrease in household water b. Access to water consumption from 34 to 19 cubic meters 100 per month over the same period—in the process reducing the need for major new 75 infrastructure. But even with higher prices, water remains relatively affordable for the percent average household. The tariff structure 50 allows the Colombian government to cross- subsidize the poorest consumers from richer 25 households and industrial users. As a result, the average poor household spends less than 5 percent of its income on utility services. 0 t ge a In the electricity sector, in the 1990s the es lar got all st city size Bo sm rules on who gets to generate and sell elec- tricity were changed. After two major black- 100 c. Access to sanitation out periods (1983 and 1992/93), the govern- ment grappled with increasing capacity or increasing ef�ciency. Given severe � nancial 75 constraints, increasing capacity was not an option. Deregulation was therefore under- percent taken to improve the ef�ciency of existing 50 capacity (Larsen and others 2004). As part of the reforms, electricity was unbundled 25 into generation, transmission, distribu- tion, and commercialization. In the 1990s, the electricity sector represented a third of 0 st ge a lar got Colombia’s public debt stock. By 2004, e all st city size Bo sm this had fallen to less than 5 percent and 1964 1993 2005 Colombia had become a net exporter of electricity. Source: Based on data from the Colombia’s National Administrative Department of Statistics (DANE) census 1964, 1993, and 2005. Box text contributed by Somik Lall. 144 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T increased demand, making a supply-side-only pay an area license fee of S$3 ($1.25) a day approach both costly and ineffective. For to enter the central business district during instance, building new roads is often ineffec- peak hours. The number of vehicles entering tive in reducing congestion because it incen- the restricted zone declined by 73 percent, tivizes the use of individual vehicles, leav- and average speeds increased by an estimated ing congestion unchanged. For this reason, 10–20 percent (Federal Highway Administra- action is also needed to manage demand. tion 2008). Modal shift can improve the ef�- Policy makers can chose from an array of ciency of such price-based transport policies tools that includes price instruments, regula- and help mitigate their negative consequences tion, and integrated planning of supply and (such as the signi�cant spatial inequality they demand. can create) (see Gusdorf and others 2008). But it requires investments in public transport Prices: Important but hampered multimodal coordination (such as creating by low elasticity parking lots next to train stations), and urban Price elasticity—that is, the percentage change planning (to maximize access to public tran- in quantity demanded in response to a change sit and ensure that passenger density is high in price—is relatively low in the transporta- enough to justify the required investments). tion sector, at least in the short term. This In the water sector, different uses have is, in part, because consumers may be slow different elasticities. Residential use has a in responding to price signals. But it is also low price elasticity, estimated at about –0.1 because the real cost of transport (sometimes to –0.3 (Nauges and van den Berg 2009; referred to as the generalized cost) includes Nieswiadomy and Molina 1989). Agricul- both the monetary cost of transport and the tural use has a higher elasticity, and subsidies cost of the time spent in transportation. And (whether to water or to the electricity needed sometimes the cost of time is larger than the for pumping) in this sector can thus create monetary cost of transportation. Elasticity is distorted incentives, favoring activities with greater in the long run, because individuals high water consumption. And disincentives can adjust their choice of where to live, means to water conservation are greatest where the of transportation, or lifestyle. For instance, resource is scarcest (Frederick and Schwarz the price elasticity of automobile fuel demand 2000). Removing subsidies and raising prices ranges from –0.1 to –0.4 in the short run and can thus be ef�cient in this sector. –0.6 to –1.1 in the long run (Chamon and others 2008). Demand-side actions, standards, This low elasticity explains why the and regulations: Critical rebound effect (whereby people may increase complements to prices their driving when the cost of car use Price-based instruments can be made more decreases as a result of improved ef�ciency) ef�cient if complemented with appropriate is relatively limited, even though it may be demand-management actions. Large quanti- greater at lower income levels. Sorrel (2007) ties of water can be saved in India through �nds that this effect should remain below 30 better irrigation technologies, obviating percent (that is, less than 30 percent of the the need to exploit new raw water sources. gain in efficiency will be “taken back� by In China, industrial water reuse systems the increase in demand). Greene and others can save water, reducing the need to build (1999) � nd that the rebound effect for indi- expensive water conveyance systems. Many vidual transport in the United States is about of the technologies that can make a differ- 20 percent. ence already exist and are in use in devel- Various price instruments have proven ef�- oped countries. Further application needs to cient. Singapore’s Area Licensing Scheme— be supported by institutions and promoted the first-ever comprehensive road pricing by sector leaders. India’s Total Sanitation scheme in the world—required drivers to campaign is a successful example of using PHYSICAL CAPITAL 145 noneconomic incentives to promote greener Integrated market development, includ- options (box 6.7). ing technology standards, is needed to pro- Standards and regulations may also be mote the use of clean and ef�cient solutions useful where price elasticity is limited or the at the household level. The Global Alliance political economy of price reform is complex. for Clean Cookstoves, launched in September Examples of such instruments include renew- 2010, aims to enable 100 million households able portfolio standards, in which regulators to adopt clean and ef�cient stoves and fuels require utilities to include a given percentage by 2020. The alliance works with public, pri- or an absolute quantity of renewable energy vate, and nonpro�t partners to help overcome capacity in their energy mix. the market barriers that impede the produc- In transport, fuel economy standards are tion, deployment, and use of clean cookstoves common for new vehicles (see chapter 2). In in the developing world. 1995, Japan introduced fuel economy stan- dards to reduce new car fuel consumption Green infrastructure requires by 19 percent, achieving the target by 2004. planning and strong institutions A new target, set in 2006, aims for another Because infrastructure is lumpy, infrastruc- 23.5 percent reduction (An and others 2007). ture systems cannot be grown incremen- In Europe, improvements in fuel economy tally and continuously, and they need to be occurred largely as a side effect of air pol- planned in a holistic manner. A road or train lutant regulations, although automobile line cannot be designed without considering manufacturers agreed with the European other parts of the transport system, land use Commission on a voluntary fleet average regulations, and urban planning. emission target of 140 grams of CO2 per kilo- Moreover, different infrastructure systems meter for new passenger cars. Governments interact across sectors and cannot be designed can also create automobile restricted zones in isolation. Water availability affects elec- to limit passenger car traf�c in urban areas, tricity generation, and electricity is critical in as Denmark did in the city of Aalborg. water management (for groundwater pump- Promoting clean cooking and heating ing, for example). Transportation and energy solutions is another case in which standards interact closely: energy production often and public investments are likely to be more requires transport infrastructure, and dif- helpful than pricing instruments. Replac- ferent transport modes have different energy ing traditional three-stone cooking fires needs (from liquid fuel transport to electricity with advanced stoves could significantly grids for electri�ed cars). Smart use of infor- reduce emissions and health risks (World mation and communication technologies can Bank 2011b). Without drastic interventions, green the urban environment and improve 2.7 billion people may still lack clean cook- the ef�ciency of other infrastructure systems ing facilities in 2030 (IEA 2011). (box 6.8). Thus, much can be gained from BOX 6.7 Using noneconomic incentives to reduce the demand for water and sanitation India’s Total Sanitation Campaign, launched in Part of the effort involved the Clean Village 1999, focused on communication, education, com- Award Program—awards to local councils that munity mobilization, and the provision of toilets in achieved the status of “Open-Defecation Free and government schools, mother/child centers, and low- Fully Sanitized Uni.� The awards—inspired by a pro- income households (World Bank 2011c). There was gram initially introduced in Maharastra (the “Sant little government contribution to the capital cost of Gadge Baba�)—helped increase reported sanitation sanitation facilities. Instead, the focus was on pri- coverage from 21 percent in 2001 to 57 percent vate investment and private behavior change. in 2008. 146 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 6.8 Harnessing smart information and communication technologies to shape a green future The smart application of information and commu- few substitution opportunities for private road traf- nication technologies can facilitate green growth, �c in the form of mass-transit system, would have a both by reducing emissions of greenhouse gases much more bene�cial impact than in, say Hong Kong and by creating new market opportunities, such as SAR, China, or Singapore. Asian countries commit- smart grids and Intelligent Transport Systems (ITS). ted to introducing ITS—such as electronic fare and To date, most of these mitigation opportunities have road-user charging systems, transport control cen- been applied in high- and middle-income countries. ters, and real-time user information—in Goal 11 of But it is arguably in the megacities of the developing the Bangkok Declaration on Sustainable Transport world where the impact could be greatest. Applica- Goals for 2010–20. tion of ITS in Bangkok or Manila, where there are a planning system that can integrate various existing urban areas to be redeveloped and objectives and infrastructure systems at both should prepare the peri-urban fringe to the country and regional level to signi�cantly accommodate new settlements. For this to reduce infrastructure costs. work, land markets need to be functional. Urban land markets mediate demand and supply and enable the ef�cient use of land Developing cities: Managing rapid and optimal development of constructed expansion to tap the potential for floor area, both of which shape a city’s spa- efficiency gains tial structure. Developed countries typically Rapid urbanization is both a driver and a rely on market data from transactions and feature of economic development, with seri- property attributes to reveal land and prop- ous consequences for infrastructure design erty prices. In contrast, most developing (World Bank 2009). In many developing countries lack the basic institutional machin- countries—particularly countries transition- ery to value and price land. ing from low- to middle-income status—the Higher land prices routinely lead to next few decades will see a dramatic increase higher density—which enhances productiv- in the share of people living in cities. In ity spillovers, potentially increases the supply fact, the number of people living in urban of affordable housing, and helps manage the areas in developing countries is expected to demand for transport. But this mechanism is double, from 2 billion to 4 billion, between sometimes impaired by land regulations—in 2000 and 2030. And this massive increase is many Indian cities the floor-space index is expected to triple the physical footprint of limited to 1 (as opposed to 5–15 in other urbanized areas from 200,000 to 600,000 Asian cities). As a result, high land prices square kilometers. The public policy and coexist with low density and sprawl, creat- investment challenges of managing the ing both housing affordability and transpor- social and environmental implications while tation issues. promoting cities that are economic drivers Also, when “official� land prices do not of the economy are substantial. Fortunately, reflect demand and are depressed at the urban practical options exist to efficiently green periphery, it is likely that sprawl or subur- the urbanization process. banization will be excessive. How the peri- The � rst priority is designing policies and urban expansion is managed will be a criti- institutions that can help anticipate future cal determinant of whether cities can harness urbanization. These policies should enable agglomeration economies and induce ef�cient PHYSICAL CAPITAL 147 resource allocation. The absence of a func- urban land development and can create both tioning land market creates a major urban positive and negative externalities as cities governance challenge, as the scale at which grow. Problems arise when there are inconsis- urban and metropolitan economies now oper- tencies between new developments and mass ate often does not coincide with their physical transit investment—as in Hanoi, where new and administrative boundaries. The institu- dense urban development projects are not tional arrangements that can enhance coordi- being located near the planned transit net- nation across these entities is likely to be con- work. This kind of planning creates a dou- text speci�c, but signi�cant efforts are needed ble risk of having too few users of a public to make them emerge. transit system, threatening the � nancial and The second priority is redeveloping older, social return on investment, and increasing obsolescent areas to promote more ef�cient the number of cars on the roads, with conse- development and achieve higher densities. quences on congestion and air pollution. Older areas typically share several common Urban transport is best addressed as traits. Their network of streets and alleys is part of integrated urban strategies that can often irregular and highly granular—limiting address the interests of multiple user groups the ability of developers to build modern and anticipate long-term needs for which no high-rise buildings. An alternative is to rede- one is yet advocating but that will become sign these areas to accommodate higher den- critical in the future. Although public trans- sities. Doing so typically requires assembling port tends to be more sustainable than per- small plots into larger and more ef�cient par- sonal motor vehicles, it is often unviable in cels and ensuring that the redeveloped area low-density agglomerations (table 6.3). has adequate infrastructure (particularly Although planning and developing public transport, water, electricity, broadband Inter- transit is likely to generate co-bene�ts for eco- net, and public services) to support higher nomic integration and manage demand for population densities. These actions should private modes of motorized transport, these be designed using consultations with the strategies should not come at the expense of local population, to make sure they bene�t. allowing a wider range of transport options For instance, rehabilitation projects need to that can enhance the poor’s mobility. Sur- account for the fact that slum dwellers often veys show that many people cannot afford gain more from slum upgrading than from public transport. In Sub-Saharan African relocation (World Bank 2006). cities, walking represents between 5 percent The third priority is integrating land (in Kigali) and 80 percent (in Conakry) of all policy with urban mobility and transporta- urban trips, with public transportation rang- tion (Viguié and Hallegatte 2012). Options ing from 10 percent to 90 percent (World for urban transportation are closely tied to Bank 2008). A signi�cant share of households TABLE 6.3 Effect of land use and density on use of public transport Public Modal model split (%) transport Petrol consumption Motorized Public Non- Automobile use use (trips/ for transport Population density Typical region private transport motorized (km/person/yr) person/yr) (MJ/person/yr) Low (25 people per ha) North America 80 10 10 >10,000 <50 >55,000 and Australia Medium (50–100 Europe 50 25 25 — — — people per ha) High (more than Asia 25 50 25 <5,000 >250 <15,000 250 people per ha) Source: Gomez-Ibañez 2012. Note: —=not available. 148 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T reports no public transport expenditure, but A fourth priority is integrating urban the average share of income spent in public planning with natural risk management— transport ranges from 3 percent (in Addis still rare, especially in low-income countries. Ababa) to 14 percent (in Lagos), reaching In 2005, the global community adopted the about $12–$16 a month in most cities. This Hyogo Framework for Action, a 10-year implies that at low-income levels, the wider plan to make the world safe from natural availability of different service levels and disasters. To date, 70 percent of high-income modes at different prices is a necessary strat- countries are carrying out urban and land- egy for providing urban transport services. In use planning under the framework, but only particular, improving sidewalks, streetlights, about 15 percent of low-income countries are and other measures to protect pedestrian doing so (�gure 6.3). This low participation users should be parts of an urban transport matters because cities are increasingly vul- strategy. nerable to natural hazards, including floods Urban transport also plays a key role in that are becoming more destructive in many spatially integrating urban labor markets. As parts of the world. And considering the cities around the world expand their spatial limited protection offered by dikes and sea footprints, the limited reach of walking trips walls, only risk-sensitive land-use planning may exacerbate slum formation, as many can mitigate flood losses over the long term people trade off housing quality to be close (Hallegatte 2011). to jobs. It can also severely limit labor mar- Given the role of urbanization in devel- ket opportunities for people who live farther opment, a green policy able to develop cities away from economic centers. Bovenberg and without increasing risks and negative envi- Goulder (1996) suggest that higher commut- ronmental outcomes would help maintain ing costs can decrease labor supply. Graham or increase cities’ attractiveness and pro- (2005) �nds that productive �rms are located duce economic bene�ts (World Bank 2009). in accessible and densely populated places. It is an open question as to how cities can FIGURE 6.3 Too few countries are implementing plans to mitigate against natural disasters (percentage of countries that implemented risk management policies under the 2005 UN Hyogo Framework for Action) 80 70 60 50 percent 40 30 20 10 0 drainage infrastructure slope stabilization masons training on provision of safe urban and land-use in landslide safe construction land for low-income planning prone areas households high income upper-middle lower-middle low income Source: UN 2011. PHYSICAL CAPITAL 149 accommodate the huge increase in urban removing subsidies or imposing an envi- population that is expected in many regions ronmental tax) or additional investments without experiencing a hike in disaster losses in infrastructure (such as sanitation sys- (World Bank 2010). That said, a recent World tems) can yield large co-bene�ts and syner- Bank study uses Alexandria, Casablanca, gies between economic and environmental Rabat, and Tunis to illustrate how flood objectives. An example is the provision of risks and climate change can be integrated in urban public transport in crowded cit- urban planning (World Bank 2011a). Trans- ies with high congestion and air pollution portation infrastructure has a key role to play levels, where public transport can increase to make it possible for the population to live economic ef� ciency and improve environ- in safe locations while retaining access to jobs mental conditions. Sometimes the synergy and services (Hallegatte 2011). is between the environment and welfare, Infrastructure robustness and redundancy without being uniquely mediated by eco- are critical to maintaining the functions of nomic ef� ciency (an example is sanitation the economic system after disasters, especially infrastructure, which improves water qual- in urban environments, where the failure of ity and thus population health). one component (such as electricity, trans- Previous chapters have shown that many port, water, or sanitation) can paralyze activ- actions and policies can green growth and ity. In many cases, indirect disaster impacts capture synergies between environmental caused by the loss of lifeline and essential protection and development. Designing a infrastructure services are of similar mag- green growth strategy requires policy mak- nitude to direct disaster losses (Hallegatte ers to choose among these options, based on 2008; Tierney 1997). However, increasing what is most important and urgent. The next robustness and redundancy is costly, creat- chapter proposes a methodology to identify ing trade-offs between the resilience of the priority actions, as a function of the iner- economic system and its ef�ciency in normal tia and irreversibility they imply and of the conditions (Henriet and others 2012). trade-offs and synergies they create. Minimizing the potential for Notes regrets and maximizing 1. Transport externalities in the United States are short-term benefits estimated at $0.11 per mile (Parry and others 2007). Traf�c congestion not only increases Some infrastructure investments that are emissions, it also increases local pollutants required from a development and economic and noise. perspective and useful from an environmen- 2. WHO-UNICEF (2012) projects that by 2015 tal point of view cannot be implemented the share of people without improved water because of � nancial, institutional, or plan- will have fallen to 8 percent, exceeding the tar- ning constraints. Given these constraints, get of 12 percent. In contrast, about 33 per- a green growth policy should seek to mini- cent of the world’s population is projected to mize the risk from regret and maximize lack access to improved sanitation, far from short-term bene�ts. the 23 percent target. To do so, one needs first to identify 3. Investment needs is a relative concept, as it depends on what the target level of cov- what investments made today can lead erage and quality is. No �rm data exist on to irreversibility that will cause regret in how much countries invest in infrastructure, the future. 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Crafting a Green Growth Strategy 7 Key Messages • The design of green growth policies must of local and immediate co-benefits) and balance predictability against flexibility and urgency (inertia and the risk of irreversibil- relevance against enforceability. ity and lock-in). • Step-by-step guidelines, including a checklist, • A green growth strategy needs to be designed can help analysts and decision makers structure before individual projects are assessed and the process of crafting green growth strategies. selected. Project assessments need to account • The suggested approach identi�es priorities for uncertainty and diverging world views. along two dimensions: synergy (the existence A good green growth strategy can create trade-offs between environmental pro- increase welfare by providing both tection and short-term economic growth. environmental and economic ben- For this reason, political and social accept- e�ts. It is not a panacea to a country’s eco- ability require that green growth policies be nomic ills: if economic growth is insuf�cient designed with the speci�c goals of mitigating because of institutional or policy problems, trade-offs across both space and time and green growth will not boost it in the absence offsetting costs by maximizing synergies and of other structural changes. short-term economic benefits (such as job Many green policies impose economic creation, poverty alleviation, and increased costs in the short term, such as higher invest- ef�ciency). ment or operational costs. But over the lon- Traditional economic analysis of policies ger term, they are designed to yield economic and projects can be complemented with a bene�ts and contribute to long-term sustain- screening exercise that helps design policies able growth. Even so, short-term costs can that provide short-term economic benefits 153 154 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T and are thus easier to implement. Not all investments: businesses will not invest heav- green growth policies can yield such syner- ily in research on low-energy or water-saving gies, and trade-offs will be unavoidable. It technologies if they cannot be sure that is nevertheless useful to scrutinize policy a market will exist over the long term for designs for opportunities to achieve more co- innovations in these domains. Their will- bene�ts, if necessary by combining several ingness to invest in green technologies and policy interventions. infrastructure depends on their trust in and This chapter does not provide a one-size- projections of future environmental goals. �ts-all green strategy, because the appropri- But environmental policies themselves ate measures and policies are highly depen- need to evolve over time, in response to new dent on the context, especially on the most information (such as technology or scien- pressing environmental and economic issues. ti�c facts) and to the actions undertaken by Countries at different income levels will nec- other countries or regions. Thus, the ability essarily have different priorities; the lowest- to adjust course is essential—even if it can income countries are more likely to delay the occur only at the expense of predictability. implementation of environmental policies Getting around the commitment prob- that imply trade-offs with short-term produc- lem. What factors might reduce predict- tivity. Instead, this chapter provides a step- ability? Certainly, changes in the political by-step approach to designing a strategy that landscape, scienti�c uncertainty, and differ- is appropriate in a given context. ences in interpretations of scienti�c results or future technological potentials will arise—as will questions about the government’s abil- The challenges of developing ity to commit (Dixit and Lambertini 2003; a green growth strategy Kydland and Prescott 1977). The fact that Much can be gained from framing environ- governments lack the ability (or credibility) mental policies as national strategies with to make long-term commitments has led to positive long-term goals. Doing so increases the transfer of monetary policy to indepen- the acceptability of immediate costs by the dent central banks in many countries. On population and the private sector. It also the � scal front, independent � scal councils improves consistency among policies and (such as the Of�ce of Management and Bud- fosters policy certainty—which creates a get in the United States) have been created friendlier climate for investments, making to monitor government policies and inform it more likely that private resources will be policy makers from a technical and nonpar- invested in long-term projects. But build- tisan perspective. ing a national strategy creates some chal- This commitment problem exists in the lenges of its own, including the need for environmental domain as well. Innovative interagency coordination, private sector solutions will have to be found to combine engagement, and the de� nition of relevant political legitimacy with the ability to com- long-term goals and indicators. mit. A process needs to be established that allows long-term objectives to be monitored by a body other than the government in Balancing predictability and flexibility place at a given point in time. There may be Promoting a transition toward a more a role for an “independent environmental environment-friendly grow th pathway council� that monitors environmental poli- requires balancing the credibility and pre- cies for consistency with agreed-upon long- dictability of long-term objectives on the one term objectives. hand and the flexibility of the selected strat- Building consensus. How a national strat- egy on the other. Credible and predictable egy is developed and implemented strongly long-term objectives are necessary to help influences its sustainability, credibility, and coordinate economic actors and promote predictability. National strategies help bring CRAFTING A GREEN GROW TH STRATEGY 155 together diverse groups of stakeholders (busi- coordinating mechanisms to ensure that nesses, worker unions, and civil society) to environmental concerns are mainstreamed build connections, exchange viewpoints, raise in government activity. Poverty reduction awareness, and build a sustained political strategies, economic development plans, commitment. This approach signals to soci- disaster risk reduction strategies, and cli- ety that signi�cant and durable efforts will be mate strategies provide opportunities for dedicated to environmental protection. this to happen. Local authorities play a vital role, given Consider the case of climate strategies. that it is at the local level that citizens experi- One way for countries to balance climate ence the destructive impact of environmental policy and development objectives is through degradation (such as atmospheric pollution) national climate plans and low-emission and government is often empowered to take development strategies. Already, more than corrective action (through land-use planning 47 countries have low-emission development or the regulation of economic activity). Local strategies supported by bilateral or multi- authorities have proved to be willing innova- lateral bodies; many more have issued cli- tors, offering opportunities to test policies mate change–related strategies on their own and build consensus before scaling up. (World Bank 2011b). Some countries, such as Brazil and France, For instance, India’s National Action Plan have tried to build consensus through open on Climate Change defines eight national and participatory approaches involving polit- “missions,� including policy programs for ical parties and civil society. Ahead of the energy ef�ciency, a sustainable habitat, and preparation of its National Plan on Climate sustainable agriculture. Bangladesh’s 2009 Change, Brazil created the Brazilian Forum Climate Change Strategy and Action Plan on Climate Change, which brought together requires reviewing and revising existing gov- representatives from government, civil society, ernment policies to ensure that they take cli- business, universities, and nongovernmental mate change impacts into account. Climate organizations to mobilize society around a change “focal points� within all line minis- climate plan of action. Public participation tries are to work in coordination with a cli- took the form of a national conference on the mate change unit housed within the Ministry environment and sector dialogues. of Environment and Forests (Government Approaches that feature iterative, multi- of Bangladesh 2009). Other country strate- stakeholder involvement and extensive con- gies outline a central interministerial body to sultation with the private sector and civil coordinate climate activities, including with society create the transparency and politi- key economic ministries (table 7.1). cal buy-in to make commitments to green Another way to integrate economic and growth sustainable. Extensive consultation environmental goals is to require that the can also help address some of the governance environment be brought into core govern- risks inherent in climate change—which is ment operations. A logical place for this to characterized by complexity, uncertainty, occur is through the budget, as the budget and asymmetries in information. It is par- process is the central means of ensuring that ticularly important to ensure opportunities expenditures are aligned with policy goals for the indigenous and poor communities to and that proper consideration is given to the voice their concerns and priorities (Transpar- trade-offs involved when climate-related con- ency International 2011). cerns and growth objectives clash. For exam- Jointly setting economic and environ- ple, carbon pricing schemes, subsidy reform, mental goals. At the strategic level, integrat- and energy and infrastructure investment ing environmental concerns with broader decisions all affect the �scal balance (as dis- government activity involves systematically cussed in chapter 2). As a result, �nance min- evaluating government policies through istries and other core government and devel- an environmental lens and creating new opment planning actors must be key players 156 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T TABLE 7.1 Inter-ministerial arrangements for coordinating on climate change strategy in selected countries Country Arrangement Bangladesh National Steering Committee on Climate Change headed by the Minister of Environment and Forests oversees the work of the Ministry of Environment and Forests’ climate change unit, which works with climate change focal points in each line ministry. Brazil Inter-ministerial Commission on Climate Change is chaired by Ministry of Science and Technology and includes the Ministry of Planning, Budget, and Management, and the Ministry of Finance, among others. India Advisory Council on Climate Change, led by the prime minister, oversees climate policy. Coordinating unit within the Ministry of Environment and Forests implements the National Action Plan on Climate Change. Ad hoc inter-ministerial commissions will address the eight national “missions� identi�ed in the National Action Plan. Indonesia National Committee for Climate Change includes representatives of all departments with responsibilities related to mitigation or adaptation. Mexico Inter-secretarial Commission on Climate Change, led by the Secretary of Environment and Natural Resources and including the Secretary of the Economy as well as other line ministries and agencies, is charged with promoting and coordinating the national plan and associated activities. South Africa Inter-ministerial Committee on Climate Change coordinates government climate change actions and aligns climate policy with existing legislation and policy. Vietnam National Steering Committee headed by the prime minister and representing all major line ministries oversees the work of a unit within the Ministry of Natural Resources and Environment that is to coordinate implementation of the National Target Program to Respond to Climate Change. Source: Governments of Bangladesh 2009; Brazil 2010; India 2008; Indonesia 2009; Mexico 2009; South Africa 2010; and Vietnam 2008. in developing and implementing green poli- Balancing relevance and enforceability cies. The Republic of Korea’s national green Key dimensions of the needed balancing growth strategy (box 7.1) and many national act between relevance and enforceability of climate strategies have already begun to environmental objectives include the choice reflect this reality. of indicators with which to measure prog- • The Indonesian Ministry of Finance has ress toward objectives; the time horizon over taken a leading role in national climate which environmental objectives should be policy. In 2009, it issued a green paper selected; and the scale (national, local, or outlining actions to support the country’s sectoral) at which environmental objectives agenda on climate change (Government of are set.1 Indonesia 2009). It was the lead national The choice of indicators. Potentially partner for a World Bank country study accurate indicators may be dif�cult to set or on low-carbon growth. enforce, and easier-to-implement indicators • Ministries of � nance in Morocco and the may be less relevant. For climate change, a Philippines, among others, are undertak- natural indicator for measuring mitigation ing climate change public expenditure is a “long-term carbon budget,� which mea- reviews to help align spending with cli- sures global carbon emissions over the course mate change and development objectives. of a given period of time, say, a century • As part of Niger’s participation in the (Matthews and others 2009; Meinshausen Pilot Program for Climate Resilience— and others 2009). But carbon budget commit- which provides assistance for integrating ments are dif�cult to introduce and enforce. climate resilience into national develop- Indeed, there is an incentive for decision mak- ment planning—the Ministry of Econ- ers to delay investments and efforts beyond omy and Finance will house a strategic their mandate. unit to coordinate actions taken under Another possibility is to de� ne emission the country’s climate resilience program targets at one or several points in time— (PPCR 2010). such as the European objective of reducing CRAFTING A GREEN GROW TH STRATEGY 157 BOX 7.1 Implementing a green growth strategy in the Republic of Korea Korea has moved assertively to become a leader in crisis, reducing the country’s energy dependency, implementing green growth policies and defining and rebalancing the economy toward green sectors a global green growth agenda. Its two-tier strat- over the long term. egy focuses on a short-term response to the current Korea’s $30.7 billion stimulus package, adopted in global economic crisis and a long-term transition 2009, was the greenest of any country, with 80 per- toward green growth through export-focused green- cent of all funds going toward environment-friendly tech research and development. In acting as a res- projects (World Bank 2010). Investments initially olute � rst mover, Korea has exposed itself to both targeted infrastructure as a short-term response to risks and potentially high payoffs. the crisis. Projects funded included the development Policy makers in Korea are seeking transforma- of renewable energy sources, energy-ef�cient build- tion, not marginal adjustment, of the economy, ings, and low-carbon vehicles; the expansion of rail- seeking to move it away from its current heavy reli- ways; and the management of water and waste. Most ance on energy-intensive industries (which doubled of the green investment funded three initiatives: river its greenhouse gas emissions during the 1990s) and restoration, expansion of mass transit and railroads, massive energy imports (which account for two- and energy conservation in villages and schools. thirds of imports). In pursuing green growth, they Together, the three projects were projected to create are combining three complementary and mutually 500,000 jobs (World Bank 2010). reinforcing objectives: responding to the economic Source: http://www.greengrowth.go.kr. greenhouse gas emissions by 20 percent selected to meet the short-term goal may lock by 2020. This type of objective is easier to in technology and infrastructure, making it enforce, but setting an objective for a par- impossible to reach longer-term objectives ticular point in time removes some flexibil- (Vogt-Shilb and Hallegatte 2011). To meet an ity as to when and how to act, leading to ambitious long-term objective, a short-term higher costs. target may need to be achieved by imple- The time horizon over which environ- menting options that have greater potential mental objectives are set. Relevance would (or suffer from greater risks of lock-in or favor setting very long-term objectives, but irreversibility). Urban policies such as land doing so risks encouraging policy mak- use planning or mass transportation may not ers and economic actors to delay action. be required to reach short-term targets (for Shorter-term goals are needed to ensure that instance, in terms of emissions by 2020). But action is taken. Shorter-term milestones are considering the timescale of such policies, also useful because there is less uncertainty they need to be implemented without delay surrounding technologies and economic con- if longer-term (2050), more ambitious targets ditions over the short term, making it easier are to be met. to de�ne relevant targets. It thus makes sense The scale (national, local, or sectoral) to combine a long-term objective (such as at which environmental objectives are set. limiting global warming to less than 2°C) Where objectives are economy wide (such as with shorter-term objectives (such as reduc- a carbon tax), the economic system has full ing emissions by 20 percent by 2020). flexibility to reach the objective by taking Short-term goals complement rather than action where it is least expensive to do so. replace long-term goals. If a short-term Given the information asymmetry between goal is an end in itself, it may make sense to governments and economic agents, it makes implement the least expensive solution. But sense to let market-based mechanisms deter- in this case, there is a risk that the solutions mine where it is most cost-effective to act 158 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T (Laffont 1999). But the government cannot reduce reliance on diesel generators and is set credible and predictable signals over the combined with demand-side action and meas- very long term, and economic agents do not ures to transition to cleaner sources of energy. anticipate changes that occur over decades. Similarly, building coastal dikes can be part As a result, there is underinvestment in of a long-term land-use strategy to manage land-use planning, resilient infrastructure, risks—although if it is not combined with research, and other interventions critical to appropriate maintenance and land use regu- greening growth but whose benefits take lations, it can increase vulnerability. Given time to materialize. these kinds of consequences, a green growth Given these constraints, action at the sec- strategy needs to be designed before individ- tor level may make sense in sectors with sig- ual projects are evaluated and selected. ni�cant potential for both lock-in and green impacts (Vogt-Schilb and Hallegatte 2011; Step 1: Identify economic and social chapter 3). Overlapping sectoral objectives— objectives and key obstacles such as the 20 percent renewable energy tar- get in Europe, fuel-economy standards in the Step 1 is to identify the key economic and automobile industry, and changes in urban social objectives in terms of the growth and planning, building norms, and infrastructure welfare channels noted in the green growth design—may thus be part of an ef�cient miti- framework presented in chapter 1 (the � rst gation policy. three bullets relate to growth; the last two, However, sectoral policies are vulnerable to welfare): to regulation capture, rent seeking, and inef- • Increase production factors (human, ficient micromanagement (Laffont 1996; natural, and physical capital). Rodrik 2005). Rent-seeking behavior is • Enhance ef�ciency, by correcting market likely to affect policies even in countries with failures to move closer to the production strong institutional capacity and appropri- function (the maximum production level ate checks and balances (Anthoff and Hahn possible with the available technology, 2010; Helm 2010). Systematic appraisal of physical capital, labor, and environment, policies, using cost-benefit analysis where assuming maximum ef�ciency). feasible, can mitigate these risks (see a dis- • Push out the production frontier, by cor- cussion on such analysis below). It is also recting innovation and dissemination important for national authorities to ensure market failures in order to be able to pro- that sector policies are developed through a duce more with less. transparent process that provides opportuni- • Increase economic resilience and reduce ties for all stakeholders to contribute. vulnerability to natural hazards and com- modity price volatility. A step-by-step process • Increase the job content and poverty for crafting a green growth reduction of growth (that is, move toward strategy “inclusive growth�). How should policy makers design a green In addition, policy makers need to take growth strategy that �ts the country’s require- other important policy goals—such as main- ments? This section proposes a series of steps taining a balance in regional and local devel- to follow. A key principle is that individual opment, which may also offer a potential projects need to be assessed with respect source of synergy—into account. to a strategy rather than in an abstract and Once the objectives have been identi�ed, isolated way. For instance, building coal- the next step is to identify the market or powered electricity plants can be a useful institutional failures that retard growth and short-term component of a strategy to green limit well-being (table 7.2). Hausmann and electricity over the long term, if doing so helps others (2008) claim that different countries CRAFTING A GREEN GROW TH STRATEGY 159 TABLE 7.2 Channels through which green policies could contribute to growth Channel Questions Possible priorities Increase in production factors Which categories of capital (physical, natural, Increasing transportation (and export) (human, natural, and physical capital) human) are important in limiting economic capacity, improving secondary education growth or in reducing population welfare? and population health Enhanced efficiency (correcting What are the greatest inefficiencies in the Reducing urban congestion and energy market failures to move closer to the economic systems? costs, increasing energy supply reliability, production frontier) increasing employment of young quali�ed workers Outward movement in the What are the obstacles to innovation and to Improving worker skills and property production frontier (correcting innovation adaptation and dissemination? right protection, reducing entry costs for innovation and dissemination market innovative �rms, improving access to capital failures to be able to produce more with less) Increases in economic resilience Is the economy particularly vulnerable to Diversifying the economy, reducing energy exogenous shocks such as commodity intensity and dependency on imported price volatility, natural disasters, energy, reducing vulnerability to large-scale or competitor innovations? disasters, improving food security Increases in the job content and What are the major problems in the labor Reducing rural or urban poverty, mitigating poverty reduction of growth market and poverty reduction, and ethnic segregation, �ghting poverty traps, (moving toward “inclusive growth�) why have they persisted up to now? improving access to capital for the poor face different obstacles to growth and that objectives, and preferences and to avoid con- growth-enhancing policies need to be targeted flicts between the green growth strategy and to address the speci�c obstacles. A study by other planning initiatives. the Organisation for Economic Co-operation and Development (OECD 2011a) proposes Step 3: Consider six types of that green growth strategies be developed by interventions and identify �rst identifying speci�c obstacles to growth. synergies Step 3 is to determine which types of policy Step 2: Identify environmental interventions would help a country reach its objectives and lock-in risks environmental goals while also improving Step 2 is to identify (1) the environmen- economic growth and social welfare. This tal improvements that are most likely to report singles out six types of interventions. increase welfare and (2) the risks of irre- Pricing and � scal policies: taxes, subsi- versibility in both the environmental and dies, or subsidy removal (chapter 2). Fiscal economic domains. The idea is to focus on policies can be used to guide economic welfare-improving environmental objectives behavior and create environmental and eco- that preclude a “grow dirty, clean up later� nomic bene�ts. Governments need to assess pathway. Examples include improving water fiscal policies as a whole, taking account quality, reducing air pollution and flood of the trade-offs between alternative ways losses, protecting soils, and avoiding irre- to source and apply funds. Reallocating versible destruction of coral reefs. Here (as resources from fuel subsidies to spending on in Step 1), the analysis should combine scien- education, health, and infrastructure will ti�c and economic information from reports, help reach environmental objectives and local knowledge, and widely agreed priori- increase economic growth. Reallocating ties. It should rely on broad consultations to these funds to services that are accessible to ensure consistency with population goals, the poor will also help reduce poverty. Oil 160 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T dependency, and thus vulnerability to oil Innovation and indu stri al policies price volatility, can be mitigated by impos- (chapter 3). The greening of the economy ing an energy tax, to favor energy-ef�cient requires growing new industries, along with technologies and equipments. Such policies developing and disseminating new technolo- would provide environmental bene�ts and gies. This process can be eased with speci�c enhance economic resilience. policies that target (1) the development and Political economy considerations will play dissemination of technologies and innova- an important part in determining the feasi- tions, by correcting the effect of a knowledge bility of a realignment of �scal policies with spillover, and (2) the development of new green growth objectives. Interest groups will industries and sectors, by correcting the effect resist the withdrawal of subsidies and tax of nonenvironmental market failures (such incentives. Nonetheless, as recent efforts by as coordination failures and capital market the Islamic Republic of Iran to reduce fuel imperfections). subsidies illustrate, progress can be made. A Green industrial policies can help dissemi- phased approach supported by communica- nate new technologies (especially when they tion and complementary policies that real- have been tested and demonstrated in devel- locate resources to the poor can help build oped countries) and develop new competitive constituencies for reforms. In some cases, sectors. Examples of green industrial policies resources may need to be allocated temporar- that have been used include feed-in tariffs for ily to compensate losers, even if they are not solar electricity, or subsidies to research and the poor or needy. Building in sunset clauses development (R&D) in renewable energy. to such compensatory programs may help Countries with a latent competitive advantage prevent temporary relief becoming another in renewable energy (such as North Africa with permanent subsidy. solar energy) may want to pursue this advan- Institutions, norms and regulations, and tage with the hope of creating a viable and behavior-based policies (chapter 2). Eco- competitive industry. However, support must nomic incentives can be usefully comple- carefully balance market failures and govern- mented with other types of instruments. For ment failures given the risks of policy capture instance, where low building energy ef�ciency and rent-seeking, especially where institutions contributes to high energy imports, introduc- and civil society are weak (chapter 3). ing regulations or creating new mechanisms Education and labor markets policies to make dwelling owners invest in insulation (chapter 4). Green transitions are likely to and ef�cient appliances could yield a double involve structural change away from some dividend, strengthening the economy and industries and toward new ones. Experience protecting the environment. with trade liberalization offers valuable les- Policy makers must consider how environ- sons as to how to reduce the cost and length mental policies affect businesses and individu- of such structural changes. In particular, als, taking into account their decision-making policies that facilitate the movement of work- biases and the noneconomic incentives that ers from one sector to another can accelerate affect behaviors. A strategy that takes these the transition and reduce adjustment costs. aspects into account—by, for instance, fram- Where such movement is impeded by skill ing policy changes within a positive collec- issues, training programs can help—for tive project and providing individuals with example by training construction employees feedback on how they behave with respect to ef�ciently retro�t buildings. to the project—will be more efficient than Natural capital, agriculture, and ecosys- one based on an economic argument alone. tem services management (chapter 5). An Information disclosure programs that require excellent way of greening agricultural pro- �rms to publish their level of pollutant emis- duction is through conservation agriculture, sions can be as efficient as and less costly which simultaneously yields environmental than a norm. bene�ts (by reducing pollution of waterways CRAFTING A GREEN GROW TH STRATEGY 161 from nutrients and increasing carbon seques- urban area could reduce air pollution and tration in soils); increases the efficiency of spur growth (thanks to the benefits from production (by reducing the use of energy urbanization and concentration). Multiple inputs); increases resilience (by frequently bene�ts can also be reaped from multipur- rotating crops); and increases agricultural pose infrastructure such as water reser- productivity in the long run (by reducing ero- voirs that produce hydroelectricity, mitigate sion and enhancing soil structure). floods, and ensure minimum river flow dur- But for this to work, there needs to be bet- ing drought. And regional integration in ter information underlying decision making infrastructure design and investments can and better access to this information. For improve the efficiency of the system, for example, greater access to weather and cli- instance by increasing the reliability of elec- mate information services for farmers can tricity generation and allowing for a greater improve resilience in the agricultural system penetration of renewable energy. and the overall value chain, including pro- duction, post-harvesting, storage, and market Step 4: De�ne priorities access. It can also help innovations to succeed (such as in weather-based risk products). Policy makers face limitations in terms of the Infrastructure, building, urbanism, trans- capacity and resources to design and imple- port, and energy (chapter 6). Green sectoral ment reforms and the political and social interventions can help increase factors of capital to launch several reforms simultane- production, push out the production fron- ously. They therefore need to de� ne priori- tier, enhance ef�ciency, improve resilience, ties based on urgency (to avoid lock-in and create jobs, and reduce poverty. In some irreversibility) and synergies (the existence of countries, urban congestion and the lack of local and immediate bene�ts that will help efficient transportation reduce well-being diminish political and social resistance). and hold back economic growth, on top Priorities can be de�ned by examining the of causing negative environmental effects. policy options identi�ed in step 3 through the Investments in public transit and changes lens of political and social acceptability and in land-use plans to favor a more compact lock-in risk, as done in table 7.3. Columns TABLE 7.3 Some guiding principles for establishing green growth strategies Local and immediate benefits LOWER HIGHER (Trade-offs exist between short-and (Policies provide local long-term or local and global benefits) and immediate benefits) LOWER (action is less urgent) • Drinking water and sanitation, solid waste • Lower-carbon, higher-cost energy management Inertia and/or risk of lock-in supply • Lower-carbon, lower-cost energy supply • Carbon pricing • Loss reduction in electricity supply and irreversibility • Stricter wastewater regulation • Energy demand management • Small-scale multipurpose water reservoirs HIGHER • Land use planning (action is urgent) • Reduced deforestation • Public urban transport • Coastal zone and natural area • Family planning protection • Sustainable intensi�cation in agriculture • Fisheries catch management • Large-scale multipurpose water reservoirs 162 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T organize policies for the extent of local and priorities and strategic choices. Such a review immediate bene�ts they offer. Some policies should rely on a multicriteria analysis, given provide immediate synergies between the the limitations of cost-bene�t analysis. economy and the environment (such as reduc- The limitations of cost-bene�t analysis. ing leaks in water networks), whereas others The standard cost-bene�t analysis—which is involve trade-offs, at least in the short term commonly used to evaluate public policies or (restricting development in coastal areas, for investment projects—is necessary but needs example). Rows classify interventions for the to be supplemented by other approaches for extent to which they prevent irreversibility green growth policies. The reason is that and lock-in. Policies may need to be imple- cost-bene�t analysis encounters three major mented more urgently even where they imply dif�culties when applied to environmental or trade-offs, simply because acting later would green growth policies. be more costly or even impossible. Other pol- First, some of the benefits (or costs) are icies can be postponed because they do not dif�cult to assess and measure. Environmen- involve signi�cant inertia. tal bene�ts are often problematic to quantify In designing a green growth strategy, pri- and value, beyond the assessment of health ority should go to policies that are high in impacts. But some economic benefits, like terms of local and immediate benefits and innovation-related or resilience-related ones, more urgent (such as public urban transport are also dif�cult to assess and are thus often and sustainable intensi�cation in agriculture). left out of the analysis. For instance, the Policies that provide local and immediate innovation bene�t of a demonstration project bene�ts, even if they are not urgent, can be cannot usually be quanti�ed. More generally, implemented at any level of income. bene�t-cost ratios consider only one project It is more difficult to implement poli- at a time and often cannot take into account cies that are urgent but involve significant the integration within a broader, longer-term trade-offs (such as reduced deforestation). strategy and the consistency with priorities But these policies would be more costly—or and strategic choices. even impossible—to implement later. For this Second, different stakeholders often assign reason, these policies require international very different weights to different types of cooperation, especially when they affect consequences, and differences in world views global challenges, such as climate change. and priorities translate into different pref- Developing countries (especially low- erences for design and targets of policies. income countries) should focus on environ- Cost-benefit analysis requires agreeing on mental policies that have a negative or zero values—something that can be very dif�cult economic cost thanks to synergies with to achieve. development (such as developing hydropower Third, many of the tools and policies that where appropriate, or implementing speci�c can be part of a green growth strategy involve urban plans); have a positive economic cost signi�cant uncertainties. For instance, reduc- but large direct welfare impacts, that is, when ing vulnerability to oil shocks is a clear eco- they target local environment goods such as nomic bene�t, but is dif�cult to quantify in local air pollution or natural risks; and whose the absence of reliable probabilistic estimates cost can be offset with external resources of future oil volatility. This uncertainty arises (such as carbon trading). from many sources, including technological change, climate change, and policy ef�ciency and enforcement. Cost-bene�t analysis can Step 5: Conduct a systematic analysis of capture uncertainty when it can be translated the policies and projects included in the into probabilities for different outcomes. green growth strategy Where policies and projects involve deep Step 5 is to thoroughly review each policy uncertainty, however—as green growth poli- and project as a function of the selected cies often do—it is very dif�cult to estimate CRAFTING A GREEN GROW TH STRATEGY 163 probabilities or reconcile different stakehold- In 2002, the United Nations Framework ers’ world views. Convention on Climate Change developed Differing world views, diverging priori- guidelines for using the adaptation assess- ties, and the use of multicriteria analysis. ment process in low-income countries. A green/wealth accounting system would The guidelines suggest using multicriteria allow the consequences of green policies analysis to prioritize adaptation measures to be aggregated and policies compared. (U NFCCC 2002). 3 In 2011, the United However, as noted in chapter 2, aggrega- Nations Environment Programme proposed tion is dif� cult, because many prices are a multicriteria decision-making tool for cli- missing; aggregation also raises ethical mate policies in its Multi-Criteria Analy- and philosophical issues on which there sis for Climate (MCA4Climate) project is little consensus. In the absence of such (box 7.2). The project lists the various ben- an accou nting system , many policies efits, co-benefits, costs, and co-costs of a will involve difficult trade-offs between set of environmental policies to ensure that improving the environment and tradition- coeffects are included. ally measured growth. 2 Thus, it is useful This multicriteria approach is particu- to complement the cost-benefit analysis larly appropriate for green growth, because with decision-making methods that facili- it allows analysts to identify trade-offs and tate capturing—if only qualitatively—the synergies and present decision makers with full costs and bene�ts and the correspond- the information they need to capture the ing uncertainty. potential for co-benefits from green poli- For these reasons, multicriteria analysis cies. A variety of indicators can be used to can be useful, at least as a �rst screening tool. measure the potential benefits from green It does not provide an objective ranking of all growth policies. Each of the channels shown possible actions, but it allows decision mak- in table 7.4 could be further broken down ers to include a full range of social, environ- (for example, improved environment could mental, technical, and economic criteria and be split into biodiversity, air pollution, and policy goals in a balanced manner—mainly climate). Many institutions—including the by quantifying and highlighting trade-offs OECD (2011b), World Bank (2011a), and between conflicting objectives that are dif�- the United Nations Statistical Division that cult to compare directly and agree on. created the System of Environmental and Multicriteria analysis is widely applied Economic Accounting—have proposed indi- to environmental issues, including disaster cators for this purpose. risk reduction and climate change adapta- Applying such a process would ensure tion assessments. In the past several years, that the real motives for implementing a it has been applied to urban flood risk project are taken into account. For exam- in France (Viguie and Hallegatte 2012) ple, a demonstration of new technology and Germany (Kubal and others 2009); that depends on economies of scale to be to adaptation options for climate change ef� cient would not be expected to pass a in the Netherlands (Brouwer and van Ek cost-bene� t analysis (or to reach the clas- 2004; De Bruin and others 2009); to cli- sically required return on investment) that mate change–related health risks (Ebi and does not take this demonstrator status Burton 2008); and to adaptation planning into account. These bene� ts can be made in Canada (Qin and others 2008). Older explicit by simply identifying the projects’ examples include identifying vulnerabil- contribution to a set of policy objectives, ity in the agricultural sector and assess- as Morocco did for a solar power project ing alternative crop options (Julius and (box 7.3). Scheraga 2000), and prioritizing climate Of course, no methodology provides change adaptation options in Africa (Smith a purely objective way of making deci- and Lenhart 1996). sions; it can communicate only trade-offs 164 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 7.2 MCA4Climate: A practical framework for planning pro-development climate policies Climate change is a pervasive and complex prob- National Adaptation Programs of Action, and other lem, with uncertainty surrounding its multifaceted broad, economy-wide climate strategies. impacts. Setting priorities is hampered by the lack MCA4Climate rests on three main principles: of a systematic and comprehensive description of • Climate change policy has multidimensional the issues concerned, the links among them, and the implications for human societies and the environ- trade-offs involved. Structured guidance is needed ment, affecting multiple interests and a wide range to underpin long-term policy planning in this area— of values and priorities. guidance that systematically considers the direct and • If formulated appropriately, policy responses to indirect economic, social, environmental, and insti- climate change can help meet country-specific tutional costs and impacts. development objectives. The goal of the MCA4Climate initiative is to help • Nonmonetary values, uncertainty, and the long- � ll this gap by developing practical guidance that term dynamics of environmental, socioeconomic, enables governments to identify low-cost, environ- and technological systems are inherent to climate mentally effective, and pro-poor climate mitigation change. They should be considered in the develop- and adaptation policy choices. The multicriteria ment of any policy response to it. framework offers a useful planning tool for prioritiz- ing and populating with concrete measures, includ- Source: UNEP 2011. ing Nationally Appropriate Mitigation Actions, TABLE 7.4 Framework for measuring potential bene�ts from green growth policies Type of benefit Channels Examples of indicators Environmental Improved environment Indicators speci�cally developed for the domain in question (for example, reduction in greenhouse gas emissions, natural area protected from development, air or water quality) Economic Increase in factors of production (physical capital, Measured by the additional production from human capital, and natural capital) increased capital (potentially measured by the value of ecosystems or renewable resources), or by the value of additional capital Accelerated innovation, through correction of Measured by productivity indicators (for example, market failures in knowledge efficiency of photovoltaic panels used to produce electricity) or dissemination indicators (for example, the fraction of the population with access to photovoltaic electricity) Enhanced efficiency, through correction of non- Measured by indicators for resource efficiency environmental market failures (for example, the material or energy intensity of production, reduction in the value of time lost from congestion), or by additional production Social Increased resilience to natural disasters, Measured by metrics related to the project, from commodity price volatility, and economic crises avoided disaster losses (in monetary terms) or number of people at risk from floods to a measure of the vulnerability to oil price volatility Job creation and poverty reduction Measured by the number of jobs created or an indicator of the impact on the poor (for example, reduction in the number of people without access to drinking water and sanitation) CRAFTING A GREEN GROW TH STRATEGY 165 BOX 7.3 Using a policy framework to analyze the bene�ts of Morocco’s Ouarzazate concentrated solar power project Through a public-private partnership, the World • It will contribute to Morocco’s energy and cli- Bank is helping � nance the � rst phase of a 500 meg- mate change objectives of security of supply, awatt Ouarzazate solar power plant in Morocco. energy diversification, and reductions in CO 2 The project’s goal is to increase power generation emissions, as well as other economic and social from solar power, along with mitigating greenhouse objectives, such as helping start a new green gas emissions and the deleterious effects of power industry, developing interior regions of the coun- production on the local environment. try, and creating jobs. The project illustrates the limits of a cost-bene�t • It will test the use of storage technology in con- analysis when a project has nonmonetary objec- centrated solar plants, create a precedent for the tives and is part of a broader national strategy. Both use of the public-private partnership business cost-effectiveness analysis and cost-bene�t analysis model to develop concentrated solar power plants indicate that the project is not economically justi�ed in Morocco and elsewhere, and contribute to under prevailing economic conditions. However, a regional integration of the electricity market in the simple listing of policy objectives and the project’s Mediterranean. contributions to these goals can help identify co- These co-bene�ts can be identi�ed using the six bene�ts that would otherwise be ignored. rubrics shown in table B7.3.1. The multicriteria anal- • The project seeks to help develop a globally avail- ysis is thus useful for decision makers, even though able noncarbon power generation technology and it should not replace the cost-bene�t analysis, which to reduce the cost of concentrated solar power provides invaluable information. worldwide (a global public goods bene�t). TABLE B7.3.1 Co-bene�ts of the Ouarzazate concentrated solar power project Type of benefit Channels Examples of indicators Environmental Climate change mitigation Reduced greenhouse gas emissions Economic Increase in factors of production (physical capital, Added electricity production capacity human capital, and natural capital) Local learning on solar technologies Accelerated innovation, through correction of Demonstrate technology that has market potential in region, market failures in knowledge given likely latent competitive advantage and capacity to export solar resources to Europe Institutional innovation through the development of PPP Reduce cost of concentrated solar power globally Enhanced efficiency, through correction of non- None environmental market failures Social Increased resilience to natural disasters, Diversifying energy in Morocco commodity price volatility, and economic crises Job creation and poverty reduction Creating jobs and new industries Spurring economic activity in interior regions of the country Source: Based on the “Ouarzazate Concentrated Solar Power Project for Morocco� Project Appraisal Document. to de c i sion m a ker s . For i n st a nc e , a Uncertainty and the need for cost-bene�t analysis will provide different robust decision making answers if different aggregation methods are used (how to aggregate losers and win- Assessing the costs and bene�ts of a green ners) or if different valuation methods are growth strategy is extremely dif�cult, espe- used (how to measure ecosystem losses in cially when the future is dif�cult to project monetary terms). or even describe using probabilities.4 166 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T Uncertainty surrounding green growth about land-use planning, water manage- strategies stems from at least three sources: ment, and electricity production. • Many factors of success are not controlled Green growth strategies need to be robust by national decision makers. Such factors with respect to these uncertainties. Kalkulh include the availability of technologies and others (2012) highlight how the optimal from abroad; the price of internationally policy in the presence of perfect knowledge traded goods such as oil, minerals, and on technology potentials and market failures food; economic growth and imports and differs from the optimal policy in the pres- exports from other countries; and green ence of deep uncertainty. Disregarding uncer- or trade policies in other countries. tainty and basing actions on the most likely • There are many implementation obstacles, scenario is dangerous and may lead to unde- and it is dif�cult to predict how ef�cient sirable outcomes (box 7.4). innovation policies will be or how quickly Cost-bene�t analyses can be extended to production costs will fall when produc- consider multiple states, each with a prob- tion volumes increase. ability of occurrence. These probabilities are • Scienti�c uncertainty is high. No one can sometimes determined by a frequency-based project future changes in local climates method (How often did the event occur in with certainty, complicating decisions the past?) or by belief-based analysis, such as BOX 7.4 Incorporating uncertainty in protecting Ho Chi Minh City Ho Chi Minh City already experiences extensive exceed the maximum values considered in the design routine flooding; increased precipitation and rising phase. These surprises require significant revisions sea levels in the coming decades could permanently to the plans. The canals and pipes built principally inundate a large portion of the city, placing the poor to upgrade the discharge capacity of the storm sewer at particular risk and threatening new economic system and address land up-� lling may not be able development in low-lying areas. to handle increased flows. Increases in precipitation In response to these challenges, Ho Chi Minh and tide levels observed over the past decade already City has developed plans for, and started implement- exceed those projected and may top dikes and barriers. ing numerous infrastructure projects to mitigate Future saline intrusion and rainfall intensity may be flood risks. Over the years, its multibillion dollar more severe than anticipated, potentially rendering the investment plans in sewerage and drainage infra- poldering plans obsolete before they are approved. structure have included 6,000 kilometers of canals In addition, unforeseen effects may cause signi�- and pipes covering 650 square kilometers in the cant harm and increase risk in Ho Chi Minh City. city to upgrade the discharge capacity of the storm Since the plan was created, the city has experienced sewer system and address land up-� lling; roughly unprojected urbanization in low-density areas, per- 172 kilometers of dikes and river barriers, mainly haps because of the illusion of safety associated with to control tides; and a tide control plan that uses at the presence of flood prevention infrastructure there. least 12 gates and 170 kilometers of dikes to create The city’s Steering Committee for Flood Control is a polder system. concerned that the insuf�ciency of the planned infra- These plans were based on the best predictions structure may exacerbate flooding in some areas. If of future climate and development available at the it does, the legacy of the intervention will have been time they were made. Recent analysis suggests, how- to increase vulnerability. ever, that climate change and urbanization will be The Steering Committee is now preparing an greater than expected. In fact, some variables already integrated flood management strategy to harmonize (continued next page) CRAFTING A GREEN GROW TH STRATEGY 167 BOX 7.4 (continued) the master plans for the storm sewer system, flood role of persistent, deep uncertainties as a new com- control system, and urban development. Aware of ponent in its planning process. the consequences of underestimating uncertainty, Maximizing the robustness of strategies may they have chosen a robust approach to address con- require changes in decision-making approaches. Tra- cerns that their earlier approaches to planning con- ditional decision-making processes address quanti�a- sistently under- or misestimated uncertainties; that ble uncertainty (risk) by predicting a future state and plans proved brittle to assumptions that proved designing a plan or project for the conditions of that inaccurate, leading to costly realignment; and that it state. This approach produces optimal results for the was often dif�cult to reach consensus among diverse intended future, but its application may be increas- actors and agendas. Through an integrated, robust ingly limited when faced with larger uncertainties. approach, the Steering Committee is accepting the Source: Hallegatte and others 2012. Bayesian analysis (What are the odds of the FIGURE 7.1 Schematic for crafting solutions in the presence of event? How much do I trust my model?). deep uncertainty But as uncertainty grows, it becomes more dif�cult to characterize the probability of an learn act learn event’s occurrence, particularly when mul- tiple stakeholders with differing values and expectations are involved. In such a situation, revise the optimal solution may be designed for a world whose existence is uncertain; that solu- Source: Hallegatte and others 2012. tion may perform poorly in other plausible, yet unanalyzed, worlds. In such a context, solutions should be adopted that are more is done through a stakeholder consultation robust—often achieved by making them flex- process that identi� es the available strate- ible and allowing for adjustment over time, as gies or “policy levers,� then determines the new information becomes available. Learn- criteria for appraising these strategies and ing and action are thus conducted in paral- the range of uncertainties to consider. Next, lel, in an iterative process that includes learn- decision makers proceed through an itera- ing and monitoring as a major component tive process, identifying the vulnerabilities (�gure 7.1). “Waiting for more information� that different scenarios expose and how is never an option: information has to be cre- these can be addressed until the vulner- ated, through experimentation, monitoring, abilities are reduced to an appropriate level. and analysis. If information is not suf�cient This robust decision-making approach can to make an investment decision, a learning be managed through a consultative process plan is required. or supported by sophisticated modeling The robust decision-making approach (box 7.5). helps design strategies able to cope with deep This approach is particularly relevant uncertainty (Lempert and others 2003). It when multiple policy goals and world views starts with analyzing a candidate strategy coexist, because it allows for a flexible de�- to determine its vulnerability to surprise nition of success and failure. A cost-bene�t and uncertainty. It then tries to reduce this analysis requires a consensual objective vulnerability, thereby increasing the overall function that is able to rank all potential resilience of the strategy. In practice, this outcomes. In contrast, the robust decision- 168 I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T BOX 7.5 Using robust decision making in water planning in southern California water Planners have traditionally used historical stream UWMP could perform poorly and miss many of its flow data and weather patterns to develop sea- goals, causing economic losses. sonal water forecasts. But because climate change is Additional runs of the model, using more than expected to change weather patterns, air tempera- 200 scenarios and 8 additional management strat- ture, and precipitation patterns in an as yet unpre- egies, were then performed. In 120 of the scenar- dictable fashion at the local scale, planners are now ios, cost was 20 percent higher than expected. The seeking methods to incorporate the impacts of cli- analysis revealed that UWMP was particularly vul- mate change into their planning processes. nerable when future conditions were drier, access In 2006, the RAND Corporation worked with the to imported water more limited, and natural per- Inland Empire Utility Agency (IEUA), in Chino Hills, colation of the groundwater basin lower. Strategies California, to test its robust decision-making frame- ranged from increasing water use ef� ciency, recy- work. In 2005, IEUA released its Regional Urban cling storm water to replenish groundwater, and Water Management Plan (UWMP), in response to developing the region’s water recycling program. In a projected population increase of 800,000 to 1.2 all cases, augmenting the UWMP with additional million people by 2030. The document outlined a management strategies reduced both costs and plan to meet future water demands by improving vulnerability. water use ef�ciency and developing local resources. The analysis concluded that local solutions should The robust decision-making analysis took the not be overlooked when developing ways to mitigate UWMP as its initial strategy, used climate infor- the impacts of climate change. Local policies and mation from the National Center for Atmospheric management opportunities may be more cost effec- Research, and employed a planning system from the tive, reliable, and feasible than other options. Stockholm Environment Institute to assess how dif- Under the robust decision-making analysis, the ferent policy levers would perform under a variety of best management plan was found to be adaptive possible futures. and to include near-term implementation of more The � rst run of the model evaluated the proposed water use ef�ciency techniques. Presented with these management plan under four climate scenarios. Its results, water managers expressed increased con� - � ndings generally indicated that if the impacts of cli- dence that they could plan for the effects of climate mate change were minimal, the UWMP would meet change despite the uncertainty of forecasts. its supply goals for 2030. However, if climate change were to cause signi� cant warming and drying, the Source: For more information, see http://www.cakex.org/case-studies/1029. making approach makes it possible to com- One critique of robust approaches is their bine different performance criteria. It is thus sensitivity to the worst-case scenario. This useful for the design of green growth policies, tendency is not an artifact of the method- which are based largely on the identi�cation ology; rather, it reflects the reality of some of synergies across policy goals. choices; in other cases, decision makers Both robust and optimal techniques are can judge that hedging about a worst-case necessary elements in a decision-making pro- scenario is too expensive and not worth cess involving signi�cant uncertainties. Anal- it. Robust processes deal with this issue yses focused on optimality are vulnerable to through stakeholder participation and overcon�dence bias. Robust approaches dwell exchanges with experts. The choice of the on consequences and eschew risky behavior. worst-case scenario is thus a negotiated, Managed risk-taking, however, is an essential participatory process that plays a key role in part of development and inseparable from determining which policy options will even- innovation. tually be implemented. CRAFTING A GREEN GROW TH STRATEGY 169 This type of approach is particularly Notes appropriate in the context of green growth, 1. This section draws heavily on Vogt-Schilb because it allows analysts to identify the and Hallegatte (2011). policies and measures that are necessary to 2. With widely accepted prices (and an agreed avoid getting locked into patterns that will upon discount rate), all the components of be extremely dif�cult to change in the future. future welfare can be summarized in a single Robust decision making thus helps identify number (which can be referred to as “wealth�). measures that are needed over both the short In this case, a policy is “good� (it increases and medium terms. wealth) or “bad� (it decreases wealth). Moreover, the deep uncertainty surround- 3. For an example of standardized multicriteria ing environmental issues affects the type of analysis scoring for a variety of adaptation solutions that need to be implemented. As actions, see Republic of Burundi (2007). any good solution must be context speci�c, 4. This section relies extensively on Hallegatte and others (2012). the application of “best practices� is dif�cult. Two general rules can be proffered, however. 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ECO-AUDIT Environmental Benefits Statement The World Bank is committed to preserving Saved: endangered forests and natural resources. • 18 trees The Office of the Publisher has chosen to • 7 million BTUs of print Inclusive Green Growth: The Path- total energy way to Sustainable Development on recycled • 1,876 pounds of net paper with 100 percent postconsumer fiber in greenhouse gases accordance with the recommended standards • 8,489 gallons of for paper usage set by the Green Press Ini- waste water tiative, a nonprofit program supporting pub- • 536 pounds of lishers in using fiber that is not sourced from solid waste endangered forests. For more information, visit www.greenpressinitiative.org. As the global population heads toward 9 billion by 2050, decisions made today will lock countries into growth patterns that may or may not be sustainable in the future. Care must be taken to ensure that cities and roads, factories and farms are designed, managed, and regulated as ef�ciently as possible to wisely use natural resources while supporting the robust growth developing countries still need. Economic development during the next two decades cannot mirror the previous two: poverty reduction remains urgent but growth and equity can be pursued without relying on policies and practices that foul the air, water, and land. Inclusive Green Growth: The Pathway to Sustainable Development makes the case that greening growth is necessary, ef�cient, and affordable. Yet spurring growth without ensuring equity will thwart efforts to reduce poverty and improve access to health, education, and infrastructure services. Countries must make strategic investments and farsighted policy changes that acknowledge natural resource constraints and enable the world’s poorest and most vulner- able to bene�t from ef�cient, clean, and resilient growth. 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