Accelerating investment in green growth (41)
By Brindusa Fidenza
As the world economy continues efforts to regain its balance, emerging markets are forecast to contribute most of the global growth by 2015 and according to the OECD, are likely to account for 60 percent of global gross domestic product (GDP) by 2030.
This global growth path could lift a further 3 billion people in developing countries out of poverty and into the mostly urban middle classes within the next two decades — an economic forecast to be celebrated in the midst of more challenging growth estimates for Europe, the United States and Japan.
However, the associated rise in demand for energy, water, urban development, transportation and agricultural infrastructure to help meet this growth forecast is unprecedented. A cumulative investment in infrastructure of $18.1 trillion will be needed by 2030, according to a recent analysis undertaken for the World Economic Forum’s Infrastructure Initiative.
Close to $1 trillion a year on average is a huge investment challenge to meet. In addition, a gathering body of analysis suggests that a business-as-usual approach to investment in traditional, emissions- and resource-intensive infrastructure will not result in the sustainable growth that many developing countries seek, and may even decrease economic resilience in some cases.
For example, by 2030 there could be a 40 percent gap between global water demand and supply, with the situation worse for those developing countries, particularly in the Middle East and Asia, that are already using freshwater supplies unsustainably.
In the agricultural sector, investment in traditional practices to meet the expected doubling of demand for production by 2030 could increase land under cultivation from 1.5 trillion hectares to 3.2 trillion hectares, leading to large-scale deforestation with negative land, water and climate change consequences.
Increase in energy demand
The energy sector also holds tremendous challenges. The International Energy Agency forecasts a 40 percent increase in energy demand by 2030, driven almost entirely by growth in developing and emerging countries.
Without action to decarbonize energy infrastructure, investments in the energy sector will continue to accentuate the world’s reliance on emissions-intensive fossil fuels for close to 60 percent of total power generation for this period.
In addition to increasing greenhouse gas emissions, following such an approach will expose developing countries to increased volatility in fossil fuel prices, as imports of oil and coal rise.
The consequences are potentially dramatic. Given these scenarios, scientists and other observers warn that the world is heading for a global average increase in land temperature of between 4 and 6 degrees Celsius by the end of the century, when in fact the average global temperature increase should be maintained within 2 degrees to avoid the negative impacts of climate change.
The latest scientific analysis suggests the world has already experienced an average land mass warming of 1 degree since 1950; for every degree rise in average land temperature, scientists estimate an increase in the potential for more extreme weather events.
Some commentators suggest that we are already seeing the early signs of things to come, with changing weather patterns (droughts and heavy rainfall) in many parts of the world, such as the recent floods in Thailand, the Philippines and Pakistan that have claimed many lives, left millions of people affected and created billions of dollars in economic damage.
Fortunately, some good news exists. The multitude of initiatives, policy and business-driven commitments that are being announced on the margins of the Rio+20 negotiations stand as proof of the potential for the public and private sectors to work together to achieve sustainable growth.
Supported by international agencies, an increasing number of governments in developing countries are changing their approach to infrastructure and industrial planning to make their economic growth more sustainable and resilient.
This is not just an abstract concept. China has devoted key parts of its last three five-year plans to developing a green growth strategy for energy, agriculture and infrastructure, investing over $51 billion in new renewable energy projects in 2010 alone, according to Bloomberg New Energy Finance.
Recently, Mexico enacted a national law making the reduction of greenhouse gas emissions by 30 percent by 2030 a legal commitment. Other emerging economies such as Brazil, South Africa, South Korea, Kenya, Vietnam, and increasingly India are promoting green growth policies to enhance the resilience of their economic development.
Many other developing countries are following suit. According to the Global Status Report of the Renewable Energy Network (REN21), by the end of 2010, 96 countries had enacted renewable energy targets, 60 had bio-energy mandates and at least 30 were developing some form of low-carbon growth path.
The goal of these national strategies, which includes policies on renewable energy, energy efficiency, transport and agriculture, as well as market-based carbon tax and trade mechanisms, is to direct significant investment flows into resource-efficient, job-creating growth.
The role that organizations such as the Global Green Growth Institute (headquartered in Seoul) are playing in helping developing countries design comprehensive green growth strategies is already showing initial successes in countries such as Ethiopia or Indonesia.
The move among many developing countries to make their infrastructure investment and their growth strategies green in general has important economic implications.
Bloomberg New Energy Finance shows that in 2011 global investment in new renewable power plants — estimated at $187 billion — surpassed that of power plants fuelled by natural gas, oil and coal — of $157 billion — for the first time.
2011 was also the first year when expenditure on renewable energy in developing countries, driven by China, exceeded that of the industrialized world.
These conditions present a window of attractiveness for investment into these growth markets. In the current economic circumstances, the fiscal outlook is more optimistic in developing countries, where debt to GDP ratios have been falling in recent years, as growth has been maintained and where as a consequence, risk premiums have continued to decrease.
The economic performance of emerging markets, including several in sub-Saharan Africa, has improved greatly in recent years, as is the case with emerging market countries such as India that can attract more investment and are in a better position to absorb capital flows aimed at an expansion in investment.
Sustainable world economy
To support the dramatic increase in private investment that is needed to transform towards a sustainable world economy, this past July 17 at the Mexican Business 20 (B20) Summit, the World Economic Forum launched a new public private partnership initiative entitled the Green Growth Action Alliance, with Mexican President Felipe Calderon taking the role of Honorary Chair.
The alliance aims to deploy public money to unlock and utilize private sector investment for clean energy, transport, agriculture and other green growth areas. It will feed results into key international processes such as for example the G20, the climate change international negotiations.
The alliance has defined five areas of action: it will work to promote free trade in green goods and services, to achieve robust carbon pricing across the world market, to end inefficient subsidies and other forms of fossil fuel support, to accelerate low-carbon innovation and to increase efforts to direct public funding towards the most effective mechanisms and instruments that can help leverage private investment.
Nearly fifty of the world’s largest energy companies, international financial institutions, and development finance institutions have already joined the alliance.
This coalition will work closely with governments and non-governmental organizations efforts, including existing initiatives, such as the United Nations’ Sustainable Energy for All initiative, the Green Climate Fund, the International Development Finance Club currently chaired by Germany’s promotional bank KfW, and the San Giorgio Group — a policy research collaborative initiative by the Climate Policy Initiative, the World Bank and the OECD. Its main objective will be to enable, support and scale up existing projects looking at achieving real impact.
Among others, the World Economic Forum, in collaboration with the members of the alliance will be supporting the piloting of new mechanisms for green infrastructure and adaptation investments in specific countries, building new innovative financing models for green infrastructure which leverage private sector finance, identified through work in Mexico, India, Kenya, and Vietnam, among others.
Unlocking private finance
Concretely, as an example, it will assist Mexico in unlocking private finance for investments in businesses and technologies that will help achieve its legal requirement to reduce green house gas emissions by 30 percent by 2020. In partnership with governments, the alliance will identify key green growth initiatives, design strategies to overcome these obstacles, and draw in private investment.
In Kenya, the forum has already been working with the national government, international and local businesses to help them understand what are the various bottlenecks to the deployment of private finance of clean energy at scale and work collaboratively to design and develop potential solutions.
The Mexican President Felipe Calderon, who is also chairing the G20 this year, said, “The G20 Mexican Presidency welcomes this initiative and supports its efforts to define the practical steps business can take, in partnership with government, to deliver the green growth agenda. The Alliance will also play an important role in tracking our progress in leveraging private finance for green growth.”
Brindusa Fidanza is associate director and deputy head of Climate Change Initiatives at the World Economic Forum where she engages governments, the private sector and development institutions in collaborative approaches to designing public-private financing mechanisms that unlock low-carbon markets in developing countries. She is currently leading Green Investment initiative work in several African countries. She is also a contributor to the World Economic Forum’s Sustainable Competitiveness Index and represents its low-carbon work in inter-governmental preparatory meetings such as for the Clean Energy Ministerial and the G20.