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A green stimulus to help developing countries cope with economic turmoil and climate change

Written by Jodie Keane

By Jodie Keane and Jessica Brown

Drastic steps have been taken to provide life support to the global financial system. It has been estimated that the UK has spent almost as much as 20% of GDP on financial bailouts so far; the US - almost 7%; and Norway - almost 14%.

A crisis that began in financial markets is now being felt throughout the real economy – hitting production and jobs. Global growth was projected by the IMF to be above 2% in October 2008; this has been revised to just 0.5% (measured by purchasing power parity) or negative if measured in market exchange rates. This means a reduction of global GDP or a loss of wealth at unprecedented levels since World War II.  Growth projections have been, and continue to be, revised for individual countries. Most developed countries, and a growing number of middle income countries, have announced countercyclical fiscal stimulus packages.

But to what extent do these packages that are intended to allay the impact of the financial crisis on the real economy take into account the other global crisis – climate change? If well designed, fiscal stimulus packages could provide a unique opportunity to kill two birds with one stone: to re-energise the global economy and incite the low-carbon investments needed to begin to mitigate climate change at a significant scale. This piece presents a preliminary stock-take of the proportion of green elements in global fiscal stimulus measures and the proportion destined for developing countries.  

Size of fiscal stimulus packages
The fiscal stimulus packages launched to date to mitigate the impact of the global financial crisis are estimated to account for an average of around 3.2% global GDP (though estimates do range from 3% to 5%) or $2.2 trillion. But, based on growth revisions, it is estimated that the global financial crisis has already led to an output loss of $2.7 trillion: $737 billion from developing countries of which $51 billion is estimated to be from sub-Saharan Africa. Private capital flows are projected to decline by 82% in 2009, relative to 2007.  

The developing world is likely to be hit hard by the crisis, given the enormous impact on capital flows.  Robert Zoellick, President of the World Bank, has argued for 0.7% of stimulus packages to be set aside for a ‘vulnerability fund’ for poor countries. ODI research by Dirk Willem te Velde has  argued recently for a ‘rainbow’ stimulus package to developing countries that includes green elements.

Green elements of fiscal stimulus packages
Many policy makers are calling for a ‘Green New Deal’ to stimulate the global economy and advocate that a percentage of National stimulus packages go towards green investments. While it is still too early to make a definitive green ranking of fiscal stimulus packages, some initial indications are clear.

According to the Guardian, the US stimulus package includes $100 billion for green measures, accounting for 13% of the total package (less than 1% of GDP). South Korea allocated roughly 33% of its recovery package (around3% GDP) to green measures; similarly China, which is concentrating its efforts on the push for energy efficiency. Some 14% of the EU’s recovery plan is estimated to be green, with Germany accounting for most of this; Poland’s bail out has no green component; Italy’s is insignificant at the moment. The proportion of the UK’s package estimated to be green is in the region of £535 million, or just 0.05% of GDP.

What proportion destined for developing countries is green?
Lord Stern has urged governments to create a green global package of $400 billion (£279 billion): this equates to roughly 20% of the total stimulus money being invested (assuming a £1.4 trillion total stimulus). The UN is calling for around 1% of global GDP to be spent on efforts to green the global economy – equal to roughly $750 billion. Current ‘green’ elements of stimulus packages have been estimated to be in the region of $430 billion, just 0.6% of global GDP. This suggests that Stern’s target may have been met in terms of total commitments, while the UN target has not. But the mobilisation of funds and the proportion destined to be spent on green investment in developing countries – including finance for green investment – is much less clear.  

There is a strong case to be made for investing in a ‘low-carbon economy’ in developing countries; according to McKinsey (2009) 70% of greenhouse gas (GHG) mitigation and abatement opportunities are in the developing world. The fastest growth in carbon emissions is projected for developing countries, whose collective share of global emissions is projected to exceed developed countries by around 2025.
It has been estimated that developing countries require between $65-90 billion a year, on average, between 2010 and 2020 to mitigate emissions and, therefore, to help to avoid dangerous climate change. This includes improving energy efficiency and developing new low-carbon energy supplies. A stimulus package delivered to developing countries that contained green elements could indeed help kill the two birds with one stone.  There is, for example, potential for clean energy projects in Sub-Saharan Africa. If fully realised, this estimated technical potential could more than double the region’s current installed capacity. Latin America may have a comparative advantage in pursuing a low-carbon, or green growth path by investing in hydroelectricity, smart transport systems, conserving its large forestry reserves through tapping into carbon markets and maintaining, expanding and maximising other clean energy opportunities.

The mitigation of future emissions includes those sectors that lay the foundations for future economic growth, such as energy supply, transportation and infrastructure – known as horizontal enablers – the sectors that contribute most to carbon emissions based on existing practices. Missing the opportunity to make countercyclical ‘green’ investments in developing countries now, and strengthen the relationships required to unlock low-carbon opportunities, could mean storing up problems far larger than the global financial crisis for the future. Developing countries are likely to be hit the hardest by adverse effects from climate change. Estimates of the annual funds required for adapt to climate change in developing countries range from $10 to $86 billion annually; but these estimates increase the longer efforts to mitigate emissions are delayed. 

It is likely that the proportion of a green stimulus to developing countries will be limited. From a development point of view, it is unclear what the implications of this would be. Some may argue that a fiscal stimulus package, distracted by a call for green elements, is likely to be less effective in terms of spurring growth for developing countries. Others may argue that a lack of green investment in Least Developed Countries (LDCs) could imply that these countries may be further marginalised as the global economy makes a low-carbon transition.

It is not yet clear whether a green fiscal stimulus package can actually achieve both outcomes: growth and climate change mitigation. But sending a clear signal on commitments to low-carbon growth for the global economy, and for developing countries in particular, could foster the confidence needed to fuel a ‘green’ recovery. It may also help to increase the likelihood of an international deal on climate change at the UNFCCC conference in Copenhagen.