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Climate negotiations and development: how can low-income countries gain from a Climate Negotiation Framework Agreement?

Working papers

Written by Leo Peskett, Dirk Willem te Velde

Climate change negotiations can have more important welfare consequences for poor countries than other negotiations such as the current trade negotiations. This paper reviews key negotiation issues in the run-up to Copenhagen climate change negotiations, sets out key scenarios and models their effects on incomes in poor countries. The paper suggests that developing countries gain from emissions stabilising policies as they enjoy lower environmental damages but they suffer a reduction in Gross Domestic Product (GDP) if they themselves are subject to emissions stabilising policies without a breakthrough in technological change. Climate finance can enhance GDP in developing countries, but they will only stimulate green growth if public finance initiatives do more than substitute for domestic investments.

We consider three main negotiation issues: emissions reductions, technology transfer and climate finance. Using an Integrated Assessment Model (RICE98) which includes negative effects of environmental damages on income levels, albeit in a relative conservative way, we find that sub-Saharan Africa (SSA) can gain 1% of (accumulated) GDP by negotiating strong emission reductions (e.g. 80%-95% cuts on 1990 levels by 2050) in developed countries, but would lose up to 2% of GDP if it takes on emission reductions (15% by 2020) itself. Cheaper green technology, in developed and developing countries will raise incomes of developing countries considerably.

Climate finance (which is additional to current aid commitments) to Africa for adaptation and mitigation can raise SSA incomes, but it is crucial to understand which levels of finance to negotiate for. For example, funds for mitigation and adaptation worth $ 28 billion per year (in 1990 prices and hence corresponding the estimates contained in the EC blueprint) alleviates GDP losses for developing regions such as Africa when it reduces emissions by 15% by 2020 although the scenario still leads to a loss in GDP compared to a Business as Usual (BAU) scenario in which no action to reduce emissions is taken. So additional climate finance goes some way to compensate for reduced emissions.

Scaled-up climate finance worth around $ 95 billion per year (within the range of the WB’s WDR 2010) and available equally for all developing countries according to their levels of income per capita, leads to a gain of around 0.2% of GDP (again assuming Africa is subject to a 15% emissions constraint by 2020) compared to a BAU scenario.

The scenarios of greatest economic value to Africa are those in which there are ambitious cuts in developed and large developing country emissions, large finance packages but no specific emissions constraints for poor countries, in which case transfers from rich to developing countries enhance growth, reduce emissions and allow an earlier introduction of domestic purchases of backstop technologies. This scenario would raise Africa’s GDP by up to 6% (compared to BAU).

The paper clearly shows that various negotiation outcomes can have substantial and differential development effects on developing countries. Further work could shed light on the details of specific negotiation issues and the sensitivity of the results to using different model specifications.

Nicola Cantore, Leo Peskett and Dirk Willem te Velde