How will the economies of developing countries be affected by efforts to deal with climate change? This report examines the impact of international mitigation policies on economic opportunities in developing countries. Greater understanding of the impacts of different mitigation policies on developing countries is needed to inform the decision-making of developed country policymakers’. More importantly, such understanding can help developing countries to start taking advantage of new opportunities and to protect themselves from new risks arising from mitigation. Donors need to increase support for developing countries’ low carbon growth efforts, and compensate countries where they lose out from international mitigation efforts.
There is a growing body of literature assessing the impact of climate change on developing countries. But there is much less work exploring how developing countries’ economies will be affected indirectly by mitigation policies adopted by the international community. This report examines the impact of a selection of international mitigation policies, including: carbon taxes, border tax adjustments, the Clean Development Mechanism (CDM), Reduced Emissions from Deforestation and Forest Degradation (REDD+) and carbon labelling.
These policies have a number of potential economic impacts, which also depend on the various transmission mechanisms, such as trade, foreign direct investment (FDI), aid, changes in consumer preferences and private sector responses. The effects of mitigation will also depend on levels of cooperation in the international community.
Mitigation policies will create both threats and opportunities for developing countries:
- Mitigation policies that drive down the price of fossil fuels will benefit fossil fuel importers and be detrimental to fossil fuel exporters.
- A carbon tax is likely to affect developing countries negatively. Border tax adjustments could be negative for developing countries that export affected products, but could benefit importers of those products.
- Emissions trading schemes would benefit Middle Income Countries (MICs) by reducing the cost of mitigation and stimulating trade and FDI.
- Reform of the Clean Development Mechanism and a phased approach to REDD+ could both generate considerable benefits.
- Liberalisation of trade in environmental goods and services will be beneficial. Carbon labelling could benefit developing country exporters that produce goods in a relatively carbon efficient way.
- The establishment of a multilateral technology fund could stimulate increased technological innovation and technology transfer to developing countries, strengthening mitigation and facilitating low carbon growth.
Developing countries’ ability to take advantage of the economic opportunities that mitigation will present depends on their investment climate, their management of new trade opportunities and higher aid and capital inflows, and their institutional framework. Furthermore:
- Net oil and fossil fuel exporters need to focus on reducing emissions. These countries could diversify or invest in carbon capture technologies that may become an important export market.
- Oil importing countries should develop a policy framework and infrastructure that promotes renewable energy. Countries with carbon assets should lobby for financial support for adaptation and try to influence the international agenda.
- Relatively industrialised countries should support the CDM since they stand to gain most from liberalisation of environmental goods and services.
- Agricultural countries need to understand how carbon labelling or consumer preferences will affect demand for agricultural produce.
- Developing countries for whom exports are important should invest in domestic certification schemes to benefit from carbon labelling. They should diversify their sources of income.
