To what extent can developing countries move towards low carbon growth without compromising economic development? This study reviews the literature on the economics of climate change. It finds that all countries need to act decisively in order to reduce emissions, and that preventing economic growth targets from increasing emissions will require significant additional investment. However, these extra costs may not be prohibitive, and low carbon patterns of growth may offer opportunities for developing countries. These include improving efficiency and lowering energy costs, developing low carbon industries, improving technology, raising carbon finance through international mechanisms and safeguarding natural resources.
Without action from the developing world, stabilisation targets towards preventing more than a two degrees centigrade temperature rise will be impossible to achieve. This is because a rapid increase in the emissions of developing countries is likely over the next 10-15 years, driven by greater energy demands.
Climate resilient patterns of growth are not well-defined or understood in practice. It is not yet clear how low carbon growth and climate resilient growth will fit together: whether they will naturally align or whether they will involve conflicts or trade-offs.
Few analyses have dynamically assessed the wider impacts of low carbon patterns of growth on the economy using macroeconomic analysis. However, those that have point to growth reductions of less than one per cent, and in some cases increased growth due to improved economic efficiency, access to carbon financing (subsidising investment), and emerging industries. These analyses are premised on significant emissions cuts, back to and below base year levels. Therefore, while extrapolating such findings to other countries and regions is problematic, it seems that less ambitious cuts in specific countries should not undermine growth. Further findings are that:
- The impacts of low carbon patterns of growth on the economy are not uniformly distributed. For example, specific sectors (such as heavy industry) incur more job losses, and higher energy costs particularly affect people with lower incomes.
- Economic assessments rarely capture the costs associated with implementation, which include transaction and policy costs.
- The extent of the transition towards low carbon patterns of growth in developing countries will depend on the progress of an international agreement, political will and economic self-interest.
Developing countries will need to invest in adaptation measures to ensure both climate resilience and economic growth. However, as investment to ensure greater climate resilience could impact on growth in the short term, complex tradeoffs may emerge, and policy implementation remains a key challenge. It is vital to improve understanding of how to take forward low carbon and climate resilient patterns of growth in synergy.
- At the macro-economic level, sectoral shifts away from climate sensitive areas such as agriculture will need to be encouraged.
- Climate-resilient patterns of growth must be considered in addition to the current economics of climate change and costs of adaptation.
- For all developing countries, additional investment levels will require international cooperation to ensure long-term certainty for investors, and robust mechanisms to enable carbon trading.
- It is important to both recognise and quantify the co-benefits of low carbon growth, so as not to overplay the economic costs at the expense of wider policy benefits.
- Opportunities should be pursued in sequence, reflecting cost, technological maturity and ease of implementation.
- It is important to have effective policies across all sectors and the capacity to access international finance.
