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Decarbonizing
Development
Decarbonizing
Development
Three Steps to a Zero-Carbon Future
Marianne Fay
Stephane Hallegatte
Adrien Vogt-Schilb
Julie Rozenberg
Ulf Narloch
Tom Kerr
© 2015 International Bank for Reconstruction and Development / The World Bank
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DOI: 10.1596/978-1-4648-0479-3
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v
Climate Change and Development
The Climate Change and Development Series was created in 2015 to showcase economic
and scientifi c research that explores the interactions between climate change, climate
policies, and development. The series aims to promote debate and broaden under-
standing of current and emerging questions about the climate-development nexus
through evidence-based analysis.
The series is sponsored by the Climate Change Vice Presidency of the World Bank,
and its publications represent the highest quality of research and output in the
institution on these issues. The group is committed to sharing relevant and rigorously
peer-reviewed insights on the opportunities and challenges presen t in the
climate-development nexus with policy makers, the academic community, and a wider
global audience.
vii
Contents
Acknowledgments .........................................................................................................................xiii
Abbreviations .................................................................................................................................. xv
Overview ..........................................................................................................................1
Planning for a Low-Carbon Future: What We Need to Do Now
Depends on the End Goal ..............................................................................3
Enabling the Transition with a Policy Package That Is Effi cient,
Acceptable, and Credible ................................................................................8
Managing the Transition: Protecting Poor People and Avoiding
the Potential Pitfalls of Reforms ..................................................................15
In Conclusion ................................................................................................20
References ......................................................................................................21
Part I Planning for a Low-Carbon Future: What to Do Now Depends
on the End Goal ................................................................................................23
1. Reducing Carbon Emissions to Zero ..................................................................25
Stabilizing the Climate Requires Zero Net Emissions.................................25
Zero Net Emissions Requires Action on Four Fronts .................................27
Notes ..............................................................................................................36
References ......................................................................................................37
2. Acting Sooner Rather than Later ........................................................................39
Feasible Really Means Cost-Effective ...........................................................39
Cost-Effectiveness Requires Early Action ....................................................42
The Costs of Early Action Should Be Modest .............................................46
Early Action Paths Are Prudent ...................................................................50
Notes ..............................................................................................................51
References ......................................................................................................52
3. Planning Ahead with an Eye on the End Goal ..................................................55
Factor in Uncertainty, Disagreement, and Multiple Objectives .................55
Focus on What Is Urgent and Carries Co-Benefi ts .....................................58
Build Sectoral Pathways to Carbon Neutrality ............................................68
viii
Contents
Annex 3A: Tools to Develop Sectoral Pathways to
Zero Emissions ..............................................................................................69
Notes ..............................................................................................................73
References ......................................................................................................73
Part II Enabling a Low-Carbon Transition: Prices and More ..............................77
4. Getting Prices Right ..............................................................................................79
A Necessary Step: Removing Fossil-Fuel Subsidies .....................................79
The Economics of Carbon Prices—Pretty Straightforward .......................84
Notes ..............................................................................................................90
References ......................................................................................................91
5. Building Policy Packages That Are Acceptable, Credible,
and Effective ...........................................................................................................95
Ensuring the Needed Technologies Are Available
and Affordable ..............................................................................................96
Ensuring the Needed Infrastructure Is in Place ........................................104
Tackling Other Factors—Such as Behavior—That Reduce the
Impact of Price Incentives ..........................................................................109
Notes ............................................................................................................113
References ....................................................................................................113
6. Getting the Finance Flowing .............................................................................119
Growing the Pie ..........................................................................................120
Greening the Pie .........................................................................................126
Notes ............................................................................................................135
References ....................................................................................................135
Part III Managing the Transition: Protecting the Poor and Avoiding
the Potential Pitfalls of Reforms ................................................................137
7. Ensuring the Poor Benefi t ..................................................................................139
Direct Distributional Impacts of Right Pricing—Possibly
Positive? .......................................................................................................140
Revenue Recycling Enables Redistribution and Allows for
Pro-Poor Climate Policies ..........................................................................141
Managing Perceived Impacts ......................................................................144
Land-Use-Based Mitigation—Impacts Depend on Design .....................146
ix
Contents
Notes ............................................................................................................148
References ....................................................................................................148
8. Smoothing the Transition to Make It Happen .................................................153
Managing Concentrated Losses .................................................................154
Managing the Fears of Competitiveness Loss ...........................................156
Managing the Risk of Government Failures..............................................158
Notes ............................................................................................................162
References ....................................................................................................162
Boxes
1.1 The “Full” Story on Greenhouse Gases..................................................................27
2.1 An Extreme Case of Commitment—Urban Forms ..............................................44
3.1 Short-Term Strategies Need to Be Designed Keeping the Long-Term
Goal in Mind—Examples from Brazil and Germany ...........................................64
3.2 A World Bank Software for Comparing Abatement Options:
MACTool ................................................................................................................. 66
3.3 Using Space to Design Deforestation Policies .......................................................67
4.1 Agricultural Subsidies Are Also Sizable .................................................................82
4.2 Progress on Fossil-Fuel Subsidy Reform ...............................................................83
4.3 Gaining Momentum on Carbon Pricing ...............................................................85
4.4 Public Acceptance of Carbon Taxes: Good Communication Helps ....................86
4.5 Global Mechanisms to Cut Emissions from Deforestation and Forest
Degradation ............................................................................................................90
5.1 Fiscal Instruments to Encourage Demand for Clean Technology
Products ................................................................................................................103
5.2 Combining Carbon Pricing with Infrastructure Development
in Paris ...................................................................................................................105
5.3 Orchestrating Renewable Power Scale-Up—The Case of India
and Australia .........................................................................................................108
6.1 Infrastructure Investment Needs Illustrate the Challenges Faced in
Securing Long-Term Financing in Developing Countries .................................121
6.2 Innovative Public Finance at Work ......................................................................132
6.3 Global Innovation Lab for Climate Finances “Call for Ideas” ..........................133
6.4 A Toolkit of Banking Regulation Measures for Low-Carbon Finance ..............134
7.1 Nonprice Instruments Are Often Regressive ......................................................143
7.2 Tips on a Good Communication Strategy for Fossil-Fuel Reform ....................144
7.3 Managing the Impacts of Global Land-Use Initiatives on the Poor .................147
x
Contents
Figures
O.1 The Tortoise and the Hare: Not Starting Early Will Entail More
Drastic Emission Cuts Later .....................................................................................5
O.2 Using a Longer Time Frame Changes the Optimal Policy Mix for Brazil .............7
O.3 Devising a Strategy Requires Information on Time, Cost, and
Emission-Reduction Potential .................................................................................8
O.4 How to Assess the Obstacles to Low-Carbon Solutions .......................................12
O.5 Using Fossil Fuel Subsidy Resources for Universal Cash Transfers
Benefi ts Poor People ...............................................................................................16
1.1 Rising Cumulative Emissions of CO
2
Mean Rising Temperatures .......................26
1.2 Carbon Neutrality Is Needed by 2100 to Achieve Climate Goals ........................28
1.3 The Four Pillars of Decarbonization .....................................................................29
1.4 The Possible Paths to Decarbonizing Electricity ...................................................30
1.5 Low-Carbon Energy Sources Must Become Much More Widely Used ...............31
1.6 The Transport Sector Needs to Tackle Both Effi ciency and Fuel Shifting ...........32
1.7 The Building Sector Can Focus First on Effi ciency ..............................................33
1.8 The Industry Sector Doesn’t Fall Neatly into Any One Approach .......................34
1.9 Changing the Way We Eat Can Help .....................................................................35
2.1 Delaying the Peak Date Means Cutting Emissions even Faster Later ..................41
2.2 Long-Lived Capital Lasts a Very Long Time..........................................................43
B2.1.1 Viewing Paris through a Public Transport Lens ...................................................44
2.3 A Majority of Known Fossil-Fuel Reserves Will Need to Stay in
the Ground ..............................................................................................................45
2.4 Early Action Results in Fewer “Stranded Assets”...................................................46
2.5 Mitigation Costs Rise with More Ambitious Target, but with a Big
Uncertainty Range ..................................................................................................47
2.6 The Costs of Mitigation to Reach the 2
°
C Target Varies across Regions ..............48
2.7 Lower Air Pollution Means Lower Mortality Rates ..............................................49
2.8 Early Action Investments Kept Manageable by Lower Needs in
Some Sectors ...........................................................................................................50
3.1 Some Countries Worry Much More about Environmental Issues
than Others .............................................................................................................57
3.2 Evaluating a Policy Package along Several Dimensions ........................................58
3.3 Marginal Abatement Cost Curves Provide Information on the Cost
and Potential of Emission-Reduction Options .....................................................61
B3.1.1 Using a Longer Time Frame Changes the Preferred Investment Plan .................64
3.4 Devising a Strategy Requires Information on Time, Cost, and
Mitigation Potential ................................................................................................66
xi
Contents
B3.3.1 The Costs of Avoiding Deforestation in the Brazilian Amazon ...........................67
3A.1 Formulating a Power Sector Strategy for Europe and North Africa ....................72
4.1 Fossil-Fuel Subsidies in the Middle East Distort Incentives for
Clean Energy ...........................................................................................................80
4.2 Fossil-Fuel Subsidies in the Middle East Lengthen Payback Period for
Investments in Energy Effi ciency ...........................................................................81
4.3 A Rising Rate Can Offset a Declining Tax Base .....................................................89
5.1 Green Innovation Generates Much Greater Knowledge Spillovers than
Brown Innovation ..................................................................................................97
B5.2.1 Carbon Taxes Work Best When Public Transport Is Available ...........................105
5.2 Institutions with a Shadow Carbon Price Use a Range of Value That
Increases over Time .............................................................................................109
5.3 How to Assess the Obstacles to Low-Carbon Solutions ....................................110
5.4 What Matters Is the Relative Lifetime Energy Cost ............................................113
6.1 After Two Decades of Growth, Private Infrastructure Investments in
Developing Countries Seem to Have Plateaued .................................................122
6.2 Project Preparation Costs Can Sharply Increase the Overall Tab ......................123
6.3 Multilateral Development Bank Lending for Infrastructure Peaked in 2010 ....125
6.4 Annual Green Bond Issuances Are Up Dramatically .........................................130
7.1 Using Fossil-Fuel Subsidy Resources for Universal Cash Transfers
Benefi ts Poor People .............................................................................................142
B7.2.1 Most Egyptian Households Were Unaware of the Size of the
Energy Subsidy .....................................................................................................145
Maps
B4.2.1 Many Countries Are Moving to Reform Fossil-Fuel Subsidies ............................83
B4.3.1 More Countries Are Turning to Carbon Pricing ..................................................85
5.1 Pinpointing Where to Install Large Solar Power Plants in South Africa ...........100
Tables
3.1 Some Guiding Principles for Establishing Green Growth Strategies ...................59
3.2 Examples of Possible Sectoral Targets for Tracking Progress toward
the Decarbonization End Goal ..............................................................................68
xiii
Acknowledgments
This report was written by a team led by Marianne Fay and Stephane Hallegatte
comprising Adrien Vogt-Schilb, Julie Rozenberg, Ulf Narloch, and Tom Kerr.
Contributions were made by Sue Aimee Aguilar, Mook Bangalore, Laura Bonzanigo,
Deb Chattopadhay, Tamaro Kane, Berit Lindholdt Lauridsen, and Aditi Maheshwari.
This report benefi ted from extensive discussions with Simon Zadek and Nick Robins
from the United Nations Environment Programme’s Inquiry into the Design of a
Sustainable Financial System program. We gratefully acknowledge the comments and
advice provided by our peer reviewers: Ottmar Edenhofer, Christophe de Gouvello,
Christina Hood, Somik Lall, Mike Toman, and Xiaodong Wang. Other useful inputs
and suggestions were provided by Sameer Akbar, Judy Baker, Morgan Bazilian,
Pablo Benitez, Carter Brandon, Paula Caballero, Omar Chaudry, Moez Cherif,
Charles Cormier, Shanta Devarajan, Gerhard Dieterle, Toan Do, Nina Doetinchem,
Chas Feinstein, Ravi Gupta, Justin Piers Hill, Abhas Jha, Norman Kimber, Gary Kleiman,
Andreas Dietrich Kopp, Jolanta Kryspin-Watson, Alan D. Lee, Eun Joo Lee,
Muthukumara Mani, Brunno Faria Maradei, Alexias Pantelias, Neeraj Prasad,
Grzegorz Peszko, Ivan Rossignol, Cecilia Sager, Ernesto Sanchez-Triana,
Jonathan Sinton, Wendy Werner, Sven Wunder, and Fan Zhang.
The report was edited by Laura Wallace (lead editor) and Joanne Platt of Publications
Professionals LLC (copy editor). This report was sponsored by the Climate Change
Vice Presidency of the World Bank under the leadership of Rachel Kyte.
xv
Abbreviations
CCS carbon capture and sequestration
CFL compact fluorescent lamp
CO
2
carbon dioxide
ETS Emissions Trading System
EU European Union
GHG greenhouse gas
GtCO
2
gigatons of carbon dioxide
GW gigawatt
IEA International Energy Agency
IFC International Finance Corporation
IPCC Intergovernmental Panel on Climate Change
LED light-emitting diode
MAC marginal abatement cost
MACTool Marginal Abatement Cost Tool
MDB multilateral development bank
MtCO
2
metric tons of carbon dioxide
MWh megawatt-hour
OECD Organisation for Economic Co-operation and Development
PPM parts per million
R&D research and development
REDD+ reducing emissions from deforestation and forest degradation and other
forest-based mitigation activities
VAT value added tax
All monetary values are in U.S. dollars unless otherwise noted.
1
Overview
Stabilizing climate change entails reducing net emissions of carbon dioxide (CO
2
) to zero. This
report outlines three principles to guide countries in their efforts to create a zero-carbon future:
(a) planning ahead with an eye on the end goal; (b) going beyond carbon pricing with a policy
package that triggers changes in investment patterns, technology, and behaviors; and (c) protecting
poor people and avoiding concentrated losses. Although countries at different levels of income
and with different endowments will adopt different strategies, all have a role to play.
Stabilizing climate change entails reducing net emissions of carbon dioxide (CO
2
) to
zero. CO
2
stays in the atmosphere for hundreds, if not thousands, of years. As long as
we emit more than nature can absorb in its sinks (oceans, forests, and other vegeta-
tion), concentrations of CO
2
in the atmosphere will keep rising, and the climate will
keep warming. And the decisions we make now will determine the planet’s climate for
centuries.
The latest science also tells us that we need to reach zero net emissions by 2100 to
stabilize climate change around the 2°C target above preindustrial temperatures that
has been agreed by governments as the maximum acceptable amount of warming.
Relaxing the target to 3°C would make little difference in the policies needed, although
a 2°C target would require more aggressive, earlier action.
But can we envisage a world in which economic activities have been made com-
pletely carbon neutral by the end of the century? Here, we should emphasize that car-
bon neutrality or decarbonization does not imply no emissions whatsoever. Positive
emissions in some sectors and some countries can be offset, to some extent, through
natural carbon sinks and negative emissions in other sectors and countries. So decar-
bonization means zero net emissions of CO
2
—as well as the stabilization of emissions
of short-lived greenhouse gases such as methane that dissipate in the atmosphere in
days, weeks, or decades.
The latest report of the Intergovernmental Panel on Climate Change (IPCC)—
which presents the consensus views of 830 scientists, engineers, and economists
from more than 80 countries and was formally endorsed by the governments of
194 countries—identifi ed many possible pathways to reach carbon neutrality by the
end of the century. All require acting on four fronts: (a) decarbonization of electricity;
(b) massive electrifi cation (using that clean electricity) and, where that is not possible,
2
Decarbonizing Development
a switch to lower-carbon fuels; (c) greater effi ciency and less waste in all sectors; and
(d) improved carbon sinks (such as forests, vegetation, and soil).
In practical terms, what does this mean for countries, especially developing coun-
tries that are already struggling to reduce poverty and achieve prosperity? Many are
unable to keep up with the investments to satisfy the basic needs of their citizens, let
alone the effi cient cities, roads, housing, schools, and health systems they aspire to
create. At the same time, the fact that much of their infrastructure is yet to be built
means opportunities exist to act early and gain effi ciency. Thus, the pursuit of a low-
carbon transition must be integrated into the overall development agenda: the goal is
not just to decarbonize, but to decarbonize development.
The aim of this report is to take this lofty goal of zero emissions by 2100 and examine
what it means in terms of today’s policy making for development. It does not discuss
whether or why to stabilize climate change, or at which level we should do so. Our start-
ing point is the 2
o
C goal set by the international community. We begin by examining
how planning can help lay the foundation for both a stable climate and a good develop-
ment path. Next, we explore how countries can create the right enabling environment
so that the needed technology, infrastructure, and fi nancing are available. Finally, we
discuss how countries can carefully manage the transition, given the vital role that the
political economy will play.
The message of this report is that to decarbonize development, and to do so by 2100,
three broad principles must guide countries’ low-carbon efforts:
Plan ahead with an eye on the end goal. The appropriate way to achieve a given
reduction in emissions by, say, 2030 depends on whether that is the fi nal target
or a step along the way to zero net emissions. If the latter, early action will need
to be a mix of cheap, quick fi xes and costlier long-term measures to promote
technology development, investment in long-lived infrastructure, and changes
in how cities are built. So every country needs to defi ne a long-term target—
say for 2050—that is consistent with decarbonization and to build short-term,
sector-specifi c plans that contribute to that target and are adapted to the coun-
try’s wealth, endowments, and capacity. The good news is that many options
with high potential offer immediate local co-benefi ts, especially in low-income
countries, so that early action need not represent a trade-off with short-term
development goals.
Go beyond prices with a policy package that triggers changes in investment patterns,
technologies, and behaviors. Carbon pricing is necessary for an effi cient transi-
tion toward decarbonization. It is also an effi cient way to raise revenue, which
can be used to support poverty reduction and development or to reduce other
taxes. And a carbon tax can be designed to be administratively simple yet harder
to evade than taxes on income or capital. But carbon pricing alone cannot solve
the climate change problem, given the many market failures and behavioral
3
Overview
biases that distort economies. Policy makers also need to adopt measures such
as targeted investment subsidies, performance standards and mandates, or com-
munication campaigns that trigger the required changes in investment patterns,
behaviors, and technologies—and if carbon pricing is temporarily impossible, to
use those measures as a substitute.
Mind the political economy and smooth the transition for those who stand to be
most affected. Reforms live or die on the basis of how well the political economy
is managed: a climate policy package must be attractive to a majority of voters
and avoid impacts that appear unfair or that are concentrated in a region, sector,
or community. Thus, reforms have to smooth the transition for those who stand
to be affected—by not only protecting vulnerable people but also avoiding con-
centrated losses and sometimes compensating powerful lobbies. Fortunately,
getting rid of environmentally harmful subsidies and pricing carbon provide
additional resources with which to improve equity, to protect those affected,
and, when needed, to appease opponents.
Of course, these are broad principles that every country will need to interpret in
light of its own needs, institutions, and aspirations. Even so, a few generalizations can
be made. Low-income countries, given their extremely low emissions levels, should
focus on options that are consistent with immediate poverty alleviation and that do not
stand in the way of short-term growth, including the adaptation and diffusion of tech-
nologies developed elsewhere. Richer countries can afford to implement more expen-
sive measures and take the lead on developing frontier technologies such as carbon
capture and storage and subsidizing their deployment so that the technologies improve
and their cost decreases.
But all countries should work to avoid creating carbon-intensive lock-ins that will
be costly to reverse later and to capture the large economic and health co-benefi ts from
a cleaner and more effi cient economic system. Further, income is not the only factor
that differentiates countries. Countries that are rapidly urbanizing have a crucial
window of opportunity to create cities that are energy effi cient and easy to serve with
public transit. Countries with large forests can achieve a lot by focusing on reducing
irreversible deforestation. More generally, countries differ by the endowment of natu-
ral resources—for instance, their potential for hydropower or solar energy—and will
therefore implement very different strategies. But, although countries will follow
different pathways, all countries have a role to play.
Planning for a Low-Carbon Future: What We Need to Do Now Depends
on the End Goal
A key reason scientists believe it is possible to achieve full decarbonization by 2100 is
that they have looked at pathways that would do so. Those pathways are derived
from various energy and economic models that examine what it would take to achieve
4
Decarbonizing Development
decarbonization under a number of different scenarios of economic growth and tech-
nological innovation. As mentioned earlier, what all models and modelers agree on is
that action will be needed on four fronts:
Decarbonizing the production of electricity
Undertaking massive electrifi cation (to increase reliance on clean electricity)
and, where not possible, switching to cleaner fuels
Improving effi ciency and reducing waste in all sectors
Preserving and increasing natural carbon sinks through improved management
of forests and other vegetation and soils
The question is when to begin and at what speed to proceed. Fortunately, there is no
need for all countries to follow the same path or rhythm. Weaker efforts early on can be
offset (up to a point) by greater efforts later, and more effort now means less will be
needed tomorrow. And since decarbonization is a global goal, greater efforts by a richer
or more able country can offset less intense efforts by a country with less capacity. As
the IPCC argues, multiple pathways can lead to decarbonization. However, the key to
feasibility is affordability, and affordability requires early action.
Early Action
Early action is vital for two reasons. First, it is cost-effective, because it allows countries
to take advantage of natural opportunities to green their capital as it is retired or as it is
rst built. The alternative is delays, which imply the continued construction of dirty
power plants and other capital that create “committed emissions. For example, the
fossil-fueled power plants built in 2012 alone will emit some 19 billion tons of CO
2
over
their expected 40-year lifetime, more than the annual emissions of all operating fossil-
fueled power plants in 2012. Retiring them early is possible, but costly. The models
reviewed by the IPCC fi nd that if mitigation is postponed until 2030, costs would rise
an average 50 percent for the 2030–50 period, and 40 percent for the longer term
(2050–2100).
Second, early action is prudent because delays can result in lock-ins and the loss of
options. A failure to invest in developing new technologies such as carbon capture and
storage now may mean they are not available by midcentury when they are needed.
And trying to retrofi t a low-density city to make it more carbon effi cient and suitable
for public transit is extremely diffi cult, as city managers around the United States are
nding out.
Thus, the pledges made by member countries of the United Nations Framework
Convention on Climate Change in Cancún in 2010 are worrisome: they amount to
such modest reductions in the short run that they would require annual cuts in emis-
sions of 6 percent per year from 2030 onward to achieve the globally endorsed stated
objective of 2°C. Historically, such rapid declines have occurred only during economic
5
Overview
collapses, such as the fall of the Soviet Union. The highest decarbonization ever
achieved in a planned fashion was 4.5 percent per year, when France deployed its
nuclear energy program (fi gure O.1).
Some will say that waiting can also save money: as technologies evolve, they improve,
become more affordable, and open up new options. But if everyone waits, those tech-
nologies will not be invented, and they certainly will neither improve nor become more
affordable. And in the face of development pressures, waiting is not always an option.
Things get built anyway—but incorrectly, as is occurring in much of the urbanization
taking place in developing countries.
FIGURE O. 1 The Tortoise and the Hare: Not Starting Early Will Entail More Drastic
Emission Cuts Later
Rate of emissions decrease after peak to reach objective (%)
10
9
8
7
6
5
4
3
2
1
0
2010
2015
2020
2025
2030
2035
2040
2045
Peaking year for emissions
2°C objective, pessimistic
2°C objective, optimistic
2.5°C objective, pessimistic
2.5°C objective, optimistic
Fastest historical decarbonization rate recorded over 5 years
(France, 1980–85)
Mean annual rate needed in 2008–20 to reach –20% objective in
2020 compared a 1990 baseline (EU 27)
Source: Adapted from Guivarch and Hallegatte (2013).
Note: Peak year refers to the year in which emissions have reached their highest level and start to decline. Delaying the peak year by
just a few years, say from 2010 to 2020, entails increasing the rate of annual emissions reduction from 3 percent to 4.5–5.5 percent.
The fi gure also reports the fastest historical decarbonization rate achieved over a fi ve-year period (outside of periods of economic
collapse) and the decarbonisation rate implied by the European Union’s commitment between 2008 and 2020. EU = European Union.
6
Decarbonizing Development
So someone has to start. And when it comes to new technologies, the richer countries
must lead in funding frontier innovation and creating the demand that allows for large-
scale deployment and lower costs. Thus, the massive expansion in solar energy in Germany
has been critical in reducing the cost of solar panels. But even very poor countries can
identify early action that makes sense within their overall development strategy.
What exactly does early action entail? And how should policy makers make deci-
sions in situations of uncertainty, multiple worldviews, and competing objectives? We
would argue, as we did in Inclusive Green Growth: The Pathway to Sustainable
Development (World Bank 2012), that countries should focus on actions that offer syn-
ergies with short-term development goals or that are urgent:
Synergies. Many mitigation options (such as public transit, cleaner energy, and
energy effi ciency) offer immediate and local economic and welfare benefi ts.
Prioritizing those options will help ensure that climate considerations are well
integrated into countries’ development plans and will increase political accept-
ability. For example, some analyses suggest that the health benefi ts of cleaner air
alone would exceed the cost of mitigation in many regions at least until 2030
(Shindell et al. 2012; Thompson et al. 2014).
Urgency. Some mitigation options are associated with high technical inertia
(meaning that they carry a risk of lock-in, irreversibility, or higher costs if action
is delayed)—such as unplanned low-density urban expansion or the cutting
down of old-growth forests. Some abatement actions will take time and will
need to be implemented early (such as research and development for the needed
technologies and support for their deployment). For them, action is urgent.
Otherwise, action can be postponed for measures that create hard trade-offs
with other development goals in poor countries.
Planning Ahead
The good news is that a number of planning tools are available to help countries—poor
and rich alike—devise an appropriate decarbonization plan. But the key is to use these
tools with an eye on the end goal for a number of reasons.
First, keeping an eye on the end goal will help poorer countries align development
and poverty alleviation with climate policies. Higher emissions from better energy
access or structural change in poor low-emission countries or regions should not be a
concern as long as irreversible carbon lock-in is avoided (possibly by using urban plans
and well-enforced building norms). Indeed, those countries should use low-cost
options to maximize poverty reduction, which may include coal where solar power or
hydropower is not possible or is too expensive. That said, they would still benefi t from
capturing the potential for low-cost renewable power (such as hydropower), avoiding
energy waste, improving air quality, and creating a cost-effi cient economic system
(with appropriate energy pricing and performance standards).
7
Overview
In addition, for all countries, a focus on short-term targets (such as 2030) without
considering long-term ones (such as for 2050 and beyond) would lead to emission
reductions based on the cheapest options—which may lack the potential to achieve
complete decarbonization. It could thus result in a carbon-intensive lock-in, making it
much more expensive to achieve the long-term objective.
Take the case of a low-carbon strategy analysis done for Brazil. As gure O.2 shows,
the optimal strategy for a 2020 end goal makes greater use of marginal actions that are
cheap and easy to implement but that have a limited potential (improved energy effi -
ciency in refi neries). In contrast, the optimal strategy for a 2030 end goal entails more
ambitious actions that are more expensive and take longer to implement but that have
the potential to contribute to deeper decarbonization. Thus, if the goal is simply a 10
percent reduction in 2020, limited use should be made of investments in subways,
trains, and waterways—although those investments are critical to ensure the feasibility
of a 20 percent reduction by 2030.
The key to designing an emission-reduction plan that accounts for the long term is
to consider three characteristics of each option: cost, mitigation potential, and time
needed to implement. Options with “negative costs” (such as energy effi ciency) or large
development co-benefi ts should be implemented as soon as possible. But as fi gure O.3
FIGURE O.2 Using a Longer Time Frame Changes the Optimal Policy Mix for Brazil
Emission reductions by 2020 (MtCO
2
)
In the 2020 strategy
In the 2030 strategy
Improvement in refineries
Subway, train, and waterways
Other measures
15
6
17
7
Source: Adapted from Vogt-Schilb, Hallegatte, and de Gouvello (2014).
Note: The 2020 and 2030 bars amount to an equivalent amount of emission reduction, although they include a different mix of
measures; MtCO
2
= million tons of carbon dioxide.
8
Decarbonizing Development
illustrates with a fi ctional example, options that are expensive but that are slow to reach
their full potential (such as transport) may also have to get started early in order to
reach the long-term goal. In contrast, cheaper options may be delayed—in fi gure O.3,
electrifi cation is cheaper than transport but can be introduced later without threaten-
ing the long-term goal.
With this information, governments can design operational short-term targets to
ensure that they make progress in all sectors. For instance, a target may be to produce
30 percent of electricity from renewable sources by 2030, to drive cars that emit less
than 80 gCO
2
per kilometer by 2025, or to use wood materials—from sustainably man-
aged forests—instead of steel and cement in half of all new buildings by 2035. This
sectoral approach has an advantage over economy-wide emission goals, because the
latter could be achieved with marginal actions that do not contribute suffi ciently to
meeting the long-term objectives.
Enabling the Transition with a Policy Package That Is Effi cient,
Acceptable, and Credible
Good planning is important, but so are incentives and policies that ensure planned
actions are implemented and projects are fi nanced. Thus, carbon pricing is a critical
policy, as it addresses a major market failure—the failure to price the environmental
FIGURE O.3 Devising a Strategy Requires Information on Time, Cost, and Emission-Reduction
Potential
Baseline emissions
Efficiency
Electricity
decarbonization
Industry
Transport
Emissions after abatement
Emissions (MtCO
2
/yr)
Time Cost
Marginal abatement cost ($/tCO
2
)
Emission-reduction potential
Note: The “wedge curve” on the left shows emission-reduction potential as well as the time it takes to roll out a particular option (such as effi ciency
or electricity decarbonization). It is combined with a marginal abatement cost curve that shows emission-reduction potential and their cost, so that
the three key dimensions of emission-reduction options—time, cost, and potential—can be displayed simultaneously. Numbers displayed are
purely illustrative. The two graphs are certainly not suffi cient to develop a full strategy. More information is needed on obstacles to implementation
(such as why negative costs options have not been implemented already), but they do help highlight the need for looking at the three key dimen-
sions simultaneously.
9
Overview
damage caused by greenhouse gases. However, a multiplicity of market and govern-
ment failures comes together to make climate change a complex problem to solve. So
pricing is necessary, but not suffi cient, especially if a low-carbon strategy is to be politi-
cally acceptable and credible enough to trigger the kind of long-term investments that
are needed. Also needed are complementary measures to make individuals and fi rms
more responsive to prices—or substitutes for prices when they are ineffective.
Getting Prices Right—Good Economic and Fiscal Policy
Schemes to get prices right have the great advantage of raising revenues in an economi-
cally and fi scally effi cient way, making them good fi scal policies, in addition to their
environmental benefi ts. That advantage is obvious with the elimination of environ-
mentally harmful subsidies, but it is also the case for carbon pricing—whether taxes or
cap and trade (provided that permits are sold or auctioned).
Getting prices right includes reforming fossil-fuel subsidies—which reached about
$548 billion in 2013, according to the International Energy Agency, a number that is
likely to be an underestimate. Even so, this sum still averages a whopping 5 percent of
gross domestic product and 25–30 percent of government revenues among the 40
mostly developing countries for which it was calculated (IEA 2014). In addition, the
Organisation for Economic Co-operation and Development estimates that its member
countries spent $55–$90 billion a year in the 2005–11 period (OECD 2013). Other
environmentally harmful subsidies, such as agricultural support schemes that incentiv-
ize the overuse of pesticides and fertilizer and excessive emissions, need to be reformed
as well.
Encouragingly, good progress has been made in recent years. Over the past two
years, more than 25 countries, many in Asia, have signifi cantly reformed their fossil-
fuel subsidies. Indonesia abandoned a four-decades-old policy of subsidizing gasoline,
India liberalized diesel prices and raised fuel taxes, and Malaysia eliminated subsidies
on gasoline and diesel. That trend is likely to accelerate with the drop in oil prices,
which makes it easier to reform subsidies for oil importers and creates pressure for
reform among oil exporters. And Europe is fi nally overhauling its common agricultural
policy to largely eliminate environmentally harmful subsidies.
As for carbon pricing, it is also gaining momentum—with some 39 national and 23
subnational jurisdictions globally having implemented or scheduled to implement
carbon-pricing instruments. For example, China has seven local emission-trading
pilots to test possible approaches to a national scheme, and British Columbia, one of
Canadas fastest-growing provinces, introduced a carbon tax in 2008.
Carbon pricing offers a potential double dividend” by providing both environ-
mental benefi ts and the possibility of reducing more distortionary taxes (such as those
on labor or capital) by recycling carbon revenues. In addition, carbon constitutes
10
Decarbonizing Development
an excellent tax base, as carbon sources are concentrated and diffi cult to evade. In the
United States, for example, tax collection covering 80 percent of emissions could be
accomplished by monitoring fewer than 3,000 points (refi neries, coal mines, and natu-
ral gas fi elds) (Metcalf and Weisbach 2009). In Sweden, which has had a carbon tax
since 1992, tax evasion is less than 1 percent for carbon, much less than for the value
added tax. In the United Kingdom, evasion on energy taxes is about 2 percent, much
lower than the 17 percent for income tax. That is a substantial advantage for the many
developing countries that struggle with tax evasion—and the wedge it introduces
between the formal and informal sectors.
Yet another way to get prices right is with performance-based payments, which
can be used to create incentives to preserve or increase carbon sinks, such as forests
and soil. Currently, more than 300 payments for ecosystem service schemes have been
established worldwide, many of them for carbon sequestration. International incen-
tive mechanisms—such as reducing emissions from deforestation and forest degra-
dation and other forest-based mitigation activities (also called REDD+) are being
developed.
Policies to Complement Prices or to Substitute for Them When They Are
Ineffective or Unchangeable
But getting prices right is not enough to ensure that low-carbon policies are acceptable,
credible, and effective. Instead, policy packages need to take into account the following
issues:
Are prices an effective instrument to trigger the desired change? The answer
depends on such factors as the availability of low-carbon alternatives or the need
for long-term credibility. For instance, a carbon tax is suffi cient to trigger fuel
shifts in the energy sector (maybe from coal to gas) but may not be enough to
generate frontier innovation in the energy or automobile industry.
Is it possible to change prices? Whether prices can in fact be changed enough
to trigger a response depends on the political or social acceptability of a price
change. The issue may be concerns about the impact on poor people or the need
to manage powerful lobbies fi ercely opposed to reform.
Those two issues are linked. If price effectiveness is low, reducing emissions to a
given level would require a signifi cant price hike, which is more likely to hurt some
groups or industries and is thus less acceptable. It is also possible that prices can be
changed without leading to the expected impact on emissions because of missing
markets, lax compliance, lack of information, or behavioral biases and cognitive failures.
As a result, the policy package will need a battery of instruments—such as research and
development and innovation support, performance standards and scal incentives for
investments, nancial instruments, and social policies and compensation—to create
11
Overview
an enabling environment for the low-carbon policies to work. This requires efforts on
the following fronts.
Ensure needed technologies. A fi rst challenge is to ensure that the needed technolo-
gies exist (a pure innovation problem) and are available at scale and at a competitive
cost (a deployment problem). Existing technologies are suffi cient to keep the world
on a 2°C path up to about 2050, but thereafter, staying on track will require deploy-
ing technologies that are currently barely at the pilot stage or do not even exist. And
the claim that a 2°C path is affordable relies on the assumption that the needed
technologies will be available.
Green innovation suffers from a double market failure—environmental externali-
ties and the same “knowledge externality” that plagues all innovation (new knowledge
can be acquired at low cost by competitors). But a combination of a carbon price and
broad public support for innovation will not be suffi cient. Specifi c support toward
green innovation is essential. Economic actors prefer to innovate where they have inno-
vated before and where there is a combination of well-known demand and mature
markets—a bias that favors marginal innovation in traditional domains, not radically
new green innovation. Also, a carbon price is unlikely to be a suffi ciently credible
instrument to justify the kind of long-term, risky investments that are required for
green frontier innovation. Policy makers should kick-start the transition either by tem-
porarily supporting investments in low-carbon technologies (Acemoglu et al. 2012) or
by imposing additional regulations or performance standards (Rozenberg, Vogt-Schilb,
and Hallegatte 2014).
In addition, governments may even need to target specifi c green technologies. That
specifi city is justifi ed in the case of solar, which is still more expensive than wind energy
in most markets but has greater potential for reducing cost through economies of scale
and for addressing the clean-energy challenge. Because of solar’s current relatively high
costs, it is unlikely to be massively deployed with only horizontal (nontargeted) sup-
port to carbon-free electricity production or a carbon price.
To ensure that green technologies are invented and deployed at scale, countries
might supplement carbon prices (or substitute for them where they cannot yet be
implemented) with a number of instruments:
Performance standards—such as those commonly used for cars in China, the
European Union, and North America, and energy-effi cient lighting or building
codes (windows, ventilation, or heating and cooling systems).
Fiscal instruments—such as auto feebates, which combine a surcharge (fee) on
energy-ineffi cient cars with a rebate on more energy-effi cient ones (used, for
example, in a number of European countries) or a value added tax exemption
for appliances or energy-effi cient lighting (used, for example, in China, Ghana,
and Tunisia).
12
Decarbonizing Development
Mandates—such as renewable portfolio standards that require electricity provid-
ers to include a minimum share of clean energy in their output mix. Mandates
have been used throughout the world, notably in Chile, China, Germany, and
many U.S. states.
Trade policies—such as cutting tariffs on green goods, such as solar panels, wind
turbines, and energy-effi cient lightbulbs as Asia Pacifi c Economic Cooperation
countries recently agreed to do—to ensure that countries, fi rms, and households
can access the best technologies that are available globally at an acceptable cost.
Better institutional capacity and law enforcement—such as clarifying prop-
erty rights and increasing controls and fi nes. In Brazil, enforcing and clarify-
ing existing laws have proved to be an effective, low-cost strategy to reduce
deforestation.
Ensure the needed infrastructure. Providing the needed infrastructure is critical for
both the effectiveness of low-carbon strategies and the political acceptability of carbon
pricing. For example, imposing signifi cant fuel taxes has proved a lot more diffi cult in
the United States than in Europe, in part because a much larger share of U.S. voters live
in places unserved by easy, convenient public transportation. Infrastructure also makes
a carbon price more effective by making demand more elastic to price changes. A mod-
eling exercise for Paris shows that public transport reduces by half the carbon tax
needed to achieve a given emission reduction (Avner, Rentschler, and Hallegatte 2014).
Similarly, some countries have struggled to ensure that the needed electricity transmis-
sion lines and network capacity are in place to handle increased shares of renewable
energy.
Account for behavioral biases and other obstacles to changing habits. But even with
price incentives and available alternatives, people may still stick to old habits for a vari-
ety of reasons (fi gure O.4). They may do so because incentives are not effective due to
FIGURE O.4 How to Assess the Obstacles to Low-Carbon Solutions
Incentive assessment
Information
access
assessment
Are incentives inappropriate?
Because of
market failures?
Because of
government
failures?
Are decision-
makers ill
informed?
Are behavior
biases
impairing
action?
Are resources
and access to
resources too
limited?
(e.g., unpriced
externality,
principal-agent
issue)
(e.g., poor law
enforcement)
(e.g., people
do not know
about existing
technologies)
(e.g.,
preference for
status quo)
(e.g., lack of
access to
credit)
What policies should
be implemented?
Behavior
assessment
Resource
assessment
Policy design
Source: Adapted from World Bank (2013).
13
Overview
some market failure (for example, landlords who buy ineffi cient equipment because
tenants pay the electricity bills) or because the incentives are just not enforced. Many
countries have enacted energy-effi ciency requirements for new buildings without
implementing measures to enforce them.
People may also not be aware of better alternatives. Labels and certifi cation schemes
can easily provide the information consumers need to infl uence production technolo-
gies and promote sustainable natural resource management (for instance, for forest
management).
Evidence abounds of people being “tempted” by the low price of an appliance and
not paying attention to the lifetime cost of a purchase. And people tend to stick to the
default option. Such behavioral biases can in fact be used to increase the adoption of
green technologies. For example, a German energy company found that 94 percent of
its customers stayed with the green (and more expensive) option when it was set up as
the default, and only 4 percent opted for a cheaper one (the remaining 2 percent either
changed suppliers or opted for a more expensive green option).
Getting the Finance to Flow—Which Will Take More than Carbon Pricing and
Green Finance
Making the needed infrastructure and technologies available requires fi nancing. In fact,
most developing countries struggle with fi nancing infrastructure provision and tech-
nological development and deployment even without the low-carbon objective. Fiscal
limits constrain self-fi nancing and overseas development aid, so the bulk of the fi nance
challenge lies with making sure that developing countries can access more private
(domestic and international) resources for long-term investment. That fi nancing con-
straint extends to developing-country fi rms, especially small and medium-sized fi rms,
many of which would need to invest in energy-effi cient and low-carbon equipment
and to access technologies adapted to local conditions.
The challenge thus is twofold: (a) to increase fi nancing for investments in develop-
ing countries and in long-term projects, notably infrastructure, and (b) to increase the
share of those investments that goes toward green projects. The low-carbon part of that
challenge is an important one but should not be overestimated. A