By Randolph Bell, Director, Atlantic Council Global Energy Center; Richard Morningstar Chair for Global Energy Security and Elena Benaim, Intern, Atlantic Council Global Energy Centre
Carbon border adjustment (CBA) policies are gaining momentum on both sides of the Atlantic. They were proposed as a key element in the European Green Deal and as part of US Democratic presidential nominee Joe Biden’s climate plan. But how do they work? Carbon border adjustment mechanisms tax imported goods based on their carbon footprint with the aim of limiting emissions leakage and levelling the playing field for domestic industries that produce goods with lower greenhouse gas emission footprints than imports that may be cheaper but have higher greenhouse gas footprints.
There are a number of technical challenges to overcome in implementing a carbon border adjustment policy, including whether to peg it to a domestic price on carbon, which sectors to apply the tax, and how to ensure accurate and transparent data on embodied carbon. But one major concern is that the policy could have negative consequences for the economies of developing countries by cutting their export revenue and/or impeding the development of new export-oriented industries. Developing countries might argue that the policy runs counter to the Paris Agreement’s bottom-up, nationally determined contributions, and could push them to cut emissions more than what they pledged. Carbon border adjustment could also run afoul of the Common But Differentiated Responsibility (CBDR) principle that developing countries do not share the same responsibility as developed countries in addressing climate and environmental issues.
Riad Meddeb, Senior Principal Advisor for Small Island Developing States, UNDP
This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.This blog is also a part of a thread looking more specifically at the impacts and responses to the COVID-19 crisis in Least Developed Countries (LDCs).
Small Island Developing States (SIDS) have experienced great success in expanding their tourism industries, particularly over the past 10 years. The industry is an economic lifeline and driver of development for many SIDS. Their rich biodiversity and beautiful ecosystems attracted around 44 million visitors in 2019. However, global travel restrictions imposed as a result of the COVID-19 pandemic have devastated SIDS’ economies. Compared to Gross Domestic Product (GDP), export revenues from tourism represent about 9% of SIDS economies. In countries like St. Lucia and Palau, tourism revenues make up 98 and 88 percent of total exports respectively. It is a vital source of revenue for community livelihoods, disaster recovery, biodiversity and cultural heritage preservation.
By Maria Netto, Lead Capital Markets and Financial Institutions Specialist, Inter-American Development Bank, and Naeeda Crishna Morgado, Policy Analyst – Green Growth and Investment, OECD
The developing world urgently needs more and better infrastructure. Affordable and accessible water supply systems, electricity grids, power plants and transport networks are critical to reducing poverty and ensuring economic growth. The way new infrastructure is built over the next 10 years will determine if we meet the Sustainable Development Goal (SDGs) and the Paris Agreement objectives. Considering the long lifespan of most infrastructure projects, the decisions developing countries make about how they build infrastructure are critical: we can either lock-in carbon intensive and polluting forms of infrastructure, or ‘leap frog’ towards more sustainable pathways.
Many countries in Latin America are making this shift: thirty-two of them have committed to cut their emissions and improve the climate resilience of their economies, in infrastructure and other sectors, through Nationally Determined Contributions (NDCs). The cost is estimated at a staggering USD 80 billion per year over the next decade, roughly three times what these countries currently spend on climate-related activities. What is more, this is in addition to a wide investment gap for delivering development projects and infrastructure overall – the World Bank estimates that countries in Latin America spend the least on infrastructure among developing regions in the world. Continue reading →
By Milan Brahmbhatt, Senior Fellow, New Climate Economy (NCE) and World Resources Institute1
Explore this topic further with the upcoming launch of the 2017 African Economic Outlook: Entrepreneurship and Industrialisation in Africa.
Stay tuned for details
Policy makers across Africa have embraced industrialisation and economic transformation as keys to accelerate inclusive growth. They also increasingly see the need for economic transformation to deliver green growth – growth that does not endanger Africa’s natural environment in ways that reduce the welfare of present and future generations. Economic transformation and green growth depend on doing new things: making risky investments in new, unfamiliar sectors or products or adopting new, unfamiliar methods, processes, technologies, inputs or business models. All this depends crucially on the activity of entrepreneurs, who drive change through their innovation and risk-taking. Fostering entrepreneurship, including green entrepreneurship, is thus a key policy aim for African countries.
By Kate Eklin and Myriam Gregoire-Zawilski of the OECD Development Centre’s Emerging Markets Network (EMnet)
Last week, officials in Beijing declared an air pollution “red alert” for the first time since the monitoring system was implemented in 2013. Pollution levels put life in the city on hold: factories shuttered, schools closed, traffic was restricted, fireworks were banned.
Between this latest “airpoclypse” and the just-concluded COP 21, everyone is talking about China and its part in the climate agenda. Why? China is the largest greenhouse gas emitter. While China is certainly part of the climate change problem, it is a big part of the solution. Indeed, China is also the world’s largest investor in renewable energy. And public and private investment will be critical for China to transition to a greener and cleaner economy. Continue reading →
By Carl Dahlman, Head of the Thematic Division and Head of Global Development Research at the OECD Development Centre and Martin Wermelinger, Economist at the OECD Development Centre
Strong growth over much of the past decade has substantially boosted developing countries’ share of the global economy and accelerated per capita income convergence with richer countries. We call this process “shifting wealth.” However, productivity is still lagging and growth is too low to allow continued convergence. Low productivity also challenges more inclusive and sustainable development. This blog argues that developing countries have many opportunities to boost productivity.
Non-OECD countries’ weight in the global economy is today above that of OECD countries in terms of purchasing power parity, a measure of what money will buy in different countries. This is remarkable especially since their share stood at around 40% just 15 years ago. This change in relative economic size of developing versus developed countries is being led by the BRIICS, particularly China and India. Together, these two countries account for almost one quarter of global GDP.
Non-OECD countries already surpass OECD countries in share of global GDP
Despite the momentum towards convergence, several lower middle-income countries, such as India, Indonesia and Vietnam, and countries in the upper middle-income bracket, such as Brazil, Colombia, Hungary, Mexico and South Africa, would fail to converge with the average OECD income level by 2050, given their average growth rates since 2010. In fact, the growth differential between OECD and non-OECD countries has narrowed dramatically relative to the pre-2008/09 crisis period. Their challenge is deepened by the recent slowdown in China, where rapid growth has up to now benefited its neighbours and suppliers, in particular natural-resource exporters.
Growth slowdowns can be associated with significant slowdowns in productivity growth. Over the past decade, productivity growth made only a marginal contribution to economic growth in many middle-income countries. It was also insufficient to significantly reduce the very large gap in productivity with advanced countries. In Brazil, Mexico and Turkey, the gap even widened. In contrast, China recorded impressive growth in productivity: around 10% annually in labour productivity in manufacturing and services.
“So, how can countries boost productivity?”
Factors associated with moving up the value chain, expanding inclusive and environmentally sustainable development and promoting effective governance are all part of the strategic mix to drive structural reforms and boost productivity. This mix includes:
Diversifying continuously into higher value-added market segments in agriculture, industry and services:Diversification is particularly important in middle-income countries that are seeing rising wages as well as those rich in natural resources.
Innovating by using global knowledge and developing domestic capabilities: Middle-income countries have significant room for technological catch-up. Besides better integrating in the global trading system and tapping foreign knowledge through trade and foreign direct investment, countries also need to develop capabilities to innovate new products and processes to better suit their own needs. This can be done by licencing technology; obtaining technology, designs, production and management assistance from foreign buyers, consulting firms and technical experts; learning from foreign education and training; copying and reverse engineering products and services; and undertaking domestic R&D.
Developing skills: In many middle-income countries, improvements in educational attainment and deeper integration into value chains have often been insufficient to ensure the competitiveness of the labour force. This suggests that education policies need continuously to adapt the supply of skills to the economy’s changing needs.
Reforming product and financial markets: In many middle-income countries, the development of competitive, innovative businesses is often constrained by an inadequate regulatory environment.
Fostering competitive service sectors: The domestic service sector can grow to meet the demand of the growing “middle classes.” Increased use of services, like engineering, R&D or marketing services, also improves the competitiveness of manufacturing. Moreover, some knowledge- and information-intensive services, such as ICT, and business services can help to improve the efficiency of the economy and can be themselves a source of export earnings. Emerging digital services such as big data analytics and the Internet of things are likely to have game-changing impact on inclusive and sustainable growth.
Growing inclusively: Development challenges are about much more than just economic growth. Many emerging and developing economies have been capable of reducing poverty over the last two decades. At the same time, however, income inequality is increasing in many of these economies. Moreover, the Arab Spring and rising social tensions in other developing economies make clear that social cohesion and equality of opportunity to more broadly share the benefits of economic opportunity deserve greater attention. This also requires identifying regional competitive edges and increasingly tailoring public services to local needs. For example, productive employment and firms can emerge in any region provided they nurture environments conducive to entrepreneurship.
Investing in “greener” growth: The problems of environmental damage caused by growth also raise issues of environmental sustainability. Diversifying into less energy-intensive sectors and adopting energy-efficient technologies would reduce vulnerability to fluctuations in energy prices and changes in regulations and preferences.
Developing capable and effective governments: Better training of government officials and improved coordination across government ministries are essential to ensure effective planning and implementation. Bold changes in strategies may be politically difficult and costly, though less so than no change. Effective communication strategies and the right timing and sequencing are critical to obtain support by multiple stakeholders to implement reforms. China’s rapid rise had been in large part due to its determined, target-oriented government with a vision to address changing economic challenges. It made bold reforms that were possible through effective organisations and procedures to implement the necessary steps. Other countries with more democratically-organised governments need to engage in effective consultations with key stakeholders to build support for necessary reforms and to develop capabilities to implement those reforms.
“Though “shifting wealth” has become more complicated, it can continue.”
A current period of low commodity prices, a slowdown in China as the global growth engine and political turbulences in larger emerging economies mean that other developing countries can today less easily free-ride on the bandwagon to global convergence. Yet, developing countries have a number of practical opportunities to tap their own strengths to advance structural reforms and boost productivity and inclusive, sustainable development.