The G20 agenda should include implementing a global “green” new deal

Posted by on 7 March 2009

Global stimulus packages have now reached nearly $3 trillion, and most of the expenditures are by G20 economies (http://www.voxeu.org/index.php?q=node/3156). Some G20 governments have included “green” investments in their stimulus packages to reduce carbon dependency, enhance economic recovery and create jobs.

For example, the $787 billion recovery program in the United States includes around $100 billion to retrofit buildings, expand mass transit and freight rail, construct a “smart” electrical grid transmission system and expand renewable energy supply. These investments amount to 0.7% of US GDP over the next two years, and are anticipated to create around 2 million jobs.

Denmark, Germany and the United Kingdom have adopted initiatives in the past year to expand renewable energy supply and employment. The $146 billion UK Renewable Energy Program is expected to create160,000 jobs from 2008 to 2020. 12 percent of China’s $586 billion stimulus is for energy efficiency and environmental improvements, rail transport and new electricity grid infrastructure.

South Korea has launched a national Green New Deal plan. At a cost of $36.3 billion over 2009 to 2012, around 3% of GDP, the plan invests in low-carbon projects, water management, recycling and ecological protection. The initiative will create 960,000 jobs, with 149,000 new construction jobs in 2009. The low-carbon projects include developing railroads and mass transit, fuel efficient vehicles and clean fuels, energy conservation and environmentally friendly buildings. These investments total 1.2% of GDP and will create at least 334,000 of the new jobs.

Although these initiatives are a promising start, the G20 needs urgently to expand them into a global “green recovery” effort. Otherwise, restarting the world economy today will do little to tackle climate change, energy insecurity, freshwater scarcity, deteriorating ecosystems, and global poverty. Instead, the right mix of policies can stimulate a recovery that will address these problems while creating millions of jobs and needed investments. A “Global Green New Deal” refers to such a timely mix of polices.

A Global Green New Deal (GGND) should have three principal objectives:
• Revive the world economy, create employment opportunities and protect vulnerable groups.
• Reduce carbon dependency, ecosystem degradation and water scarcity.
• Further the Millennium Development Goal of ending extreme world poverty by 2025.
Such a worldwide policy initiative is urgently needed, for several reasons.

First, the International Labor Organization (ILO) estimates that by the end of 2009 the unemployment caused by the recession could rise to 51 million. But there is even greater concern about the consequences for global poverty.

Projections prior to the recession indicate that, by 2015, around 1 billion people will be living on less than $1 a day and almost 3 billion on less than $2 a day. Billions in developing economies lack access to basic sanitation, clean water and modern energy services, and live in fragile environments prone to ecological degradation. According to the World Bank, every 1% fall in growth in developing economies during the crisis will translate into an additional 20 million people consigned to poverty. Thus, waiting for the world economy to recover before addressing poverty simply raises the costs of such actions.

Second, the global recession will not diminish the costs of climate change and energy insecurity.

The International Energy Agency (IEA) estimates that, once growth resumes, fossil fuel demand will rise by 45%, and the oil price could reach $180 per barrel. The remaining oil reserves will be concentrated in fewer countries, the risk of oil supply disruptions will rise and oil supply capacity will fall short of demand growth. Greenhouse gas (GHG) emissions are likely to increase by 45% to 41 gigatonnes (Gt) in 2030. If atmospheric concentrations of GHG lead to 5-6°C warming, global gross domestic product (GDP) could fall 5-10%, and by more than 10% in developing economies.

Finally, there are multiple benefits from investments today to reduce carbon dependency and improve energy and water services in developing economies.

A study by the Peterson Institute of International Economics and the World Resources Institute reveals that every $1 billion invested by the US green stimulus plan will generate energy savings of $450 million per year, reduce annual GHG emissions by 592,600 tons by 2020, and lead to approximately 30,000 job-years – a 20% increase in job creation over more traditional fiscal stimulus measures such as income tax cuts or road building.

A similar program to expand energy conservation and renewable energy supply in the European Union (EU) could create 1 to 2 million new, full-time jobs.

The renewable energy sector of China has a value of nearly $17 billion and employs around 1 million workers. Further investments in the sector are expected to have a major impact on growth, expanding exports, and creating employment.

Halving, by 2015, the proportion of people in the world without sustainable access to safe drinking water and basic sanitation is estimated to yield annual benefits of $38 billion. The annual benefits just for Sub-Saharan Africa are $15 billion, which equals 60% of the continent’s current aid flows.

In developing economies, every $1 invested in improving the energy efficiency of electricity generation saves more than $3 in operating costs. Small hydropower, biomass and solar photovoltaics (PV) already provide electricity, heat, water pumping and other power for tens of millions of people in many rural areas. Developing economies currently account for 40% of existing global renewable resource capacity, 70% of solar water heating capacity and 45% of biofuels production. Expansion of these sectors will not only increase the availability of affordable and sustainable energy services for the world’s poor but also provide much needed employment opportunities.

What can the G20 do?

First, all G20 economies should follow the lead of South Korea and invest at least 1% of their GDP over the next two to three years in reducing carbon dependency. The total amount spent would amount to about one third of aggregate G20 stimulus investments.

Second, the G20 economies should coordinate the timing and implementation of these investments globally. The global economic impact of a coordinated effort by the G20 to launch green recovery programs that comprise at least a third of the $2 to 3 trillion in stimulus spending cannot be overstated; together these economies account for almost 80% of the world’s population, 90% of global gross domestic product (GDP), and at least three quarters of global GHG emissions.

Third, the G20 should also instigate pricing and regulatory reforms for reducing carbon dependency, including removing perverse subsidies and other distortions in energy, transport and similar markets.

For example, in the US there are $6 billion in fossil fuel energy subsidies and tax breaks. A cap-and-trade permit system would not only place a realistic price on carbon and thus spur long-term low-carbon investments, including necessary new innovations in clean coal technology, carbon capture and sequestration and advanced renewable, but also mean that low-carbon investments would be less affected by volatile swings in fossil fuel energy prices. In addition, the costs of the full $100 billion US green economic recovery program could eventually be recouped with proceeds from auctions under a greenhouse gas cap-and-trade program and the elimination of fossil fuel subsidies and tax breaks.

Globally around US$300 billion annually, or 0.7% of world GDP, is spent on fossil fuel subsidies. Over two thirds of these subsidies occur in G20 economies, which could coordinate their phased removal. Cancelling these subsidies could reduce GHG emissions globally by 6% and add 0.1% to world GDP. The financial savings could be redirected to investments in clean and renewable energy R&D and energy conservation, further boosting economies and employment opportunities.

Finally, as the dominant sources of international aid and funding of multilateral institutions, the G20 could mobilize international policy in support of the GGND.

For example, the G20 could secure a post-Kyoto global climate change framework. Both uncertainty over future global climate policy and the delay caused by inaction increase sharply the costs of an agreement to reduce global GHG emissions. The expiration of the Kyoto agreement in 2012 also increases the risks to global financing of carbon-reducing projects and clean energy investments in developing economies.

The G20 could also tackle global freshwater scarcity, through joint action to remove water subsidies and other distortions, adopt market-based instruments and regulations to increase water efficiency, and facilitate transboundary water governance.
Of urgent need is guaranteed financing for a global vulnerability fund. The President of the World Bank, Robert Zoellick, has asked every high-income economy to pledge 0.7% of its stimulus package to finance in developing economies a comprehensive and targeted safety net for the poor, investments in infrastructure including low-carbon technology projects and support for small and medium-sized enterprises and micro-finance institutions. Similarly, the UN High Level Task Force on the Global Food Crisis has called on donor countries to double financing for food assistance, other types of nutritional support and safety net programs, and for an increase in the percentage of aid to be invested in food and agricultural development from the current 3 % to 10% within five years.

A Global Green New Deal, if implemented effectively and swiftly, could help revive the world economy while reducing its vulnerability to energy insecurity and climate-induced risks. By increasing development assistance to developing economies, the G20 could ensure their cooperation. For example, developing countries could signal their commitment to a GGND by spending at least 1% of their GDP on investments for improving clean water and sanitation, as recommended by the UN Development Programme, and by investing in well-targeted safety net programs and educational and health services for the poor.

Reference:

For more details on the studies, statistic and arguments cited above, see Barbier, Edward B. 2009. A Global Green New Deal: Final Report. Report prepared for the Economics and Trade Branch, Division of Technology, Industry and Economics, United Nations Environment Programme. Geneva, February. Available at http://www.unep.org/greeneconomy/docs/GGND_Final%20Report.pdf.

Edward B. Barbier, Department of Economics & Finance, University of Wyoming