E3G

Delivering a Sustainable Low Carbon Recovery

By Nick Mabey

Failing to kick-start low carbon investment will lock in dangerous climate change

The urgency of the economic crisis is matched by the imperative to tackle climate change. The global energy economy is at a crossroads. In order to prevent catastrophic climate change, global carbon emissions need to peak by 2015 and then reduce by 5% per year. This is a radical change from business-as-usual which foresees emissions rising at 2-3% per year. Put simply, the world needs to move to a virtually zero carbon energy system by 2050, and in developed countries well before this.

Stimulus packages could provide the necessary jump start to low carbon industries to quickly achieve this structural transformation. Investing in business-as-usual projects will merely delay necessary expenditures to a time when public spending will be very tight, risking locking economies into high carbon infrastructure. This transformation is also affordable. Estimates put the cost at only 1-2% of global GDP, and reduced dependence on oil and gas use means that this cost falls to zero if oil prices remain above $120/bbl.

Low carbon stimulus plans are too small and dwarfed by high carbon spending

Delivering growth in low carbon sectors requires policy packages which combine immediate fiscal measures with sustainable medium term policies. Countries are already implementing packages covering energy efficiency, renewable energy, carbon capture and storage, grid infrastructure, public transport, efficient vehicles, water systems and RD&D. However, current spending is too small to achieve the level of change required.

Current stimulus packages will amount to 3.25% of global GDP over 2008-2010, with two thirds in direct government spending. The IMF expects this total to increase as more countries finalise their policies for 2010-2011. On a generous assessment around $436bn, or 23% of the total stimulus, has been allocated to low carbon investment.  However, if investment with uncertain carbon reduction gains (e.g. infrastructure) is excluded, direct spending on improved efficiency, low carbon energy, transport and R&D is only $140bn or 8% of the total. This is almost half of the $272bn allocated to road-building in the same stimulus packages.

These averages also mask strong differences between countries.  South Korea has dedicated 80% of its stimulus spending on low carbon investments. China also ranks highly (37%), dedicating around $200bn to low carbon investments – although a substantial amount of this is committed to rail and grid infrastructure with uncertain climate benefits. Amongst developed countries only the US, France and Germany have allocated over 10% of their stimulus to low carbon investment. All countries have scope to increase the range and size of low carbon stimulus spending, especially on energy efficiency and low carbon energy. Europe and Japan are lagging behind the average, despite their strong climate change policies and leadership in low carbon industries.

A large scale expansion of investment is possible in these dynamic sectors. For example, global renewable energy investment grew by 60% annually from 2004-2007. Given current financing problems, sustaining scale-up of production in these sectors in the coming years may require short term industrial support (e.g. loans, tax holidays) perhaps clustered in Low Carbon Innovation Zones. Additional finance can be generated using innovative mechanisms such as green bonds backed by public or private funds, and can be distributed through low carbon infrastructure facilities which leverage private finance.