IMF – World Bank
2010 Annual Meetings Program of Seminars
Thursday, 7 October 2010
Green growth and development: Opportunities, challenges, experiences panel: key points by Pier Carlo Padouan, Deputy Secretary-General and Chief Economist.
Since the financial and economic crisis, green growth is receiving increased attention by governments as a way to pursue economic development on more environmentally and socially sustainable grounds. Our experience with OECD and partner countries – such as China, South Africa, and Indonesia – confirms this trend, as does the growing demand that the UN and the World Bank are facing for technical assistance on green growth issues.
As part of the fiscal stimulus packages, we have seen that countries have already taken a number of measures aimed at greening the recovery – including public investments in green infrastructure and in basic R&D for green innovation, as well as the strengthening of environmentally-related taxes.
While these measures have been a valuable part of the stimulus response, much more needs to be done in order to ensure that green growth remains more than just a short-term response to the crisis; but is a transforming dynamic for greater economic integration, technology co-operation and reduced pressure on scarce environmental resources. How can this be achieved?
Is green growth an oxymoron?
Green growth is not only an environmental imperative but an economic imperative as well. It arises from the urgent need to account for pressing environmental risks that could set back social and economic progress, thereby enhancing the resilience of our economies to negative shocks. Its underlying premise is that economic growth will itself be put at risk if proper internalisation does not occur.
The green growth model dispenses with the idea that there is a tension between growth and the environment – provided of course that the right policies are set in place. It involves combining mutually-supportive economic and environmental policies, which aim at harnessing the growth potential that arises from addressing environmental concerns – through e.g. green innovation and the value-added generated in industries for environmental goods and services.
Opportunities and trade-offs
Green growth will involve both opportunities and challenges. On the one hand, moving towards greener economies will entail opportunities for the development of new green industries, technologies, jobs and skills development.
At the same time, the transition will require carefully managing the greening of the more traditional sectors as well as any associated employment and distributional effects. Indeed, a key challenge that governments will face will be to facilitate the re-allocation of capital and labour across economic sectors, while minimising the resulting adjustment costs.
The transition will involve trade-offs and there will be ‘losers’ – especially in the short term, as the adjustment process will take time. However, some of the losses need to be kept in perspective. For example, labour market adjustment as a consequence of the transition does not seem large when compared with normal turnover in labour markets.
These are some of the key issues that we are exploring as part of the OECD Green Growth Strategy – to be released in May 2011. The Strategy will develop a framework that spells out the priorities and the policy tools that will be needed for a smooth transition and for making reform happen.
Green growth and developing countries
Green growth is a global issue; equally relevant to both developed and developing countries. Developing countries potentially have more to gain from a widespread shift to green growth. One reason this may be the case is the extent to which green growth policies can help to avoid negative shocks to growth; shocks that would tend to have a more profound effect on poorer countries – both in terms of income levels and growth rates.
Developing countries have a relatively larger share of their economies directly dependent on natural resources and are particularly vulnerable to climate change. Sound management of natural resources offers considerable economic opportunities, while adaptation to the impacts of climate change will be critical for development.
For example, recent studies show that low-carbon growth can bring a range of development co-benefits (opportunities for development). In the energy sector, for instance, improved energy efficiency and use of modern renewable energy can reduce air pollution, improve access to energy, and enhance national energy security.
Especially for developing countries, providing basic education, ensuring food security, and delivering essential services, such as water supply and sanitation, will remain overarching priorities. Green growth and poverty reduction must therefore go hand in hand and the international community can provide critical support to make it happen. Issues regarding financing, technology transfer and institution building are central in this discussion.
The policy mix for green growth
Regarding now the policies that will need to be implemented to achieve green growth – and while there is no 'one-size-fits-all' – we are working on a general policy framework that can be tailored to fit specific country circumstances and stages of development.
Overall, a first set of policies of this framework aim at removing the barriers and policy distortions currently impeding green growth. Examples of areas necessitating reform include the removal of environmentally harmful subsidies, less distortionary tax systems, regulatory failures and barriers to trade, investment and knowledge flows.
If implemented, these steps could help drive growth while capturing both environmental and economic benefits. For example, in the case of environmentally-harmful fossil fuel subsidies, OECD analysis based on data by the International Energy Agency finds that removing subsidies to fossil fuel consumption in emerging and developing countries could reduce global greenhouse gas emissions by 10% in 2050 – compared with business-as-usual. It would also make these economies more efficient, reduce the burden on government budgets, and alleviate the potentially distortive effects of subsidies on competition.
However, removing barriers will alone be insufficient to put our economies on a greener trajectory. Green growth strategies will additionally require a mix of policy instruments, including market-based approaches, regulations and standards, measures to incentivise R&D, and information-based instruments to facilitate consumer choices.
Correctly pricing pollution or the exploitation of a scarce resource through taxes, natural resource charges or tradable permit systems should be a central element of the policy package, most notably to provide a clear market signal.
Recent OECD findings show that the use of environmentally-related taxes, charges and emission trading schemes is indeed spreading across OECD and emerging economies, but there is considerable scope for expansion in the use of green taxes.
Wider use of these market-based instruments can also be an important source of government revenues. For example, analysis shows that if all industrialised countries were to cut their emissions by 20% by 2020 relative to 1990 levels, via taxes or emission trading systems with full permit auctioning, proceeds generated in 2020 could be as high as 2.5% of GDP across countries.
Revenues from carbon taxes or auctioned permits can offset more distortive forms of taxation, to generate welfare gains. They could also be used to help meet the financing commitments in support of climate change adaptation and mitigation in developing countries. Given the urgent need to reduce government deficits following the crisis, revenues could also be used for fiscal consolidation. In emerging and developing economies, such revenues could finance other pressing priorities, such as education, health care and poverty alleviation.
Market-based instruments alone will not be enough to bring about a shift to greener consumption and production patterns. Regulations will be needed in cases where market failures result in weak responses to price signals or when a complete ban on certain activities is necessary, for example in the production and use of toxic chemicals.
Other approaches, such as voluntary instruments and information-based measures – e.g. energy efficiency ratings and well-designed eco-labelling – can play an important supporting role in raising consumer and producer awareness on the environmental impact of specific activities as well as on the availability of clean alternatives.
The role of innovation and innovation policy
Innovation will be a critical driver for green economies and job creation. It provides the foundation for new industries, businesses and jobs. Innovation-led growth can also provide the manoeuvrability that will make it easier for governments to address pressing social and environmental (global) challenges. Moreover, it can do much to help address these challenges at the lowest cost.
Policies to accelerate the development and diffusion of green technologies and related knowledge should thus be a key part of any green growth policy package.
This will involve a broad approach, comprising price-based instruments and incentives for firms to engage in green activities, as well as public procurement and the funding of basic research.
It will be essential to remove barriers to trade in clean technologies as well as to the entry of new firms, and improve the conditions for entrepreneurship, especially in light of growing evidence that young firms represent a large source of more radical innovations.
There is also a crucial need for more effective and inclusive multilateral co-operation on science, technology and innovation.
Enhancing the international transfer of green technologies will be a key aspect for ensuring that the benefits of green growth are reached at a global level. There are significant advantages to technology and knowledge transfer, since both source and recipient countries (and others) benefit environmentally from the transfer. Moreover, the deployment of green innovations to emerging and developing countries will be a strong driver of expanding markets for eco-innovation and ensuring self-sustained economic development.
The way we respond to challenges relating to co-operation across countries, funding arrangements, institution building and development of indigenous absorptive capacity in developing countries will largely determine our success with green growth.
OECD countries have a collective responsibility, including for ensuring that their green growth policies strengthen policy coherence for development, for forging stronger trade links internationally, and for measuring up to their aid commitments.
Green growth is about recognising that how we grow is at least as important as how much we grow. It is about taking a closer look at the composition, the sources and the risks of growth. It is about defining and measuring what is understood as well-being in the 21st century. Here is where work on indicators for green growth and global projects such as the one on "Measuring the Progress of Societies" can make a strong contribution.
The first draft of OECD's Green Growth Strategy Synthesis Report – and the Report on Green Growth Indicators – will be released at the end of January 2011. Our aim is for the Report to be of practical use for policymakers, with key findings and policy recommendations on these and other difficult questions. We will make sure to share these first drafts with you as a way to contribute to our continued discussion and co-operation.