How developing countries can reach net zero

BEIJING  —  The world’s developing economies are gearing up for a fight as the United Nations Climate Change Conference (COP27) takes place in Egypt. The gathering provides low- and middle-income countries an opportunity to air their justified grievances about the climate costs they disproportionately bear, and rich countries a chance to start paying their fair share.

While today’s developed economies have reaped the benefits of emitting massive amounts of greenhouse gases for 200 years, developing countries have been asked to sacrifice their future to save the planet. But if we are to reach net-zero emissions, the international community must ensure that the energy transition creates opportunities for lower-income countries, particularly ones on the frontlines of climate change.

Nowhere is the tension between promoting growth and fighting climate change more palpable than in Asia. Despite a challenging geopolitical landscape, Asia’s economies have bounced back from the COVID-19 pandemic with strong growth and flourishing trade, owing to new regional agreements and expanding value chains. At the same time, many Asian governments have been struggling to cope with severe urban air pollution and the increasing frequency of powerful storms and floods. While Asia accounts for the world’s largest emissions of greenhouse gases with the highest carbon intensity, it is also home to 99 of the world’s 100 most climate-vulnerable cities.

The net-zero transition is a massive undertaking that requires enhanced state capacity. As a new report by the Asian Infrastructure Investment Bank points out, it poses the greatest challenge that emerging and developing economies have ever faced. Laggard state-owned enterprises with outsise carbon footprints and state-controlled banks that are over-invested in fossil fuels need to become leaders in advancing renewable energy. Similarly, governments must develop and implement mission-driven policies to price carbon use accurately, encourage green innovation, and phase out dependence on oil and coal in a socially and politically sustainable fashion.

Some state-owned companies have already begun responding to these challenges. Since Indian Prime Minister Narendra Modi pledged to achieve net-zero emissions by 2070, the state-owned mining company Coal India has been increasingly focused on renewables, particularly solar energy. Similarly, the Chinese government has directed the “Big Five” state-owned electricity companies to take the lead on greening the system. State-owned financial institutions are also changing: China’s Exim Bank, for example, has adopted a green framework for its domestic operations.

But we cannot reach global carbon neutrality without significant contributions from the private sector. While private companies’ financing capabilities are often the focus of this discussion, the skills and technologies they can bring to the transition are even more critical. But a thriving private sector requires a state capable of fighting corruption, enforcing competition, and protecting property rights. That is why the private sector is weakest in countries that lack adequate state capacity.

It is striking that in many countries, including India and Indonesia, renewables have been developed almost exclusively by private companies. This has rapidly boosted wind and solar energy but also created a dichotomy between state-sponsored fossil-fuel industries and a renewable sector that is largely privately owned. Diversification initiatives are critical to accelerating the transition to a low-carbon economy, but they must happen without undermining private-sector incentives.

In emerging, developing, and developed economies alike, the transition’s most challenging aspect is that it requires unprecedented alignment and coordination of decision makers across the economy. To this end, a carbon price that reflects the true climate impact of many activities is crucial to any coordination framework. But many countries, including China and India, have struggled to impose a meaningful price on carbon, and in most cases have managed to cover only a few sectors.

But carbon pricing alone is not enough to achieve net-zero emissions fast enough. Mariana Mazzucato and others have spoken about the need for “moonshots”, once-in-a-lifetime government projects that inspire mission-oriented industrial policies. In that spirit, Singapore is currently creating a framework whereby government entities work closely with state-owned financial institutions and private companies to achieve the net-zero target. The sense of common purpose that permeates these institutions will be essential to reaching this goal.

Large-scale coordinated efforts place a heavy burden on state capacity, and prioritising some sectors and technologies over others is an inherently difficult task that is often vulnerable to outside influences and regulatory capture. That is why UN Special Envoy Mark Carney and others have proposed that development partners help countries build state capacities critical to the net-zero transition. Several countries, including Pakistan and the Philippines, have already launched pilot versions of such “country platforms”.

Unfortunately, countries that are suffering the worst effects of climate change are also those where state capacity is weakest. The international community must support vulnerable countries like Afghanistan, Myanmar, Bangladesh and the Maldives in building the capacities required to sustain the transition to a net-zero economy.

To succeed, the transition must be perceived as just. It cannot perpetuate disparities between rich and poor countries, and it must transcend socioeconomic inequalities within countries, too. Programmes that reskill workers and transfer valuable skills from fossil-fuel industries to renewables are key. But they will require investment and careful execution.

Crucially, emerging and developing economies in Asia and beyond must develop their own “moonshots”. A positive vision of shared prosperity must drive the replacement of polluting technologies with greener alternatives. Achieving a net-zero economy is crucial to mitigating the worst effects of climate change. But if developing countries expect to be left behind, they will never come along.

Erik Berglöf is chief economist of the Asian Infrastructure Investment Bank. Copyright: Project Syndicate, 2022. 

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