Suppose you are a policymaker in a developing economy. Your country’s income per capita is a fraction of that in the US, western Europe or Japan. Your economy has grown over the past 30 years, but so have richer ones, meaning that the income gap has barely budged. Your young people are impatient and dream of leaving the country, often at high personal risk, in search of a better life.
Now you are told that, because of carbon dioxide emitted mostly by advanced economies, your country needs to adapt to a changing climate and restrict carbon dioxide emissions, which makes energy more expensive and economic progress harder. Should you disregard green issues and focus solely on national development instead?
No, you should not. The reason is that decarbonization is capable of transforming global production and trade patterns so radically that new growth opportunities are bound to arise for savvy countries of the Global South. Their goal should not be to stop global warming by restricting domestic emissions, but rather to carve out a role for themselves in a rapidly greening world economy.
As Bill Gates says in his book How to Avoid a Climate Disaster, producing green electricity and electrifying anything we can, such as all forms of transport, is central to any strategy for achieving net-zero emissions, but fully decarbonizing transport — a huge challenge — would only get us one-quarter of the way. The world also needs to change the way that it makes steel, aluminum, copper, cement, fertilizers, fuels, heat, and even food and cities.
The good news on the decarbonization front is that the costs of solar and wind energy have dramatically declined. The problem is that these energy sources’ intermittency has created a wide divergence in value between use-it-or-lose-it electricity and dispatchable power, which is available on demand and produced mainly by so-called “peaker plants” that burn natural gas.
The solution to the intermittency problem is storage. Lithium batteries have been the go-to option for technologies from cellphones to vehicles, while molten salts can store solar energy as heat for later use in electricity generation.
An important new hope for decarbonization is hydrogen: Using renewable energy to split water molecules produces hydrogen and oxygen. Hydrogen can be burned as a fuel and it only emits water vapor, or it can be put in a fuel cell to make electricity on demand.
Alternatively, hydrogen can be used as a feedstock to make more energy-dense compounds such as ammonia — which can serve as a fuel itself, or help make ammonium nitrate for use in fertilizers and explosives. Hydrogen can also help to make green methane, methanol, jet fuel or plastics. All of this is physically possible, but making it economically efficient requires innovation.
Another solution to the problem is so-called “carbon capture and sequestration” (CCS). This technology has so far been installed at emission sites such as thermal power plants, but in principle, CCS can occur anywhere — preferably, close to geologically appropriate underground storage locations.
Ideally, there would be a global market for CCS services, where emitters in one country could buy CCS in another. That market does not yet exist, but it could be created.
The bulk of innovation, as always, results from learning by doing, through what economists call Wright’s Law: costs fall with accumulated production, as people figure out better ways of doing things. Who does the learning determines who has what it takes to participate successfully in today’s emerging green industries.
However, there are reasons to do the learning where, because of some natural advantage, existing technology is already competitive. For example, the world’s highest levels of insolation — the amount of solar radiation reaching a given area — are in the deserts of Australia, Chile and Namibia, three countries that are developing green hydrogen strategies.
All of this opens new economic development paths for countries in the Global South, whether in the production of green energy and materials, or in the value chains that underpin them — including inputs, capital goods, engineering, procurement and construction of green infrastructure.
Countries that fail to pay attention to these changes might be left with “gray” products that are increasingly shunned by a greening world, making national development more difficult.
In short, while the effects of global warming pose a severe threat to developing countries, decarbonization is not merely a source of constraints and impositions on potential economic opportunities. It is also a change generating new industries, markets and avenues for growth.
The governments of developing countries should study the emerging value chains behind the industries producing the green outputs needed to reduce emissions. To that end, they should emulate Israel and Singapore by establishing the position of chief scientist so that they can conduct technological surveillance and figure out how to exploit emerging trends.
Policymakers should also aim to develop explicit strategies to attract investment from emerging green industries. That means determining which parts of the value chain play to their country’s strengths, be they existing productive capabilities or some relevant natural resource such as solar radiation, wind, hydropower, lithium or geologically suitable carbon dioxide storage locations.
Achieving the needed transformation requires creating a price wedge between often identical green and gray products. One way to achieve this is through a homogeneous global carbon tax, but this is unlikely to materialize. More complex rules are thus bound to emerge, whether through regulation or subsidies.
The governments of developing countries need to figure out which types of rules, in global and regional agreements, can best advance their national interests.
The green agenda might be about preventing a global catastrophe, but if developing countries manage it well, they have a chance to transform it into new avenues for national development.
Ricardo Hausmann, a former minister of planning of Venezuela and former chief economist at the Inter-American Development Bank, is a professor at Harvard University’s John F. Kennedy School of Government and Director of the Harvard Growth Lab.
Copyright: Project Syndicate
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