ENERGY, GROWTH AND DEVELOPMENT

in

a Carbon Constrained World

Amar Bhattacharya

Senior Fellow, Brookings Institution

Berlin Energy Transition Dialogue

March 20, 2017

1

A new global agenda and sustainable infrastructure:

the future of growth and development

• The milestone events of 2015 have set a new global agenda focused on three

simultaneous challenges:

• Delivering on sustainable infrastructure is at the center of all three

challenges.

• Well-designed infrastructure can be pro-growth, pro-poor, and pro-climate.

Reignite global growth Deliver on the SDGs Drive strong climate action

2

The growth story of the future

• Growth, sustainable development, poverty reduction and climate change are complementary and interwoven. (“Better Growth, Better Climate”, NCE, 2014; “Why are we Waiting?” MIT Press, Stern, 2015;“The Sustainable Infrastructure Imperative”, NCE, 2016; “Delivering on Sustainable Infrastructure for Better Development and Better Climate”; Bhattacharya et al., 2016)

• Opportunity to:

» Boost shorter-run growth from increased investment in the low-carbon transition (sustainable infrastructure);

» Spur innovation, creativity and growth in medium term;

» Provides the only feasible longer-run growth on offer.

• A growth story that delivers: alternative paths of economic development; rising living standards; cities where we can move and breathe; stronger communities; ecosystems that are more productive and resilient.

3

Sustainable infrastructure is crucial to the story

Promotes environmental sustainability

SUSTAINABLE

INFRASTRUCTURE

End poverty in all its forms everywhere

End hunger and achieve food security

and improved nutrition

Ensure healthy lives and

promote well-being for all

Ensure quality education and

learning opportunities for all

Achieve gender equality

Ensure availability of water

and sanitation for all

Make cities and human settlements

resilient and sustainable

Promote productive employment and

decent work for all

Promote sustainable use of

terrestrial ecosystems

Conserve and sustainable use

of marine resources

Ensure sustainable consumption

and production patterns

Take urgent action to combat

climate change and its impacts

Ensure access to

affordable and clean

energy for all

Promote resilient infrastructure,

sustainable industrialization and

foster innovation

Reduce inequality

within and among

countries

Promote peaceful and

inclusive societies

Revitalize the global

partnership for sustainable

development

4

Next 10 to 20 years are of crucial importance

• Long-lasting infrastructure investments on scale will need to be made in our cities,

energy, water and transport systems all over the world:

» aging infrastructure in advanced economies will need repair and replacement.

» higher growth and growing weight of emerging/developing countries in global

economy.

» structural change in developing countries including rapid urbanisation from

around 3.5bn now (50% of 7+bn) to 6.5bn by 2050 (70% of 9+bn). Africa’s

population will double (from 1 billion to 2 billion).

• World economy likely to double in next 20 years or so, infrastructure will more than

double.

• Once in history transition.

• Altogether $80-$90 trillion in infrastructure investments will be required over

next 15 years - more than the current existing stock.

5

Ramping up

• The Paris Agreement recognises need to ramp up ambition and actions:

» Current pledges (NDCs)are around 55-60 GtCO2e per annum in 2030, an

improvement on BAU (ca. 65-68 GtCO2e per annum ).

» A 2°C path would require GHG emissions around 40 GtCO2e or less

per annum by 2030 (depends on assumed path thereafter).

• Recognises that gap; peaking of emissions must happen “as soon as

possible”.

• It agreed conventions on measurement and to meet every five years to look

at progress towards meeting NDCs with a view to enhancing levels of

ambition.

• Will require actions, collaboration and commitment from many parties

(countries, cities, private sector and the MDBs.).

• Coming into force of the Paris agreement allows and requires focus on

ramping up.

6

Urgency and opportunities for ramping up ambition

• The window for making the right choices is uncomfortably narrow because of

lock-in of capital, technology and emission patterns for decades and because of a

shrinking carbon budget (ratchet effect of flow-stock process, i.e., emissions to

concentrations).

• On the other hand, much clearer recognition now, as evidenced in Paris, of both the

immense risks and great attractions and opportunities that lie in low-carbon

climate-resilient growth.

• Time is opportune; low interest rates, rapid technological change (energy

production and use, digital, materials, biotech, construction) and the opportunity to

shape the new infrastructure.

• BUT if we do not take the opportunities now, 2°C target will be out of reach with

all the grave consequences.

• Next twenty years will be decisive in world history: deep responsibility as well as

great opportunity.

7

Projected cumulative infrastructure demand, 2015-2030By regional groups, sector and income groups

2014 USD, trillions

Source: Bhattacharya, Chattopadhyay, and Nagrah (forthcoming)

Note: Projections based on mid-point of range estimates. Excludes fossil fuel extraction and use, expenditure to enhance energy

use efficiency, and operation and maintenance costs.

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Investing in sustainable infrastructure requires a shift in investment

but does not need to cost much more

8

Infrastructure spending needed for a 2°C scenario (2015-2030, percentage change)

Note: Δ is the mathematical symbol for change.

Source: Global Commission on the Economy and Climate, 2016 and 2014, and Bhattacharya et al., 2016

9

Energy access is vital to support development

Average per capita primary energy consumption; GJ/capita; 2014

• Historically, about 100 GJ of

primary energy per capita

per year has been required

to achieve this.

• By 2050, the world’s

population is expected to be

9-10 billion, all of whom

deserve a good standard of

living.

• Currently about 1 billion

people still have little or no

access to electricity and

around 3 billion do not have

access to clean cooking

facilities, mostly in Africa

and Asia (SE4all, 2016).

• The central question is: how

can we create an energy-

abundant future that

supports development and

keeps temperature rises

“well below 2C“?

Source: Energy Transitions Commission, 2016

10

Options for energy provision are being transformed by falling costs

10

Utility scale solar PV auction prices Source: IRENA, 2017

Projected battery costs (2012USD/kWh capacity)

Source: Rocky Mountain Institute, 2014, in ETC, 2016

11

Tackling the impediments to sustainable infrastructure

• Tackling these impediments will require concerted and mutually reinforcing

actions on four dimensions of policy and finance:

» First: eliminate pervasive fossil fuel subsidies and adopt carbon pricing, thus

improving incentives and generating revenues to enable the investments needed in

sustainable infrastructure.

» Second: provide a stable policy environment and strengthen investment

frameworks thus helping to deliver a concrete pipeline of viable and sustainable

projects, reducing the high development and transaction costs and attracting the

private sector.

» Third: tackling the gaps in the availability and costs of long-term finance both in

the upfront and operating phases. Mobilising both long-term debt finance and the

large pool of institutional investor assets can boost confidence and mutually reinforce.

» Fourth: strengthen cooperation on technology development and deployment

especially on clean energy and energy efficiency.

• Credibility, clarity, consistency are crucial to reduce uncertainty

11

12

Adapting Carbon Pricing to country circumstances

• Emission reduction targets in lower income countries could be less ambitious

(higher opportunity cost of consumption; market and institutional gaps)

• May need a lower price to achieve a given level of reduction

• Distributional impact of carbon pricing, especially concern about impact on the

poor. In theory can be addressed through transfers but not possible in practice.

• On the other hand, there may be important co-benefits such as reduced

pollution which are particularly damaging for the poor.

• Revenues from carbon pricing can be used for pro-poor investments including

education, health and infrastructure.

• Carbon pricing should be integrated into an overall country-specific policy

package, but with broad consistency of action across countries.

13

Importance of climate related financial disclosure

• Requiring full disclosure of risks and exposure to the physical and policy risks of climate change will be good for stability but also for accelerating the low-carbon transition.

• FSB Task Force on Climate-related Financial Disclosures (TCFD) has set out the information which companies and their intermediaries must disclose about the climate risks of their business activities.

• G20 should move toward appropriate mandatory disclosure standards as a matter of corporate governance

• This would support a process of moving towards universal and standardised disclosure that can rapidly scale and accelerate the use of climate-related financial risk information in investment decisions across countries to inform financial decisions.

14

Lower capital costs are crucial for sustainability

Source: Waissbein et al. 2013

15

Moving from ‘billions” to “trillions”

• There is no shortage of world savings but major obstacles in transforming investment opportunities into real investment demand and major difficulties in bringing forward the right kind and scale of finance at the right time.

• Strong, clear policies and capacity-building necessary to translate

opportunities into real projects.

• Together MDBs, along with ODA/climate finance and export credit

agencies, could be used to mobilise a much larger sum of private capital

and help with policy design and capacity building..

16

The crucial role of multilateral development banks

• Key role for MDBs around supporting investment by enhancing the quality of the project, reducing risk and crowding in private finance.

• Their presence can impart confidence, reduce risks (particularly government-induced policy risk), bring relevant instruments for managing risks (equity, guarantees, long-term loans…) and encourage participation of other sources of financing.

• This can bring down the cost of capital: crucial for volume and sustainability (quantity and quality).

• They are trusted conveners that can help coordination and help establish replicable and scalable models.

• They play a crucial role in getting projects through difficult early stages. After that institutional investors can be attracted by stable long-term returns; great potential scale.

17

Better infrastructure can deliver on growth, sustainability

and poverty reduction

From BAU To better infrastructure

Inadequate investments in sustainable

infrastructure in most countries constraining

growth and development

Scaled investment in sustainable

infrastructure globally, leading to improved

economic development and growth

Inadequate provision of affordable

infrastructure for poor people, risking

reversal in fight for development and poverty

reduction

Increased infrastructure access and

affordability for the poor, leading to improved

development outcomes

High proportion of high-carbon

infrastructure investments and inefficient

use of infrastructure, creating danger of lock-

in and irreversible climate change

Increased preference for investments in low-

carbon infrastructure, mitigating climate

change to below 2 degrees

Low resilience infrastructure, creating

vulnerability to risks of climate change (esp.

among poor people)

More resilient infrastructure that accounts

for climate risks and protects populations

most vulnerable to climate change