Clean technology

The Global Energy Challenge

This entry is the first of a series of posts written by members of the World Bank's Development Research group's Environment and Energy team on economic and policy issues involving energy and climate change mitigation.

Issues relating to energy are among the most important and difficult challenges confronting the world today. Providing sufficient energy to meet the requirements of a growing world population with rising living standards will require major advances in energy supply and efficiency. Doing this while mitigating the risks of climate disruption will be an even more challenging undertaking. It will require a significant shift in the historic pattern of fossil-fuel use and a major transformation of the global energy system. Especially in the developing countries, the choice of technology, policy, and economic levers that will be used to transform and expand their energy systems will have profound implications for their growth, international competitiveness, and economic security and prosperity. This overview focuses on the challenges related to electricity supply; subsequent blogs will address other parts of the energy system.

Trillions of dollars at risk for investors from climate change

Here is a trillion dollar question: How will the portfolios of long-term asset managers like pension funds, foundations and endowments be affected by climate change? These institutions, in contrast to commercial banks, are legally obligated to take a long-term view in managing their returns. A new report by Mercer, a leading consulting and investment services firm, provides the first look at yet another window on the complex consequences of climate change—the implications for strategic asset allocation.

A headline result of the study is the estimated increase of up to 10 % in overall portfolio risk, primarily due to policy uncertainty—equivalent to as much as US$8 trillion by 2030. Traditional equity and bond holdings—usually the most conservative forms of hedging against uncertainty –- are most at risk of underperformance. In contrast, carefully selected investments in climate- sensitive sectors may actually reduce overall portfolio risk.

The International Finance Corporation (IFC) and UK’s Carbon Trust, along with 14 institutional investors collectively managing over US$2 trillion, funded the analysis, which was carried out by Mercer. The analysis looks at impacts by sector, region, and asset category (bonds, private equity, real estate, etc.) and builds on a set of climate change scenarios out to 2030 developed by the Grantham Research Institute at the London School of Economics and the consulting firm Vivid Economics.

China, the US and clean energy cooperation

Photo: istockphoto.com

Presidents Hu and Obama created buzz earlier this week in Washington when they met on pressing bilateral issues, including US-China business and investment regulation, trade, currency imbalances and security concerns. US-China clean energy cooperation is an important part of that bilateral dialogue (see transcript of my intervention at a January 18 US-China Strategic Forum hosted by Brookings).

Why?
Cooperation between the two countries can yield big economic benefits. The world is recovering from the worst economic crisis since the Great Depression. In this context, taking advantage of clean energy opportunities is crucial to fueling a sustained global recovery.

Let clean technology "stand on the shoulders of giants"

Green growth has been in the news lately with much talk about greening the fiscal stimulus for a triple bottom line. Yet there are worries and the question remains as to whether green growth means slower growth with resources diverted to cleaning up the growth process. And what would happen to countries who unilaterally decide to impose domestic environmental regulations and/or a carbon price?. Will this lead to jobs moving abroad—to poorer or less-green countries that would become pollution havens?

Unfortunately much of the green growth discussion has been of the proselytizing or the scare-mongering kind, with not enough analysis of the potential trade-offs between greening and growing, and not enough thought devoted to ways of minimizing these trade-offs.

In this context, a new paper by Philippe Aghion, Daron Acemoglu and two Harvard graduate students, on “The Environment and Directed Technical Change” (pdf) is a much needed contribution. It also makes for a fascinating read: do not let the large number of equations scare you off! As in all of Aghion’s work, the key insights of the papers are fully captured in crisp writing in the first few pages of the paper.

In his presentation at the World Bank on March 8, Aghion explained the motivation of the paper: most economic models looking at the trade-offs between acting aggressively or not on climate change assume technical change is exogenous—i.e., does not respond to changes in energy prices (for example through a carbon tax) nor to environmental regulation (like a cap on emissions). This results in green growth being slower than dirty growth, at least if the negative impacts of climate change are small, and/or results in the need for permanent subsidies.

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