Friday, 30 October 2009 14:40

Latin America, climate change and the countdown to Copenhagen: Interview 3* Featured

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In this interview we spoke with the World Bank’s Chief Economist for Latin America and the Caribbean, Augusto de la Torre. 1. With Latin America beginning to reverse the trend of punching below its weight, do you think the region can be a global leader on climate change, and if so through which political or economic space(s)? LAC has been “leading by example” for a long time. With respect to energy emissions, LAC is among the regions of the world with lowest emissions per unit of GDP (about half that of middle-income countries’ average), and its emissions per capita are more than 30 percent below the world average. Given its past record of low carbon development, its wealth of natural resources and its intermediate levels of income – when assessed on a global scale – many Latin American countries are well placed to take a leadership role in the developing world’s response to the climate change challenge. 2. In your report, ‘Low carbon, high growth: Latin American responses to climate change’, one of the key messages emphasizes the need to design policies and activities to tackle climate change, which are complementary to the region’s development. The report argues that there are numerous ways in which Latin American emissions could be reduced at low cost while simultaneously reaping considerable development co-benefits. Have you noticed any major or incremental changes in Latin American development thinking which is taking up this new climate-development discourse? Most Latin American and the Caribbean (LAC) countries are beginning to wake up to the dangers of global warming and thinking about how they should respond. Most concrete actions have to date been evolutionary, rather than revolutionary. But there have been some significant measures taken in some countries. The World Bank is supporting Mexico with a $500M Climate Change Development Policy Loan, a first of its kind, aiming at implementing its national climate change action plan. Many of the actions needed for reducing the growth in the region’s emissions are of a “no regret” nature: they would be socially advantageous regardless of their impact on climate change mitigation. In addition, adopting a low carbon development path would benefit the region’s long-term competitiveness to the extent that the world’s technological frontier moves in the direction of low carbon technologies. Most countries are assessing their climate change policies on the adaptation and mitigation sides, and some, like Mexico, are at a fairly advanced stage of developing an operational strategy. They are also leading forces among developing nations in the global climate negotiations. Taking advantage of these opportunities, however, requires an appropriate international policy environment in which a critical mass of high-income countries take a global leadership role. This is important not only to make such a global framework equitable, thereby lending it credibility, but also to generate sufficient incentives and momentum for the private sector to invest in low carbon technologies. For the world to benefit from Latin America’s efficient mitigation contributions, the international climate framework needs to be responsive – and welcoming – to the region’s potential contributions in the areas of forest conservation, renewable energy sources and environmentally sustainable biofuels. Countries in the LAC region are the world’s leaders in implementing incentive-based payment schemes for forest conservation. In 1996, Costa Rica passed the Forest Law 7575, which has recognized that forest ecosystems generate valuable ecosystem services and provided the legal basis for the owners of forest lands to sell these services. Brazil—the largest player in the global biofuels markets with about half of the global ethanol production— has developed the capacity to produce ethanol at a fraction of the cost of producing it in other countries. Because of favorable conditions for cultivation of sugarcane and the uniquely flexible industrial structure for sugarcane and ethanol processing, in periods of high oil prices Brazil’s ethanol industry has been competitive even without government support. Brazil, in fact may be the only country in which the ethanol industry has been able to stand on its own without government subsidy, and even in Brazil, this appears to have been the case only in 2004–2005 (but not 2006 when international sugar prices skyrocketed) and 2007–2008. (The Brazilian industry was also subsidized for many years to get to this point.) Elsewhere, biofuels production has not been financially viable without government support and protection. Biofuels producers in the European Union and the United States receive additional support—over and above farm subsidies and support to producers through biofuels mandates and tax credits—through high import tariffs. It is clear that from the perspectives of emissions, social costs and economic production costs, ethanol from sugar in Brazil is superior to alternatives. Reducing or eliminating the high trade barriers and huge subsidies currently in place in many countries would produce economic benefits for Brazil and its trade partners, and reduce GHG emissions. In assessing the impacts on overall emissions in producing biofuels in different countries, one relevant question is how much land must be shifted from other crops or converted to produce each gallon of biofuels. The ethanol yield per hectare from sugar in Brazil is about twice that of ethanol from corn in the US. This fact has led to the estimate that if the ethanol currently produced in the US were instead produced in Brazil,3 it would require only 6.4 million hectares, instead of 12.8 million, potentially leading to reduction in pressure for indirect land use change and substantial savings in emissions from this source. But the potential for Brazilian sugar-based ethanol to replace less efficient production from other sources is limited by the current high barriers to import of ethanol into the US and other high income countries. Reduction of these trade barriers to imports of Brazilian ethanol could lead to substantial savings in world cost of production of ethanol and a lower level of land use change. 3. Latin American countries have a number of similarities between them including a reliance on exporting primary goods; a strong record on renewable energy; abundant forest reserves and an interest in REDD; and a rapidly expanding middle class interspersed with persistent inequality. Are Latin American regional and subregional organizations, such as NAFTA, the Andean Community of Nations or MERCOSUR, taking advantage of these similarities and forging greater consensus on climate change in the region? Many international organizations – including the World Bank, the FAO, the Inter-American Development Bank, the UN Economic Commission for Latin America – have large work programs on climate change and are actively supporting efforts countries are making to evaluate their climate change policies on the adaptation and mitigation sides, and to develop and implement an operational climate change strategy. Some of these efforts are regional or sub-regional in scope. Under the auspices of the World Bank, we now have in place the first ever multi-country catastrophe insurance pool, the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which will provide participating governments from the region with immediate access liquidity if hit by a hurricane or ea rthquake. Pooling their risk will save the eighteen participating countries approximately 40% in individual premium payments. Exploratory work is underway for a similar facility for the Central American countries. We have also been working with countries of the region to establish or improve their agricultural weather insurance systems, and to develop the capacity to lay off some of the risk in international re-insurance markets, which will be helpful in mitigating the impacts of changing weather patterns on agricultural production. Unfortunately, in a number of countries, the infrastructure for monitoring weather has actually deteriorated over the years. This will need to be rectified, which will require investments, and the local insurance markets will need to be deepened. 4. Has the global financial crisis helped to push tackling climate change further up the political agenda, given the potential to save billions of dollars through energy efficiency programmes and to improve competitiveness? The global financial crisis has had ambiguous effects on the push to tackle global warming. On the one hand, it has diverted the attention toward the shorter term emergency. The urgency, immediacy, and staggering magnitude of the challenges posed by such crisis has competed with the no less daunting challenges of global warming. The capacity of political leaders and of national and supranational institutions to deal with major global threats is, after all, not unlimited. It would be, therefore, naïve to think that the world’s ability to tackle the colossal breakdown of financial markets and resulting economic contraction is free of tensions and trade-offs with the ability to proactively reduce GHG emissions. On the other hand, a number of factors (including the proximity of the Copenhagen Climate Change Conference and a clear change towards climate friendly policies in the U.S.) have helped keep the world’s attention on global warming issues, despite the global financial crisis. Moreover, it is feasible to reconcile efforts to deal with the financial crisis with efforts to confront global warming. Stimulus policies and programs can be designed and implemented with a “green” objective in mind, and some have in fact been designed that way in many a country, especially in public investments. A “green recovery”—that is, a virtuous interaction among job creation, growth resumption, and low-carbon-oriented public investments and policy actions—is a worthy option and arguably the only sensible option for the world community at this juncture. 5. One of the major failings to emerge from the global financial crisis was the inability to internalize systemic risk. Do you believe there are experiences to be gained from the crisis which may help to create greater risk management and resilience strategies for fighting global warming within Latin American governments, particularly finance and planning ministries? I doubt that such is the case. I would rather think that the reverse is more likely – namely, that regulation in different areas that the environment can learn from the latter about effective ways to induce a better internalization of externalities. 6. What potential links are being formed between the work being conducted on the economics of climate change in Latin America and more conventional macroeconomic and financial development topics? Let me focus on financial development. Financial markets are particularly important in responding to the challenges of climate change in several ways. Better insurance markets allow households to reduce their risk exposure from extreme events, which are expected to become more common as the world warms up. We in the World Bank are heavily engaged in providing assistance aimed at developing weather insurance markets in developing countries. Better access to short-term savings instruments likewise allows households to “save for a rainy (or excessively dry) day”, while longer-term financial instruments facilitate borrowing for investments that will be needed to reduce damages from catastrophes. Of course, development of financial markets provides many benefits even in the absence of considerations of climate change, illustrating the more general point that good policy to adapt to climate change is largely congruent with good development policy. Governments also need to be able to respond to weather-induced catastrophes, and new financial instruments are being developed to help them do so. One example is the Caribbean Catastrophe Risk Insurance Facility. Another is the World Bank’s Deferred Drawdown Option lending instrument, which is basically a pre-approved line of credit, which gives a government quick access to liquidity in an emergency. 7. The IADB reports that up to 98 percent of Latin American businesses are micro, small or medium-sized and are said to generate around 60 percent of the region’s employment. At a time when leading economists are calling for a green recovery to the financial crisis, what potential is there in Latin America to create green jobs for the millions of peoples involved in this business sector? Many green investments are consistent with stimulus objectives. The World Bank has recently analyzed the short-term employment generation potential of different types of infrastructure investments and has found that large highways and traditional thermal power plants, for example, generate very little short-term employment for the amount of money spent - in the hundreds to low thousands of yearly jobs for US$1 billion of investment. In contrast, the expansion of water supply and sewerage networks can generate upwards of 100,000 short term annual positions for the same amount of money and rural road maintenance, which gives small businesses and farmers access to markets and which often employ micro-enterprises, may generation 250,000 to 500,000 short-term positions for every US$1 billion of investment. Any major investment that begins with direct labor expenditures before high-value added content is added - such as small hydro facilities or the construction of dedicated bus lanes - will reach into the slackest part of the labor market and will generate the highest shares of direct employment. On the higher end of the value-added spectrum, LAC continues to be a leader in alternative and renewable energy generation, from its large hydro base to the growing use of geothermal, bagasse, wind and even solar. LAC's proximity to the US market and the region's own growing interest in renewable technologies has not been lost on the technology companies. A major integrated solar panel manufacturer in the US is now looking to relocate a part of its manufacturing to Mexico and we may expect that this trend of incorporating LAC into the supply chain for renewable technology will continue. 8. In recent years, Latin America’s carbon intensive sectors such as the mining, hydrocarbons and forestry sectors have helped to fuel the region’s economy aided by booming commodity prices. To stabilize greenhouse gas emissions concentrations to avoid dangerous climate change, over 50 percent of global mitigation potential would be located in developing countries. In the cases of industry, agriculture, and forestry, almost 70 percent of that mitigation potential is in developing countries. How is Latin America responding to this challenge and what synergies or conflicts exist between the trade and climate change regimes for the region? There are several ways in which trade policy can be improved to help address the challenges of climate change. First, all kinds of barriers to food trade could be more effectively disciplined. This would facilitate changing patterns of food trade as climate change alters production patte rns over the long term, as well as spread the effects of short-term supply shocks and ensure that consumers and producers respond appropriately. With a share of close to 11 percent of world agriculture and food exports, LAC is currently a major food-exporting region. But some countries may suffer large losses in productivity, leading to dramatic shifts in food trade patterns inside and outside the region. This issue is therefore of vital concern to the LAC region. One of the lessons of the recent precipitous increases in food prices is that when shortages arise, there is a tendency for countries to react with “beggar thy neighbor” trade policies that insulate domestic consumers and producers from international price movements, and in doing so, shift the adjustment costs onto others. This has included ad hoc reductions in import barriers and increases in export barriers, neither of which is effectively disciplined under current WTO rules. Many governments have also responded to the food crisis by focusing on measures to increase their degree of self-sufficiency in food production. In the future, as climate change makes food production increasingly high-cost in some countries, trying to maintain levels of self-sufficiency will likewise become increasingly costly. This underscores the importance of keeping the trade system open in order to give all countries confidence that they can rely on it to supply their food requirements. Second, barriers to trade in goods and services that help reduce emissions would ideally be eliminated. These are currently being addressed in the Doha Round negotiations, but progress has been limited. Of particular interest to LAC is the reduction of barriers to trade in ethanol. This is of greatest interest to Brazil which is the lowest cost producer in the world, but may be important for other countries in the region where ethanol can be efficiently produced from sugarcane. From the dual perspectives of efficiency and effectiveness in reducing emissions, it is in the world’s interest to ensure that ethanol is produced where this can be done most efficiently, rather than in countries where it requires large subsidies and high trade barriers. Ethanol can be produced in Brazil using about half as much land and at a far lower cost than production from, let’s say, corn in the US. Yet current biofuels trade policies and subsidies in high-income countries have generated huge distortions in agricultural markets, with adverse impacts on poor food consumers worldwide, and at best minimal reductions in carbon emissions. Finally, the WTO’s Committee on Technical Barriers to Trade is already involved in reviewing the increasing number of standards and labeling requirements targeted at energy efficiency or emissions control. It could also play an important role in ensuring that other trade policies – including tariffs levied on the basis of the producing country’s emission reduction commitments or environmental regulations – are not discriminatory and do not unnecessarily restrict trade.
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Guy Edwards

Guy Edwards is a Research Fellow at the Center for Environmental Studies, Brown University, where he manages a research project on the politics of climate change in Latin America. Along with co-author, Professor Timmons Roberts, he is currently writing a book on Latin American leadership on climate change for MIT Press. He has also written various academic papers, policy briefs and op-eds for a number of different publications. As co-founder of Intercambio Climático and formerly co-editor of the website, Guy has worked closely with the Latin American Platform on Climate and the Latin American office of the Climate and Development Knowledge Network. He has also worked for the Overseas Development Institute, the consultancy River Path Associates and as the resident manager of the Huaorani Ecolodge in the Ecuadorian Amazon.