Can We Align Third World Development with Net Zero?

Can We Align Third World Development with Net Zero?

Given that the majority of future carbon emissions will come from the developing world, the question of what the developed world might do about this should be central to every climate policy discussion—and yet it isn’t.

And there’s another reason to be bullish on FDIs: in a global energy economy dominated by renewable energy and necessary critical minerals, foreign partnerships will be crucial to the United States’ geopolitical strategy. Over the last decade, America’s rivals have increasingly positioned themselves to weaponize clean energy access. China, in particular, has been extremely aggressive, leveraging its massive influence in Africa and South America to secure a near-monopoly on minerals like lithium, cobalt, and copper—all crucial resources in the energy transition. The Chinese Communist Party has also invested heavily in manufacturing: where the United States once controlled cleantech production, China now dominates, producing three-quarters of the world’s photovoltaics and leading the wind turbine industry.

There’s no overstating the impact this could have on the American economy. A disturbing first glimpse came in late 2020, when China explored limiting American military contractors’ access to rare earth minerals in response to arms sales to Taiwan. This could soon become the norm—as the global economy becomes increasingly reliant on renewables, countries with cleantech capacity will be able to leverage energy access as a powerful political tool. Green FDIs thus play a vital role in the United States’ approach to energy geopolitics. The greater the hand America has in the developing world’s cleantech industries—from minerals to renewables—the better chance it will have at securing an energy-independent future.

This is the greater vision of what the U.S.-developing world energy relationship could look like: in which industrializing countries benefit by developing for a net-zero economy, the United States benefits by investing in that development, and the planet itself ends up better off as a result.

A FEW conclusions can be drawn from all this. First, as Majkut and Trembath both note, it is neither reasonable nor effective to force the Global South towards net-zero. Countries will almost always develop according to their own national interests—and in the case of economic growth, these interests will improve the lives of millions.

But second, and just as important, is the fact that planning for a low-carbon economy should be viewed as congruent with those same national interests. Clean technology is becoming cheaper and more effective by the year, and fossil fuels are falling out of favor as powerful international institutions move to make addressing climate change a priority. Lower and middle-income nations would do well to recognize this trend and invest heavily in the energy infrastructure that will power future economies. On this second point, Trembath and Majkut might disagree on questions of scale. While both expect cleantech to have a role in lower-income economies, Trembath holds that the developing world will have to rely almost entirely on natural gas as it industrializes. Majkut, meanwhile, is more bullish on renewables’ prospects.

But far more importantly, both agree on a central premise: the United States, and the West more generally, can set the developing world on a cleaner path by investing in its low-carbon industries. It’s a talking point that has become so overused that it’s almost banal, and yet it still holds true: carrots, not sticks, will be the way to promote international climate action. If America is successful in limiting third-world emissions, it won’t be because of restrictions and finger-wagging—it will be because of long-term financing and international supply chains.

Developing nations will have a role to play here too. Domestic decisionmaking will dictate the terms by which emerging economies can benefit from foreign investment. This thus raises the question: what does smart policy look like in the industrializing world? To this, it appears the success of pro-growth climate action in the Global South will come down to two main themes: strong political leadership and smart incentive structures.

One thing we’ve learned from the last several years of the energy transition is that declining clean energy prices will only spur widespread adoption when there’s sufficient political will to do so. As CSIS’s Nikos Tsafos and Lachlan Cary stated in their 2020 report on emerging economies, “Energy systems do not necessarily follow the path of least cost—politics, political economy, and institutions matter.” This may sound like a simple prescription, but it’s one that has already been proven out across the developing world. The same places that had early success in the cleantech market are also the ones whose leaders made it a priority. Thanks to India’s first electric vehicles (EV) scheme, for example, the Indian state of Gujarat has managed to foster a growing EV industry. This, in turn, attracted automakers like Ford and General Motors, who have set up assembly plants in the region. A similar case is apparent in Vietnam, where the government’s implementation of feed-in tariffs for new solar farms has triggered a boom in its commercial and rooftop solar sectors.

These successes don’t just owe themselves to the forces of the market. In India, Prime Minister Narendra Modi’s early solar policies came at a time when coal was still the vastly cheaper option. Rather, in the cases of both Gujarat and Vietnam, the growth of the cleantech industry was driven by top-down leadership—and both times, these decisions led to massive economic opportunity.

A QUESTION worth asking here is whether there really exists a one-size-fits-all climate policy for the developing world. Some regions get three hundred days of sunshine a year; others get only eighty. Many countries are reliant on coal; others have the benefit of possessing rivers, and thus, hydropower. With so much variability in the geography and political economies, policies that work in one country will often not work in another.

Nonetheless, there are some key market-based mechanisms that have already been implemented across the developing world, often with a great deal of success. One particularly popular policy has been feed-in tariffs like the ones in Vietnam, wherein producers are offered above-market prices for the clean energy they deliver to the grid. These tariffs have worked well in the early stages of industry growth, when production would not have otherwise been economically feasible. But they can also create problems later on, when the tariffs are inevitably reduced and distribution companies are saddled with expensive, long-term power purchasing agreements.

Another option, then, is a carbon tax. Talk of carbon taxes in the United States still draws incredulity from those who have seen the policy suffer one crushing Congressional defeat after another over the last three decades. And indeed, though the tax is increasingly popular with the American public, it still faces an uphill battle on the Hill. That is a shame so far as American climate action is concerned: according to a 2019 Brookings Institution report, a price on carbon could slash national emissions by as much as 40 percent by the end of the decade.

But carbon pricing has taken hold across much of the rest of the developed world, and countries are already feeling the benefits. In Europe, the combination of national-level carbon taxes and the European Union’s cap-and-trade system has led to a 20 percent reduction in CO2 emissions since 2005, all whilst having little to no impact on the economic performance of regulated sectors. Other countries have started to follow suit: in 2019, citing Europe’s environmental and economic success, Singapore became the first country in Southeast Asia to introduce a carbon tax. Though the policy is still relatively new, Singapore has already announced plans to raise the price over the next few years, arguing that it will not affect the competitiveness of the national economy.

There is good reason to think that carbon pricing schemes could work in the developing world, too. The International Monetary Fund (IMF) has done much of the research here, and has recommended that there be a tiered, worldwide carbon price floor by 2030. Under this plan, advanced, high-income emerging market and low-income emerging market economies would be subject to price floors of $75, $50, and $25 per ton of CO2, respectively. This approach would reduce global emissions by 23–24 percent by 2030 compared to business-as-usual while allowing lower-income economies more flexibility as they industrialize.

There are a number of advantages to this approach. First, there are ways in which the carbon tax can pay for itself. Lower-income countries are often heavily reliant on coal power plants, and emissions controls would thus significantly reduce local air pollution and improve health outcomes. One recent study in Environment International projects that an electricity and cement sector cap-and-trade system in China would reduce deaths by tens of thousands by 2030. Second, as developing countries enter the middle-income space, the costs of state services go up. This puts stress on governments to expand their tax base—and even at just $5 per ton, a price on carbon could raise a substantial part of that revenue, increasing access to essential services and improving quality of life. Third and finally, there is the aforementioned larger point around economic growth: a carbon tax would set lower-income countries on a cleaner development pathway, thus allowing them to participate in an increasingly carbon-neutral economy.

There is, therefore, good reason to think that carbon pricing could play a crucial role in the international decarbonization project. Year in and year out, the list of countries considering the tax grows—with a group that now includes Brazil, Indonesia, Pakistan, and Russia. One can reasonably assume that this is a reaction to the policy’s increasingly clear economic, and not environmental, potential. Policymakers should see this as an extraordinarily promising development.