Myth Buster no. 1: Climate action hinders economic development? - Wrong!

Alignment of Development Finance with the Paris Agreement: Myth Buster Series

This blog series aims to debunk ‘myths’ about trade-offs between climate action and development. Addressing political decision-makers, practitioners in multilateral development banks as well as staff of civil society organisations and the interested public, three blog posts will provide them with evidence to refute widespread misconceptions about the effects of climate action on development. They will also include recommendations for multilateral development banks on how to contribute to strengthening the link between climate action and development and thereby highlight win-win opportunities and avoid trade-offs.

Over the past decade, the urgent need for global climate action finally paved its way through to national and international politics and largely enjoys public recognition today. However, preconceptions about various perceived trade-offs impede much needed climate action. One concern that is prevalent especially in low- and middle-income countries (LMICs) is that climate policies might undermine (short-term) economic development by purported high opportunity costs or co-impacts of climate action. This “myth” is fuelled by three main assumptions. First, that climate action will raise the cost of living, as many green projects, e.g. renewable energies, are perceived as being more expensive and linked to higher costs for consumers. Second, that high opportunity costs will exacerbate poverty. And third, that more ambitious climate policies will impede economic growth, due to for example the fear of additional investment costs or through a loss of competitiveness. Some policy-makers draw on these arguments to push forward fossil development rather than seeking cleaner alternatives. In the following, we will explain why climate action does not hinder economic development, and in fact promotes it.

There is growing concern that the world is on the verge of facing a deep economic crisis. The Russian invasion of Ukraine has caused food, fertiliser, and energy prices to surge. Inflation, geo-economic fragmentation, and supply chain problems send shock waves across the globe. On top of that, climate induced catastrophes worsen the situation.[1]

Figure 1: Comparison of economic losses (bn USD) by disaster type: 2021 and annual average of 2001-2020

In highly indebted countries such as Sri Lanka, social unrest has erupted. The looming economic crisis in large parts of Africa threatens food security to an extent not seen since the 1950s. These setbacks come at a time when huge efforts and investments in the global transition to greenhouse gas neutrality and climate resilience are required.

In this context, calls remain to de-prioritise climate action and instead invest in preventing the erosion of living standards and compensating macroeconomic imbalances. This, however, would be fatal. Deprioritising climate action would inevitably worsen the problems in the medium and long-term: According to the Intergovernmental Panel on Climate Change (IPCC), 3.3 billion people are currently living in countries that are vulnerable to climate change impacts. By 2050, the IPCC expects this number to have increased to an extent that almost everyone living on the planet will be affected.[2] Climate action is therefore more urgent than ever before and even turns into a condition for sustainable economic development. As we will see in the following examples, despite persisting misconceptions about the opportunity costs of climate action, it is scientifically evident that climate action provides significant development co-benefits.

CLIMATE ACTION REDUCES RATHER THAN

INCREASES THE COST OF LIVING.

There are concerns that climate action will increase the cost of living, mainly because of the assumption that energy prices are likely to increase with the transition to renewable sources. Yet is this fear justified?

Analyses show that rising energy prices are particularly problematic for countries that are heavily dependent on energy imports.[3] If these countries are additionally highly indebted, energy price shocks such as the current one strain their budgets.[4]

Nevertheless, even coal producing countries without such dependencies have faced severe setbacks by global increases in energy prices, such as in India. While higher prices of energy imports have negatively impacted economic development, the overall price increase has also led to higher prices for domestic coal.[5] Last year already, low stockpiles and rising power demands, especially during the increasingly hot summer months, have complicated the plans to expand domestic coal production. Instead of being able to work towards becoming independent from coal imports, these circumstances contributed to a spike in energy prices and an even heavier dependence on coal imports.[6] On top of that, 40% of India’s thermal power plants (nuclear energy, gas, or coal-fired power plants) are exposed to shortages of water, which they need for cooling, and thus face the risk of forced power outages because of drought. By 2030, this problem will expand to 70% of India’s thermal power plants as increasingly higher temperatures aggravate water stress in the country.[7]

As opposed to this, energy prices for renewable energy remain more stable and more resilient to water stress. Since their energy supply eliminates the need for a fuel to be transported, supply chain disruptions do not affect prices as easily as is the case with fossil fuels.[8]

Countries whose energy production is largely secured by domestic renewable energy are therefore less vulnerable, which directly benefits lower-income groups[9] and economic growth. In Europe, for instance, households with their own solar PV panels are less affected by recent electricity price jump. On average they save about 60% on their monthly energy bills.[10]

Example: Kenya - Combating climate change and the fight against hunger and poverty

Ending poverty is Kenya’s number one priority, a country with a population of 45% living below the poverty line. Climate change is already undermining anti-poverty efforts with droughts becoming more frequent and severe in recent years, turning into a major threat leading to famine, conflict, and displacement, in particular in the north of the country.[11] Poverty, climate change, and environmental integrity are regarded as interconnected societal challenges in Kenya, and are addressed in a set of policies[12] including for example the Climate Change Bill, the National Climate Change Response Strategy, and the National Climate Change Action Plan (NCCAP).[13][14]
One opportunity to alleviate poverty in Kenya is to expand renewable energy. Early climate action and vast wind, solar, and geothermal energy resources have allowed Kenya to become a leader in renewable energies, ranked 12th in the world and first in Africa in terms of renewable energy deployment.[15] The country is a leader geothermal energy taking advantage of the opportunities in the Great Rift Valley.[16] Kenya aims to double its geothermal capacity by 2030, and even export know-how to neighbouring countries.

Two graphs that display Kenya Energy Outlook

Figure 2: Kenya elecricity generation by technology

Only wind and solar PV plants may limit the geothermal expansion, given their faster return on investment, higher potential for decentralised solutions, and easier construction.[17] Being a cost-effective source of energy, geothermal power can grant access to electricity at lower prices and thus enhance access to health care and education.[18]

CLIMATE ACTION HAS GREAT POTENTIAL TO

REDUCE POVERTY. CLIMATE INACTION WILL

INCREASE POVERTY.

Another frequently expressed concern calls ambitious climate policies a luxury that is too expensive for countries whose priority is overcoming extreme poverty.

Yet this criticism does not stand up to scrutiny either. As a study by the World Bank shows, costs of building new climate resilient infrastructure are relatively small in comparison to baseline infrastructure investment needs and thus do “not affect current affordability challenges.”[19] Moreover, as figures 2 and 3 indicate, investments in more resilient infrastructure show a high benefit-cost ratio. While the research indicates that large financial losses are in fact unlikely, climate resilient infrastructure is rather cost-effective and could even generate benefits.[20]

Figure 3: Cost effectiveness of investment in resilient infrastructure (left) and costs of inaction (right)

Investing in climate resilience is indeed not only cost-effective, but also essential to avert a rise in poverty: Analyses show that poor countries and households suffer above-average economic losses from climate change, making it a top driver of poverty.[21] This is particularly true for semi-arid and agriculturally dependent countries, cyclone affected countries, countries exposed to sea level rise and countries in which especially the poor are highly dependent on fisheries. Climate change impacts thereby undermine efforts for inclusive development and often affect the poorest the most.[22]

Climate adaptation, climate-sensitive social safety nets, and climate risk transfers stabilise and increase the income of rural households whose livelihoods are often highly dependent on ecosystem services such as regulating services like flood protection or provisioning services like timber.[23] Furthermore, investments in climate resilient pro-poor infrastructure, such as coastal protection, resilient housing, transport, and agriculture, have positive effects on mitigating climate-induced damages and thereby stabilise local costs of living.

Example: Bangladesh’s Mujib Climate Prosperity Plan - Green, climate-resilient growth

Constant economic growth is Bangladesh’s top priority. The country is scheduled to graduate from the status of a Least Developed Country by 2026. With its real GDP rapidly growing,[24] Bangladesh belongs to the “Next Eleven”[25] countries.[26] However, aggravating economic damages due to extreme climate events increasingly threaten Bangladesh’s development.[27]

World map indicating Global Climate Risk Index

Figure 4: Global Climate Risk Index 2000-2019

In 2019, a 100% renewable energy scenario was developed that shows that Bangladesh has a large untapped potential for renewable energy, contrasting with the rapidly outdated 2016 published Power System Management Plan (PSMP) that largely disregarded local resources of renewable energy.[28] It further indicated that 100% renewable energy supply is not only feasible, but also economically beneficial.[29][30] Shifting to a full renewable energy supply would lead to a massive increase in employment of over 250% by 2050, whereas jobs in a business as usual reference scenario would almost halve in the same period.[31]
These considerations led to a review of the PSMP and eventually the cancellation of the expansion plans for coal-fired power plants[32] and the approval of the Mujib Climate Prosperity Plan (MCPP)[33] in 2021. The MCPP links climate action to development planning in order to achieve robust socio-economic development based on climate resilience and green economic growth. With this approach, the government seeks to mitigate catastrophic climate impacts on the economy which could accumulate to yearly losses of 6.8% in GDP by 2030 in a business as usual scenario.[34] This proves that climate action is not only financially feasible for poorer countries but that it can even provide various benefits.

CLIMATE ACTION STIMULATES ECONOMIC

GROWTH AND DEVELOPMENT. INACTION HAS

THE OPPOSITE EFFECT.

Furthermore, some worry that ambitious climate action might slow down economic growth. However, this also proves to be incorrect.

Future economic prosperity depends on limiting global warming to well below 2 degrees. In the long run, climate-induced damages are expected to increase to USD 438 billion annually in the 2030s, rising up to USD 1.067 billion by 2050 if current trends continue.[35] The IPCC identified over 130 key risks across regions and sectors, including critical infrastructure, networks and services, living standards, health, food and water security. In the light of this widespread potential for risk, the IPCC calls for scaling up investments in transformative adaptation by 3 to 6 times by 2030.[36] For example, investing in climate-resilient infrastructure to improve adaptation is estimated to generate four times more benefits than costs.[37] Instead of slowing it down, ambitious climate action can thus in fact contribute to economic growth.

In another example, even in the short term, climate action can have a positive impact on the economy, a study on decarbonisation in the US shows. While it is true that climate mitigation efforts will mostly pay off and save money in the long term, emission reduction efforts can already provide short-term economic benefits that can outweigh costs within a decade thanks to health improvements resulting from the improved air quality.[38]

At the same time, scaling up investments in decarbonisation globally now will reduce the costs incurred by economies to compensate for climate-related damages in the future. Continuing to invest in fossil energy sources would create a carbon lock-in and risk turning into stranded assets in the near future, making access to affordable renewable energy a key driver of economic growth. The International Energy Agency (IEA) has shown that in regard to the levelised costs of electricity generation, onshore wind and solar PV are the most competitive if deployed at large scale, and that coal-fired power generation is no longer competitively viable. The analysis revealed that for the majority of countries and regions evaluated in the report, renewables represent the most cost-effective solution (see figure 5).[39]