GLOBAL DEVELOPMENT AND ENVIRONMENT INSTITUTE WORKING PAPER NO. 10-01 Climate-Resilient Industrial Development Paths: Design Principles and Alternative Models Lyuba Zarsky February 2010 Forthcoming in S.R. Khan and J. Christiansen, ed., Towards New Developmentalism: Market as Means Rather than Master, Routledge Economics, 2010. Tufts University Medford MA 02155, USA http://ase.tufts.edu/gdae In conjunction with: International Institute for Environment and Development (IIED) 3 Endsleigh Street, London WC1H 0DD, United Kingdom http://www.iied.org/ © Copyright 2010 Global Development and Environment Institute, Tufts University GDAE Working Paper No. 10-01: Climate-Resilient Industrial Development Paths Abstract Global climate change is here. According to recent scientific reports, the earth has warmed by nearly half a degree centigrade over the last twenty five years. Even with robust mitigation efforts, the global climate could warm by up to 4 degrees centigrade due to past emissions. Under a business-as-usual, high consumption fossil fuel-based development path, it could warm even more, resulting in catastrophic and life-threatening destruction of earth’s eco-systems. The “climate imperative”—the urgent need to both mitigate and adapt to global climate change—has important implications for economic development paths in general and industry and energy policies in particular. Development models and practice historically have treated climate—and indeed, the natural environment in general—as exogenous. Future development models will need to incorporate both climactic uncertainty and the economic threats and opportunities arising from an evolving global climate regime. Developing countries, which are especially vulnerable to climate instability, will need to design energy and industry policies which aim to achieve not only economic and social objectives but which also enhance climate resilience. This paper explores the broad contours of climate resilient industrial development paths. It defines development as an increase in local capacities for production and innovation and argues that the overarching goal of development is the generation of sustainable livelihoods. It suggests that. to be climate resilient, industry policies should have four key design features: 1) they are pro-active; 2) they promote industrial diversification; 3) they focus on mobilizing investment in environmentally sustainable industries and infrastructure, including low-carbon and renewable energy; 4) they are highly responsive to local geo-physical conditions and are based on principles of adaptive management; and 5) they are designed, implemented and governed via accountable partnerships involving government, business, and community actors. The paper evaluates three development macro-models—neo-liberal, sustainable globalization, and new developmental—against the five design principles and finds that aspects of both climate vulnerability and climate-resilience are embodied in each. The paper concludes that responding to the climate imperative will require not a new synthesized one-size-fits-all model but a multiplicity of economic development paths. The effort to articulate the theory and praxis of such paths has barely begun. 1 GDAE Working Paper No. 10-01: Climate-Resilient Industrial Development Paths Climate-Resilient Industrial Development Paths: Design Principles and Alternative Models Lyuba Zarsky1 Introduction The unfolding drama of global climate change has paradigm-shifting implications for development theory and policy. Despite recent findings that the Washington Consensus is adrift (Rodrik 2008), development practice remains largely wedded to global, market-driven neo-liberal policies based on maximizing GNP growth and high- energy consumption, by maximizing inflows of foreign investment, integrating with global supply chains, and eschewing pro-active industry policies. The climate change imperative—the urgent need to both mitigate and adapt to climate change—has arisen at a time when many medium-income developing nations are on the threshold of major investments in industry and energy infrastructure. It is also a time of deep global economic inequity, spurring efforts by the global community—such as the Millennium Development Goals—to alleviate poverty and promote social development, including via new business models. Finally, the climate change imperative has emerged at a historical moment when development theory has been shaken loose by the economic, social and environmental shortcomings of neo-liberal orthodoxy. These three factors combine to create an opportune moment to consider how industrial transformation and economic development could—and indeed, must—evolve along new “climate resilient” paths. This paper considers the broad contours of climate resilient industrial development paths and evaluates climate-resilience in three development models. It defines development as an increase in local capacities for production and innovation. However, it argues that the central objective of development strategies in a climate- constrained world is not industrialization per se but the generation of sustainable livelihoods. The paper is in five sections. Section two reviews the recent science about global climate instability and outlines links between climate change and economic development. Section three broadly defines climate resilient development. Section four outlines five design features of climate resilient industry polices. Section five evaluates three economic development models against the design features: 1) neo-liberal globalization; 2) sustainable globalization; and 3) new developmental. The final section concludes and suggests directions for further research. 1 Lyuba Zarsky is Associate Professor at the Monterey Institute of International Studies. She is also a Research Fellow at the Global Development and Environment Institute and International Fellow at the International Institute for Environment and Development, which provided support for this research. 2 GDAE Working Paper No. 10-01: Climate-Resilient Industrial Development Paths Climate Change Imperative Global warming is here. According to the Fourth Assessment of the Intergovernmental Panel on Climate Change (IPCC 2007: 2), “warming of the climate system is unequivocal, as is now evident from observations of increases in average global air and ocean temperatures, widespread melting of snow and ice and rising global average sea level.” Scientific reports since the Fourth Assessment have found that the signs of global warming are accelerating faster than predicted, including melting of Arctic sea-ice, glaciers, and ice sheets. Sea level rise in 2009 was 80 percent greater than predicted by the IPCC just two years before. Over the past 25 years, temperatures have increased at an average rate of 0.19 degrees centigrade per decade (UNSW 2009). A September 2009 conference of climate scientists found that "since the late 1990s, greenhouse gas emissions have increased at close to the most extreme IPCC scenarios” and there is a significant possibility of 4 degrees warming before the end of the century (Science Daily 2009). The scientific consensus, and the assumption of the Kyoto Protocol, is that the avoidance of dangerous climate instability requires that warming be kept below 1.5 degrees centigrade. A higher level of warming portends major regional and local impacts on eco-systems, human settlements, food production, and bio-diversity. New scientific evidence that past emissions had a significant probability of generating a warming of 2 degrees triggered intense protests at the December, 2009 Copenhagen climate talks by African NGOs who chanted “Two degrees is suicide!” (COP 15 (2009). . The primary anthropogenic contribution to global climate change is the emission of carbon dioxide from the burning of fossil fuels and deforestation. As indicated above, under a business-as-usual scenario with no mitigation of emissions, the IPCC’s Fourth Assessment in 2007 projected an increase of 3.5 degrees centigrade by the end of the century (IPCC 2007). Despite more than a decade of global climate diplomacy, global carbon emissions were 40 percent higher in 2008 than in 1990. Even if emissions were stabilized at the current rate and brought to zero by 2030, just twenty more years of emissions would result in a 25 percent probability that warming will exceed 2 degrees (ibid). In a 2009 review of the science since the IPCC’s Fourth Assessment (UNSW 2009), an Australian team of climate scientists concluded: If global warming is to be limited to a maximum of 2 degrees C above pre- industrial values, global emissions need to peak between 2015 and 2020 and then decline rapidly. To stabilize climate, a de-carbonized global society—with near-zero emissions of CO2 and other long-lived greenhouse gases—needs to be reached well within this century. …[E]very year of delayed action increases the chances of exceeding 2°C warming (UNSW 2009: 7). Even with mitigation efforts, climate models predict that the planet will continue to warm as a result of past carbon emissions, necessitating human adaptation. The 3 GDAE Working Paper No. 10-01: Climate-Resilient Industrial Development Paths impacts of climate change on humans are defined by the interface between bio-physical and socio-economic systems. The primary expected changes in bio-physical systems are 1) increased temperature and changes in rainfall patterns; and 2) sea-level rise and an increase in the incidence and severity of disasters (fire, storms). There is also increasing evidence of the possibility of ocean acidification with attendant loss of biological productivity of marine life. The bio-physical impacts will vary greatly by region and locale. Bio-physical impacts will have a variety of secondary effects on socio-economic systems, including severe stresses on water availability (drought and flooding) and damage to existing assets and infrastructure. These stresses in turn, are likely to trigger a high degree of social stress and conflict, not least due to impacts on agriculture (Figure 1). Figure 1 Expected impacts of climate change Bio-physical impact Social impact Economic impact Increased temperature and Reduced agricultural Reduced supplies and higher changes in rainfall patterns productivity (drought) prices for food Reduced marine productivity Changes in arability and Water stress and scarcity cropping patterns Increased prevalence of disease Reduced availability and higher Forced migration prices for water Change in distribution of labor supply Sea level rise and increased Damage to assets and High cost of insurance incidence or intensity of infrastructure Disruption of supply inputs disasters (storms, fires) Disruption of final markets Population displacement Sudden labor scarcity or influx Conflict Cumulative Carbon regulation Rising fossil fuel prices bio-physical impacts Conflict Governance breakdown Source: Adapted from Tanner and Mitchell (2008) The impacts of climate change will be felt most acutely by people in developing countries for two reasons. The first is bio-physical risk. Besides the poles, climate models show warming trends to be greatest in sub-Saharan and northern Africa, as well as parts of south, central and east Asia (IPCC 2007: Figure SPM2). Second, developing countries, especially least-developed countries, lack the capacity to adapt to climate stress. Adaptive capacity is a broad-ranging concept that spans basic socio-economic resilience stemming from wealth (income, technology, knowledge) to abilities to mitigate specific climate- related threats, such as climate monitoring and disaster planning. Together, bio-physical risk and lack of adaptive capacity comprise the vulnerability of individuals, economies, communities or nations to adapt to global climate 4 GDAE Working Paper No. 10-01: Climate-Resilient Industrial Development Paths change. In an effort to provide guidance on climate risk for global investors, the Canadian consulting group Maplecroft calculated a composite “climate change vulnerability index” based on bio-physical risk and adaptive capacity. Unsurprisingly, but worrisome nonetheless, the most vulnerable regions are the poorest (Figure 2). Figure 21 Climate change vulnerability map 2010 Explanatory note: Maplecroft Climate Change Vulnerability Index (CCVI) rates 166 countries on their capacity to mitigate risks to society and the business environment posed by changing patterns in natural hazards, such as droughts, flooding, storms and sea level rises and the resulting effects on ecosystems. The climate change vulnerability factors are divided into six groups: economy; natural resource security; ecosystems; poverty, development and health; population, settlement and infrastructure; and institutions, governance and social capital; and comprises of 33 indicators. The CCVI was calculated using a Geographical Information System (GIS) model. Each cell represents an area of approximately 25km². For more information see www.maplecroft.com Source: Maplecroft (2010) 5 GDAE Working Paper No. 10-01: Climate-Resilient Industrial Development Paths To date, official development assistance and global adaptation finance have sought to reduce vulnerability primarily by increasing local capacities to undertake discrete climate adaptation efforts, such as climate monitoring and disaster response. It is clear, however, that to significantly increase climate resilience, developing countries must increase local economic productivity, in both agriculture and industry, generating higher incomes, as well as revenues for infrastructure investment, and better health. Ironically, for many of the poorest people in developing countries, vulnerability to climate change is exacerbated by lack of access to reliable and affordable energy. While the earth is dangerously warming as a result of the historical emissions of fossil fuel- driven industrialization in OECD countries, some 2.4 billion people in developing countries still use traditional biomass fuels for cooking and heating; around 1.6 billion lack access to electricity (UNDP 2005a). Beyond enhancing human welfare, energy is a key input for industrial development, at both micro and macro levels. Large developing countries like China, India, Brazil and South Africa have built dynamic industrial sectors driven largely by fossil fuels and, as a result, have emerged as the largest current and future absolute source of carbon emissions (though per capita emissions remain far below developed countries.) Defining the obligations of developing and developed countries for mitigating carbon emissions has become the pivot—and the stumbling block—of attempts to craft a global climate regime. The climate imperative requires developing countries to integrate mitigation and adaptation as central features of development strategy, considering not only threats to lives and livelihoods but also new opportunities for industrial transformation. A global effort to regulate carbon and replace carbon-based energy infrastructure, for example, will spur dramatic growth of low carbon and renewable energy technology industries, including off-grid technologies. Developing countries may be able to leapfrog fossil fuel- based growth and create competitive advantages in low and no carbon energy and industrial technologies and processes. Given the large stakes, it is little wonder that the Human Development Report called climate change ”the defining human development issue of our generation” (UNDP 2007). Defining Climate Resilient Development The first step in defining climate resilient paths of industrial development is to define development itself. Rather than growth or poverty alleviation, this paper defines (economic) development as the building of local capacities for economic production and innovation. Such endogenous capacities are the foundation for both economic growth and poverty alleviation. Numerous studies, including by this author, have found that, in a global economy, promoting GNP growth without strengthening underlying local productive capacities generates economic enclaves dependent on foreign investment and export markets (Gallagher and Zarsky 2007). Also, attempts to alleviate poverty without enhancing local productive capacity founder when external assistance is withdrawn (Easterly 2002). 6 GDAE Working Paper No. 10-01: Climate-Resilient Industrial Development Paths Local capacities for production and innovation embrace knowledge, skills, technology, infrastructure, human solidarity, and governing institutions. Such capacities not only create or enable the grasp of current opportunities to enhance productivity and social welfare, they also enable adaptation to changing conditions—economic, social or climactic. The capacity to adapt is a central feature of climate resilience. The overarching objective of productive and innovative capacities is to provide and sustain livelihoods. In climate resilient development models, sustainability is a foundational principle for all economic activity. To be sustainable, livelihoods must be derived from productive activities that are: • Ecologically sound: they must maintain the health of terrestrial, marine, air and atmospheric eco-systems and bio-diversity, at local and global levels; • Economically viable: they must enhance local productive capacities and allocate them efficiently; • Socially resilient: they must promote equity and social solidarity. The ability to sustain livelihoods may be highly compromised under rapidly changing and uncertain climactic conditions, as well as a rapidly evolving climate regime which drives rapidly changing fuel prices. To maintain livelihoods, development strategies must explicitly incorporate knowledge of existing and projected local and regional climactic conditions and build in industrial and resource diversification and other strategies to enhance resilience. The overarching goal of climate resilient industrial development should thus be to generate local capacities to sustain livelihoods for all people under a range of climatic conditions in ways that do not exacerbate global warming. Another way to say this is that the goal is to reduce vulnerability stemming from lack of an adequate livelihood. Many people in developing countries are already highly vulnerable to seasonal climate change and other risks. The goal of promoting sustainable livelihoods conflates what are today often approached as separate objectives—poverty alleviation and industrial transformation. A focus on reducing vulnerability could invigorate current development efforts. As two leading climate and development researchers argue: “climate change may actually be an opportunity to create pathways out of chronic poverty through targeted efforts to enhance vulnerability reduction and adaptation” (Tanner and Mitchell 2008: 6). Moreover, a focus on sustainable livelihoods removes the focus of development away from “growth for growth’s sake,” enabling a redirection away from wasteful high- energy, water-intensive consumption patterns. Finally, it embraces both wage and non- wage forms of livelihood and livelihoods derived from both agriculture and manufacturing. 7 GDAE Working Paper No. 10-01: Climate-Resilient Industrial Development Paths Development strategies aimed at creating sustainable livelihoods thus have as their starting point three integrated objectives: 1) increasing income (and equity) by increasing the productivity of economic activities; 2) promoting growth in local capacities for production and innovation; and 3) increasing resilience of economic activity by incorporating knowledge about climate uncertainty and other environmental information. With this starting point in mind, climate resilient development can be conceptualized as a socio-economic trajectory that generates and sustains human livelihoods in ways that both mitigate and adapt to global climate change. Central to mitigation is the transition to non-carbon energy sources. At the global level, it means developing along a path that stabilizes atmospheric concentrations within the range of 350-450 ppms, a level that is understood to be consistent with warming 1.5-2 degrees C. For developing countries, mitigation will primarily consist of ensuring that new investment in industry, transport, and infrastructure is based on low-carbon and/or renewable energy. Figure 3 Adaptation and development: A continuum of investment activities . Address the drivers of Build response Manage climate risk Confront specific vulnerability Capacity climate changes Enhance underlying Build robust systems for Integrate climate Confront and respond to factors to reduce innovation and problem information into direct climate changes; vulnerability to poverty solving for both climate decisions to reduce e.g. sea level rise, and harm; increase and non-climate related negative directs effects melting glaciers, local capacities for activities; e.g. on resources and drought production and communications and livelihoods; e.g. disaster innovation; mobilize planning processes management, ‘climate investment for low or proofing infrastructure’; non-carbon energy; build infrastructure to promote solidarity and manage flood-drought social problem-solving cycles (cid:197)--------------------------------------------------------------------------------------------------------------------(cid:198) Climate-resilient Discrete development adaptive Source: Adapted from McGray et al (2007) and Tanner and Mitchell (2008) Climate resilient industrial development paths must be strongly focused on adaptation; that is, on reducing vulnerability to global climate change. A central aspect of adaptation is that both the change in global average temperature and local and regional impacts of global climate change are highly uncertain (Appendix Figure 9.2). One reason is that climate scientists poorly understand how local and global feedback loops interact. 8 GDAE Working Paper No. 10-01: Climate-Resilient Industrial Development Paths In some parts of Africa, for example, it is not clear if rainfall will be greater or less or both. Moreover, models predict greater climate variability. The subject of a burgeoning literature, adaptation requires the mobilization of investment in activities along a continuum (Figure 3). On one end are discrete actions that respond to particular emerging or expected climate changes; for example building or reinforcing sea walls in coastal cities or relocating populations of soon-to-be-submerged islands. On the other end are investments that promote adaptive capacity by targeting the drivers of vulnerability; like poverty, unsustainable industry, lack of sustainable livelihoods, poor health, lack of education, good governance, etc. In other words, reducing vulnerability to global climate change entails reinvigorating traditional development goals. Also critical to climate resilient development is investment in problem-solving and response capacities. There is great uncertainty as to how climate change will unfold and with what impacts. As stated above, capacities for social learning, deliberation and innovation will be at a premium. Policy Design Principles Climate-resilient development paths entail a high level of social planning and integration of knowledge, both scientific and traditional. They also require a high level of social solidarity, given the potentially catastrophic disruption to existing livelihoods. Implied is a central role for public policy, in terms of both content -- policy objectives and tools -- and the process of designing and implementing policy. Gleaned from a review of “traditional” development case studies, as well as a burgeoning literature on climate and development, this section outlines five principles as starting points for the design of climate resilient development policy. Pro-active industry policy Over the past two decades, neo-liberal approaches to development have eschewed pro-active industry policies aimed at nurturing targeted industry sectors in favor of industry-neutral “market-driven” integration into global supply chains. The performance, however, has been mixed at best. Latin American countries that rigorously followed the neo-liberal prescription, for example, have fared poorly in terms of growth and employment compared to China and other East Asian countries (Gallagher and Chudnovsky). Industrial policy has two objectives in terms of linking climate and development. First, it aims to reduce vulnerability by promoting financially sustainable livelihoods. Second, as outlined by UNCTAD (2009: xiii), it seeks to “shift production and consumption patterns towards the use of those primary commodities, means of production, and consumer goods that place a lower burden on the earth’s atmosphere than the current GHG [greenhouse gas] intensive ones”. Linking climate change mitigation policies with traditional development goals, argues UNCTAD, “requires industrial policies that foster the creation of capabilities to produce or participate in the production of such goods and their subsequent upgrading” (ibid: xv). 9