HDR 07/08 on Climate Change- Development leds to destruction

Climate Change: Threat to all but poor most vulnerable

• Vidyanand Acharya

Brasilia, 27 November 2007—With governments preparing to gather in Bali, Indonesia to discuss the future of the Kyoto Protocol, the United Nations Development Programme’s Human Development Report has warned that the world should focus on the development impact of climate change that could bring unprecedented reversals in poverty reduction, nutrition, health and education.

The report, Fighting climate change: Human solidarity in a divided world, provides a stark account of the threat posed by global warming. It argues that the world is drifting towards a “tipping point” that could lock the world’s poorest countries and their poorest citizens in a downward spiral, leaving hundreds of millions facing malnutrition, water scarcity, ecological threats, and a loss of livelihoods.

“Ultimately, climate change is a threat to humanity as a whole. But it is the poor, a constituency with no responsibility for the ecological debt we are running up, who face the immediate and most severe human costs,” commented UNDP Administrator Kemal Derviº.

The report comes at a key moment in negotiations to forge a multilateral agreement for the period after 2012—the expiry date for the current commitment period of the Kyoto Protocol. It calls for a “twin track” approach that combines stringent mitigation to limit 21st Century warming to less than 2°C (3.6°F), with strengthened international cooperation on adaptation.

On mitigation, the authors call on developed countries to demonstrate leadership by cutting greenhouse gas emissions by at least 80% of 1990 levels by 2050. The report advocates a mix of carbon taxation, more stringent cap-and-trade programmes, energy regulation, and international cooperation on financing for low-carbon technology transfer.

Turning to adaptation, the report warns that inequalities in ability to cope with climate change are emerging as an increasingly powerful driver of wider inequalities between and within countries. It calls on rich countries to put climate change adaptation at the centre of international partnerships on poverty reduction.

“We are issuing a call to action, not providing a counsel of despair,” commented lead author Kevin Watkins, adding, “Working together with resolve, we can win the battle against climate change. Allowing the window of opportunity to close would represent a moral and political failure without precedent in human history.” He described the Bali talks as a unique opportunity to put the interests of the world’s poor at the heart of climate change negotiations.

The report provides evidence of the mechanisms through with the ecological impacts of climate change will be transmitted to the poor. Focusing on the 2.6 billion people surviving on less than US$2 a day, the authors warn forces unleashed by global warming could stall and then reverse progress built up over generations. Among the threats to human development identified by Fighting climate change:

Ÿ The breakdown of agricultural systems as a result of increased exposure to drought, rising temperatures, and more erratic rainfall, leaving up to 600 million more people facing malnutrition. Semi-arid areas of sub-Saharan Africa with some of the highest concentrations of poverty in the world face the danger of potential productivity losses of 26% by 2060.

Ÿ An additional 1.8 billion people facing water stress by 2080, with large areas of South Asia and northern China facing a grave ecological crisis as a result of glacial retreat and changed rainfall patterns.

Ÿ Displacement through flooding and tropical storm activity of up to 332 million people in coastal and low-lying areas. Over 70 million Bangladeshis, 22 million Vietnamese, and six million Egyptians could be affected by global warming-related flooding.

Ÿ Emerging health risks, with an additional population of up to 400 million people facing the risk of malaria.

Setting out the evidence from a new research exercise, the authors of the Human Development Report argue that the potential human costs of climate change have been understated. They point out that climate shocks such as droughts, floods and storms, which will become more frequent and intense with climate change, are already among the most powerful drivers of poverty and inequality—and global warming will strengthen the impacts.

“For millions of people, these are events that offer a one-way ticket to poverty and long-run cycles of disadvantage,” says the report. Apart from threatening lives and inflicting suffering, they wipe out assets, lead to malnutrition, and result in children being withdrawn from school. In Ethiopia, the report finds that children exposed to a drought in early childhood are 36% more likely to be malnourished—a figure that translates into 2 million additional cases of child malnutrition.

While the report focuses on the immediate threats to the world’s poor, it warns that failure to tackle climate change could leave future generations facing ecological catastrophe. It highlights the possible collapse of the West Antarctic ice sheets, the retreat of glaciers, and the stress on marine ecosystems as systemic threats to humanity.

“Of course there are uncertainties, but faced with risks of this order of magnitude uncertainty is not a case for inaction. Ambitious mitigation is in fact the insurance we have to buy against potentially very large risks. Fighting climate change is about our commitment to human development today and about creating a world that will provide ecological security for our children and their grandchildren,” Mr. Derviº said.

Avoiding dangerous climate change

The authors of the Human Development Report call on governments to set a collective target for avoiding dangerous climate change. They advocate a threshold of 2°C (3.6°F) above pre-industrial levels (the current level is 0.7°C, 1.3°F).

Drawing on a new climate model, the report suggests a ‘21st Century carbon budget’ for staying within this threshold. The budget quantifies the total level of greenhouse gas emissions consistent with this goal. In an exercise that captures the scale of the challenge ahead, the report estimates that business-as-usual could result on current trends in the entire carbon budget for the 21st Century being exhausted by 2032. The authors warn that on current trends the world is more likely to breach a 4°C threshold than stay within 2°C (3.6°F).

The Human Development Report addresses some of the critical issues facing negotiators in Bali. While acknowledging the threat posed by rising emissions from major developing countries, the authors argue that northern

governments have to initiate the deepest and earliest cuts. They point out that rich countries carry overwhelming historic responsibility for the problem, have far deeper carbon footprints, and have the financial and technological capabilities to act.

“If people in the developing world had generated per capita CO₂ emissions at the same level as people in North America, we would need the atmosphere of nine planets to deal with the consequences,” commented Mr. Watkins.

Using an illustrative framework for an emissions pathway consistent with avoiding dangerous climate change, the Human Development Report suggests that:

Ÿ Developed countries should cut greenhouse gas emissions by at least 80% to 2050 and 30% by 2020 from 1990 levels.

Ÿ Developing countries should cut emissions by 20 percent to 2050 from 1990 levels. However, these cuts would occur from 2020 and they would be supported through international cooperation of finance and low carbon technology transfer.

Measured against this benchmark, the authors find that many of the targets set by developed country governments fall short of what is required. It notes also that most developed countries have failed to achieve even the modest reductions—averaging around 5% from 1990 levels—agreed under the Kyoto Protocol. Even where ambitious targets have been set, the report argues, few developed countries have aligned stated climate security goals with concrete energy policies.

Scenarios for future emissions reinforce the scale of the challenge ahead. On current trends, CO₂ emissions are projected to increase by 50% to 2030—an outcome that would make dangerous climate change inevitable. “The bottom line is that the global energy system is out of alignment with the ecological systems that sustain our planet,” commented Mr. Watkins, adding: “realignment will take a fundamental shift in regulation, market incentives, and international cooperation.”

Fighting climate change identifies a range of policies needed to close the gap between climate security statements and energy policies for avoiding dangerous climate change. Among the most important:

Ÿ Pricing carbon. The report argues that both carbon taxation and cap-and-trade schemes have a role to play. Gradually rising carbon taxes would be a powerful tool to change incentive structures facing investors. It also stresses that carbon taxes need not imply an overall greater tax burden because they could be compensated by tax reductions on labour income.

Ÿ Stronger regulatory standards. The report calls on governments to adopt and enforce tougher standards on vehicle emissions, buildings and electrical appliances.

Ÿ Supporting the development of low carbon energy provision. The report highlights the unexploited potential for an increase in the share of renewable energy used, and for breakthrough technologies such as carbon capture and storage (CCS).

Ÿ International cooperation on finance and technology transfer. The authors note that developing countries will not participate in an agreement that provides no incentives for entry, and which threatens to raise the costs of energy. The report argues for the creation of a Climate Change Mitigation Facility (CCMF) to provide $25-50 billion annually in financing the incremental low-carbon energy investments in developing countries consistent with achieving shared climate change goals.

Drawing on economic modeling work, the Human Development Report argues that the cost of stabilizing greenhouse gases at 450 parts per million (ppm) could be limited to an average to 1.6% of world GDP to 2030. “While these are real costs, the costs of inaction will be far greater, whether measured in economic, social or human terms,” warned Mr. Derviº. The report points out that the cost of avoiding dangerous climate change represents less than two-thirds of current world military spending.

Adaptation efforts overlooked

While stressing the central medium-term role of mitigation, Fighting climate change warns against neglecting the adaptation challenge. It points out that, even with stringent mitigation, the world is now committed to continued warming for the first half of the 21st Century. The report warns that adaptation is needed to prevent climate change leading to major setbacks in human development—and to guard against the very real danger of insufficient mitigation.

The report draws attention to extreme inequalities in adaptation capacity. Rich countries are investing heavily in climate-change defence systems, with governments playing a leading role. By contrast, in developing countries “people are being left to sink or swim with their own resources,” writes Desmond Tutu, Archbishop Emeritus of Cape Town, in the report, creating a “world of ‘adaptation apartheid’.”

“Nobody wants to understate the very real long-term ecological challenges that climate change will bring to rich countries,” Mr. Watkins commented. “But the near term vulnerabilities are not concentrated in lower Manhattan and London, but in flood prone areas of Bangladesh and drought prone parts of sub-Saharan Africa.”

The Human Development Report shows that international cooperation on adaptation has been slow to materialize. According to the report, total current spending through multilateral mechanisms on adaptation has amounted to $26 million to date—roughly one week’s worth of spending on UK flood defences. Current mechanisms are delivering small amounts of finance with high transaction costs, the authors say.

The report argues for reforms including:

Ÿ Additional financing for climate proofing infrastructure and building resilience, with northern governments allocating at least $86 billion annually by 2015 (around 0.2% of their projected GDP).

Ÿ Increased international support for the development of sub-Saharan Africa’s capacity to monitor climate and improve public access to meteorological information.

Ÿ The integration of adaptation planning into wider strategies for reducing poverty and extreme inequalities, including poverty reduction strategy papers (PRSPs).

Fighting climate change concludes that “one of the hardest lessons taught by climate change is that the historically carbon intensive growth, and the profligate consumption in rich nations that has accompanied it, is ecologically unsustainable.” But the authors argue, “with the right reforms, it is not too late to cut greenhouse gas emissions to sustainable levels without sacrificing economic growth: rising prosperity and climate security are not conflicting objectives.”

MNCs Devouring the Natural Resources of Developing Countries

COUNTRIES SEEK GREATER DEVELOPMENT GAINS FROM FOREIGN INVESTMENT IN EXTRACTIVE INDUSTRY

Higher commodity prices have led to increased foreign direct investment in extractive industries, and especially in low-income countries, transnational corporations (TNCs) dominate the extraction of natural resources, UNCTAD´s annual review of investment trends reports.

TNC involvement provides both opportunities and challenges for developing countries, the World Investment Report 2007 concludes. This year´s report is subtitled Transnational Corporations, Extractive Industries and Development(1). It says that maximizing development gains from such industries requires coherent and well-designed policies that reflect a commitment to the public good by all involved.

The universe of extractive-industry TNCs is diverse and new players are emerging

Rising demand, especially from Asia, for oil, gas, and metals has spurred an investment boom in mineral exploration and extraction. Those industries account largely for the recent increases in foreign direct investment (FDI) in many mineral-rich developing countries, notably in Africa. The boom has also triggered a series of cross-border mega mergers in these industries, resulting in higher market concentration.

The World Investment Report 2007 shows that the relative importance of TNCs varies between different extractive industries. In metal mining, 23 of the top 25 producers in 2005 were privately owned TNCs, whereas only 2 were majority State-owned. In oil and gas, the majority of the top 50 producers were majority State-owned. Most such production was controlled by State-owned companies from developing and transition economies. For example, in 2005, the production of Saudi Aramco (Saudi Arabia) was more than twice that of the largest privately owned oil and gas producer, ExxonMobil (United States).

The report also highlights the rise of new extractive-industry TNCs. While private companies remain the largest corporations in terms of foreign assets, a number of developing-country firms, especially in the oil and gas industry, are rapidly becoming global players. The combined overseas production of the seven most important State-owned companies -- CNOOC, CNPC, Sinopec (all China), Lukoil (Russia), ONGC (India), Petrobras (Brazil) and Petronas (Malaysia) -- exceeded 528 million barrels of oil equivalent in 2005, up from only 22 million 10 years earlier (figure 1). Their overseas expansion is partly driven by rising demand in Asia´s fast-growing economies.

TNCs dominate extractive activities, especially in low-income countries

In a number of low-income countries, investment in extractive industries makes up the bulk of inward FDI. Due to small domestic markets and weak production capabilities, these countries tend to have few other industries to which they can attract significant FDI. Consequently, revenues from mineral exploitation and exports often represent a very large share of their national incomes.

While the extent to which countries rely on TNCs for exploitation of their natural resources varies, low-income countries are generally the most dependent on foreign companies. In metal mining, foreign affiliates account for virtually all of the (non-artisanal) production in least developed countries (LDCs) such as Guinea, Mali, the United Republic of Tanzania, and Zambia, as well as in Argentina, Botswana, Gabon, Ghana, Mongolia, Namibia, and Papua New Guinea. In another 10 metal-producing countries, the shares of foreign affiliates account for between 50% and 86% of production (figure 2).

In oil and gas, foreign affiliates in 2005 accounted for 57% on average of the output of sub-Saharan Africa. For example, foreign companies accounted for more than half of production in Angola, Equatorial Guinea and Sudan (figure 3). Foreign affiliates account for significant production shares in other countries as well, including Argentina, Indonesia and the United Kingdom. In West Asia, however, where the largest and richest reserves of oil and gas are located, the corresponding share was a mere 3%. No production was attributed to foreign affiliates in Iraq, Kuwait, and Saudi Arabia.

TNC participation can have significant impacts on host economies

UNCTAD argues that the commodities boom should provide opportunities for development and poverty alleviation in mineral-exporting countries. But considerable efforts to address the economic, environmental, social, and political issues relating to mineral extraction are necessary for harnessing the earnings from extractive industries to boost development.

TNCs can influence the outcome. They may contribute capital, technology, and management skills -- and when domestic capabilities are lacking, such an approach is often the most viable option for exploiting natural resource wealth. The most important economic impact of foreign investment in a country´s extractive industry is increased income, including government revenue. At the same time, UNCTAD notes, TNC involvement can raise concerns about unequal bargaining power, ownership and control over non-renewable resources, rent-sharing, transfer pricing, and various environmental and social costs. For example, TNCs claim a significant share of the revenue generated and repatriate part of their profits.

Ultimately, the overall impact of revenue generated will be determined by the way it is shared between the foreign companies and the host country, and on how the government´s portion of the revenue is managed, distributed and used. Funds should be used to support development objectives and the needs of current and future generations.

The extraction of natural resources can have far-reaching environmental, social and political consequences. TNC participation may add to environmental degradation and social conflicts simply by making resource extraction possible in a country. On the other hand, TNCs may reduce adverse environmental consequences by using more advanced technologies and by applying and diffusing higher standards of environmental management than domestic companies employ. TNCs can also become embroiled in local conflicts and may find themselves acting against the interests of local communities. In some cases, their mere presence may strengthen the existing governmental order. Some TNCs take adverse social impacts into account and abide by higher standards than their competitors do in dealing with such issues.

To confront policy challenges, efforts by all stakeholders are needed

A concerted effort by all concerned is necessary to ensure that the vast mineral resources located in some of the world´s poorest countries become a force for development. "The objective is to ensure that investments are undertaken in the most efficient and environmentally friendly manner possible, and to ensure that they contribute to poverty alleviation and accelerated development. For that, institutional and regulatory frameworks must be promoted by accountable governments as well as responsible investors," United Nations Secretary-General Ban Ki-Moon recently remarked.

The report makes a number of recommendations:

• The quality of governance, specific government policies and institutions of the host country are a determining factor for ensuring sustainable development gains from resource extraction, with or without TNC involvement. Governments need a clear vision and strategy to ensure that oil and other mineral resources are used in a transparent and equitable manner to contribute to sustainable development. They also need to strengthen their abilities and capacities for designing and implementing appropriate policies.
• High mineral prices have led many governments to seek to increase their share of the profits generated by amending mining codes, fiscal regimes, and contracts. Recent regulatory changes in developed, developing, and transition economies suggest that previous regulations may have been overly generous to foreign investors. The report recommends that countries seek to develop frameworks that are robust over the different phases of the business cycle, for example by introducing progressive taxation systems for the revenues from extractive industries.
• Home-country governments should promote responsible behaviour by TNCs investing in extractive industries abroad. This is equally important for State-owned TNCs.
• The international community can help promote greater development gains from resource extraction through technical assistance, the development of relevant standards and guidelines, and the monitoring of their implementation. A number of initiatives, such as the Extractive Industry Transparency Initiative, the Voluntary Principles on Security and Human Rights, and the Global Reporting Initiative, can provide valuable input, but more countries and companies need to commit to and implement these standards.
• The role of TNCs is to contribute to efficient production while, at a minimum, respecting host country laws. When mineral deposits are located in weakly governed or authoritarian States, foreign companies need to consider carefully the implications of investing there.

Tables and figures

Figure 1. Oil and gas production of selected TNCs outside their home country, 2006

(Millions of barrels of oil equivalent)