Rich Countries’ Carbon Debt: $23 trillion

August 5, 2009

Developed countries would need to reduce their emissions by 213% by 2050, for developing countries to maintain their current per capita emission level

By Martin Khor, Malaysian Star, August 3, 2009

High-polluting developed countries have already used up much of the world’s “carbon space,” and should pay up their carbon debt to facilitate in fair global deal on climate change.

Next week, climate negotiations resume in Bonn in an attempt to reach a global deal in Copenhagen in December. There are intense pressures to get developing nations like China, India, Brazil and Asean countries to commit to reduce greenhouse gas emissions.

But the promised financial and technology transfers to help them move are still nowhere in sight.

The western media seems to blame developing countries for holding up a deal.

“India rejects green agenda with refusal to cut emissions for decade,” is the headline of a front-page article in the Financial Times on Aug 1.

But it is unfair to expect developing countries to commit to emission reduction before they are assured of the funds and technology they need to change from one production system to another.

Developed countries have a historical responsibility to help developing countries because they have already taken up most of the “atmospheric space” available.

The atmosphere can only absorb so much carbon dioxide and other climate-dangerous gases. Above the danger level, the average global temperature will rise by more than 2° Celsius, with disastrous consequences.

Greenhouse gas (GHG) concentrations in the atmosphere have to be limited to 450 parts per million (ppm) or even 350ppm, and global emissions must be cut by 50% to 85% by 2050 compared to 1990 levels.

The key question for the Copenhagen “global deal” is how to assign the emission-reduction task fairly between developed and developing countries.

Developed countries are proposing a 50% global GHG emission cut by 2050 (from 38 billion in 1990 to 19.3 billion tonnes in 2050). They are willing to take a 80% cut from 18.3 billion to 3.6 billion tonnes which implies that developing countries would have to accept a 20% cut from 20 billion to 15.7 billion tones.

As the population of developing countries is expected to double during that period, they will end up with a 60% cut per capita. And since population size is projected to remain the same in developed countries, their per capita reduction will be the same as their overall reduction at 80%.

It is unfair to ask developing countries to undertake a per capita emission cut just slightly below the cut that developed countries are prepared to make.

If developed countries were to make a 100% cut, developing countries would still be required to make a 52% cut per capita.

Developed countries would need to reduce their emissions by 213% by 2050, for developing countries to maintain their current per capita emission level.

Developed countries would, in other words, need to cut emissions to 0% and create sinks to absorb greenhouse gases equivalent to another 113% of their 1990 emissions.

To both developed and developing countries, this may seem impossible. For developing countries it may seem impossible to achieve economic development while maintaining (instead of increasing) their current, low per-capita level of emissions.

For developed countries it may seem impossible to go beyond a 100% emission cut. But it may need two impossibles to make a possible deal.

In order not to exceed the danger level, the world has around 600 billion tonnes of emission of carbon (equivalent to around 2,200 billion tonnes of carbon dioxide) to budget between 1800 and 2050.

Given their ratio of world population, the equitable share of the carbon budget for developed countries is 125 billion tonnes while developing countries would be 475 billion tonnes.

The developed countries, however, have already emitted 240 billion tonnes of carbon between 1800 and 2008. This is far above their “fair share” of 81 billion tonnes in that period.

And, given the scenario of a 50% global cut and an 85% developed country cut by 2050, they will emit another 85 billion tonnes of carbon between 2009 and 2050.

Thus, their total emission would be 325 billion tonnes of carbon from 1800 to 2050.

Since their fair share is 125 billion tonnes, they have a “carbon debt” of 200 billion tonnes, which they owe to developing countries.

On the other hand, if carbon space were allocated fairly, developing countries would have a share of 475 billion tonnes of carbon emissions between 1800 and 2050.

However, the situation till now, plus the scenarios for now to 2050, would mean that developing countries in actual fact would only emit 275 billion tonnes of carbon which is 200 billion tonnes less than their fair share.

In a fair climate deal, developed countries would compensate developing countries the equivalent of 200 billion tonnes of carbon. This is equivalent to 733 billion tonnes of carbon dioxide.

Economist Nicholas Stern in his book The Global Deal gives a value of carbon dioxide of US$40 (RM141) per tonne in the carbon trade. From 1800 to 2008, developed countries have a carbon debt of 159 billion tonnes, or 583 billion tonnes of carbon dioxide.

At US$40 (RM141) per tonne, the value of this carbon debt would be US$23 trillion (RM81 trillion). The carbon debt can be put in a global climate fund to help developing countries take action to cut their emissions.

Although US$23 trillion (RM81 trillion) may seem like a lot, it is only a little more than the US$18 trillion (RM63.4 trillion) that developed countries have reportedly set aside for bailouts and provisions of banks and companies in trouble during the present financial crisis.

Though saving the banks may be important, saving the world from climate catastrophe is even more important and necessary.

If this approach and the fund can be agreed to, we would be well on the road to a global deal in Copenhagen.

South Should Prepare to Counter Effects of Global Finance Crisis

September 9, 2008

By Martin KhorThird World Network,1 September 2008

The global financial turmoil has yet to affect Asian developing countries severely, but it is best to anticipate adverse effects and examine policy options to counter them before the crisis hits. This was the conclusion of a workshop last week held in Penang (Malaysia) by the Consumers’ Association of Penang and the Third World Network.

Several experts from international agencies warned that Asian countries face vulnerabilities, especially to the vagaries of capital flows. Though the region is better prepared than during the financial crisis a decade ago, some countries have weaknesses which in ways are different from the old ones but can nevertheless cause problems.

The workshop on the ‘Global Financial Turmoil, Capital Flows and Policy Responses’ was attended by 50 policy makers, researchers and civil society representatives.

Two routes by which the global crisis may affect Asia are through volatility in financial flows and reduced trade caused by recession, said Dr. Yilmaz Akyuz, former Chief Economist of the UN Conference on Trade and Development (UNCTAD).

He added that Asian countries are even more integrated to the global financial system than a decade ago, making them more vulnerable to shocks. In some countries, there have also been massive increases in the outflows of capital by residents, who press their governments to enable them to diversify their investments abroad.

If the global crisis leads to less inflows (or a high outflow) of foreign funds, the government may want the local funds to return, but it is not easy to achieve this, warned Akyuz.

China and Malaysia are two countries with large trade surpluses and big increases in foreign reserves. It is not easy to get good returns on the reserves, while there are also costs for the governments in “sterilisation”.

This refers to the sale of bonds by the Central Banks to banks to mop up excess liquidity caused by capital inflows. The governments incur a loss since they usually have to pay higher interest for the loans they obtain than the interest they earn on their foreign reserves.

Akyuz estimated that Asian developing countries together lose US$50 billion a year from the cost of holding foreign reserves that are “borrowed.” He used the term “borrowed reserves” to refer to that part of foreign reserves built up by a country that results from inflow of capital, as contrasted to “earned reserves” which result from surpluses from the trade or current accounts.

He suggested that Malaysia take measures to increase investment in the country (which at 22% of GNP is much lower than savings, which comprise 38% of GNP), while China should increase wages so that growth can be boosted by higher domestic consumption rather than just by exports.

Several other speakers, including Indian economist C. P. Chandrasekhar and Yu Yongding of the ChineseAcademy of Social Sciences, and Filipino academic Joseph Lim warned that their countries had become more vulnerable to the volatility of capital flows because of recent financial deregulation and liberalization.

Chandrasekhar said India has a large and growing trade deficit, which is covered by capital inflows. (This is a case of a country’s reserves increasing due to borrowed reserves as the contribution of earned reserves is negative).

If the inflow of capital is reversed, India could face significant weakening of its balance of payments. Deregulation has also increased banking fragility, including fears of India’s own domestic sub-prime crisis, besides exposure of local institutions to losses due to their investments abroad (including a US$2 billion loss in the US sub-prime crisis).

Yu Yongding gave a comprehensive presentation on China’s capital controls and macro-economic management. He said China had previously been sheltered by capital controls but due to liberalization, the country has been inundated by a flood of inflow of hot money, which had destabilisation effects, such as over-heating of the economy and inflation.

With the large capital inflows, there was a dramatic increase in foreign reserves. The “sterilisation” measures were not sustainable due to its negative impact on commercial banks and its high and increasing costs.

He argued against liberalizing the capital account now, saying that such liberalization should be a matter of long-term reform and not short-term expedience. Both inflows and outflows should be well managed, said Yu, who also suggested several measures to tighten control over the capital flows.

Joseph Lim of the Ateneo de Manila University said that financial and capital account liberalization in thePhilippines had led to increased volatilities in the GDP, the balance of payments, portfolio investments and the exchange rate.

Although there was high growth in 2003 to 2007, this is deceptive as the growth was jobless and it was accompanied by a fiscal crisis (both of which were linked to liberalization), while the poverty rate increased from 30% in 2003 to 33% in 2006.

Dr. Razali Ramli, former Coordinating Minister of the Economy of Indonesia, traced the adverse effects of IMF policies on Indonesia and said the country had failed to learn the lessons of the crisis. Continued liberalization has led to the inflow of hot money, driving up stock market and property prices.

“The more hot money flows into Indonesia, the more vulnerable the economy becomes,” he said, urging the policy makers to learn from the recent policies of other countries like China and Thailand.

Dr Dian Ediana Rae, deputy director of Bank of Indonesia’s international directorate, said that Indonesia had removed capital controls, thus banks and companies can take foreign-currency loans. This liberalization is complemented by precautionary measures (such as the prudential policy framework for private foreign borrowing and the regulation on bank foreign borrowing), as Indonesia realizes that financial and capital account liberalization without first strengthening prudential framework is a recipe for disaster.

Datuk Seri Andrew Sheng, former deputy head of the Hong Kong Monetary Authority and former Chairman of its Securities Commission, said that it was now even clearer that reform of the global financial system is needed, as recent events showed that the central countries can also face financial crisis and thus the world requires the changes.

However, the international financial institutions are not designed to cope with crisis occurring in the central countries. Asian developing countries should get their act together for regional cooperation to increase their global voice, but it may take a new threat through a global financial crisis to lead them to a common view and approach.

Heiner Flassbeck, director of UNCTAD’s Division on Globalisation and Development Strategies, said that GDP growth is slowing down across the world. There is a downturn in developed economies resulting from effects of the US sub-prime crisis. While growth in developing countries has been fairly resilient due to stable domestic demand dynamics in large economies, it appears that they are beginning to be affected.

There is a gloomy outlook for the world economy as well as risks for the developing world, added Flassbeck. Firstly, there is uncertainty and instability in international financial, currency and commodity markets, with speculation being a major destabilisation factor. Secondly, there are doubts about the direction of monetary policy in some major developed countries.

The situation may become more difficult if currencies of countries with huge current-account deficits come under pressure to devalue, for example, Russia and East European countries.

Flassbeck also warned that the commodity prices boom could come to a halt due to cyclical factors. Developing countries remain highly vulnerable to commodity price fluctuations, and diversification and industrial development are the best long-term strategy.

He proposed that developing countries emphasise the financing of investment in new productive capacity, with the financing increasingly coming from domestic sources. Self-financing of enterprises from retained profits is the most important and reliable source, with bank credit being of second importance, especially for new businesses and SMEs. He warned that policies of high interest rates are counterproductive.

There should also be a stronger role for governments in influencing the direction of credit to strategic sectors. These include credit provided by public financial institutions, interest subsidies for selected investment projects, stricter control of lending for consumption or speculative purposes, and government guarantees for promising investment projects.

Ramon Moreno, Head of Emerging Market Issues in the Bank for International Settlements, explaining the crisis, said there had been high leverage in advanced financial systems, reflecting reliance on securitization to finance mortgages. Losses on debt securities linked to the US sub-prime mortgage market triggered de-leveraging. The losses spread to the banking system, with tighter financing conditions leading to a slowdown in economic growth.

Moreno added that emerging economies are not immune to the effects of the financial turbulence but have shown remarkable resilience due to their build-up of foreign reserves (though there are costs to holding them) and their bank systems are in good shape.

In the workshop’s final session, the prospects of Asian regional financial cooperation were discussed. Flassbeck spoke on how Europe achieved monetary cooperation (including the present common currency) through steps taken over many decades.

“Political will was key, there were strong leaders who pushed this forward,” he said, adding that Asia could learn from this and start monetary cooperation now as it will take many years to achieve.

Chandrasekhar said regional cooperation was needed in three areas – to prevent financial crises, to manage them if they occur, and to provide financing for growth, as was being attempted by the Bank in the South inSouth America.

President of the Philippine Institute for Development Studies, Josef Yap, said there has to be an overhaul of the uni-polar global financial system. The democratic deficit in IMF voting rights has to be addressed.

He advocated regional integration and cooperation, including capital market integration in East Asia and giving more teeth to the objective of “channelling East Asian savings into regional projects in the region.”

Yap summarized the various Asian regional cooperation measures, such as the Chiang Mai initiative, the Asian Bond Fund, and discussions on exchange rate coordination. However, some of the more recent efforts appear to have stalled, he said.

Participants of the workshop concluded that attempts towards regional monetary cooperation must be accelerated, in view of the need to counter the impending effects of the global crisis.