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This booklet contains the Overview from the forthcoming book, Low Carbon, High Growth: Latin American Responses to Climate Change. To order copies of the full-length book, published by the World Bank, please use the form at the back of this booklet.

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Preface

In effect, the world economic slump will be associated with a fall in private investment, including climate friendly investment. The latter may tend to suffer disproportionately in the current context, given that the price of fossil fuels has fallen dramatically relative to alternative, clean sources of energy. Not surprisingly, utilities already seem to be making significant reductions in their investments in alternative energy and there is already a reduction in the flow of project finance devoted to low-carbon energy projects. The expectation that a low relative price of fossil fuels is here to stay might not only deter investment in low-carbon technology, it could also induce substitution in consumption in favor of cheaper but dirtier energy. For example, low gasoline prices could deflate the momentum towards hybrid vehicles, particularly in North America. With lower economic growth worldwide, furthermore, GHG emissions could experience a cyclical decline and this might create political incentives to postpone policy efforts to bring down the emissions trend. In all, the global financial and economic crisis could lead to a shortening of policy horizons that might induce a shift towards a more carbon intensive growth path. That would only increase the difficulty and raise the costs of reducing GHC emissions down the line.

Experience with previous financial crises in emerging economies suggests that tradeoffs often arise between long term environmental concerns and short-term macroeconomic policy responses.¹ In particular, as competing claims rise on shrinking budgetary resources during a crisis, budget cuts tend to affect to a larger extent the provision of public services that are considered to be a ‘luxury”—i.e., services whose immediate impact on the people or sectors affected by the emergency is perceived to be low and only indirect. In developing countries, these often include such items as forest conservation or the protection of ecosystems. According to an IMF paper,² for example, in the aftermath of the Asian and Russian crises, Brazil reduced public expenditures (excluding wages, social security benefits, and interest payments) for 1999 by 11 percent in nominal terms with respect to 1998. However, some key Amazon environmental programs were reduced by much more than the average. The Brazilian Institute for Environment and Natural Renewable Resources (IBAMA), for instance, experienced a budget cut of 71 percent with respect to originally approved funding, and of 46 percent compared to 1998. There are also indications that this phenomenon went beyond the federal level. Brazilian states and municipalities, faced with the need to produce “primary surpluses”, were not able to compensate for the cuts in federally funded environmental programs in the Amazon.³

If leaders at the national and international levels are visionary, they can avoid falling into the trap of sacrificing environmental sustainability to short-term macroeconomic necessities, and can take advantage of the opportunities to address climate change concerns. In particular, policies and programs to address today’s pressing problems can be designed and implemented with a long-term horizon. Sometimes, these decisions can be win-win. But sometimes, there will be trade-offs. For example, private investment in, and consumption of, clean energy will be stimulated by a relative increase in the price of fossil fuels, and this can be encouraged through a combination of regulations, taxes, carbon-trading schemes, and/or subsidies. But making firms pay to pollute and forcing households to consume more expensive if cleaner energy is not popular in times of economic recession. Tilting private sector activity in a sustainable fashion towards low-carbon choices thus calls for carefully managed political compromises and sound judgment on the part of policy makers to ensure that long-term considerations are not neglected for political expediency.

Greater scope for synergies is likely to be found in the area of public investment. Massive public investment programs will have to be part of the fiscal stimulus required to deal with the global economic crisis, especially in developed countries and high-saving emerging economies. Appropriately designed and implemented, these programs can generate win-win dynamics and outcomes, simultaneously advancing the causes of supporting economic recovery, on the one hand, while helping to encourage growth in areas that minimize or mitigate the impact on climate change, on the other. Moreover, countries that manage to effect the transition from a high-carbon to a low-carbon economy during the economic slump can enjoy “first-mover advantages,” that is, a greater competitive ability to promote long-term growth beyond the cyclical downturn. As a result, the current financial crisis can actually create a unique opportunity for a new deal for the 21^st century, focused on low-carbon growth. The declared vision for environmental sustainability and energy-security of the recently elected government in the U.S. adds hope in this regard. A “green recovery”—that is, a virtuous interaction between job creation, growth resumption, and low-carbon oriented public investments and policy actions—is a worthy option and, arguably, the only sensible option for the world community at this juncture. Such an option can be turned into reality if leaders and political systems rise to the occasion.

Laura Tuck

Director, Sustainable Development Department

Latin America and the Caribbean

The World Bank

Augusto de la Torre

Chief Economist

Latin America and the Caribbean

The World Bank