Transcript Climate Finance – Curse or Blessing?

Climate Finance – Curse or Blessing?
Jan Steckel
New Delhi, February 21, 2013
Why to worry about financial inflows?
average
GDP growth
(1975-1989)
8
6
Growth
4
net exports of fuels, ores and metals
in percent of GDP (1970-1974)
2
0
-20
-10
-2
0
10
20
30
40
50
60
70
80
90
-4
y = -0,0783x + 1,4095
R2 = 0,2381
-6
Resource Exports
Empirical evidence shown by numerous studies e.g. Sachs and Warner
(1995), Gylfason et al. (1999), Papyrakis and Gerlagh (2003). Collier and
Goderies (2007) etc.
Do we need to expect comparable (i.e. negative) effects wrt
climate finance?
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Experience with financial transfers
Natural resources
• Early literature: focus on adverse impacts (e.g. Sachs & Warner 1997)
•  Resource curse
• Numerous transmission channels have been identified
• Mixed empirical evidence -> also some positive channels?
ODA
• Similar issues as natural resource curse
• Common concept: absorptive capacity (~20% of GDP)
• Literature emphasizes the role of governance (Burnside & Dollar 2000)
FDI
• Most authors emphasize positive spill-overs
• However, empirical evidence is mixed
• This suggests that there are also negative effects (e.g. Dutch disease)
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Explanation for resource and aid “curses“
Volatility
• Decreases incentives for investments (Aizenman & Marion 1999)
• Can trigger distributional conflicts (Rodrik 1998)
“Dutch-disease“
• Appreciation of RER crowds out manufacturing (Corden & Neary 1982)
• This slows down endogenous growth (e.g. LbD) (Van Wijnbergen 1984)
Rent-seeking
• Dissipate resources in a zero-sum game (Krueger 1974)
• Can slow growth by undermining the business environment (e.g. Tornell
& Lane 1999) in particular the quality of institutions (Murphy et al. 1989,
1993)
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Developing countries and climate change mitigation
Data derived from Luderer et al. (2012)
• To achieve ambitious climate
targets, physical emission
reductions need to be arranged
in developing countries
• Ethically that must not
comprise with development
prospects
• UNFCCC principle of
“Common but differentiated
responsibilities” implies
compensation
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Non-Market Transfers
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Emissions Trading
Different allocation schemes: Contraction and Convergence, equal per capita,
and based on current GDP (i.e. grandfathering)
Financial Flows 2020
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Financial Flows 2050
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Comparing Financial Flows
Climate Finance Range
[% of GDP]
Data Resource Exports, FDI: Year 2009; Aid: Year 2008; ETS: ReMIND scenario Year 2020
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Rent seeking and institutional quality
Institutional quality in countries expected to receive the climate rent is
significantly lower than in countries that have managed resource rents relatively
well in the past.
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EU-ETS prices in €/tCO2
Volatility
Volatility in the EU ETS is comparable to other commodities’ volatility in the past.
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Causes of the Resource Curse
1) Institutions
Bad Quality--> unproductive rent-seeking
Permit creates rents

2) Volatility
Volatile prices--> volatile GDP growth
Volatility of permit price?
Bad financial system --> reduced growth
EU-ETS prices

3) Dutch Disease
Appreciation of the real-exchange
rate

Spending effects
Even though not totally congruent and depending on the carbon market
design, a climate rent curse can be expected to occur under certain
circumstances
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% of affected players
Difference in utility
The climate rent curse in a coalition model
Sachs and Warner: g (i, t )  g0 (i, t )   
 (i , t )
*
GDP(i, t )
, with φ = 9,81
• Climate rent destabilizes coalitions
• Negative effects need at least halved compared to historical
observations for transfers to be beneficial for developing countries
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Conclusions
• Magnitude of climate finance uncertain; depends on numerous
factors (stabilization target, scheme to disburse funds, allocation
scheme…)
• Financial flows could be large and even exceed current revenues
from natural resources and negatively affect growth in DCs
• This casts some doubt on the feasibility of emissions trading to
finance mitigation in DCs; at least some review of carbon budget
seems mandated
• There is no ‘one-size-fits-all’ remedy; the appropriate response
depends on how funds are disbursed as well as country
characteristics
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Thank you for your attention.
Kornek, U., J. Steckel, K. Lessmann, O. Edenhofer (2013): The Climate Rent Curse: New
Challenges for Burden Sharing. Working Paper.
Jakob, M., J. Steckel, C. Flachsland, L. Baumstark (2012): Climate Finance – Curse or
Blessing? Working Paper.
Available on http://www.pik-potsdam.de/members/steckel
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The climate rent and market-based transfers
C (rent) >
= A (abatement costs)
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Effects on stability
GDP = Consumption+Savings+Mitigation+Damages+Net(Exports)
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Transfer schemes
1.
2.
3.
4.
Historic Responsibility (HR)
Equal-Per-Capita (Per-Capita)
Contraction and Convergence
Optimal Transfers
Discounted sum of transfers in tr USD
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MICA equations
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