Marianne Fay is the Chief Economist for Sustainable Development Vice Presidency at the World Bank. She holds a PhD in Economics from Columbia University. Previously, she served as the Chief Economist for Climate Change. She has contributed to many papers and books on topics like infrastructure, climate change, urbanization, and decarbonisation. The TSEconomist team met with her during her visit to TSE in November 2017 where she presented a talk on Green growth and decarbonisation.
For the people who were not able to come to your talk, what is decarbonizing development?
First let’s start with the word decarbonizing. The idea is a made up word, that is really about making sure that our economic processes are no longer necessarily generating net new carbon. So, again there is a big difference between not emitting versus having zero net emissions, and I think the realistic goal is zero net emissions. We were talking at lunch about how realistic carbon capture and storage is as an option, how economic it is. Still a big question mark—I don’t have the technical background to give you that. There’s also having negative emissions, essentially natural carbon sinks like forests. Decarbonizing development is really about trying to evolve our economic development processes so that they won’t necessarily entail generating a lot of emissions as you’re having economic growth and economic activity.
Do you mean net emissions per country or globally?
Global. That’s a very good question actually. Net zero carbon means globally. It is very possible that parts of the world would continue to emit some. Particularly, you can imagine countries that really don’t have any wind or solar resources, whereas others can serve as carbon sinks for the world because they have very large areas that can be reforested or because they have a huge potential on carbon capture and storage if one day carbon capture and storage becomes economic. The big question then is whether that requires big transfers of resources between countries, which doesn’t tend to work to well. It’s hard to imagine the US sending a ton of money to China.
People who want to show that they are carbon-friendly or that they implement renewable energy sources, they tend to put them where people see them, but not necessarily where they are efficient, so how is that going to work in the whole global net pollution framework?
That’s a really good question. The cost, the actual price of an emission avoided is only one of the dimensions. The other two dimensions that you want to think about is the potential for this technology. Take the case of CCS—Carbon Capture and Storage—which I am not necessarily advocating for, but it could potentially be a technology that we really need, eventually. Right now it is extremely costly. Extremely costly. Does that mean you shouldn’t do it? Or does it mean that maybe there should be quite a bit of investment in it because at some point we are going to need it and by then we need the technology to be mature and to be as affordable as possible. I think we should always remember that there are these three dimensions: the cost, the potential, and the time that it will take to get there. McKinsey made [marginal abatement cost curves] popular. It’s a very intuitive presentation because it makes it look like you have a clear dispatch function. You start with the cheapest [abatement technology]. But again, it is extremely misleading because you have a bit of a sense of the potential, but what you do not have a sense of is how long it will take to implement these kinds of things.
If your end goal is just a 30% reduction in emissions by 2030, you’re going to do the cheapest, the quickest thing. If, on the other hand, you’re going to have full emission [reduction] by the end of the century or even by mid-century or something like that, you’re going to have to put in place some of these really expensive things or some of these things that just take a lot of time to put in place. You may for example choose to build subway systems or systems that take a while to develop. Because also one of the things that happens is then people get locked into particular lifestyles, or cities develop in a particular way, so you may want to do more things like land use planning in cities, that is expensive, that is difficult, rather than just quickly developing a little bus system.
So, related to that, you have a report, Decarbonizing Development, (from 2015), which recommends countries set up long-term objectives to, say 2050. It seems like a big ask for politicians who often don’t have long time horizons, like US Presidents who have at most 8 years in office. Do you have any examples of countries that been able to set such goals?
Well, I think it is easier to set these goals when you have a sort of societal cohesion around a particular goal. The US is kind of unique, it is one of the few countries, fortunately, where climate change is really a partisan issue. If you are Republican, you do not believe in climate change. I am exaggerating a little bit, but officially as a Republican you do not believe in climate change, though I am sure there’s plenty of perfectly reasonable Republicans. And if you are a Democrat, you believe in climate change and climate change policies. Again, it is a bit simplified, but I think in Europe climate change has been a lot less of a political issue. It is not surprising, therefore, that Europe—okay it has been very imperfect—but it has put in place a number of systems and a number of things that help with more of a long term vision.
It is extremely difficult to put in place, and I think one of the reasons why I am not such a big believer in prices is that I think that prices are much more subject to change and partly the impact of the change is immediate. I can be an unpopular president and put it in place, but then the next person who comes—who wants to be a popular president—can remove them. Whereas if I say, ‘look, here’s a fuel emissions standard for cars that I’m announcing now and will be implemented in 10 years.’ The car companies may complain about it, but it is not a huge amount of a cost on them right now. So, the political cost to me is not that enormous. And, yes, of course the guy in 10 years can say ‘oh, changed my mind I’m not going to implement it,’ but by then car companies have invested for 10 years to develop the fuel efficient cars and therefore they have much less of an incentive to push the government, the president. I think there are a few tricks of the trade, a few policy instruments that can help a little bit with these long term commitments, with these pre-commitments. They may not be optimal, from a pure economic point of view, but again I love this [Otto von] Bismarck quote, ‘politics is the art of the possible.’
Some groups may be negatively affected by carbon-reducing policies, at least in the short run; if someone wants to implement a price right now, there will be huge groups that are affected. How can countries, and especially developing countries, mitigate the transition for such groups, whether they are vested interest groups or poor people?
We are developing a whole toolkit around fossil fuel subsidy removals, because that is a big deal. Before you can even start talking about a carbon price, at least get rid of the subsidies. They tend to be very bad subsidies for a number of reasons. One is they tend to be very poorly targeted and benefit the rich, they are extremely distortive, and they can be hugely costly; some countries spend up to 5, 6, or 7% of GDP, so an enormous cost. Usually when we talk to governments they say oh no we cannot remove them because the poor will be affected. When you look at the distributional burden or the distributional incidence, typically the poor get a tiny fraction of these [subsidies]. It is the middle class that gets a large share of it.
But why is it that the poor people only get a small share of it?
If you are really poor you do not own a car. If you are really, really poor you tend to walk to work. But you still get affected because you still buy food. If the price of fuels goes up then there will be ongoing effects. But if you look at the share of fossil fuel subsidies that are captured by the bottom 20% of the population, it is usually a tiny fraction; the vast majority is captured by the middle class, and the richer population. But importantly, even if only a tiny share is captured by the poor, it does not mean that they will not be affected. They may still be affected by increases in prices and other secondary effects. Many countries now have social safety nets, like financial transfers to the very poor. But it is generally fairly simple and certainly not very costly to take care of the poor because it does not require large sums. What is more complicated is what to do about the middle class and the firms.
Iran did something interesting because Iran was spending a very large share of GDP on fossil fuels. As a result there was huge overconsumption of petroleum products. And those were petroleum products they couldn’t export—the opportunity cost was quite large. What they did was completely remove the subsidy, which was something like 5-10% of GDP, an enormous sum. Prior to that, they had done this big campaign so that every household in Iran had to establish a bank account—in the remote areas it was at the post office or something. And on the day that they stopped distributing the fossil fuel subsidy, cost of petroleum massively increased, but something like 70% of households in Iran received a lump sum transfer.
Typically, countries first tell you that they are worried about the poor, but we can reassure them. Then they say ‘but our industries will become non-competitive.’ And that really depends, we were talking with Stefan Ambec because he has this very nice paper on the Porter Hypothesis. I was asking him whether there was something in there that we could use for this fossil fuel subsidy removal, and essentially it is the same kind of analysis that you are likely to have more of an impact in the short term than in the medium term when firms have a chance to adjust. It will vary tremendously according to industries depending on the cost composition; some industries may be hugely dependent on fuels; energy might be a large share of the cost. If energy is just a small share of your cost it’s not going to make an enormous impact. And then industries also and individual firms vary in their capacity to innovate and to adopt new technology or to substitute new machinery or more labour. It is important to do this kind of analysis to try to understand which firms will be most hurt and then figure out what other policies you can put in place to help them and/or maybe in some ways buy them off if they are really part of the lobbies.
Also in your talk you mentioned green growth. What is the main idea behind green growth? And do you believe that green growth is achievable in today’s society?
If you Google ‘green growth’ you’ll find lots of very sophisticated definitions—and they’re all absolutely correct and I love them all—but I like to keep it simple and, basically, to me green growth is growth that does not come at the expense of the environment. So it is the opposite of what we did during the Industrial Revolution. It is growth that does not require grow now and clean up later kind of thing. One important thing, which I think is worth really insisting on, there should be no presumption that green growth is equitable growth. In some cases, as the China example that I gave [during the talk], it happens to be an environmental investment or an environmental project that has extremely positive distributional impacts. That is not always going to be the case. Sometimes there will be trade-offs and it is important that they be undisturbed so that mitigating measures can be put in place to make sure that equity and poverty considerations are well-covered.
Do I believe we can do it? My strong belief is that we can grow a lot greener than we do today without growing any slower. Mainly because of all the inefficiencies that I see in the systems today. Improving energy efficiency in buildings is not going to slow anybody’s growth. Energy efficiency in general is a win-win. It does not happen because of a number of market inefficiencies and so on and so forth, but from a sort of overall societal point of view, there is no doubt that that is a positive. And there are plenty of other things. The transportation systems we have now are often kind of dumb. Your average person is sitting in a 5-person car and driving around all by themselves. How dumb is that, right? They take a car that they use at most an hour per 24 hours and use up an entire parking space in the middle of downtown. So, there are infinite numbers of inefficiencies that if we could address we could certainly grow a lot greener without growing slower. What I cannot tell you, and nobody can tell us, is whether it is truly possible to grow perfectly green at the same speed as we can today. I think that is an empirical question that is hugely dependent on technological innovation and hopefully the answer is yes at some point in the future, I do not know that it is necessarily possible today.
After green growth, and looking at climate change, what sort of research questions do you think will be important if we ever solve climate change for instance?
I do not think we will solve climate change, I think climate change is going to remain a challenge certainly for my lifetime, but I’m sure for yours as well. I think it is going to be a huge motivation in terms of innovation. Both mitigation and adaptation. So, if you are looking for a place to work, I think that is a very interesting place to work. I think in general sort of Environmental Economics is an interesting area to invest in, but I would try to be broad. Environmental Economics is one application of Economics. So, I would advise you to really have solid micro and solid regulatory economics because that is useful. I think, to be a good Environmental Economist and do good policy work, you really want to understand all sorts of other processes: notably energy, infrastructure—unless you specialize more in the green environmental economics as opposed to the brown stuff. Then you really want to understand the economics of natural resources.
By Kristina Hagen, Annie Krautkraemer, and Lars Nordgreen