Eight questions for sustainable growth

Three facts make sustainable growth a global imperative: (1) Developing countries are home to the majority of the world’s vulnerable or impoverished individuals. (2) Their citizens are most affected by environmental damages today and in the future. (3) The majority of future greenhouse-gas emissions are likely to take place in these countries.

The IGC's white paper, Innovation, growth, and the environment,  explores how developing countries can achieve sustainable growth whilst tackling poverty and protecting the natural environment, and the importance of policy-focussed economic research to the climate change agenda.

1. Why is it important that economic research redefines growth in a way that prioritises sustainability and considers environmental externalities?

Economic development transforms lives. Take South Korea, which jumped from poverty to prosperity in decades, spanning the entire arc of development in two generations. Historically, much of economists’ time was spent on decoding growth stories like these and focussed on how removing market and government failures maximised growth, and ultimately improved human welfare.

 This, however, misses an essential fact: growth often generates negative environmental externalities that inhibit the positive impact of growth on human welfare. The accumulation of greenhouse gases over the past century has culminated in a climate crisis. Countries cannot grow in the same way as before. Therefore, economists need to rethink how we achieve growth and improve welfare, accounting for the future negative impacts that may occur.

2. What are some of the recent developments in clean energy technologies that developing countries can leverage for sustainable growth? What opportunities and barriers might they face in this?

Energy drives growth and is also the largest contributor to global carbon emissions (71% of global emissions in 2021). The tight link between energy and growth means expanding energy access in developing countries remains paramount.

Fortunately, because of vast innovations in renewable energy, the trade-off between environment and energy access has blunted substantially. The cost of solar energy has plummeted, giving us the cheapest form of electricity we have ever known. In 2021, over 65% of newly installed energy capacity from non-fossil fuel sources was less expensive than the per unit price of coal.

Many countries in sub-Saharan Africa, the Middle East, and South America have significant untapped solar potential. To expand energy access, we encourage market reforms to allow for new technologies to be brought onto the grid to drive down the cost of energy and create new opportunities for access. Without energy access, levels of employment are smaller, firms hesitate to open or invest in a country, and long run human capital development is stunted.

A primary challenge for scaling up new renewable energy technologies remains the distorted price mechanisms brought on by failures in the energy market. We need to understand how contracts can be better awarded by governments to suppliers to ensure long-term certainty in price and payment. Over time, we want to see a movement towards wholesale markets for energy, where renewables can compete fairly against other energy producers. This will require accompanying investments into grid infrastructure and systems for managing variable load from renewables.

3. How can firms be made more efficient and align with sustainable growth, and account for the growing, young populations in developing countries?

Firms are both a vehicle for economic growth and a source of environmental externalities. Firms are also centres of innovation. They adopt new technologies and generate high-quality jobs for young people. As such, the choices they make have a substantial impact on the future development trajectory of a country.

To become more productive, firms need to upgrade through technological adoption, moving from the most basic level of production to more advanced methods. They also need access to reliable electricity and to incentivise strong performance on environmental outcomes, the government needs to support the diffusion and transfer of technologies domestically.

A final push, of course, is for governments to use taxes and regulation to increase the price of pollution and encourage firms to lower environmental externalities. While a carbon tax may seem counterproductive, it has the potential to be more progressive in developing countries. This type of regulation on the firm can help foster competition in terms of environmental performance and create new opportunities for workers in varying levels of skills.

4. Where are investments needed to reap the climate adaptation and mitigations benefits of cities?

Cities can be places of adaptation. They offer public services, new job opportunities and improved social networks for a better life. But realising this vision can be difficult. Governments need to make significant investments to design cities in a way that the rapid speed of urbanisation does not deliver the downsides of density: congestion, crime, insecure housing, and pollution.

Transportation, housing, public utilities, and adaptation infrastructure will make urban areas resilient to climate change. These investments create a better quality of life for urban dwellers, while also providing the adaptive capacity necessary to withstand climate shocks. Communication systems, such as public telecommunication cables, are needed to send climate warnings to residents, while energy access is necessary so households may turn on the air conditioners during high heat days. These are just a few examples of areas that deserve municipal investment as cities grow under climate change.

5. What kind of innovation in policy design is needed to ensure social protection interventions are resilient against climate change?

Undoubtedly, social protection will become an increasingly important part of the policy response to climate change. As we are increasingly feeling the impacts of climate shocks, we also need to prepare households for these disasters. Social protection programmes will need to expand, and governments will need to better identify vulnerable populations before climate shocks occur to deliver assistance.

In terms of innovation in the programmes, new evidence allows us to think about the different types of assistance and the timing of delivery around climate events.  Social protection programmes that augment cash transfers with business lending or vocational training can enable households to diversify income streams, creating some resilience against climate shocks in agriculture. Some programmes provide assets. If these benefits are not portable, we may be incentivising individuals to stay in risky areas for longer. Innovation in delivery is necessary in conceptualising the provision and the application of social protection.

6. Climate change affects parts of the world differently, resulting in varying levels of resilience against climate extremities. How can international cooperation help level the playing field of climate preparedness?

Climate change is a global problem: relying solely on domestic policy will be insufficient. The lack of climate finance has been a particular sticking point. Paper promises have been made, but actual disbursements lag well behind targets. It is important to remember that climate finance is development finance.

Funding to developing countries needs to increase in the near-term to lower the cost of capital, fix credit markets, and create the projects that offer climate resilience to encourage future investment and development in these markets. Additionally, international agreement on a loss and damage fund can help secure the essential money that will be needed to support vulnerable populations.

7. How can innovation help balance growth and its externalities?

Innovation is the key to achieving a balance between growth and the externalities from growth. We need broad-based innovations in technology, in the organisation of the state, in the structure of energy markets, and in the designs of cities.

Innovation is the process by which we as individuals, as firms, and as political systems, get much more efficient at reaching the same targets. One essential innovation for climate change is the technology to produce energy without emissions and the market mechanisms that ensure rapid adoption across countries.

8. What are some of the key areas of further research, especially for young researchers to work on?

We want to encourage the next generation of the academic community to support policymakers in striking a balance between generating the economic growth needed to tackle poverty and curbing the externalities that lie behind climate change. Using economics to look at development and environment issues is a way to evaluate the potential innovative approaches to reduce emissions while improving adaptive capacity and productivity.

We want to see more research on social protection under climate shocks as a key priority moving forward. There is also a fascinating new area of research on how natural capital can be managed and the markets that are needed to support their development and potential conservation. Finally, we see firms as drivers of structural change in an economy, and we need more work on what policies can support the development and adoption of green technologies in developing countries.

To learn more, read IGC’s white paper, Innovation, growth, and the environment.