1. Wishful thinking about low carbon growth? Tony Venables University of Oxford What determines (and should determine) the uptake of green technologies in developing countries? Particular reference to Africa (SSA) (Collier and Venables ‘Greening Africa; constraints, technologies and comparative costs’)

2. Need for developing country action Project catalyst: of the 17Gt reduction from BAU needed by 2020 for 450ppm, 12Gt from developing countries Vision of LCG in developing countries Leapfrog to new (and future) technologies; (mobile phones) Co-benefits from green technologies Implementation through Green Growth Plans Uptake slow – for good reasons? Need to understand reasons Some are market failures  co-benefits from solving them Most are not: just implications of low development/ endowments  scarce funds, capabilities, weak incentives Introduction

3. Uptake depends on interaction between country characteristics and characteristics of green technologies Eg, International trade reasoning: Suggest that Current green technologies– largely ill-suited to developing economies Country characteristics  local costs at which neither efficient nor profitable to adopt Potential new technologies – inappropriate to delay investments delay particularly costly for developing countries Opportunity cost of mitigation is therefore particularly high in SSA Introduction

4. Country characteristics - endowments Characteristics Natural endowments Solar Hydro Fossil fuels Land Distance, fragmentation, transport Capital endowments Financial capital Human capital Governance / institutional capital Scale Latecomer advantage Timing of investments Green technology - input intensities Opportunities for green investments But Effective use of natural endowments requires capital endowments

5. Natural endowments. Solar: Areas of high solar potential Hydro: 2.5% world capacity: est. 12% world potential Fossil: Oil: 12% world oil production, 10% proven reserves + rapidly increasing Gas: new discoveries, Tanzania, Mozambique Coal: S. Africa, new developments Mozambique Land: ‘Potentially available’ arable land, 200mn hectares (world 450 mn). Distance, fragmentation and transport: 45 countries: 16 landlocked High transport costs: low population density, few ports or navigable rivers. Total economic size, 2.4% world gpd ppp; (1.5% nominal e-r = Benelux). Africa (SSA) characteristics

6. Capital scarcity. Low domestic savings rate: SSA, 17%; LDCs 14%; MIC 31%; world 21% (2007) Limited access/ high borrowing rates on international markets Low levels of FDI (except natural resource sectors) Political risk Record of default Poorly developed financial systems: eg interest spread SSA, 10%; LDCs 12%; MIC 7%; world 6% (2007) Small business borrowing ~ 60% p.a (Ghana, Udry and Anagol) Household borrowing: credit constraint. Africa (SSA) characteristics

7. Skill scarcity. Low levels of tertiary education, vocational training Low levels of technical skills Fiscal, institutional and regulatory capacity. Very low share of tax in GDP Low regulatory capacity Weak definition of property rights – e.g. land. Protection of property rights -- Lack of incentive to invest, lack of collateral -- IFC ‘Doing Business’ indicators Africa (SSA) characteristics

8. Present: Low levels of manufacturing, utilities Particularly low electricity production: Failure to organise complex network activities (power grid, rail network) Future mitigation prospects Summary, from MAC By sector/ activity Arguments for delay? Implications

9. The price of capital X CO2 reducing activities Kenya 2020: indicative MAC (selected activities): 4% discount rate Improved stoves Scrap old vehicles Geothermal PV Micro-hydro

10. Kenya 2020: indicative MAC (selected activities): 30% Improved stoves Scrap old vehicles Geothermal PV Micro-hydro The price of capital X CO2 reducing activities

11. Old trucks not scrapped: SMEs face interest rate >> 4% plus, road quality, accident rates, insurance markets, lack of funds for public investment (roads of vehicles). New stoves not introduced: households face credit constraints (interest rate >> 30%) Similar arguments for building design, insulation. Trucks and stoves: Solar PV: High capital costs – but cheaper than grid in remote locations Who pays? credit constraints. Micro-hydro similar?

12. Green technologies are capital intensive: More advanced combustion techniques: Wind, solar Some green technologies are large scale: Eg: Hydro Often remote – need grid investments. Network If large scale, need cross-border links: hold-up problem Colonial projects: Owens Falls, Cahora Bassa, Kariba Current: Grand Inga: 39 GW (2x Three Gorges); stalled Ethiopia: 10 GW planned or under construction – now concerns about excess supply Chinese investments Power generation I:

13. Hydro-carbons, coal and tradability If perfectly tradable, local endowment would not effect choice of power generation technique. But: High transport costs: internationally/ internally Double incidence of transport costs. Exports of fuel  imports of something else Commodity price volatility: local use as insurance Estimates of cost of coal powered energy generation (Heponstall) Coal scarce Japan, Italy, Sweden ~ $60-$80 MWh Coal abundant Australia, S. Africa ~ $27-$36 MWh Seems inevitable that SSA will use local fossil fuels Power generation II:

14. CO2 emissions related to urban density Urban: African cities sprawl: low density formal/ high density informal Poorly defined land rights/ weak land markets Inappropriate (and un-enforced) regulatory framework Lack of funding for urban public goods (roads, utilities)

15. Land use: Agricultural innovation Potential for low intensity cultivation? Slow rate of adoption new techniques Bio-fuels Available land – but ‘land deals’ not working well Food / fuel balance: SSA net food importer De-forestation Congo basin Weak regulation and very weak enforcement

16. Have argued that many existing technologies not likely to be taken up with existing local factor supplies/ prices. Latecomer argument: is it efficient to delay investments (eg in power systems) until new technologies available? Latecomers & the timing of investment Test this argument in simple model: Economies with same labour force, technology, but initial capital stock some fraction of steady state capital stock. Production uses labour and two sorts of capital: general K, power generation E. Y = F(K, E, L). Consumers on optimal growth path, dC/dt = σ (F K – ρ) Capital accumulationd(K+E)/dt = F(K, E, L) – C – δK – δE, Capital allocation F K = F E New investment in E gets stopped for an interval of time, What is the cost of delay?

17. Income paths: high income, low income country Dashed lines: 15 ‘year’ pause in investment in E (announced and with effect from t = 0) Latecomers & the timing of investment Y: country starting with 90% terminal K+E Y, for country starting with 20% terminal K+E Elasticity of loss of PV of utility with respect to initial income ~ -4. High income: max income loss ~ 2% Low income: max income loss ~ 20% Fast increasing investment demand increases deadweight loss High discount rate Perhaps also, initial sub-optimality

18. Latecomers & the timing of investment Endogenous investment pause: Know at date t = 0 that at date t = 15 capital value of ‘old’ E drops by 50%. When is it optimal to stop investing in old E? High income, at date t =3,  12 year investment pause Low income, at date t = 9,  6 year investment pause Message: Obvious late-comer advantage from having higher proportion of capital stock in new technologies BUT: if postponement of investment to get more efficient/ better suited technologies is particularly damaging to low income/rapid growth economies.

19. Local (opportunity) costs differ from those in high income economies How to change costs? Integrate in world economy: tradable goods  factor prices Improve domestic markets Fuel subsidies, domestic capital market failures. Have co-benefits -- but hard to implement Shift endowments: Capital Electrification: Urban development and infrastructure: FDI Foreign assistance Global architecture (- or Chinese investments ?) Shift endowments: governance and institutional capabilities Much improved policy in most of SSA: but priorities not on climate Conclusions and policy