Climate change mitigation and economic development

Anthropogenic climate change, caused by greenhouse gas (GHG) emissions, will have negative if not catastrophic consequences for the livelihoods of many across the globe. With the Paris Agreement in 2015, most countries have pledged to reduce territorial GHG emissions. Per-capita emission levels are highest in today's rich countries, and many have started reducing their emissions. Current middle-income economies such as China, Ghana, India or Indonesia have experienced rapid economic, population, and emission growth in recent years, and today's poor countries are projected to be responsible for the lion's share of growth in energy demand and emissions in the coming decades. As of 2019, middle-income countries were responsible for over half of global GHG emissions. While the implementation of climate policies in middle-income countries is crucial for global mitigation efforts, the same is difficult to defend for low-income countries due to justified growth ambitions and very low historical and current emission levels. Besides switching to renewable energy sources for electricity generation, carbon pricing – either through taxes or trading schemes – as well as fossil fuel subsidy removal are arguably the most important mitigation policy tools available. These policies increase energy prices at least in the short term, thus incurring costs that may harm sustainable development goals. People and firms adapted their behaviour to low and often subsidized fossil energy. Many firms rely on generators powered by cheap diesel, while large parts of the population rely on cheap transportation and buy LPG cookstoves due to subsidized fuel prices. Clean cooking fuel adoption objectives may be hampered by taxing the fossil fuel LPG – the only viable clean cooking fuel in many regions of the world. Rising energy prices come with negative welfare consequences for households that may directly threaten poverty reduction efforts. Further, potential competitiveness losses of firms can dampen economic development prospects. Economic development has always been associated with both an increase in per-capita emissions and a decrease in poverty rates, although considerable country-level heterogeneity exists. For instance, China's and Thailand's growth have been associated with steep rises in per-capita emissions (and steep declines in poverty rates), while India's, Indonesia's, and Ghana's emission trajectories are much flatter. South African and Mexican growth rates and per-capita emissions have been relatively stagnant in the past 30 years, but these countries achieved considerable reductions in poverty rates. The trade-offs between climate policy and economic development may explain why only few middle-income countries (and no low-income country) have implemented carbon pricing to date. Those countries that have implemented carbon pricing have done so at very low price levels. The removal of fossil fuel subsidies, labelled as "second-best" climate policy for developing countries, has been more frequent. In addition to public welfare and economic growth concerns, the implementation of policies raising energy prices is frequently met with public protests – be it in China, Ecuador, France, Kazakhstan, Kenya or Mexico. These incidences are likely related to in some cases considerable short-term costs of such policies, which are clearly important from a political economy perspective, irrespective of long-term gains. Policy design needs to take into account these costs in order to avoid adverse consequences and to increase public acceptance. For instance, well-designed social transfer schemes can in theory compensate for welfare losses among the poorer population, and reforms can be phased in gradually to avoid sudden price shocks. This dissertation investigates the impact of rising energy prices, caused by different policies, on different segments of society in two lower-middle-income countries – Ghana and Indonesia – and an upper-middle income country, that is, Mexico. The analyses shed light on the short-term impacts of an increase in energy prices on the performance of small firms in Mexico and on large manufacturing firms in Indonesia, on household welfare impacts and consumption-based GHG emission reduction potential of carbon taxes in Mexico, and on the impact of fossil fuel subsidy removal on clean cooking fuel objectives in Ghana. These analyses hence provide evidence on the effects of climate policies in developing countries and their immediate trade-offs with sustainable development goals. This empirical basis can inform decision makers on how to design complementary policies aimed at mitigating adverse impacts for sustainable development, and thus may also contribute to a more rapid introduction of mitigation policies.2022-06-1