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Global Warming and the Developing World

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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Faced with great scientific uncertainty on this much debated topic, developing nations should pursue those energy options that make good economic as well as environmental sense

Anthony A. Churchill and Robert J. Saunders

In recent years, nations all over the world have become increasingly troubled by the buildup in the atmosphere of “greenhouse” trace gases. These gases—primarily carbon dioxide (CO2), methane, nitrous oxides, ozone, and chlorofluorocarbons (CFCs)—it is feared, could trigger a significant warming of the earth’s surface, with potentially harmful, even devastating, social and economic consequences for mankind. Scenarios abound of vastly changed patterns of rainfall, different temperature levels, radically changed ocean currents, increased frequency and intensity of natural disasters, and rising sea levels. The ramifications could include severe damage to vegetation in some areas, parts of entire countries being submerged under water, fertile lands being turned into deserts, and ensuing mass migrations. But at this stage, clear scientific evidence confirming such an enhanced greenhouse warming is still lacking (see box).

Given this uncertainty, how should nations respond? One difficulty is that the benefits from activities that lead to the production of these gases (low cost power and transportation, manufacture of cement, refrigeration, waste disposal, etc.) are localized, immediate, and clear, but the costs are not. A second is that although most of the greenhouse gases are being generated in the developed world—of the two most prominent gases, only 25 percent of fossil fuel-related C02 emissions, and less than 10 percent of CFC emissions, come from developing countries—most of the increases in emissions are now coming from the third world, due to economic and population growth.

At this stage, most developed countries have already begun debating domestic policy options for reducing greenhouse gas emissions. In fact, they are now spearheading efforts to craft a global climate convention, which would be ratified at the June 1992 UN Conference on the Environment and Development. However, it is the developing nations that could be the most vulnerable to any significant global climate change, because a greater percentage of their GNP originates in agriculture and, given resource constraints, they would be the least able to adapt.

This article takes a look at the spectrum of options open to all countries, but concentrates on the roles that developing countries can play in addressing energy-related greenhouse issues. It concludes that even with the tremendous uncertainties surrounding the changes that might be brought about by global warming, there are clear actions to take and policies to follow aimed at diminishing risk while simultaneously carrying out research that reduces the uncertainties. In fact, developing countries now have a major opportunity to increase incentives for sustainable energy resource use, shift to cleaner alternative fuels and technologies, and improve efficiency in energy production, distribution, and end use. Such initiatives not only address the greenhouse gas problem but they also, in most instances, make good economic sense.

Benefits clearly exceed costs

No matter which path is chosen by a country, development ultimately depends upon the effective substitution of various forms of energy for human labor. Whether this energy is used to move water, make cement, heat or cool a building, operate a truck, or cook food, it is an input into making the human condition more bearable. Developing countries, almost by definition, consume little energy other than that generated by human labor even Brazil has only about one tenth the per capita energy consumption of the United States or many European countries—so for them, the future hinges on expanding energy use in the whole range of economic and social activities.

But this requires capital, a commodity in scarce supply in the third world, and large amounts of it. For electric power supply alone, the annual investment bill for all developing countries is projected to be up to $100 billion per year—with China, India, and Brazil accounting for nearly half—and this does not include the large additional investments that will be needed to consume this energy (e.g., motors, vehicles, appliances, air conditioning, and light bulbs). Moreover, the projected demand for investments in oil, gas, and coal are at least of similar orders of magnitude. Not surprisingly, therefore, developing countries are increasingly placing a high priority on promoting a more efficient use of existing and new resources. That is, they are choosing those options where undertaking activities, or pursuing policy initiatives, will yield unambiguous economic benefits that exceed costs, even without having to include the uncertain benefits from the accompanying reduction of greenhouse gases and other pollutants. Specific sectors that are prime candidates for action include energy, industry, and transportation.

Energy sector. This sector is by far the largest single contributor (accounting for roughly half) of greenhouse gas emissions, making measures that improve efficiency a high priority. In developing countries, payback periods on energy efficiency investments tend to be much shorter, and rates of return higher, than for investments designed only to increase energy supplies. Moreover, the reduction of energy inputs per unit of useful output almost always has a positive effect on the release of greenhouse gases. In many developing countries, efficiency gains in the order of 20 percent could be achieved with relatively minor investments in upgrading existing capital stock, and further substantial gains could often be obtained with energy-efficient new investment. But this is by no means a simple task, as attested to by the current existence of large inefficiencies in both energy supply and end use. The major means to reduce the resource wastage will come through better pricing, more efficient consumption and supply, and cleaner alternative fuels and technologies.

Pricing. First and foremost, energy pricing must receive greater attention. In most developing countries, energy prices, other than for some petroleum products, do not cover economic costs, meaning that energy consumers—many of whom produce other goods—do not face prices that encourage them to use energy efficiently and select the right form of energy and energy-using equipment for their needs. In the case of electricity, for example, major industrial countries charge about 8 cents per kilowatt hour, double that of the average developing country—and the cost-plus pricing of protected energy-consuming industries leaves little incentive for reducing costs.

Energy use. The efficiency of energy consumption could be increased in many developing countries—and if energy prices reflect real costs is justified on purely economic grounds—through the use, for example, of more efficient motors, light bulbs, refrigerators, cars and trucks, water heaters, and charcoal kilns. If the energy requirements of everything from industrial boilers to stoves to light bulbs could be lowered, it would significantly slow the growth in overall energy demand and greenhouse gas emissions, in turn reducing the need for large new investments in energy supply.

But to date, many countries have found it difficult to make major progress on this score, and developing countries, in particular, have run into obstacles. The reasons appear to be many: imperfections in the market, such as prices that do not reflect real costs; trade restrictions; inadequate consumer information on costs and alternatives; social mores on how things should be done; and lack of available technologies. Nevertheless, new and evolving energy end-use efficiency technologies are promising, and along with making certain energy prices reflect real costs, there is a need to continuously re-evaluate the economic, technical, and social feasibility of their implementation. Other possible avenues include initiatives on commercial lighting, appliance labeling, information programs, and building codes, drawing on technical assistance, where needed.

Energy supply. Here, too, the record is disappointing, as reviews of the performance of developing country power utilities over a 20-year period point to a general trend of increasing inefficiency. Losses in the delivery of electricity are commonly greater than 20 percent—sometimes approaching 40-50 percent—and while some of this represents theft and inadequacies in metering and billing, it is clear that technical losses in networks are high. Furthermore, in many countries, the availability and thermal efficiency of electricity generation tends to be low, especially when such generation is based on old coal technology. Losses in petroleum refining are as high as 5 percent, whereas they could be as low as 0.5 percent in a well-run refinery. Even charcoal kilns often have efficiencies as low as 10 percent, despite the fact that they can easily be designed to operate three times more efficiently.

Fortunately, the costs of reducing these high energy losses tend to be low relative to the large benefits gained. A small investment in improving efficiency in the power sector, for example, might provide as much incremental supply capacity as three to ten times as much spent on new capacity. Realizing such improvements involves a strategy that (1) reforms the legislative and regulatory arrangements to promote increased competition among energy suppliers, partly by boosting the private provision of risk capital and private sector participation in energy supply through both cogeneration and stand-alone facilities; (2) strengthens the accountability and the internal organizational structure of energy supply enterprises; and (3) shifts investment resources at the margin from increasing capacity to improving efficiency in both supply and end use.

Alternative fuels and technologies. One of the most promising alternative fuels is natural gas, whose C02 emissions are much lower than those of other fossil fuels. It has been discovered in over 50 developing countries, and proven reserves are now larger than those for oil. At the same time, its development has become increasingly attractive on economic grounds, thanks to the new low capital cost, short lead time, and high energy efficiency turbine technology. Yet natural gas is not being exploited at anywhere near its potential, due to the underpricing of competing fuels and complex issues relating to legislation, regulation, ownership, institutional structure, fiscal regimes, financing, and information flows. Compounding matters is the fact that few developing countries have much experience with natural gas, and the experience of the developed ones tends to be inappropriate. In most industrialized nations, the natural gas market developed slowly, largely in response to industrial and residential demands, whereas in many developing countries, the industrial and residential markets are too small, and most of the demand will be for power generation.

Another alternative may well be hydropower, where there is still substantial development potential. Two advantages of this technology are its low operating costs and the fact that hydropower stations are less complex to operate than other types of electric power stations. Moreover, in recent years, the outlook for its use has improved. With the advent of high voltage direct current transmission lines, many sites once considered too remote from load centers are now becoming economically viable. The establishment of suitable legislative or regulatory frameworks in some countries has also made privately owned mini-hydro schemes more attractive. But there are local environmental disadvantages to hydropower projects, and while a number of countries have improved their hydro policies and practices to mitigate environmental and resettlement problems, much remains to be done.

Contributions of greenhouse gases to global warming

Source: World Bank.

A third prominently mentioned alternative is renewable energy sources—such as biomass (plant materials and animal waste), solar, and wind—since they usually do not contribute significantly to the net emission of greenhouse gases. Their use is economically justified in selected developing country applications, and although they currently can only meet a fraction of total demand, they provide one of the few viable alternatives for populations in remote areas. Studies in India, Ghana, Indonesia, and Cote D’lvoire, for example, show that cogeneration with bagasse from sugar mills, and wood wastes from saw mills and plyboard mills, is usually economically justified. Photovoltaics for health services, water pumping in remote areas, solar water heaters in the commercial sector, and small hydropower stations in selected rural locations also frequently make economic sense.

Industrial sector. Most of the greenhouse gases released by industry are the result of energy use, rather than specific industrial processes. Thus, most of the measures suggested for improving the efficiency of consumption in the energy sector also apply here, with the added bonus that energy-intensive industries tend to be more sensitive to price signals than small domestic consumers. The actual degree of sensitivity depends partly on the competitive structure of the industry; those companies that are highly protected or lack competition will be able to pass price increases and costly inefficiencies on to consumers.

Transportation sector. This sector contributes greenhouse gases (and local air pollution) mostly through the burning of motor fuels. But with the possible exception of compressed natural gas for vehicle fleets, few available technologies have the potential to quickly ameliorate the situation. It is likely that more efficient vehicles and cleaner fuels will be developed, although at today’s prices and production levels, alternative fuels are generally more costly than existing oil-based ones. Even so, there are initiatives that should be undertaken on economic, as well as environmental, grounds. Improving urban transport efficiency is particularly important—see the dismal reality of congested Cairo, Mexico City, Lagos, and Bangkok. The failure to adequately transfer the costs of scarce urban street space to vehicle users through congestion charges, vehicle registration fees, and parking fees has resulted in large and quantifiable economic costs without including the negative environmental side effects. Measures taken to improve the operation of urban transport systems—such as enforcing traffic laws, improved signalling, traffic controls, and road maintenance, or displacement of the automobile by buses—can significantly reduce the consumption of energy per mile traveled.

What does global warming mean?

Much of the interest and controversy surrounding the “greenhouse” effect has surfaced in recent years, as a growing number of scientists have suggested that greenhouse trace gases could possibly raise world temperatures between 2 and 5 degrees Celsius (approximately 3 and 9 degrees Fahrenheit, respectively) by the middle of the next century. If this happened, both the magnitude and the rate of change would be unprecedented in mankind’s history on earth. Over the last century, the earth’s temperature is thought to have risen only about 0.3 to 0.6 degrees Celsius, and it probably has not varied more than 1-2 degrees Celsius in the last ten thousand years, or more than 6-7 degrees Celsius in the last million years. In fact, the development of the human social and cultural infrastructure over the last 7,000 years has taken place entirely within an average global climate neither 1 degree warmer nor colder than the climate of today.

But how much do we actually know about the climatic changes ahead? One certainty is that various atmospheric trace gases—mainly carbon dioxide (CO2, methane (CH4), tropospheric ozone (O3), and nitrous oxide (N20)—trap some of the radiant heat that the earth emits after receiving solar energy from the sun, much as panes of glass hold heat inside a greenhouse. This phenomenon is normal to earth and essential to life. Without it, the earth would be more than 30 degrees Celsius cooler, and life as we know it, would not exist. The industrially produced halons (CF3Brs) and chlorofluorocarbons (CFCs) have only been added to the naturally occurring greenhouse gases during the past 30-60 years.

Another certainty is that greenhouse gases are accumulating rapidly—and have been since the beginning of the Industrial Revolution—changing the chemical composition of the earth’s atmosphere. Carbon dioxide is by far the most important and is expected to remain so in the years ahead. But not all of these gases are created equal, in that they vary sharply in terms of their capacity to absorb infrared radiation. For example, using C02 as the baseline unit for absorptive capacity (letting C02 equal 1), a single unit of methane can have as much as 30 times greater greenhouse impact than C02, and the CFCs can have an impact of up to 15,000 times greater.

What is not known is what this greenhouse gas buildup portends for the future. Scientists cannot agree on exactly how much the earth has warmed over the past century, to what extent, if any, greenhouse gases are to blame, and how much warming—and when and at what rate—we can expect. The complex interactions among clouds, oceans, trees, volcanoes, ice, snow, dust particles, water vapor, aerosols, greenhouse gases, and the sun, continue to preserve a sense of mystery, defying reliable computer simulation. Scientists also cannot state with any certainty what a warmer earth would mean for mankind. For example, will plants do better thanks to more C02, or will rising temperatures translate into poorer soil moisture, changing rainfall patterns, and rising ocean levels? Will cloud cover increase, actually helping to mitigate the greenhouse effect? Scientific breakthroughs will occur in the years ahead, but for now all long-term climate prediction scenarios should be seen more as educated guesses than literal predictions.

Rise in atmospheric carbon dioxide concentration

Source: World Bank.

Insurance makes sense

The second type of options involves those where the developed countries will need to take the lead. In this part of the spectrum, while either the costs or the benefits of the initiative are uncertain, the costs of the action are thought to be low relative to the potential high costs that might be incurred by doing nothing—much like buying insurance. In the case of the greenhouse effect, the nations of the world will have to cooperate to insure themselves. But even self-insurance is difficult when the distribution of the benefits over time and space is unknown. If the costs turn out to be small relative to potential, albeit uncertain, benefits, expeditious ways can be found to encourage participation of all parties.

Phasing out CFCs. One obvious insurance option is phasing out, or substituting for, CFCs—a gas that both depletes the ozone layer and contributes disproportionately to the greenhouse effect. The need to do this is all the more urgent given that if nothing changes, developing countries are expected to sharply increase their use of CFCs, matching the present contributions of the United States and Western Europe combined by the end of the century. CFC use in refrigeration (which currently accounts for a 30 percent share) is likely to grow the fastest. In China, for example, the percentage of homes with refrigerators went up from almost zero in 1980 to nearly 2 percent in 1985—reaching 15 percent in some cities. Tsinghua University forecasts a 50 percent saturation in Chinese homes by the year 2000, equivalent to nearly 125 million refrigerators.

Until now, CFCs have been mostly produced and consumed in a few developed countries. As a result, it should be possible for the higher income countries to bear most of the costs of eliminating CFCs, while providing the relatively small financial incentives needed to compensate the poorer countries for incurring higher costs for non-CFC refrigerants, foam blowing agents, aerosols, and cleaning agents. The Montreal Protocol to phase out the use of CFCs, along with other more recent agreements, are a move in this direction. Also, since most developing countries produce relatively outmoded refrigerators and other appliances using old, inefficient technologies, an increased emphasis on the transfer of technology from industrialized countries will be critical.

Research. Of the other insurance options now available, research should have a high priority. But as with CFCs, it is difficult to link those paying the costs with those receiving the benefits. This is particularly true of research of a more basic climatic nature, in that the benefit will be in the public domain. Fortunately, the cost of such work is relatively low, making it possible for developed countries to act for the good of the global commons without undue sacrifice or risk. Then, too, financiers will have the potential to capture at least short-run gains from other types of research, such as the development of safer, less costly nuclear power, further improvements in gas turbine technology, the design of more energy efficient batteries, photovoltaic panels, light bulbs, electric motors and motor vehicles, and the creation of more robust species of trees and food crops.

Uncertainty limits action

The final set of options embraces those areas where benefits are uncertain and the costs of action are so high that developing countries simply cannot be expected to take any initiatives at this time. Among these are the following three:

Phasing out coal or freezing C02emissions. This is highly unlikely in the developing country case unless the major uncertainties regarding the magnitude, timing, and distribution of any benefits are reduced and large benefits pinpointed. People would have to be convinced that a climate-related disaster is imminent or highly probable, or a dramatic new energy supply technology would have to emerge.

Large-scale reforestation programs. Biomass, particularly in the form of wood, is partly seen in the greenhouse gas context as an absorber of C02. However, given today’s fossil fuel use and its projected growth, an enormous amount of additional land would need to be devoted to growing forests in order to significantly reduce C02 levels in the atmosphere. For example, an estimated 2.5 million hectares per year would have to be reforested in order to absorb just the additional carbon emitted annually by recent US fossil fuel consumption—equivalent to an area slightly less than Belgium. Reforestation at this rate over the next ten years would result in covering an area the size of the United Kingdom. Annual tree plantings alone would require 6.1 billion seedlings per year, which would be equal to 25 trees planted per capita per year in the United States. In most developing countries, economic, logistical, management, and political constraints preclude the likelihood of successfully pursuing such a large-scale and costly option. On the other hand, slowing or stopping tropical deforestation through improved land management is in many instances highly cost-effective and should be pursued vigorously.

Nuclear energy. Not surprisingly, the emissions associated with the burning of fossil fuels has rekindled interest in nuclear power. But for developing countries, nuclear power has proven to be a very expensive option—compared with other forms of electric power generation—in terms of financial costs and scarce manpower skills. In addition, governments must wrestle with troublesome security and waste disposal issues. For most developing countries, the current generation of nuclear power technology does not look to be a viable option at the present time.

Future directions

Whether or not the future brings a significant global warming related to the buildup of greenhouse gases in the atmosphere, much work in the areas of energy efficiency, fuel choice, and technology development is economically justified in its own right. Indeed, efficiency issues should continue to be at the heart of developing country energy policy formulation, institutional restructuring, and operations. The usefulness of the various options reviewed here will change as the greenhouse uncertainties (magnitude, timing, distribution, etc.) are reduced, either through research or the passage of time. The international energy community must closely monitor all developments and constantly reevaluate the best policy mixes.

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