Dawn of a new market order

1 December 2008


When some fragile progress was made at last December’s UN Bali climate summit, leading to a deadline of next December’s Copenhagen summit for a post-2012 global climate agreement, the global economy was in reasonable health. Yet as delegates prepare for this year’s Poznan summit the global economy is worsening with countries queuing to move into recession. The only bright spot is provided by a pro-climate action US president-elect, but what does Barack Obama save first – the economy or the climate? And more importantly, can he save either?

There is a persuasive argument, endorsed by Obama during the presidential campaign, that the economy and the climate can be ‘saved’ in tandem by developing a global green economy through a rapid green technological revolution. But there are supply security risks with this green vision as a number of green/clean energy technologies, such as wave/tidal power and carbon capture and storage, are not commercially proven and the investment required in green/clean energy could see funds diverted from traditional

energy technologies, particularly at a time of economic hardship.

Technology will feature strongly for the first week of the Poznan summit with a number of delegates wanting the Clean Development Mechanism amended. There has long been concern that the CDM is simply funding green/clean energy projects in the developing economies that would have been developed without the funding from the CDM process. And it is the issue of funding that will likely dominate discussions on a post-2012 agreement that will be the focus of the summit’s second week.

Ahead of the Poznan summit, China raised the price of its co-operation by calling for developed countries to spend 1% of their GDP to help poorer nations cut their greenhouse gas emissions. China says the funding, which amounts to more than $300bn based on the Group of Seven countries (ie the G8 minus Russia), would be largely spent on the transfer of renewable energy technologies to poorer countries.

This is not the first time China has raised the issue of a funding transfer from developed to developing economies, and with the timing of the latest call coming after the US presidential election it is clear that Beijing wants to test Obama’s global climate resolve.

Although the president-elect is unlikely to personally attend the Poznan summit he will be under heavy pressure from industry not to jeopardise US finances in the quest to tackle global warming. Under Beijing’s 1% GDP proposals, the US would have to give more than $130bn and the EU more than $160bn to technology transfer. Yet with both economies committed to fast-tracking their own green technology revolutions they are unlikely to financially support the developing economies’ green revolution.

The problem faced by the US, as it re-enters the climate market following eight years of inaction under President Bush, is that the global market has fundamentally changed. The US may have been viewed as an economic ‘leader’ at the turn of the century, but today its economic leadership is looking less secure. And if its economic leadership is less secure then so will be its potential climate leadership.

According to a study carried out by PricewaterhouseCoopers, the looming global recession will trigger a dramatic shift in the economic balance of power to the emerging economies that could see the West lose the dominance it has enjoyed since the dawn of the industrial age. Driving this shift is the lopsided nature of the economic downturn, which means the developed world may have only have another five years before it is overtaken by the developing countries led by China and India.

PwC is not the first to forecast a fundamental shift in the global economic rankings, although it is the first to place a time scale to this shift, and it predicts that emerging market economies are on course to account for more than 50% of world GDP by 2013.

Although PwC projects the US to retain its position as the world’s largest economy its share of global GDP is forecast to decline from 21.3% to 18.8% between now and 2013. The analysis also shows that China is on course to overtake the euro area as the world’s second biggest economy, that India will challenge Japan for fourth place, and that Britain will see its share of world output drop from 3.3% to 2.9% and be overtaken in the international GDP league table by Russia.

But by far the most important of these economic forecasts is that the four so-called Brics nations – Brazil, Russia, India and China – will account for 26.5% of global GDP by 2013 and will be the world’s leading economic region. The importance of 2013 is that this is the date when a post-Kyoto climate agreement will have to commence and the Brics nations are key to any new global agreement.

Given this forecast shift in economic power, how do the US and EU approach a new global agreement? Obama has said he is committed to introducing a carbon constrained domestic economy but the US position on China and the other leading emerging economies is less clear. As for the EU, it remains committed to implementing a 20% emission cut and 20% renewables as a share of total energy by 2020. But for both the US and EU, committing to domestic emission constraints and renewable targets is the easy part; reaching a climate consensus with the developing economies is far more problematic.

A global agreement is just that, global. For too long the voice of the developing economies has been drowned out by the West. At this year’s G8 summit, for example, the developing economies were invited to discuss climate issues only after the G8 countries had debated their own views. Yet these ‘rich’ countries do not own the climate agenda and they should not be allowed to set it.

Since the Kyoto Protocol was signed there has been palpably little progress on a successor agreement largely because the momentum has been with rich economies that have been too dictatorial towards the emerging economies. And this dictatorial approach has been driven by the fear of the developed economies losing their economic rankings.

But as PwC forecasts, the developed economies are already ceding their economic prowess to the fast developing emerging economies, and if the economic baton is slowly passing to these economie areas then so should the climate baton.

Little progress is expected at Poznan but if the developed economies, led by the US and EU, are sincere in their desire for a new global agreement they will have to talk less and listen more. They should also accept that the G8 is no longer relevant in the new emerging global economy, and this elitist group should be replaced by the more globally representative G20. Not only is the world on the verge of a new economic order, it is also moving towards a new climate and energy order in which the market momentum will be with the rapidly developing emerging economies.

Returning to the question of whether Obama can save both the global economy and climate, the answer is that he cannot. But China, India and the other fast developing economies probably can, provided there is support from the US and the EU.

Jeremy Wilcox is managing director of the Energy Partnership, an independent UK-based energy and environment consulting firm.




Linkedin Linkedin   
Privacy Policy
We have updated our privacy policy. In the latest update it explains what cookies are and how we use them on our site. To learn more about cookies and their benefits, please view our privacy policy. Please be aware that parts of this site will not function correctly if you disable cookies. By continuing to use this site, you consent to our use of cookies in accordance with our privacy policy unless you have disabled them.