Opinion and Editorial

Decarbonisation to transform global economy radically

Ricardo Hausmann
Filed on June 1, 2021

Your young people are impatient and dream of leaving the country, often at high personal risk, in search of a better life.

Suppose you are a policymaker in a developing economy. Your country’s income per capita is a fraction of that in the United States, Western Europe, or Japan. Your economy has grown over the past 30 years, but so have richer ones, meaning that the income gap has barely budged. Your young people are impatient and dream of leaving the country, often at high personal risk, in search of a better life.

Now you are told that, because of carbon dioxide emitted mostly by advanced economies, your country will have to adapt to a changing climate and restrict CO2 emissions, which will make energy more expensive and economic progress harder. Should you disregard green issues and focus solely on national development instead?

No, you should not. The reason is that decarbonisation will transform global production and trade patterns so radically that new growth opportunities are bound to arise for savvy countries of the Global South. Their goal should not be to stop global warming by restricting domestic emissions, but rather to carve out a role for themselves in a rapidly greening world economy.

As Bill Gates argues in his recent book How to Avoid a Climate Disaster, producing green electricity and electrifying anything we can, such as all forms of transport, is central to any strategy for achieving net-zero emissions. But fully decarbonising transport — a huge challenge — will get us only a quarter of the way. The world will also need to change the way it makes steel, aluminum, copper, cement, fertilisers, fuels, heat, and even food and cities.

The good news on the decarbonisation front is the dramatic decline in solar and wind energy costs. The problem is that these energy sources’ intermittency has created a wide divergence in value between use-it-or-lose-it electricity and dispatchable power, which is available on demand and produced mainly by so-called peaker plants that burn natural gas.

The solution to the intermittency problem is storage. Lithium batteries have been the go-to option for technologies from cell phones to cars, while molten salts can store solar energy as heat for later use in electricity generation.

An important new hope for decarbonisation is hydrogen: using renewable energy to split water molecules produces both hydrogen and oxygen. You can then burn hydrogen as a fuel, and it will emit only water vapour, or you can put it in a fuel cell to make electricity on demand. Alternatively, you can use hydrogen as a feedstock to make more energy-dense compounds such as ammonia, which can serve as a fuel itself or help make ammonium nitrate for use in fertilisers and explosives. Hydrogen can also help to make green methane, methanol, jet fuel, or plastics. All of this is physically possible but making it economically efficient will require innovation.

Another solution to the problem is so-called carbon capture and sequestration (CCS). Up to now, this technology has been installed at emission sites such as thermal power plants, but in principle, CCS can occur anywhere – preferably, close to geologically appropriate underground storage locations. Ideally, there would be a global market for CCS services, where emitters in one country can buy CCS in another. That market does not yet exist, but it could be created.

The bulk of innovation, as always, results from learning by doing, through what economists call Wright’s Law: costs fall with accumulated production, as people figure out better ways of doing things. Who does the learning will determine who has what it takes to participate successfully in today’s emerging green industries.

But there are reasons to do the learning where, because of some natural advantage, existing technology is already competitive. For example, the world’s highest levels of insolation — the amount of solar radiation reaching a given area — are in the deserts of Australia, Chile, and Namibia, three countries that are currently developing green hydrogen strategies.

All of this opens new economic development paths for countries in the Global South, whether in the production of green energy and materials or in the value chains that underpin them — including inputs, capital goods, engineering, procurement, and construction of green infrastructure. Countries that fail to pay attention to these changes may be left with “gray” products that are increasingly shunned by a greening world, making national development more difficult.

In short, while the effects of global warming pose a severe threat to developing countries, decarbonisation is not merely a source of constraints and impositions on potential economic opportunities. It is also a change that will create new industries, markets, and avenues for growth.

— Project Syndicate

Ricardo Hausmann, a former minister of planning of Venezuela, is a professor at Harvard University’s John F. Kennedy School of Government and Director of the Harvard Growth Lab.

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