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«© 2013 The International Institute for Sustainable Development © 2013 The International Institute for Sustainable Development ...»

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This development has helped the global economy achieve a certain degree of relative decoupling, meaning that the rate of GDP growth has been higher than the rate of resource extraction. However, sustained growth will ultimately necessitate an absolute decoupling, requiring resource extraction to stabilize at some sustainable level. At the same time, awareness of the cost of industry-induced air, water and soil pollution has become increasingly obvious. Apart from greenhouse gases, industrial facilities often release hazardous pollutants into the air, water and soil, with sometimes drastic consequences for human health and safety, as well as for ecosystems. Health costs from mostly air pollution in the United States are estimated to amount to between 0.7 and 2.8 per cent of GDP (UNEP, 2012b). Such health concerns also have very tangible effects on firms: Hanna and Oliva (2011) find that even small reductions in air and water pollution in Mexico City have had a large positive impact on labour supply. A study by Zivin and Neidell (2011) lends robust empirical support to the notion that reductions in pollution can have positive effects on economic growth, finding that slight decreases in ozone concentrations in the United States have caused significant gains in labour productivity.

In view of these challenges, industry is increasingly pressed to adopt cleaner production by reducing the amount of energy and materials used in the production process and considering environmental impacts throughout product life cycles. Of course, the potential to capitalize on opportunities from the greening of industries varies widely across countries and particular industries, depending on stages of development and countries’ endowment structures. Also, there are several stages to the greening of industries, which can range from simple pollution control through end-ofpipe solutions via closed-loop production systems that minimize the use of virgin material, up to industrial ecology, which harnesses synergies within integrated production systems such as in eco-industrial parks (UNIDO, 2011).

IISD REPORT JUNE 2013 2013 The International Institute for Sustainable Development © Industrial Policy for a Green Economy Greater resource efficiency on a national level is quite consistently associated with high-income countries (Dittrich et al., 2012), pointing to low-hanging fruits to be harvested by developing countries, through, for example, increased technology transfer and adoption. However, it is not clear to what extent this difference in resource efficiency is due to the relocation of polluting industries to industrializing countries as those countries leapfrog into industrial production, while structural change implies that high-income countries move increasingly into less polluting service activities.

The most recent findings do shed some light on this question, indicating that only 30 per cent of reductions in energy intensity are due to structural change, and the remainder is due to energy-efficiency improvements (GEA, 2012). On a global level, development historically implied an inverse-U pattern of carbon dioxide emissions per unit of income, as illustrated in Figure 10.


Tons of carbon dioxide emitted per US$1 million over time. Reprinted with permission from Collier and Venables (2012).

Nevertheless, it would be premature to conclude that developing countries seeking to industrialize should emulate the “pollute now and clean up later” strategy of high-income countries. In fact, there are a number of good economic reasons why this should not be the case.

First, resource scarcity, price volatility and ever-tighter environmental regulation are here to stay. Many businesses in developing countries continue to use obsolete and inefficient technologies and fail to adopt proper management systems (UNIDO, 2010). In the five most energy-intensive sectors (cement, iron and steel, pulp and paper, aluminum, chemicals and petrochemicals), significant opportunities exist in improved energy management, fuel switching, recycling, and carbon capture and storage to capture process emissions (World Economic Forum, 2013). Moreover, a number of developing countries have generous endowments of renewable energy sources that are currently underexploited. For example, a growing number of developing economies use renewable energy solutions as viable cost-efficient options for rural development (REN21, 2012). According to the International Energy Agency (2011), oil-importing developing IISD REPORT JUNE 2013 2013 The International Institute for Sustainable Development © Industrial Policy for a Green Economy economies today face prices in excess of US$100 a barrel, while OECD countries faced an average oil price of US$22 at a comparable stage of development (in 2010 dollars). Hence, development today takes place in a radically different economic environment.

Many developing countries’ exports are also heavily concentrated in a few commodities, making them particularly vulnerable to price volatility shocks. Diversification and greening of exports can help reduce the exposure to such shocks, making industry more resilient. Moreover, certain components of greening industry are typically very labourintensive. For example, the recuperation of materials embodied in finished products often involves laborious extraction practices, which can be a source of significant labour opportunities (UNEP, 2012b). Cheap labour is increasingly becoming a source of comparative advantage for developing countries, as emerging giants and traditional hubs of lowcost labour manufacturing such as India and China have experienced rising wages over the last years (Manyika et al., 2012).

Finally, in the past few years, OECD countries have introduced environmental legislation that has had substantial impact on developing country exports. As this trend is likely to continue in the future, countries that do not adapt their production structures might indeed lose existing market shares. Beyond regulatory requirements, the ability to adapt to shifting consumer preferences in these countries can even be an important source of competitive advantage (Manyika et al., 2012).

Second, it may well be more cost-effective to design green industrialization at an early stage, instead of cleaning up later (see Acemoglu, Aghion, Bursztyn & Hemous, 2012, or Hallegatte et al., 2012). Much of the success of green industry is preconditioned on adequate infrastructure, which developing countries are going to build over the coming years. Developed economies have sunk capital in irreversible investments in often-outdated power supply, transport networks and urban structures, which confers a latecomer advantage to developing countries that could profit from new technologies at an earlier stage (Collier & Venables, 2012). Indeed, emerging economies have significantly improved their material productivity (measured as GDP per material consumption) since 1985, at faster rates than global averages (Dittrich, Giljum, Polzin, Lutter & Bringezu, 2011).

Third, disregard for the environmental impacts of industrialization overlooks their irreversible nature. For example, while desertification can be countered to some extent by replanting trees, its effects in terms of shrinking biodiversity and tourism industry potential are permanent (Hallegatte et al., 2012).

Green Industry Green industry, as distinguished from greening of industry, involves stimulating the development and creation of industries that provide environmental goods and services (UNIDO, 2011). Green industry is a varied and growing sector that transcends conventional sectoral boundaries and comprises elements from both manufacturing and services. It includes, for example, companies that manufacture and install renewable energy equipment and develop and manufacture clean technologies, but also companies active in material recovery, recycling, waste treatment and management, as well as environmental and energy consultants (UNIDO, 2011). Hence, green industry is obviously an essential part of the greening of industries, as it provides many of the related services and equipment.

To date there is no consensus on the exact definition of “environmental goods and services.” The OECD defined the environmental goods and services industry to include “activities which produce goods and services to measure, IISD REPORT JUNE 2013 2013 The International Institute for Sustainable Development © Industrial Policy for a Green Economy prevent, limit, minimise or correct environmental damage to water, air and soil and problems related to waste, noise and ecosystems.” Being a relatively new sector, the market for green goods is very dynamic, and any attempt to classify such products in lists faces a variety of challenges, such as the addition of new products and obsolence of older ones.

Analyses based on trade data face the additional problem that product classifications are harmonized internationally only up to a relatively high degree of aggregation (the Harmonized System 6-digit level). Nevertheless, Dutz and Sharma (2012) recently found a few interesting global characteristics about the sector.

First, frontier innovation in green technology is highly concentrated in high-income countries. Looking at patent data, Dutz and Sharma (2012) find that the large majority of patents in green technologies has been granted to high-income countries. Japan, Germany and the United States accounted for 60 per cent of total green innovations worldwide between 2000 and 2005. China, in tenth place, is the only emerging country in the top ten high-quality innovation countries and, together with eight other emerging economies, accounts for 80 per cent of all such patents granted to developing countries. While patents are certainly an imperfect measure, these findings still strongly suggest that high-income countries have a comparative advantage in frontier innovation green products. However, highly innovative segments of green industry account for only a very small share of employment in high-income economies (Manyika et al., 2012).

Second, environmental goods more broadly constitute a non-trivial and rising share of exports in high-income and Asia-Pacific countries. However, the gap with other regions is much narrower than for patents. The fact that developing countries have not been able to increase exports does not necessarily mean that they are at a comparative disadvantage.

Rather, looking at countries’ export potential in terms of exported products that are close7 to green goods, Dutz and Sharma (2012) seem to suggest that there are untapped opportunities. Finally, the third finding states that combined exports of green and close-to-green products represent three to five times the exports of green products alone, suggesting that there is indeed scope for developing countries to move their production into greener sectors.


Reprinted with permission from Dutz and Sharma (2012).

The term “close” here refers to the proximity of products in the product space, as described in chapter 4.

IISD REPORT JUNE 2013 2013 The International Institute for Sustainable Development © Industrial Policy for a Green Economy Renewable Energy Renewable energy is in many ways central to green growth and is a major component of both the greening of industries (in terms of energy inputs) and the stimulation of green industries (in terms of the renewable energy industry itself).

Indeed, the sector has experienced phenomenal growth over the last decade. Global green investments in renewable energy have increased more than sixfold since 2004, amounting to $257 billion in 2011, driving capacity growth notably in solar photovoltaics, concentrating solar thermal power and wind energy (McCrone, 2012). Net investment in renewables capacity was $40 billion higher than in fossil fuel capacity in 2011 (REN21, 2012). While most capacity is currently installed in a few high-income countries, developing countries are becoming more and more important players. In the wake of the financial crisis, investment originating in developing countries did not slow as much as that from OECD countries. Based on current investment growth rates, it seems likely that clean-energy asset finance flows originating in non-OECD countries will exceed those originating in OECD countries for the first time in 2012 (World Economic Forum, 2013).


S. dollars. New investment volume adjusts for re-invested equity. Total values include estimates for undisclosed deals. Reprinted with permission from McCrone (2012).

Nevertheless, low initial levels of investment mostly explain these very high growth rates. While renewables (excluding large hydro) continue to account for an increasing share of the overall generation capacity added per year (44 per cent in 2011), they still represented only 6 per cent of total power generation worldwide (McCrone, 2012). Considering all end-use sectors—power, heating and cooling, and transport—renewable energy sources have provided roughly 17 per cent of global energy consumption in 2010. However, modern sources of renewable energy, including biofuels, solar, wind, geothermal, modern biomass and even hydropower, account for roughly half this total, while traditional biomass provided the other half (REN21, 2012).

IISD REPORT JUNE 2013 2013 The International Institute for Sustainable Development © Industrial Policy for a Green Economy Meanwhile, the renewables sector has made great advances with respect to its competitiveness: the decline in the cost of important technologies is starting to challenge fossil fuel alternatives, even without climate, health and other benefits factored in (McCrone, 2012). The decline in costs has been most spectacular in solar photovoltaic modules, which in early 2012 have been 76 per cent below their level in summer 2008. Similar, but less spectacular declines in costs for renewable energy technology can be observed in other sectors as well. Modern renewables markets and industries have originated in high-income countries, but are continuingly and increasingly expanding to developing countries. China and India play an increasing role both as markets and in manufacturing, and new players are emerging elsewhere in Asia, Latin America, and the Middle East and North Africa region (REN21, 2012).

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