Energy, Development, and Security

Energy Issues in the Current Macroeconomic Context

by United Nations Industrial Development Organization

Introduction

• The development of a sustainable, long-term solution to meeting the world’s energy needs is a defining issue of our time. Energy is directly linked with the key global challenges that the world faces -- poverty alleviation, climate change, and global, environmental and food security.
• Current energy systems are failing to meet the needs of the world’s poor. Worldwide, 2.6 billion people rely on traditional biomass for cooking and 1.6 billion people – about a quarter of the human race - do not have access to electricity. The projected cumulative investment required between 2005 and 2030 to meet energy needs is almost US$20.1 trillion, but even if this investment is secured over the next thirty years, 1.4 billion people will still lack access to electricity in 2030 and 2.7 billion will still rely on traditional biomass for cooking and heating.
• Global energy-related carbon dioxide emissions (CO2) will increase by some 50 percent between 2004 and 2030 unless major policy reforms and technologies are introduced to transform the way energy is produced and consumed. Coal has overtaken oil as the leading contributor to global CO2 emissions. Developing countries will account for three quarters of the increase in carbon dioxide emissions between 2004 and 2030 unless major transformative policies and technologies are introduced in the next few years.
• Per capita emissions in developing countries will remain small compared with those in developed countries. Yet, the share of developing country emissions is expected to rise from 39 percent in 2004 to over half of the total world emissions in 2030 unless mitigated by policies that promote more efficient production and use of energy, switching to cleaner fuels, more efficient transportation, and cleaner electricity supply. Many fast-growing developing countries will make their major energy-related investments in the next decade. There is a short window of opportunity to ensure that the energy infrastructure and industrial facilities are as energy efficient as possible.
  

Growing global vulnerability in a rapidly changing environment

• The global economy is currently caught between a severe credit crunch, slowing demand in many developed countries and rising inflationary pressures in emerging and developing economies. This is compounded by volatility in energy and commodities prices. The most pressing global challenges such as energy and climate change will now have to be addressed in an increasingly more fragile macroeconomic context, especially in poor developing countries. For the first time since 1973, the world is witnessing a combination of high oil and food prices, undermining gains achieved in fighting poverty. The current financial and economic crisis will require protracted adjustment as developing countries face a shortfall in capital flows, reduced demand for exports and rising inflation.
• For many developing countries, the recent food, commodities, and oil price shocks are already having severe implications particularly among the poorest. The World Bank estimated that for countries in Africa, the impact of high food, oil, and other commodity prices since January 2007 have reduced their gross domestic product by 3 to 10 percent. The terms-of-trade effects of the combined food and energy price increases are in excess of 10 per cent of GDP in more than 15 developing countries, where the room for maneuver on the macroeconomic front is limited. With millions living on the margin between subsistence and starvation, high food and fuel prices may represent a threat to their survival. Thirty-six countries in Africa, Asia and Latin America now face acute food security crises requiring external assistance.
• Most commodity prices have now peaked and are expected to fall in response to improved supply and slowing demand. Food prices are expected to fall on good supply prospects and weaker oil prices. However, food and fuel prices will remain high and their volatility will continue to be a major concern. While global prices of food and fuel have dropped in recent months, domestic prices remain much higher than in previous years and show few signs of abating.
• The global credit and financial crisis could have a major impact on infrastructure financing in general and energy financing in particular. Some sources suggest that the financing for energy infrastructure will be severely affected – a view that is somewhat moderated by a more optimistic outlook from the renewable energy market. However, some shortfall in the financing for energy sector could be expected.
• For regions such as Africa, where the provision of electricity is by far the greatest infrastructure challenge, this is indeed bad news. Compared to other regions of the world, Sub-Saharan Africa has one of the lowest rates of energy access, capacity per capita and electricity consumption per year. But Africa will not be the only region affected. Immense investment requirements still exist in most developing countries to build additional generation capacity, extension of electricity grids in urban areas, mini-grids in medium-sized settlements, and decentralized installations providing energy services to remote and rural areas. Given the prominent role that foreign banks play in developing countries, scaling back on financing will likely decrease energy financing. According to the World Bank, private capital flows in the energy sector are also expected to decline.
• On the other hand, the economies of the Asia-Pacific region, despite the financial crisis, will continue to have robust economic growth and high energy demand. This, in turn, will have a deleterious effect on climate change. Widening access to energy services will continue to be a major challenge to the region along with addressing climate change. In Asia and the Pacific, a low carbon development path would effectively meet the region’s development needs while addressing the challenges of climate change and local pollution.
  

Energy, poverty reduction and climate change

• Energy today is at the heart of every economic, environmental and developmental issue. The world needs clean, efficient and reliable energy services to meet its long-term needs for economic growth and development. Developing countries need to expand access to reliable and modern energy services to alleviate poverty and increase productivity, to enhance competitiveness and economic growth.
• Climate change is an urgent and critical challenge that the international community needs to address now. An effective response to climate change must combine mitigation of global greenhouse gas (GHG) emissions — to avoid the unmanageable — and adaptation at regional, national, and local levels -- to manage the unavoidable.
• According to the IPCC Fourth Assessment Report, the largest growth in GHG emissions between 1970 and 2004 has come from the energy supply sector (an increase of 145 per cent). During this period, the growth in direct emissions from transport was 120 percent. From industry it was 65 percent, and from land use, land use change, and forestry (LULUCF) 40 percent.
• If business-as-usual trends in the global energy mix continue, fossil fuels will maintain their dominant position, resulting in continuing growth of CO2 emissions. The projected increase in carbon emissions is expected to reach 40 to 110 per cent over the period of 2000-2030. Two thirds of this increase is expected to come from developing regions. However, per capita emissions in developing countries will remain substantially lower than those in developed countries. Decisions taken today on the choice of energy technology will thus have profound consequences for global development over the next 40 to 60 years.
• The demand for primary energy is expected to increase significantly in the next few decades5. Increased energy demand will give rise to challenges in poverty reduction, development and macroeconomic stability worldwide. Some of these challenges will have distinct economic effects on developing and developed countries.