The Economics Of Paying For A Green Ethiopia

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Originally published on SameFacts.
By James Wimberley

.. with an assist from Ur-Nammu of Sumer.

At Copenhagen in 2009, rich countries committed rather vaguely to putting up $100 billion a year from 2020 in long-term financing for climate mitigation and adaptation. The centrepiece of this effort was supposed to be the Green Climate Fund. So far they have pledged $10.2 bn to it. In other words, they have reneged. The future agreement in Paris will be based on “national contributions”, plans which may be contingent on finance. In advance of Paris, countries agreed in Lima to submit trial balloons, “intended national contributions”, INDCs in the insider jargon. Will the rich – us – finally cough up?

ethiopian-village-hut-23555546Instead of gloomy speculation, let’s try and make the question more concrete by looking at a sample country, Ethiopia. I pick it because it’s already submitted its INDC: not too long, and quite readable. French expert Bernard Chabot has analysed it for us (h/t Craig Morris). We can also rely on a recent World Bank country report.

Key points:

  • Ethiopia is populous (99 m) and poor. In 2012, PPP income per head was $1,086 (2005 $). But it is fast growing (10.7% a year over the last decade), and quite well-run, with single-digit inflation, affordable levels of external debt, and no fossil fuel subsidies. Politically it is a stable, de facto one-party state with rigged elections. So it’s better than most. If we don’t help Ethiopia, we won’t help anybody other than Costa Rica.
  • Carbon emissions are low: 1.8 tonne CO2e per head against 17.5 tonnes for the USA. Of this, 87% is generated in the countryside, from wood-burning, deforestation, crops and livestock.
  • Most of the population (76%) has no access to electricity. What there is is almost entirely renewable hydro already.

The government’s climate plan is nevertheless ambitious, and consistent with the global 2 degree C cap, which is more than can be said for the main polluters. It intends to reduce GHG emissions per head by 40% from 2010 levels to 1.1 tonne CO2e by 2030, and 64% below a BAU scenario. (I do wonder about the realism of these BAU scenarios, seeing that the green ones are now normally cheaper if you throw in health GDP costs, as you jolly well should.)

The INDC puts a price tag of $150 billion on the needed investments, though it doesn’t offer a breakdown , which may exist in other planning documents. And of course it’s conditional:

The Government of Ethiopia already spends a substantial portion of its annual budget on infrastructure and the provision of social services, which contribute to addressing the negative impacts of climate change by reducing emissions and vulnerabilities. However, the full implementation of Ethiopia’s INDC requires predictable, sustainable and reliable support in the form of finance, capacity building and technology transfer.

I reckon Ethiopia is missing a trick by not spelling out how much they could do without governmental help – relying on domestic savings and commercial investment – and what the tab is for the full package. It’s worth making a few guesstimates.

Is the $150 bn realistic? It has to cover a lot more than electrification, but that’s the big ticket. If we earmark $100 bn for electricity, from my armchair this could buy a package looking like this:

  • 10 GW of microgrid and offgrid solar @ $3/watt = $30 bn
  • 20 GW of wind @ $1.5/watt = $30 bn
  • 3.75 GW of geothermal @ $4/watt = $15 bn
  • Transmission and distribution for hydro, wind and geothermal = $25 bn.

If the peasants on rural microgrids use 1 kwh a day, and the grid-connected urban dwellers 5 kwh a day, including their commercial and municipal uses, you would meet the needs of 102 million Ethiopians, around the current population. So the plan looks in the right ballpark. I have used a daily consumption for the peasants much higher than that typical in African solar rural projects today, which generally only cover phone chargers and LED lighting. To replace wood stoves, you need much more.

How can it be paid for? The Ethiopian savings rate is 6%, so around $6bn a year in all. The INDC plan at $150 bn over 15 years needs $10bn a year. So Ethiopia cannot possibly finance its transition from domestic sources. Let’s say that a quarter of the savings can be steered towards energy, that’s $1.5bn a year. The shortfall is $8.5 bn a year. That’s for 100 million Ethiopians. Scale up to the poorest billion in the world, and you would need $85 billion a year. This confirms that the Copenhagen commitment of $100 billion a year is in the right ballpark.

If we frame this as “foreign aid”, it is doomed. Third World spokesmen may like to present the claim as reparations for colonialism/imperialism and/or for trashing the climate, but this argument has no traction in the electorates of rich countries. It’s much easier to blame the poor for allowing Big Men to rip them off and having too many babies. The argument must be framed as enlightened self-interest.

Perceptions of foreign aid are also incredibly distorted. Polls of Americans show that they think the foreign aid budget is 26 times higher than it is (26% of the budget rather than the true 1%). Progressives think of foreign aid as cash handouts to starving Africans. Conservatives think of it as cash handouts to corrupt leaders, siphoned off to build swimming pools in the presidential palace, built by the President’s third cousin on a padded contract.

It’s hard to know where to begin with this. Famines and epidemics like the Ebola one are mercifully rare. Real kleptocrats like Eduardo dos Santos of Angola would laugh at a mere swimming pool; he has his blood funnel stuck into the royalty stream from oil concessions, and the skimmed sums are in the billions. Above all, foreign “aid” is mostly cheap loans (the ratio to grants is 3.4:1 according to this study by the St. Louis Fed, page 22). The world total for net “official development assistance“, both kinds, is $135 bn (2013); $87 bn from the EU and its members, $32 bn from the USA, on average 0.6% of rich-country GDP. The climate commitment involves roughly doubling this. How can this be achieved?

The climate fund must not be defined as “aid” but social investment, like domestic public housing. In an investment, you expect to get your money back. One big problem with many of these past loans is that they don’t generate an income. This is true both when the money goes to rural health clinics and technical colleges, which are effective in growing welfare, and when it’s blown on a motorway to the capital’s new airport, which isn’t. So the first problem with scaling up the climate fund is securing the revenues.

This ought to be doable. Mobile phone service is sold profitably in parts of Africa, including Somalia and the Eastern Congo, without any working government capable of enforcing private contracts. Defaulters can be cut off safely by remote computer. Electricity is not quite as good as this: it is possible to steal electricity in urban slums, and disconnection requires exposing a technician to the customer’s protests. Still, electricity is valuable and mostly non-storeable, and most people expect to pay for it. In Ethiopia, you can count on a revenue stream.

It may not be enough initially to secure a commercial return. People living on $3 a day can only afford small quantities at market prices – the phone charging and LEDs – but perhaps not enough for the woman’s electric cooker. This fact has so far prevented the extension of electricity grids much beyond the towns in much of Africa. That’s why my armchair plan puts the solar in village microgrids and offgrid, with only a partial extension of the grid for the cheaper wind and despatchable geothermal and hydro. The taxpayers of rich countries may have to accept a low return.

But they should jump at the chance. It’s not as if there are hundreds of other more profitable opportunities clamouring for the attention of savers. Paul Krugman, NYT 24 August:

What we’re seeing is what happens when too much money is chasing too few investment opportunities.

Andy Haldane, chief economist to the Bank of England:

Interest rates appear to be lower than at any time in the past 5000 years.

For the monetary stance of the Great Temple of Marduk, you have to rely on Haldane’s “exhausted research assistants”. However, we have continuous records of the borrowing of the trading cities of North Italy since the Middle Ages; in Genoa back to the twelfth century.  We really are at a millennial low in interest rates. In rich countries, governments can borrow at real interest rates well below 2%, and financial markets (says Haldane) predict this will continue for some time.

Ethiopia can’t borrow at 2%. This creates a social arbitrage opportunity. Lending to Ethiopia at 5% is profitable but carries a certain political risk: another Mengistu might come to power and default on the loans. But not lending to Ethiopia, as part of a global climate deal, also carries an even greater risk: rapid global warming will make droughts and famines more likely, and maybe even turn it into a failed state like its neighbour Somalia.

The World Bank has its faults, and stretches its mandate to impose Sound policies all round, but they know how to set up project loans that get paid back. Give them and the other development banks a $500-billion-dollar mandate.

Not paid back in all circumstances, by people living on $3 a day. The spectacle of Greece’s heartless and self-defeating creditors was stomach-churning. Modern bankers could profit from the preamble to the generally tough Sumerian Code of Ur-Nammu, 2100 BC :

“The orphan was not delivered up to the rich man; the widow was not delivered up to the mighty man; the man of one shekel was not delivered up to the man of one mina.”

Reprinted with permission.

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