Climate change, development, poverty and economics

The past three decades have seen an unprecedented increase in world living standards and a fall in poverty across many fundamental dimensions. Increased confidence in what was possible together with greater acceptance of moral responsibilities led to the adoption of the Millennium Development Goals (MDGs) at the turn of the century. They provided a real basis for international cooperation and development. In the Sustainable Development Goals (SDGs), agreed in September 2015, there is now a common platform for the next phase of the fight against poverty.

The SDGs make it clear that environmental protection will be a key feature of this next phase and increasingly intertwined with poverty reduction. Thirteen of the 17 SDGs are directly concerned with the natural environment, climate or sustainability. Environment, climate and sustainability were not prominent in the MDGs. With hindsight we can now see that this was a mistake.

A key factor in all this is climate change. Climate change is not the only environmental problem we face, nor is it the only threat to global prosperity. But climate change is unique in its magnitude and the vast risks it poses. It is a potent threat-multiplier for other urgent concerns, such as habitat loss, disease and global security (IPCC 2014) and puts at risk the development achievements of the past decades (World Bank 2016). If unchecked, climate change could fundamentally redraw the map of the planet, and where and how humans and other species can live.

Climate change is also unique in the scale of the response that is needed. Reducing climate risks requires cooperation from all countries, developed and developing, to reorient their economic systems away from fossil fuels and harmful land-use practices. This reorientation is urgent. Our activities in the next two decades will determine whether our successes in development will be sustained or advanced, or whether they will be undermined or reversed in a hostile environment.

The nature of the climate problem has implications for economic analysis. Economics has much to offer, and indeed continues to provide important insights, but there has been a dangerous tendency to force climate change into narrow existing ways of thinking. This must change. We need to construct theories and models that reflect the structure and scale of the problem and the contexts in which it occurs.

Climate change also has implications for development policy. In the Paris Agreement – negotiated at the end of 2015 – there is now an international platform through which global climate action can be advanced and coordinated. The Paris Agreement sets out a process through which the rise in global mean temperatures may be curtailed to “well below” 2oC above pre-industrial levels and perhaps as low as 1.5oC. These are the central long-term objectives of the agreement.

Meeting the Paris objectives requires sustained action over many decades. It also requires the reorientation of investment. At least US$ 100 trillion will be invested over the next two or three decades into buildings and urban infrastructure, roads, railways, ports and into new energy systems. It is imperative that these investment decisions are taken with climate change in mind. If they are there will be substantial benefits for development and poverty reduction – living spaces where we can move, breathe and be productive, better protection for fragile ecosystems, as well as the fundamental reduction of the risks of climate change.

Putting the SDGs and Paris together, the agreements of 2015 have given us, for the first time, a global agenda for sustainable development applying to all countries. This paper sets out the implications of this agenda, and climate change in particular, for development economics and development policy. It emphasizes the nature of the required changes and their implications. We start with an examination of what economics has had to say about the link between economic prosperity and the environment. We then explain why climate change is a different kind of problem and why it requires a new approach to both analysis and policy. The final two sections explore how this new approach might look.