Climate and Regional Economics of Development (CRED)

Our goal is to inform global climate negotiations and help break the stalemate between developed and developing countries.

CRED in Context:
Today, the average person in Africa lives on $3 per day, less than 1/40th as much as the average American and less than 1/25th as much as the average European. Climate change threatens to make these disparities even greater, both because geographically many developing countries are more exposed to climate impacts, and because poverty and inadequate infrastructure and services are major factors in vulnerability to climate change.

The best-known climate economics models, however, do not address this critical issue. According to economic theory, $1 invested in a poor country does more to boost global welfare than $1 invested in a rich country, but the models tend to include built-in restrictions that maintain the existing income distribution. Within those restrictions, the kinds of investments in climate mitigation, adaptation and general economic development that are needed to protect the world from climate change and significantly reduce poverty are not taken seriously; instead, model results keep mitigation investment low and allow for little or no transfer of resources from rich to poor countries. This policy advice is profoundly detrimental to developing countries, but it fits well with a widely held (if usually implicit) view in wealthier countries that neither climate policy nor development aid should undermine their own continued economic growth.

CRED is an attempt to find a balance: it seeks to address climate change, to maximize global welfare by supporting development and reducing poverty, and to maintain high living standards where they already exist. The model identifies the optimal level and geographic distribution of investments to meet one or more specific goals – from maximum climate-change mitigation, to maximum income equity.

CRED Insights:
With no constraints on income redistribution, CRED finds that the same policy is ideal for promoting development and for controlling climate change: wealthier countries should reduce consumption in order to increase savings, and should pump nearly half of their output net of damages into poorer countries – both for development and for climate change mitigation. Under this scenario, climate change is controlled as quickly as possible, and global incomes rise as poorer countries experience rapid economic growth.

Realizing that this is not politically feasible, we introduced a new constraint into our scenarios: all regions are guaranteed a minimum 0.5 percent consumption growth per year. With this constraint in place, wealthy countries invest large but limited shares of their net output (approximately 15 percent in 2030, and 40 percent in 2100) in the developing world, the global average temperature increase stays below 2.2°C, and average consumption in Africa and the developing countries of Asia rises to 1/6th that of the United States by 2100.

Without such large transfers of resources, the only way to keep global temperatures from exceeding 2.5°C, CRED shows, is to slow the development of poor nations, which is more consistent with leading climate economics models but also raises serious concerns about equity. If high-income countries target 10 percent of their net output for investment in developing countries, a climate stabilization scenario still allows the poorest regions to achieve moderate increases in average consumption relative to the United States and Europe by the end of the century. If high-income countries make no investment in developing countries whatsoever, Africa’s average consumption remains close to 1/40th that of the United States, while developing Asia’s average consumption improves only slightly relative to the high-income world.

Next Steps:
Having published a technical description of our global-scale model, and with several other articles submitted for publication, we are now working on a policy report aimed at a broader audience. We also continue to extend and enrich CRED, providing projections of costs, benefits, climate impacts, and investment needs at a sub-regional level. The analysis of global inequality highlighted by CRED’s basic results will be extended to include inequalities within major world regions, starting with Europe and developing Asia. We are also exploring options for incorporating new approaches to risk and uncertainty into CRED, based on important recent developments in the economic theory of climate change.