Here is Ricardo Hausmann advising a finance minister from a developing country to plan for decarbonization and focus on six themes to exploit the opportunities and threats:
It would be a grave mistake not to consider climate change as an important aspect of your job. Change is sweeping across the global economy as countries recognize that the world must slash emissions to prevent a climate catastrophe. Decarbonization will reduce demand for dirty goods and services and increase demand for those that are cleaner and greener. The question is not what you can do to reduce your country’s emissions but how you can supercharge your country’s development by breaking into fast-growing industries that will help the world reduce its emissions and reach net zero.Your country‘s history has been fundamentally shaped by the development of the few products it is able to make at home and sell abroad. Successful economies in east Asia and eastern Europe have sustained decades of high growth by upgrading their areas of comparative advantage, from garments to electronics to machinery and chemicals. They did not remain stuck in industries bequeathed by the past. If your country is to create jobs that pay higher wages, it will have to find new industries that can grow and export competitively even with higher wages.
Pessimists say that opportunities may have been there in the past for countries like Japan, Korea, or China, but those paths to development are now closed. Decarbonization will, however, create new opportunities—especially for those that move fast. The paths that are opening up have not been trod by many predecessors. Some are still virgin. Decarbonization will require significant greenfield investments, and plants will have to find new places to locate. This could be a great opportunity for your country, but to assess it, you must understand the changing landscape.
1. Embrace global electrification. To decarbonize, the world needs to electrify the things we currently do with fossil fuels and generate that electricity from green sources such as wind and solar. This will require massive amounts of solar panels, wind turbines, electrical cables, and capacitors as well as mechanisms to store energy, such as lithium-ion batteries. Electrolyzers and fuel cells will be needed as well to convert electricity into hydrogen and back. All these products are highly intensive in metals and rare earth elements. Production of these minerals will have to expand by several multiples if the world is to achieve net zero. So net zero requires a mining boom.
Mining itself is a highly energy-intensive industry. The future is likely to demand that the energy used in mining be green, too. [...]In addition, these minerals must be processed into the capital goods needed by the electrification process. This involves long manufacturing global value chains. [...] While some industries will grow as the world decarbonizes, others will shrink. Some may be in your country. You must identify export industries that will face headwinds because they are high emitters or supply high-emitting value chains. Vested interests at home will dismiss global warming as a hoax and mobilize against greening policies. But they will be impacted nonetheless by these global trends. Sooner than you think, your companies in these industries will struggle to access financing because capital markets will fear that the assets they fund will be stranded. Find ways to redeploy capabilities to more promising prospects.
2. Capitalize on proximity to renewable energy. The sun shines and the wind blows in many countries, but some (including Namibia, Chile, and Australia) are working hard to use these resources to produce green energy products. This may be a first step to an even more promising future. [...]Countries with a lot of sunshine produce solar energy for less than $20 a megawatt hour. To move the energy a long distance, it must be stored in a molecule such as ammonia. But the conversion will increase the cost of energy sixfold (not counting the cost of transport). This creates enormous incentives to use renewable energy in situ. Energy-intensive industries will move toward places rich in green energy.
3. Keep the cost of capital low. The sun shines, the wind blows, and the rain falls for free. Most of the cost of renewable-energy production is the fixed cost of the equipment, including the cost of the capital to buy it. How much are you paying? [...]Good institutions and macroeconomic management that keep country risk low are critical determinants of the cost of capital and hence your country's ability to be competitive in green energy. The world is full of countries that have squandered their natural endowments because of failures in macroeconomic and mining-sector governance.
4. Manage technological risks. Technological uncertainty has always been with us. Who would have thought the smartphone would displace the alarm clock, the camera, the CD player, and even the personal computer? [...] On the road to net zero, we do not know which technologies will win the race. But we are aware of many of the technologies in the running. They first appear as ideas in scientific papers and patents. They then move on to pilot and eventually commercial plants. You should be aware of the bets being placed across the world.[...]Technological surveillance is done regularly by industry, but few governments do enough of it. Israel and Singapore have chief scientists in their economy ministries to anticipate changes that may be coming and decide the most promising R&D bets.
5. Explore carbon sinks. Net zero is not gross zero. The difference is carbon capture, and the future is likely to create markets for it. You may be able to obtain carbon credits by reforesting deforested areas or by protecting existing forests.[...] In a well-functioning market, carbon prices should be equalized globally because the atmosphere is global. But markets cannot trust that carbon captured by trees this year is not going to return to the atmosphere next year when somebody clears the land for cattle. For this reason, your carbon credits trade at a huge discount, if at all. You need to develop the institutions for credible carbon credits.[...]You must define property rights on these geological formations so that investment can take place and you can collect a rent from storage space.
6. Plan to learn. No country today excels at the technologies and industries that will shape the future. But some will learn and others will not. What will you do to make sure your country is in the first group? [...]growth has never been just about focusing on current areas of comparative advantage. It is also about evolving that advantage. [...]Who will develop the capacity to manufacture electrolyzers competitively? Who will transform their sunshine and wind into a source of advantage? It will be those that focus on attracting strategic investments and global talent, on facilitating technological adoption by supporting research programs at universities and beyond. It can seldom be done by closing off the domestic market.
