Middle-class rise and low-carbon economy

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Homi Kharas, Senior Fellow and Deputy Director in the Global Economy and Development program, Brookins Institution with Bertrand Charrier (AFD), Lucas Chancel (IDDRI) and Isabelle Biagiotti (Aida | A Planet for life)

How to assess the impact of the huge demand of natural resources due to the emerging of a world middle class on the implantation of the SDGs? Are they contradictory?

Homi Kharas: Broadly speaking, if you look across the global spectrum, when extreme poor move to become near poor, they actually reduce their carbon footprint. That's because the extreme poor tend to do slash and burn agriculture, other very environmentally damaging agricultural practices, and over exploitation of the commons in their area—degraded lands, etc. The poverty agenda is actually quite good in that sense for sustainability. But it’s still true that the middle class consumes more resources per capita. So you probably will need a counterbalance for this overuse as the middle class grows. If you think of the world as a whole, you have environmental benefits of moving away or out of poverty; you have a cost in terms of permitting the middle class more access to energy and other kinds of things; and then we have the roughly one billion or so of people who now are classified as being rich who must adjust their consumption to become more sustainable. All of these will have to be balanced in order manage the use of natural resources.

But huge benefits come from moving people out of extreme poverty because their use of common resources improves. Take slash and burn cultivation, which still exists in large part of the world with huge impact on forests in Indonesia or Brazil for example. The carbon emission reductions are not necessarily about consumption but about their way of life. And if you look at the McKinsey1 study on the easiest reductions of carbon emissions, you will see that many of them have to do with agriculture. In fact, 60% of least-cost reductions of carbon emissions come from the agro-forestry sector in the McKinsey forecast. Much of that is related to changing behaviours of poor people and poor farmers.

In terms of finding a balance between resource use by the poor and middle class, the international discussion has profoundly changed. Developing countries are increasingly thinking about their national policies, starting with how to support their middle-class rather than focus on the poorest. There are countries where the poverty agenda just doesn't resonate any more. So even if you are concerned with poverty, you should look at middle-class issues in each country to see if it aligns or diverges from the poverty agenda. More and more the growing middle class is becoming the main political driver for policy reform.

Which consumption pattern do these middle-classes follow? Do they have internal dynamics or do they look upon Western standards?

H.K.: There is a small amount of status consumption, but one interesting thing that is not understood yet is the growth of consumption of services. People are now consuming far more services, and much earlier, than they did before – not only middle-class people but also poor people. The simplest example is the mobile phone: the amount of money being spent on mobile phones compared to your standard phone is huge. Services are of course much less energy intensive than material things. Part of the question will then be how services develop and if services prove to be a greater claim on people’s budget than material possessions. Evidence for this can be seen in China, where the services sector is growing very rapidly and probably much more rapidly than the goods sector.

Is there a policy scope that supports the two objectives – the construction of sustainability and the enlargement of the world middle-class? Do we have to choose?

H. K.: There is nothing – technological or policy – which says you can't have a developed society which is sustainable. Policy needs and tools are different in developed and in developing countries. In developing countries, taxes are not a well enough developed instrument for changing income distribution and making polluters pay – as compared to developed countries. But this simply means the issue has to be approached differently by developing and developed countries.

For example, Japan seems to have many elements of sustainability: fairly equal, low carbon footprint for its level of GDP, very efficient urban transport, Tokyo is a very dense city, an efficient use of railways, etc. Frankly, if the rest of the developed world looked like Japan, we wouldn't need to have a global agreement on climate change.

Inventing global sustainable ways of living will involve a lot of technological innovation. For instance, imagine a world where in 2020-2025 driverless cars are an available option. Right now the utilization of a car is somewhere between 5% and 10% because cars are sitting for most of the time.. Driverless cars massively reduce the demand for individually owned cars. With more people moving toward urban areas, if you get urban planning right, you will see people moving away from owning cars. In New York City, even with a very cheap price of gas and without the greatest public transport system, bike-ways and alternative transportation solutions have developed. By seeking these alternatives, removing the physical parking of cars, and the development of roads we can free up to 10% of urban space!

How quick we get there, its rate of adoption, etc., are less clear. But when you speak about what an adaptive lifestyle for more sustainability looks like, I believe this is the form it would take. And if it is not driverless cars for households, it will be driverless buses and driverless trucks – using the ability to save on land transport, not so much in Europe where there are good railway options, but in the United States and many other countries without these infrastructures. You can imagine entire highway lanes with essentially convoys of lorries going across. Convoys like this would save 10% of energy just from the physics of the wind resistance. When you move to electricity away from gasoline, which many of the driverless engines do, you increase also your carbon efficiency. The change in patterns comes with a change in technology. It will happen when you get smart roads.

And lesser technological change may be as powerful. If you can switch from two-stroke engines to four-stroke engines, the amount of carbon emissions by unit changes quite dramatically. If you could make public transport into a middle-class choice rather than a poor person choice (as it is in many developing countries), that could also have huge impact. In Asia, metro systems have increased and are actually profitable simply because of the concentration of peoples, which is very different from systems in advanced countries which require large amount of public subsidies to be constructed and sustained. Hong Kong, Singapore, Malaysia, and China are among developing countries with financially sustainable metro systems.

But we should be clear that the energy consumption of an emerging middle class, who would be in Asia and in Asian cities in particular, will rise. Business-as-usual would mean very large sales of automobiles in these markets and subsequently high carbon footprints. We need alternative technological solutions that will be a better solution to personal transportation needs, while offering far lower environmental and financial costs.

Finally a large difficulty is securing financing toward sustainability. What could be done to improve the financing of the de-carbonization of economy?

H.K.: My own take on this is that we have to move from project financing to programme financing. I have a bit of a problem with blanket-type messaging like “we would not finance any coal power plant”. I would prefer a country to have a mixed energy strategy with a plan to adjust it over time to align with their nationally declared climate commitments, and then finance that programme. When you look at these strategies, they rarely say we are going from here to zero instantly. There is always phasing.

After the COP21, the first phase is for countries to put in place energy transition strategies and really think seriously and understand what the implications are. By and large, the economics at least were reasonably favourable in terms of renewable energies in many places. With coal and oil prices going down, it may change, but these prices cannot last very long.

What is now needed is a mobilisation in favour of financing energy transition, but there is clearly a lack of political will and needed instruments. For instance, the United States lacks infrastructure banks to finance the deep de-carbonization of the economy. And if you don't have the United States taking a very strong leadership role on something that is global, you are putting one quarter of the world GDP out of the system, which makes harder for everybody else to make up the difference.

What makes Global or National Public Goods so difficult to finance?

H.K.: There is some kind of short-termism permeating not only public life but also private company boards or philanthropies. Across the board, people are saying if I give you money I want results tomorrow. And I want to be able to see them. In every sector that I look at, I see this pressure to generate short-term results, which makes it difficult for leaders to maintain any long-term perspective or commitments. For me, it is partly due to the decline of trust in any kind of institution. When you look at polls about “do you trust governments, corporations, the media, etc.”, the only group people still trust to a reasonable degree is religious groups. Why there has been such a decline in trust is hard to say. What can be done about it? – I don't know.

1 Pathways to a low-carbon economy: Version 2 of the global greenhouse gas abatement cost curve, McKinsey&Company, September 2013.