For a Green Economy Tomorrow, Private Sector Development Today will Tip the Scales!

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1 DCED Green Growth Working Group For a Green Economy Tomorrow, Private Sector Development Today will Tip the Scales! The Rio+20 summit in June 2012 will further substantiate the concept of sustainable development by discussing the idea of a green economy in the context of sustainable development and poverty eradication. The complex double challenge of reducing poverty as well as mitigating environmental degradation and the impact of climate change requires economic growth while shifting economic development to greener paths. Such strategies have been termed green growth strategies. They promote growth and income opportunities with a minimal negative environmental impact. Under the overall umbrella of the Green Economy, there are several strategies, promoted by international organizations at micro and macro level, which are reinforcing each other in their aim to stimulate sustainable consumption and production, private sector development and social welfare while minimizing the impact on the environment. Green Jobs (ILO) Green Economy (UNEP, DESA) Green Industry (UNIDO) Sustainable Consumption and Production Green Growth (ESCAP, G20, OECD) Macro-level (policy/strategy) Micro-level (operational/ solutions) The private sector is the key driver for green growth, as its investing and innovating capacities are crucial for the transition to a resource- and energy efficient low carbon economy. The vast majority of the necessary funding will have to be borne by businesses, ranging from multinationals to domestic micro, small and medium-sized enterprises. So far, however, contributions by the private sector to green growth have not been adequately considered to realise a green economy. DCED Green Growth Working Group

2 In addressing the role of the private sector in green growth, the Donor Committee for Enterprise Development (DCED) has gathered valuable experience. The DCED is a forum that unites 21 donors and UN agencies to promote sustainable poverty alleviation through the development of a dynamic private sector. The DCED, particularly its Green Growth Working Group, intends to create initiatives enabling the private sector to Recommendation 1: Private sector development must be considered a pre-requisite to reduce poverty while countering climate change and environmental degradation at their root: the patterns of production and consumption. generate environmentally sound and climate friendly growth in line with overall development goals such as job creation. Its members assist developing countries in taking appropriate policy responses to tap the private sector s potential for green growth. Tapping New Opportunities for Private Sector Development The private sector s investing and innovation capacities are decisive for the transition towards a resource- and energy-efficient low carbon economy. Green growth in the private sector counters climate change and environmental degradation at their root: The patterns of production and consumption. Especially in developing countries, green growth is rather an opportunity than an obstacle to private sector development. Greening the economy can be recognized as a chance for decent job creation and as an engine for economic growth. Thereby, increasing offer and demand for green products and services can be met while alleviating poverty. As green growth demands skilled professionals, there are new opportunities for decent and gainful employment and for the reduction of poverty. To meet the growing demand for skilled labor and to ensure a sustainable poverty reduction, a smooth reallocation of workers and key labor markets and training policies are needed. Increasing resource and energy efficiency of the private sector is not only important for an environmental friendly development, but also significantly determines the competitiveness of private companies. Therefore, green growth should be promoted as a competitive advantage. Decoupling economic growth from impact on the environment can be achieved via Recommendation 2: Especially in a development context, Greening the economy has to be recognised as an opportunity for decent job creation and as an engine for growth. greening existing industries and creating new green industries providing environmental products and services such as material recovery, recycling companies, waste management, wastewater treatment, air pollution control, renewable energy equipment, energy conservation, chemical leasing, etc. Adaptation to impacts of climate change can also be a competitive advantage, as it offers opportunities to develop markets and to expand market shares. Extreme weather events and changing resource availability create the need for a diversified, resilient, and innovative private sector that provides products, services, and technologies to adapt to climate change. While the private sector needs to adapt to a changing environment, it has yet been reluctant to invest in possible solutions. This lack of investments can partially be explained by the absence of financial incentives and inadequate framework conditions that need to be addressed by policy makers. DCED Green Growth Working Group

3 Green Finance and Investment Green investments can increase costs of production in the short run. Hence, incentives for green investments are needed. A regulatory environment conducive for strengthening the capacity of the financial sector for providing green loans, grants, seed funds etc. can encourage investments in low carbon, resource-efficient production technologies and climate adaptation. Recommendation 3: Attracting foreign direct investment, particularly in green sectors, is crucial to accelerate green growth. Moreover, insurance services can reduce the risk of extreme weather events and help enterprises to cope with effects of climate change. Furthermore, financial institutions can use sustainable indices to promote green investments. Foreign direct investment in green sectors can also be essential in funding investments in green sectors. That can be achieved through supporting the creation of emission trading platforms and markets for green equity investments. Policies for a business enabling environment A conducive policy framework is needed to activate the private sector s potential for green growth. A smart mix of market-based instruments, regulatory measures and public investments including demand policies (e.g. public procurement) is needed to design appropriate enabling conditions. Environmental aspects must be integrated into development strategies and private sector development programs to foster a structural change. Such policies should create appropriate incentives to stimulate the business case for investment in greener production and service facilities. However, the price for pollutants, energy and resource-inefficient goods and services is often lower than the cost to society and the environment, creating market failures. Different policy options, including marketbased instruments, can provide necessary incentives for green investments and less use of environmentally harmful substances. Green growth depends on institutional settings, available resources and local environmental issues. Additionally, emerging and developing countries face different challenges and opportunities. As the design of green growth strategies very much depends on the specific local context, there is no blueprint for a green private sector development. Therefore, programs need to be aligned in accordance to the specific conditions. Recommendation 4: There is no blueprint for greening private sector development. The specific design of Green Growth strategies very much depends on the local context. Private sector development needs to be aligned with the respective structure of the economy; policy instruments need to be well-adapted. Innovation and technology Innovation can help to decouple economic growth from environmental degradation and will lead to new ideas and new business models, thus contributing to green growth. For example, energy efficient technologies can reduce energy demand and have proven to be less expensive than traditional technologies for poor consumers. The private sector drives innovation. However, a suitable environment is needed for green innovation. Support should be provided for national learning and innovation hubs that bring together business sector, academia and knowledge sector, and government. Many policy instruments used in private sector development can have significant effect on the use and DCED Green Growth Working Group

4 adaptation of green technologies. Among other things, green innovation requires transparent and stable market signals such as environmental taxation. Such signals stimulate the creative potential of the private sector and enhance the innovation and diffusion of new environment friendly technologies. Recommendation 5: Risks and trade-offs Green PSD strategies must consider trade-offs The inclusion of private sector between economic and environmental or social stakeholders in developing countries is goals. Increased costs or reduced privileges essential to ensure the coherence of and subsidies create relative winners as well Green Growth policies with development as losers. It is necessary to identify vulnerable objectives. groups and potential resistance and provide alternative solutions to increase stakeholder commitment and political feasibility. Jobs in energy- and emission-intensive industries are likely to suffer from a transition to a green economy. Green growth strategies need to consider a smooth transition of workers from the emission-intensive sectors, often concentrated in certain regions, to green industries. Risk and trade-offs of green growth policies need to be well analyzed, in order to assess the dynamic effects and the political economy of reforms. As with the phasing out of subsidies for fossil fuels, such assessments often point to strategies that are socially acceptable and economically attractive. Potential contributions of Development Cooperation To raise awareness, development agencies can encourage firms to establish profitable environmental management system or provide sector specific information about expected climate impacts and adaptation requirements. Development agencies can build capacities and support partners to design and implement effective policy measures, for example to establish green financial products, to facilitate environmental fiscal reforms, or to develop markets for goods and services reducing climate induced risks while harnessing opportunities for businesses. In order to provide incentives to produce green products, donors and development agencies can facilitate technology transfers from industrialized to low-income countries. Especially small and medium-sized enterprises should profit from business development services and know-how along the entire value chain. Furthermore, development cooperation should contribute to providing enterprises with access to attractive funding options. In addition, development agencies can assist businesses in low-income countries to gain additional income from carbon markets through e.g. CDM or other financing instruments such as public private partnerships and microfinance. Recommendation 6: Structural changes in emerging economies must be supported by integrating environmental aspects into development strategies and private sector development programmes. Thereby, increasing demand for green products can be met while alleviating poverty. DCED Green Growth Working Group

5 Concluding Remarks Significant contributions by a strong and competitive private sector are necessary to successfully address the double challenge of reducing poverty as well as mitigation environmental degradation and the impact of climate change. For a successful transformation to a green economy, the private sector must develop green products, services and technologies which reduce the risks of climate change and environmental degradation while intensifying efforts for adaptation to climate change. At the same time, it must increase income opportunities for the poor. Decision-makers in Rio 2012 should adequately consider the role of the private sector for green growth. It is private sector development today that will tip the scales for a green economy tomorrow! In order to ensure coherence of green growth policies, the consultation of representatives from the private sector in developing countries remains essential. Likewise, development agencies can provide proof of how green growth can be an opportunity also for developing countries. For Rio 2012 and the implementation of decisions taken, the DCED will be happy to contribute its experience gained worldwide in many good practice examples. DCED Green Growth Working Group