The 21st Century climate challenge

Box 3.5Reducing carbon intensity in transition economies3Avoiding dangerous climate change: strategies for mitigationThe experience of countries in Central and Eastern Europe (CEE)and the Commonwealth of Independent States (CIS) serves tohighlight the important role of markets—and the consequences ofsending the wrong price signals.When these countries moved from communist rule some 18years ago, they exhibited some of the highest levels of energy intensityin the world. Heavy subsidies for coal-based energy generationand low prices for energy users created strong disincentives forefficiency, and high levels of CO 2pollution.The transition from centrally planned economies has takenthe region through a painful restructuring process. During the firsthalf of the 1990s, energy demand and CO 2emissions tracked theeconomy in a dramatic decline—a fact that explains why transitioneconomies ‘over-achieved’ against their Kyoto targets. Since then,energy policy reforms have produced a mixed picture.Energy intensity (energy consumption per unit of GDP) andthe carbon intensity of GDP have fallen in all countries, albeitat very different rates—and for different reasons (see table). Inthe Czech Republic, Hungary and Poland advances have beendriven by economic reforms and privatization. Poland has almosthalved energy intensity against 1990 levels. Deep reforms in theenergy sector, including sharp increases in real prices, and thetransition from an economy based on large state enterprises toprivate sector fi rms, have spurred rapid technological change.Ten years ago, Poland used 2.5 times more energy per unit ofcement production than the European Union average. That differentialhas now been eliminated. The energy intensity of GDPhas fallen by half since 1990.Ukraine has achieved far lower reductions in energy andcarbon intensity. Moreover, the reductions owe less to reformthan to a change in energy mix: imports of natural gas from theRussian Federation have halved the share of coal. The energycountry is the world’s third largest emitter of CO 2, with a per capitacarbon footprint close to the OECD average.The Russian Federation ratifi ed the Kyoto Protocol in 2004.When it did so, greenhouse gas emissions were 32 percentbelow 1990 levels—a fact that bears testimony to the depthof the recession that accompanied transition. Compared with1990 levels, there has been considerable progress. However, theRussian Federation remains an energy intensive economy—twice as intensive as Poland. One reason for this can betraced to the partial nature of economic reforms. While manyof the most ineffi cient state enterprises have been dismantled,economic recovery has been driven by energy-intensive sectors,such as minerals and natural gas.Energy reform has also been partial. The natural gas sectorillustrates the problem. In 2004, it is estimated that Gazprom, thestate energy company, lost nearly 10 percent of its total productionthrough leaks and ineffi cient compressors. Ineffi cient fl aringof gas is another problem. Independent estimates suggest thataround 60 billion cubic metres of natural gas—another 8 percentof production—is lost through flaring, suggesting that the RussianFederation may be responsible for around one-third of global emissionsfrom this source.Countries such as the Russian Federation demonstrate the immensepotential for achieving win–win outcomes for national energyefficiency and climate change mitigation. Emissions trading throughcarbon markets such as the EU ETS could play a role in supportinglow-carbon investment. However, unlocking the win–win potentialwill require the creation of new incentive structures through energyreform. Higher energy prices, the scaling down of subsidies, theintroduction of a more competitive energy sector with strengthenedindependent regulation, and wider governance reforms are amongthe priorities.reform process has yet to take off.Energy prices remain heavily subsidized,Carbon and energy intensity is reducing in transition economiescreating disincentives for efficiency gainsin industry. An infl uential commissioncreated by the Government—the BlueRibbon Commission—has called forTotal CO 2emissions(Mt CO 2)CO 2emissionsper capita(t CO 2)Energy intensity(Energy use per unit ofGDP PPP US$ )Carbon intensity(CO 2per unit ofGDP PPP US$)far-reaching reforms. The proposals rangefrom cost-recovery pricing to the creationof an independent energy regulator and thewithdrawal of subsidies. Progress towardsimplementation has been slow, but hasgathered pace following an interruption ofRussian Federation aPolandUkraine aHungaryCzech Republic a 19901,9843486006013820001,4703013075511920041,52430733057117199013.49.111.55.813.4200410.68.07.05.611.419900.630.360.560.240.3220040.490.200.500.170.2619901.611.241.590.501.0320041.170.681.180.370.66Slovakiagas supplies from the Russian Federation44 35 36 8.4 6.7 0.37 0.26 0.96 0.51CEE and the CIS 4,182 2,981 3,168 10.3 7.9 0.61 0.47 1.49 0.97in 2006.OECD 11,205 12,886 13,319 10.8 11.5 0.23 0.20 0.53 0.45Developments in the Russiana. 1990 data refer to 1992.Federation’s energy sector are a matter Source: HDRO calculations based on Indicator Tables 22 and 24.of global concern for climate change. TheSource: GUS 2006; High-Level Task Force on UK Energy Security, Climate Change and Development Assistance 2007; Olshanskaya 2007; Perelet, Pegovand Yulkin 2007; Stern 2006; UNDP, Ukraine 2005; Ürge-Vorsatz, Miladinova and Paizs 2006.124 HUMAN DEVELOPMENT REPORT 2007/2008