Op-ed

Reducing the eco-cost of growth in ex-communist countries

Vedemosti/International Herald Tribune/Rzeczpospolita, 10 December 2003

by Jean Lemierre

Economic growth rates in the former soviet bloc, a region of 400 million people on Europe’s eastern doorstep, are now among the best in the world. That’s the good news.

But that growth - at more than 5% in most countries and far outstripping growth in the European Union - already comes at a much higher environmental cost than in the neighbouring EU. Further economic development in these burgeoning markets risks causing disproportionate damage to the environment through climate change. The energy future of central Europe, Russia and the rest of the former Soviet Union should be of vital concern to the world’s environment ministers as they meet in Milan this week to chart the course of the UN Framework Convention on Climate Change.

Simply put, energy efficiency must go up and greenhouse gas emissions must go down in the countries east of the EU. From factory furnaces and power transmission lines to home heating and coal-fired generating plants, energy use in the region tends to be heavily polluting and massively inefficient. It takes twice as much energy to produce the output of Hungary or Czech than of France or Spain.  Romania, Estonia and Poland emit 25-100 per cent more carbon per unit of energy consumed than the countries of the EU. It can take up to 10 times more energy to produce one euro of gross domestic product in Russia and Ukraine than in the EU.

The problems are well known: old infrastructure, outdated production methods, a heavy reliance on coal for power, energy prices that don’t reflect the cost of supply. Understandably below-market prices are popular, particularly in colder climates, but over the long term they encourage inefficiency and discourage investment. At the moment, these countries are not attracting enough capital for the new equipment, services and know-how that would increase energy efficiency, cut greenhouse gas emissions and lead to more reliable supplies of power, light and heat.

Yet improving energy efficiency is an obvious way for companies to cut costs and free up capital for more productive uses. The European Bank for Reconstruction and Development (EBRD), which finances companies from central Europe, through Russia to the Caucasus and Central Asia, now counts ten per cent of its portfolio for investments that increase borrowers’ energy efficiency. Through these investments, clients have achieved up to 40 per cent reductions of energy use by changing their operations, even without resorting to expensive technology.

Even more can be achieved through the nascent market in emissions trading. Under this system, permissible emissions are negotiated for each country. Less developed economies that reduce their emissions below the permitted amount can sell the difference to the world’s biggest economies which are likely to exceed their emissions limits. This makes the switch to cleaner more efficient energy not only possible, but profitable.

The government of the Netherlands and the EBRD have together created one of Europe’s first carbon trading funds -- €32 million to invest in sustainable energy initiatives in the former soviet region. The fund will soon help to finance, for example, the region’s first major wind projects.

But emissions trading will work best in the context of a global effort to fight climate change. Seventeen of the 26 countries in the region have ratified the Kyoto Protocol, an adjunct of the UN climate change convention and a means of curbing greenhouse gases through global emissions trading; Russia and three others have signed it but not ratified it.

Even if Kyoto is not ratified, emissions trading will carry on, albeit in a piecemeal fashion. Joining the EU next year means Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia and Slovak Republic must meet EU greenhouse gas emissions standards. Their example - and greater economic competitiveness based partly on improved energy efficiency - will prove to be a standard for sustainable development in the rest of the region. The world needs any and all of these efforts to address global warming. Whether it’s floods in Italy or drought in Ukraine, climate change is real, worsening and knows no borders.

Jean Lemierre is President of the European Bank for Reconstruction and Development