Shaping Globalization

New Trends in Foreign Direct Investment

,

• Publisher: Bertelsmann Stiftung
• Year: 2013
• Print ISBN: 9783867934336
• eBook ISBN: 9783867934893
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

The rise of new economic powers in Asia and Latin America has changed the size and the direction of cross-border investment flows. Emerging economies like China, Brazil and India have become major destinations of foreign direct investment within the past decade, and they are also taking on the role of investor themselves. The unprecedented shifts in global investment flows have revived the debate over the effects of foreign investment on growth, employment and income distribution. In this book, leading experts analyse the most important trends, from the increasingly active role emerging economies play as investors in Africa to the rising suspicion in the U.S. and Europe of Chinese takeovers. Global challenges like climate change and the ageing of societies will act as new drivers of foreign investment, reshaping the patterns of globalization once again.

Betting on a Low-Carbon Future: Climate Change and Foreign Direct Investment

Daniel M. Firger

Introduction

Global climate change presents one of humanity’s greatest collective challenges. Recognizing the magnitude of the problem, 195 countries, in the United Nations Framework Convention on Climate Change (UNFCCC), have agreed to the goal of “stabiliz[ing] … greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system” (UNFCCC 1992: Art. 2). Yet nearly two decades after this treaty was opened for signature, greenhouse gas (GHG) emissions continue to rise, and communities and ecosystems from the Arctic Circle to the equator are already feeling the early effects of a warming planet. Like other cross-boundary environmental harms, climate change creates an international cooperation dilemma that has proven particularly difficult to solve. Since carbon dioxide (CO₂), the most abundant GHG, mixes uniformly throughout the Earth’s atmosphere once emitted, no state acting alone can stop the global warming process, and individual states have only limited incentives to reduce their own emissions when others do not. Moreover, the difficulty of the challenge is exacerbated by the fact that, unlike many other pollutants, CO₂ is emitted as a consequence of nearly every modern human activity, meaning that rewiring the world’s energy systems to run on renewable rather than fossil fuels will be a very expensive undertaking.

While the path forward may be less than clear, two things are quite certain: Effective climate change mitigation will require both unprecedented international cooperation and enormous capital expenditures.

Fortunately, the challenge of climate change is also creating opportunities for novel forms of international investment, in particular through “low-carbon” foreign direct investment (FDI). Such FDI, typically made in projects and activities that cut GHG emissions or help spur the development and deployment of clean energy technologies, represents a significant and fast-growing proportion of aggregate worldwide FDI flows. The UN Conference on Trade and Development (UNCTAD) annually publishes its widely read World Investment Report (WIR), which summarizes recent trends in FDI, quantifies FDI inflows and, notably, highlights an emerging issue or topical theme in the area of international investment policy. In 2010, the WIR for the first time focused on climate change. Subtitled “Investing in a Low-Carbon Economy,” the WIR estimated that low-carbon FDI flows in 2009 into just three business areas – low-carbon technology manufacturing, renewable energy projects and recycling – totaled

90 billion.

As UNCTAD explained, however, “In its totality such investment is much larger, taking into account embedded low-carbon investments in other industries and TNC (transnational corporation) participation through non-equity forms. Already large, the potential for cross-border low-carbon investment is enormous as the world transitions to a low-carbon economy” (2010a). International investment thus promises to unlock new sources of financing for climate-friendly initiatives, while holding out enormous potential for collaborative problem-solving as market participants take advantage of opportunities made available to them by policymakers.

Low-carbon FDI is incentivized and sustained by a complex array of economic, political and legal factors, some of which take the form of policies explicitly designed to respond to the threat of climate change, but many more of which are only loosely connected with the issue of global warming. Moreover, it is important to recall that not all low-carbon FDI is policy dependent; firms may invest in low-carbon projects or activities abroad for any number of independent reasons, such as gaining access to new markets and raw materials, or increasing the efficiency of their production chains. Nevertheless, climate change and energy policies are significant drivers of low-carbon FDI, and promise to create even more demand for green investment over the coming years as the world responds with greater urgency to the threats posed by a changing climate.

This article explores the relationships between a set of climate-related policy mechanisms and new forms of climate-friendly, low-carbon FDI. First, it discusses international carbon markets and the various offsetting mechanisms that allow regulated entities to comply flexibly with their emissions reduction obligations by making investments in emissions mitigation overseas. Second, it highlights the growing importance of bilateral arrangements on energy and climate change in creating incentives for low-carbon FDI. Such arrangements may include accords on clean technology research, technology transfer and the liberalization of energy investments, among other topics. Third, it turns to recent changes in bilateral investment treaties (BITs) and other international investment agreements (IIAs), which may provide substantial additional incentives for low-carbon FDI. Finally, it briefly touches upon the question of protectionism as it pertains to climate policy.

Carbon market offsets

International law, together with national legislation and a range of soft-law standards and norms, has effectively created a new commodity out of thin air: so-called “carbon credits.” More specifically, an interrelated set of climate policy mechanisms have assigned value to a previously valueless substance, CO₂, and established the rules by which this substance can be bought, sold and traded across a range of loosely interconnected markets. Although the nomenclature may vary depending on the specific policies and jurisdictions involved, one such credit, no matter what its name, is typically equivalent to one ton of CO₂ equivalent, or CO₂e. Each of the six primary GHGs has a different “global warming potential,” which means that a ton of each gas will heat up the atmosphere to a different degree than the same amount of another gas. For simplicity, scientists and policymakers express volumes for five of these gases in terms of the sixth, CO₂.¹

Because GHGs, once emitted, mix uniformly throughout the atmosphere and cause effects that are experienced worldwide, it does not matter, from a climate mitigation perspective, where emissions cuts are made. And because the costs associated with such cuts may vary tremendously from place to place and across different sectors, the inclusion of offsetting mechanisms in climate and energy policy makes sound economic sense. One of the primary policy drivers for low-carbon FDI has thus been the ability to “offset” emissions from a regulated entity in one jurisdiction with an equivalent reduction in emissions elsewhere.

Policymakers have embraced carbon offsets to varying degrees, in part due to administrability concerns and in part because of lingering uncertainties related to the monitoring, reporting and verification (MRV) of offsets, and the additionality and permanence of emissions mitigation projects undertaken in foreign jurisdictions. At first, price signals for carbon market offsets were dependent almost exclusively upon the Kyoto Protocol’s flexible compliance mechanisms. Later, the European Emissions Trading System (EU ETS) introduced a distinct, although closely interrelated, regime for offset credits. More recently, a wider range of national and sub-national climate regulations, from Australia to Japan to South Korea to the United States, have developed their own offsetting rules. Each of these regulatory systems deals with offsets in its own way, embracing some projects, activities and certification standards while eschewing others. The net result is a patchwork of overlapping rules for offsets, and a complex yet potentially compelling set of incentives for low-carbon FDI.

It must be noted at the outset that, despite their prominence, offsetting transactions represented less than 2% of total carbon market activity in 2010, with primary Clean Development Mechanism (CDM) transactions worth only

1.5 billion and other offsets adding just

1.2 billion more.² Meanwhile, the

120 billion market for EU ETS allowances represented 97% of total carbon market value in 2010. It is therefore vitally important to recall that offsetting mechanisms are just one small piece of the puzzle for climate mitigation. Still, they represent an important, and growing, driver of low-carbon FDI.

Also of note, after half a decade of robust growth, the total value of the global carbon market “stalled” at

142 billion in 2010 (World Bank 2011: 9). One major reason for the decline in demand for carbon credits is the severe regulatory uncertainty for the post-2012 Kyoto Protocol legal framework, discussed below. Perhaps more importantly, however, the global economic crisis and subsequent recession have led to further stagnation in the carbon markets, as emissions rates across the developed world have slackened due to lower output. Understanding these recent economic trends helps to put climate change law and policy in context.

At its core, international law on climate change consists of a set of binding GHG emissions reduction targets for the developed country parties listed in Annex I of the UNFCCC. It is this legal obligation to cut emissions (together with domestic implementing legislation such as the EU ETS) that constitutes the primary driver of international carbon markets, and thus of much low-carbon FDI. Crucially, the 1997 Kyoto Protocol, which established specific emissions reduction commitments for Annex I parties for the period from 2008 to 2012, also introduced several market-based “flexible mechanisms” to help achieve these reductions. These mechanisms are: 1) International Emissions Trading (IET) between Annex I countries (KP 1997: Art. 17); 2) Joint Implementation (JI), which allows Annex I countries to transfer among themselves carbon credits generated by low-carbon projects undertaken within other Annex I countries (KP 1997: Art. 6); and 3) the CDM, which authorizes Annex I countries to finance and obtain credits for emission reduction projects undertaken in developing (non-Annex I) countries (KP 1997: Art. 12).

A set of policies designed to “reduce emissions from deforestation and forest degradation” (known colloquially as REDD or REDD+) were not included in the Kyoto Protocol, but were subsequently adopted in later decisions of the Conference of the Parties (COP) to the UNFCCC.³ Each of these flexible mechanisms creates a significant role for the private sector in the generation and transfer of carbon credits, making the Kyoto Protocol a leading driver of low-carbon FDI.

The basic unit of carbon currency under the Kyoto Protocol is an allowance called the Assigned Amount Unit (AAU). An Annex I country’s “assigned amount” is equivalent to that country’s emissions reduction objective, expressed in tons of CO₂e. In other words, the assigned amount is the total volume of CO₂e an Annex I country is allowed to emit during the Kyoto Protocol’s first commitment period, which runs from 2008 to 2012. Each ton of CO₂e in a given country’s assigned amount is equal to one AAU, which may be acquired and transferred under the IET rules established pursuant to Article 17 of the Kyoto Protocol.

Unlike AA...

Table of contents

• Cover
• Titel
• Impressum
• Table of Contents
• Introduction
• Foreign Direct Investment in a Globalized World: It Works; It Doesn’t; It Can, But That Depends…
• FDI in Africa: Development Aid or Sellout?
• China’s Foreign Direct Investment: Past, Present and Future
• Investment Protectionism: Much Ado About…Little?
• Investing Abroad for Retirement: Demographic Change, Pension Reforms and International Capital Flows
• Good Money, Bad Money: The Effects of Large Capital Inflows and the Conditions Under Which Capital Controls Might Be Justified
• Betting on a Low-Carbon Future: Climate Change and Foreign Direct Investment
• The Authors