ECO N O M IC D EVELO PM EN T IM BALAN CES AN D CLIM ATE CH AN GE

3 demand for fossil fuels has pushed up the price of world crude oil and gas. As an illustration, in mid 2008, the global price of crude oil was USD 140barrel, whereas just six months previously the price was around USD 70-80barrel. The high price of fossil fuels and the need to curtail its use have encouraged developed countries to institute economic policy to promote alternative energy, so- called biofuels. The other macroeconomic consequences of this policy are very significant. Biofuel, which is derived from vegetable products such as beans and vegetable oils has raised food prices. Put another way, competition has emerged between the food requirement and meeting the alternative energy needs stipulated by government policy. With food supply not expanding to meet additional demand, food prices continue to spiral. This will become a serious issues for the global economy, in particular developing countries, where inflation caused by rising food prices will have direct adverse impacts on people with low, fixed incomes. With most of their income allocated for food, any hike in food prices would detrimentally affect their already difficult lives. Sporadically, cases of malnutrition have been found in families due to their inability to fulfill their nutritional needs. So far it is clear that climate change not only destroys the environment, but also the economy. This paper will describe briefly the complexity of problems as well as efforts to mitigate the negative impacts of climate change on the economy from the perspective of macroeconomic policies in emerging countries. Following this introduction, the subsequent two chapters will explain the relationship between economic development imbalances and climate change as well as the macroeconomic impacts of climate change. Prior to the conclusion, several economic policy implications from both global and indonesian perspectives will be elaborated.

II. ECO N O M IC D EVELO PM EN T IM BALAN CES AN D CLIM ATE CH AN GE

The issue of climate change corresponds closely to the strategy and structure of global economic development, which creates imbalances in several aspects of the global economy. Such imbalances include: i imbalances in the growth of the physical economy and development of the green economy; ii imbalances in the pace of global economic development; and iii imbalances in the development strategies of various economic sectors. Inefficacious strategy and the sub- Gross W orld Product, 1950-2007 10 20 30 40 50 60 19 65 19 73 19 77 19 81 19 85 19 89 19 93 19 97 20 01 20 05 tr ill io n US D Chart 1. Gross World Product 1950-2007 Source: IMF, CIA World Fact Book 4 Total Energy Consumption by Region 20.000 60.000 100.000 140.000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Quadrillion btu 0.000 5.000 10.000 15.000 20.000 25.000 AsiaOceania North Am erica Europe Eurasia AsiaOceania North Am erica Europe Eurasia CentralSouth Am erica - rhs Africa - rhs Middle East rhs Quadrillion btu optimal structure of global economic development in maintaining a balance between such aspects continue to accumulate and compound the climate change problems experienced recently. The overarching influence of the prevailing attitude to prioritize physical economic growth rather than maintain a balance with the global green economy is clear from recent economic developments. This has been reflected in the global economy during the last decade before the expansionary trend Chart 1. The year 2004 was noted as the highlight of an expanding world economy, which grew by more than 5. However, CO2 emissions from the combustion of fuel are also mushrooming. This pattern seems inescapable in a world where industrialization continues to play a key role in global economic growth. Therefore, it is safe to assume that the current world development structure disregards environmental sustainability. However, one should take a look at another facet of economic development. Increasing economic activity has driven demand for resources as production inputs, as well as fossil fuels, for example oil, to ignite the growth engine. Along with geopolitical factors in oil-producing and trading countries, the complex interaction between supply and demand for fossil fuels has pushed up the price of crude oil to historical highs, approaching US 150 in recent months. According to the Energy Information Agency, world oil consumption is projected to grow by almost 900,000 barrels per day bbld and by an additional 1.4 million bbld in 2009 Chart 2. Increased oil consumption will clearly release more CO2 emissions into the atmosphere. Burning fossil fuels like coal, oil and gas for heat, power and transportation produces CO2. Scientists concur that CO2 emissions are a key contributor to global warming. The catalyst of such strong global economic growth is inseparable from the robust economic development in developed countries compared to developing countries, and based on several studies it contributes significantly to climate change. This relates to imbalances in global economic growth between developed and developing countries. The IMF 2007 has documented the contributions made by developed countries to the reserves of CO2 accumulated emissions since 1750. The results indicate that annual emissions from developed countries as of 2004 account for about 75-80 Chart 3. Latest indications show that several large emerging economies, Chart 2. Total Energy Consumption by Region Source: IEA 5 which are experiencing strong growth, have also contributed to the increase in emissions. The IMF study also details emissions per capita, which are about four times as high in OECD countries compared to elsewhere; although relative to GDP, developing countries recorded higher numbers. Chart 3. Greenhouse Gas Emission by Region Source: WEO Oct 2007, IMF Source: WEO Oct 2007, IMF Rapid development in the global economy has generally always been supported more by the industrial sector compared to other economic sectors, such as agriculture and mining. The study results show that the industrial sector is a major contributor to CO2 emissions compared to other economic sectors. Using standard economic sector classifications, emissions from electricity generation in the USA contributed the most to total gas emissions in 2006 Chart 4. The transportation sector and industrial sector were second and third respectively. However, after being distributed among sectors, the industrial sector accounts for the largest proportion of US gas emissions Chart 5. A similar story was repeated in Australia and Japan. Based on the 2007 report of Department of Climate Change in Australia, the largest single source of direct emissions was the utilities sector electricity, gas and water, responsible for 35.5 of Australia’s total emissions while in Japan, the industrial sector consistently led greenhouse gas emissions among other economic sectors. Chart 4. Emission Allocated to Economic Sector in US Chart 5. Emission with Electricity Distributed to Economic Sector in US Source: US EPA Source: US EPA 6 20 40 60 80 100 120 140 160 Jun-87 Jun-90 Jun-93 Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 USDbarel The impact of imbalances in strategy support among economic sectors on climate change has the potential to continue, particularly in light of current global economic problems; namely rising energy prices Chart 6. This primarily relates to several global strategies to reduce dependence on oil. Dependence on oil has many inherent risks that could exacerbate climate change. In response to unpredictable future movements in oil prices, many governments have rolled out policies and programs to minimize socio- economic impacts by reducing consumption and dependence on oil. The most notable endeavors taken to reduce dependence on oil and other kinds of fossil fuels are through the promotion and use of alternative energy. Some important alternative fuels or biofuels include biodiesel, bio alcohol ethanol, vegetable oil, non-oil natural gas, and other biomass sources. To increase biofuel production, countries are beginning to grow sugar crops sugar cane, sugar beet and sweet sorghum or starch corn and use fermentation techniques to produce ethanol; and to grow plants that produce oils, such as oil palm, soybean, or jathropa, to be directly used as fuels or to be chemically processed to produce biofuels. The major driving force behind the development of biofuel production and use stems from the desire to achieve independence from petroleum, to moderate the global oil price, and to produce environmentally friendly fuel 3 . However, the promotion of biofuels has come under the spotlight due to the significant side effects the production of these alternative fuels is starting to have. The use of food plants to produce biofuels has brought about a significant agricultural shift in resources away from food production to biofuels. Initially, stronger demand for agricultural products to produce biofuels raised food commodity prices and intensified global inflationary pressures Chart 7. Subsequently, however, the trend of rising food commodity prices aggravated the problems associated with climate change. 3 The world initiators in biofuel development and use are United States, Brazil, France, Sweden and Germany. U.S. Energy Independence and Security Act 0f 2007 that requires the American fuel producers to use at least 36 billion gallons of biofuels in 2022. The European Union in its biofuels directive has set the goal that for 2010 each member state should achieve at least 5.75 biofuel usage of all used traffic fuel and by 2020, the figure should be increased to 10 . Chart 6. Oil Price Monthly Average Source: EIA 7 Causes of Tropical Deforestation 2000-2005 Small Holder Agriculture 35 - 45 Other 5 Cattle Pasture 20-25 Large Scale Agriculture 15-20 Logging 10-15 World Commodity Prices 200 400 600 800 1000 1200 1400 1 4 20 00 7 4 20 00 1 4 20 01 7 4 20 01 1 4 20 02 7 4 20 02 1 4 20 03 7 4 20 03 1 4 20 04 7 4 20 04 1 4 20 05 7 4 20 05 1 4 20 06 7 4 20 06 1 4 20 07 7 4 20 07 1 4 20 08 7 4 20 08 USDbushel 2 4 6 8 10 12 14 16 18 USDbushel White Rice 5 thailand CPO Cornrhs Soybeans rhs Source: Bloomberg Yet, another effect of sky-high agricultural commodities that requires closer attention is land conversion into arable land in order to maximize profits from the soaring prices of agricultural commodities. A new round of competition between land for fuel and land for food has brought immense environmental impacts on the increase of critical land area. Recent developments include rising demand for palm oil in Europe, which has consequently led to the razing of huge tracts of Southeast Asian rainforest and the overuse of chemical fertilizer 4 . The conversion of tropical forest into arable land has occurred rapidly around the world. This is a result of economic incentives offered by higher international commodity prices. Deforestation is the unwelcome result of several key causes. During the period of 2000-2005, tropical deforestation was attributable to small- holder agriculture still pose as largest cost, large-scale agriculture, logging and cattle pasture Chart 8. Economic incentives for the production of food crops have also played an important role in deforestation. Land conversion occurs as a deliberate economic activity to facilitate agricultural expansion for crop production. 4 As reported by the International H erald Tribune, Chart 7. World Commodity Price Chart 8. Causes of Tropical Deforestation 2000-2005 Source: Mongabay.com 8 The time has now come to rethink our priorities. Deforestation mainly in tropical areas accounts for up to one-third of total carbon dioxide emissions. It is a clear-cut contradiction to the nature of developing and using of biofuels due to the subsequent rise in crop prices but with a very limited effect on reducing greenhouse emissions and nearly no impact on moderating conventional fuel prices.

III. M ACRO ECO N O M IC IM PACTS O F CLIM ATE CH AN GE