global problems and local concerns...entirely different purposes. acid rain, for instance, was taken...

Social and environmental problems often spill overnational boundaries. Many of the issues describedin earlier chapters—risk management in the frag-

ile lands (chapter 4), races for property rights in waterand land (chapter 5), urban pollution (chapter 6), andconflict (chapter 7)—have international ramifications.Dealing with them requires the same kind of insti-tutional apparatus described in chapter 3: problemsmust be detected and diagnosed, and interests must bebalanced within and across borders. However, there isone big difference: at the global level, there is no cen-tral authority to enforce agreements. Nations have todevise ways to keep themselves on agreed paths.

This chapter cannot treat in detail the long, var-ied, and growing list of challenges that require inter-national cooperation: transboundary river basinmanagement; international fisheries management;control of infectious diseases; mitigation of acid rain;and prevention of armed conflict and terrorism, toname a few. Instead, it draws general lessons fromthe experience with some environmental problemsregarding the design and development of institutionsthat can handle more difficult transnational issues.

Chapter 8 features progress on two transnationalenvironmental problems: protecting the stratosphericozone layer, and mitigating acid rain in Europe. It ap-plies these lessons to two fundamental but unresolvedsustainability issues that are the subjects of contro-versy and emerging global environmental conven-tions: mitigating and adapting to climate change, andconserving biodiversity. (A third issue, desertification,is addressed in the context of chapter 4.) Though usu-ally characterized as environmental issues, these prob-lems have causes and solutions with deep social and

C H A P T E R 8

Global Problemsand Local Concerns

political roots, and lessons for nonenvironmentalglobal problems.

Designing institutions to solve global problems

Who would have thought that leaky refrigerators,fire extinguishers, and aerosol spray cans could seri-ously damage the entire biosphere? The story of howstratospheric ozone depletion was diagnosed as aproblem, and how the global community organizedto address it, illustrates how adaptive, learning insti-tutions can successfully address global issues.

Refrigerators began using chlorofluorocarbons(CFCs) around 1930.1 By 1970 the world usedabout 1 million tons of these substances each year ascoolants, as propellants in aerosol cans, and for man-ufacturing. In that year, James Lovelock used re-cently invented techniques to detect trace amountsof CFC in the atmosphere over London. His requestfor a grant to measure CFC concentrations over theAtlantic was denied: “One reviewer commented thateven if the measurement succeeded, he could notimagine a more useless bit of knowledge.”

Lovelock persisted, though, and showed thatCFCs were detectable far from land. Four yearslater, chemists F. Sherwood Rowland and MarioMolina realized that even tiny concentrations ofCFCs could, theoretically, erode the stratosphericozone layer that shields life from ultraviolet radia-tion, an insight that won them the 1995 Nobel Prizein chemistry. It was known, too, that CFCs had along lifetime in the atmosphere and that increasedexposure to ultraviolet radiation would increase therisk of skin cancer. Although a definitive cause-and-effect relationship had not yet been demonstrated,

(c) The International Bank for Reconstruction and Development / The World Bank

circumstantial evidence was strong enough in theearly 1980s to support a precautionary approach tothe threat of ozone depletion. The Vienna Conven-tion (1985) committed the nations of the world toaddressing the problem, but imposed no obligations.

Meanwhile, scientists had been monitoring strato-spheric ozone since the 1920s in a widening globalnetwork that extended to Antarctica in 1957. A sci-entist at the British Antarctic Station, noticing de-clining ozone readings in the late 1970s, publisheddefinitive data by 1984. Shortly thereafter, dramaticsatellite images of the Antarctic ozone “hole” cap-tured public attention. This deepening evidenceprompted the Montreal Protocol of 1987, an out-growth of the Vienna Convention, to impose obli-gations on developed countries to reduce the use ofozone-depleting substances. The Montreal Protocolalso set up panels to assess the impacts of ozone de-pletion and the technology and economics of miti-gating ozone-depleting substances.

By 1990 there was firmer evidence of a causal im-pact of chlorine and bromine compounds on ozone.In that year the London Protocol to the ViennaConvention took effect. Under this protocol, devel-oping countries agreed to take on obligations, witha grace period, and developed countries underwrotea trust fund to assist them.

The process remains dynamic. Two more amend-ments to the Vienna Convention have been adopted.Technical panels, involving multistakeholder cooper-ation, have helped identify technological approachesto phasing out ozone-depleting substances. Morethan $1.3 billion have been committed to help devel-oping countries. The result: a foreseeable reduction inatmospheric concentrations of ozone-depleting sub-stances and an eventual recovery of the ozone layer.

The problem of protecting the global ozone layerwas, for a variety of reasons, easier to tackle thanother global problems. The production and use ofozone-depleting substances is not central to anyeconomy—unlike greenhouse gases, whose produc-tion is deeply embedded in the energy and transportsectors. It has been easy to find less harmful substi-tutes for most substances, at modest cost. The polit-ical economy of reaching agreement has also been fa-vorable. At the national level, the wealthy industrialnations responsible for most production were alsothose at the greatest risk from skin cancer, in part be-cause ozone depletion is far more severe at temper-ate than tropical latitudes. And the corporations that

produced most ozone-depleting substances also pro-duced most substitutes.

The record of success in tackling this problem pro-vides both hope and inspiration for other global ini-tiatives. It also shows the key components in globalproblem-solving:

� Pick up signals of the problem and agree on itsnature.

� Build local capacity and international networks tosupport adaptive learning.

� Reconcile domestic and international interests.

These components are explored in detail below,together with an emerging fourth:

� Harness decentralized mechanisms to establish in-centives for socially responsible actions.

Pick up signals of the problem and agree on its nature Solving problems requires some consensus on thefacts and on the costs and impacts of action (or inac-tion). The first step is to detect the problem and putit on the public agenda. Initial detection of environ-mental problems is often by scientists, sometimesdrawing serendipitously on information gathered forentirely different purposes. Acid rain, for instance, wastaken seriously in Europe only after a Swedish scien-tist, Svante Odén, in 1967, used data from a long-standing network of precipitation monitors to linkforeign emissions to acidic rain in Sweden, and to linkthe rain to deteriorating surface water quality.2 Butdetection is not enough. Especially where dispersedinterests need to be mobilized, activists (sometimesincluding scientists) can put a problem on the publicagenda. NGOs such as TI, Global Witness, andGlobal Forest Watch gather and publicize evidence oncorruption and human rights abuse, especially in re-lation to management of forests and natural resources.In the future, the new Aarhus Convention on Accessto Information, Public Participation in Decision-making and Access to Justice in Environmental Mat-ters may facilitate detection and discussion of envi-ronmental and social problems.

The next step is achieving some consensus on theproblem’s gravity, threats, and potential solutions. Atthe outset, activists use data to demand action, anddefenders of the status quo attack the data and in-terpretation as inaccurate, incomplete, and biased.


Progress in resolving the issue requires better infor-mation and some consensus on the diagnosis. Thisis not always easy. To understand such problems asacid rain and global warming, we need to under-stand how thousands of factories and millions ofhouseholds behave—and how chemicals mix andreact across the entire atmosphere. These processescan be understood only through sophisticated simu-lation models, and the models can be validated onlyagainst rich and accurate observations of physical,biological, and social systems. There is scope forhonest disagreement on interpreting data and mod-els. And naturally, each stakeholder group will pro-mote interpretations favorable to its own interests.What is needed is a credible, legitimate forum for fos-tering consensus on diagnosis and action.3

Combining credibility and legitimacy in a policyinstitution is a fine balancing act, especially forglobal issues. Credibility requires scientific and tech-nical input, insulated as much as possible from po-litical pressures. Legitimacy, by contrast, is properlypolitical. Parties to an international agreement needto legitimate and accept the scientists’ interpreta-tions. So do the citizenries who will be asked to com-ply with the agreement. Mediating institutions needsomehow to broker problem analyses that are politi-cally palatable and yet have scientific integrity. Howcan this be done?

The IPCC is one example. The IPCC was char-tered by the World Meteorological Organization and the United Nations Environment Programme(UNEP) to assess the risk of human-induced climatechange. It has produced three large assessments, car-ried out by an international team of volunteer ex-perts, who evaluate and synthesize the vast and some-times contradictory scientific literature through anelaborate set of working groups, subgroups, and re-views. Because the reports are thick, densely techni-cal documents, attention focuses on distilling sum-maries for policymakers. Each summary is approved,line by line, by representatives of all IPCC membergovernments in a forum where scientists can defendtheir conclusions. The process results in political buy-in to scientific findings. Over the past 10 years, theIPCC’s work has contributed greatly to promotingconsensus on the nature and causes of climate change.

The World Commission on Dams (WCD) is an-other pioneering assessment effort, emphasizing so-cial issues. The commission’s goals were to review the effectiveness of large dams, to provide a frame-

work for assessing options and decisionmakingprocesses for water resource development, and toproduce guidelines related to all aspects of dam de-velopment. Convened by the World Bank and theIUCN, the commission’s members represented abroad range of stakeholders. It succeeded in produc-ing a consensus report whose core values and strate-gic priorities have been widely endorsed. But the in-formal authorizing environment has resulted in weakengagement of national governments in the result,according to an independent evaluation.4 And thereis less consensus on the WCD’s specific recommen-dations for implementation. It remains to be seenwhether the report will be a one-off outcome—orwill have initiated a sustained process of learning andengagement.

Learning and adaptingThe diagnostic process is most effective when it feedsinto an adaptive process of balancing interests, set-ting goals, taking actions, and learning from results.The Convention on Long-Range Transboundary AirPollution (CLRTAP) illustrates adaptive learning(box 8.1). This Convention has forged increasinglyambitious agreements among European nations (in-cluding economies in transition) on reducing emis-sions that cause acid rain, eutrophication, ground-level ozone, and other environmental problems. Ithas done so in part by encouraging the collection,harmonization, and analysis of data on emissionsand environmental conditions. This process hasfostered communication among policymakers andscientists, facilitated agreement on an operationaldefinition of goals, and promoted a rational, cost-effective approach to achieving those goals.

The CLRTAP and the Montreal Protocol illus-trate the appeal of adaptive learning in forging inter-national agreements. Countries are averse to takingon binding commitments when there is great uncer-tainty about the costs or impacts, about their abilityto induce citizens to comply, and about the compli-ance of other parties. Adaptive learning allows coun-tries—and groups whose behavior is targeted forchange—to understand the problem and to acquireconfidence in their own ability and others’ to dealwith it.

Two routes are available:

� One route is through “soft law”: nonbinding state-ments of principles and sometimes targets. By grad-


ually establishing norms, soft law lays the foun-dation for negotiation on binding arrangements.Nonbinding but ambitious targets can also encour-age experimentation that would be too risky undera binding regime.5

� The other route is to start with a binding agree-ment that is easy to achieve, but that sets up aprocess that allows parties to learn more about costsand benefits and to build confidence in their part-ners’ behavior and in newly created institutions.

For both routes, the seemingly mundane require-ment of reporting can be key.6 Reporting—forgreenhouse gas emissions under the Kyoto Protocol,for consumption of ozone-depleting substances un-der the Montreal Protocol, or for compliance withlabor standards under the International Labour Or-ganisation—deepens domestic understanding of theproblem and strengthens external confidence in thecountry’s commitment to compliance.

Build local capacity for assessment, negotiation, and actionHow can a hundred or more governments, represent-ing billions of people, forge sustainable agreementsthat touch those people’s lives? These agreementsneed to balance the diverse interests of groups that cutacross national boundaries. International labor stan-

dards affect the workers, owners, and customers oflow-wage assembly plants. The Montreal Protocoltouches multinational and local chemical companies,people who risk developing skin cancer, and poorfamilies that dream of affording a small used refriger-ator. Negotiations on climate change affect coal min-ers, oil companies, Sahelian herders, atoll dwellers, carowners, and wind turbine entrepreneurs.

To work, these agreements must reconcile interestswithin and between countries. This requires mobiliz-ing concern, and demands for action, among the manywho would gain some benefit from the agreement, butwho are less vocal than the few who perceive theirmain interests to be at risk. It thus requires creativeways of framing problems and solutions to increase theperceived congruence of interests, within and acrosscountries. And it often depends on strengthening thecapabilities of people and organizations in the devel-oping world to assess options, to negotiate provisions,and to finance and undertake actions.

Bolivia and Costa Rica have countless pressingdomestic concerns, yet both have taken the lead inpursuing biodiversity conservation goals with globalimplications. Their experience illustrates the criticalrole of networks of experts and policy entrepreneursin mobilizing domestic concern and finding creativeways to link civil society, domestic policymakers,and global interests. In both countries, research or-

The CLRTAP has concentrated mostly on mitigating Europeanpollution, though it includes North American parties. Its firstsubstantive agreement, the Helsinki Protocol (1985), requiredparties to reduce sulfur emissions by 30 percent relative tothose in 1980. Many observers consider this to have been amodest goal. But it established a track record of cooperationthat has so far resulted in six subsequent (and increasinglymore ambitious) protocols on emissions reductions.

In setting, refining, and implementing reduction targets,CLRTAP has been aided by the Cooperative Programme for theMonitoring and Evaluation of the Long-Range Transmission of Air Pollutants in Europe (EMEP) and the acid-rain model-ing group at the International Institute of Applied SystemsAnalysis (IIASA). EMEP was established in 1977 with a U.N.mandate, but was “adopted” and given permanent funding byCLRTAP in a 1984 protocol. EMEP has worked to compile dataon emissions and air quality—and to model atmospheric trans-port of pollutants. Several reviews by political scientists havepointed to EMEP as catalytic in promoting better understand-ing of the pollution problems and facilitating agreements onmore stringent emissions limits. Over more than a decade,

EMEP worked to ensure consistency in data collection and re-porting methods among its diverse members.

By 1990 the data were deemed good enough to support a credible simulation model, RAINS, to assess the costs andimpacts of alternative emissions reductions scenarios. Thismodel, developed at IIASA, was used by negotiators in settingcommitment levels for the Second Protocol on Sulfur Reduc-tion. It and subsequent analyses have shown that the near-term cost of fully meeting environmental goals was unafford-able, facilitating agreement on achievable interim measures.

The process of data-gathering, model-building, and modelapplication facilitated communication among scientists andpolicymakers, fostering a virtuous cycle of continuous refine-ment of data and models. This has helped the Conventiontackle additional pollutants and provides a basis for all stake-holders to monitor nations’ compliance with the protocols,increasing mutual confidence in the Convention. Integratedassessment modeling has now been formally incorporated into EMEP, though it remains based at IIASA.

Sources: Jäger and others (2001); Jäger, van Eijndhoven, and Clark (2001);Di Primio (1998); Chayes and Chayes (1995).

Box 8.1

An adaptive, learning institution


ganizations linking national and international scien-tists nurtured a group of policy entrepreneurs whocould blend scientific knowledge and internationalfinancial resources with the domestic political skillsand experience needed to usher through and imple-ment major policy reforms (box 8.2). Attuned toideas from abroad but deeply immersed in domesticsocial movements and policy debates, these countrieshave been at the forefront of an impressive record ofenvironmental policy innovations. And they havehelped to stimulate national dialogues on environ-mental quality and sustainable development.

Capacity building of this kind is important fordeveloping countries to assess, negotiate, and imple-ment international agreements. Lacking experts andmoney, poorer countries are often at a disadvantagein international negotiations. For instance, lower-income countries fielded substantially smaller dele-gations at the sixth Conference of Parties of theKyoto Protocol, handicapping their ability to partic-ipate in the wide range of simultaneous, technicallyspecialized sessions.7 And without a pool of experts,it is difficult for these countries to design policiesand implement projects. For these reasons, it is im-portant to develop expert networks and organiza-tions within developing countries (and in some casesshared between developing countries)—and sustainthem over the long term. It is not enough to assem-ble teams for temporary assignments.8

Reconcile domestic and international interests—with commitments and cash International agreements are possible because of theoverlap between domestic and global interests—andbecause participating nations agree that the benefitsthey gain outweigh the costs that they accept. Butenvironmental and social agreements usually involvebalancing opposing domestic interests, often sup-porting a broad constituency of dispersed interestsagainst one that is more narrowly focused but in-fluential. And national compliance is not usuallyachieved with the simple stroke of an executive pen,requiring instead the cooperation of a multitude of citizens, government officials, corporate leaders,and others. Think, for instance, of the issues sur-rounding worker rights, pollution, and protection ofprivately owned wetlands or forests. A nation thatagrees to international commitments on these issueshas to deploy domestic carrots and sticks to coax itscitizens into compliance. However, internationalagreements themselves can help provide some ofthose carrots and sticks.

Sometimes, international agreements can be awelcome tool to reinforce domestic legislation andregulation. The Ramsar Convention on wetlands re-quires that each participant commits to the conser-vation and sustainable use of at least one wetland site of “international importance.” (Almost 1 millionsquare kilometers of wetland are now listed, in both

In Costa Rica and Bolivia strong communities of policy entrepre-neurs have grown around a unique brand of environmental re-search organization that serves as a site for collaboration and in-tellectual exchange between national and foreign environmentalexperts. The Tropical Science Center, The Tropical AgricultureResearch and Higher Learning Center, the Organization for Trop-ical Studies, and the Ecology Institute provide training in tropicalecology. They also facilitate networking among environmentalscientists who wish to apply their knowledge toward creatinginstitutions such as environmental laws, agencies, and pro-tected areas. These same experts have taken the lead in build-ing national support for sustainable environmental management,creating environmental education programs in schools and help-ing to “mainstream” environmental concerns in their societies.

The institutional accomplishments in Bolivia include theworld’s first debt-for-nature swap, the world’s largest forest-based climate mitigation project, and some of the world’smost innovative approaches to park management, involvingindigenous peoples, NGOs, and local stakeholders. AmongCosta Rica’s successes are its national park system and inno-

vative explorations of environmental finance, including its en-vironmental services payments system, forest-based carbonoffsets, and biodiversity prospecting agreements.

Three characteristics of these research institutions arenoteworthy:

� They are physically located in the countries of interest. Thisis essential for networking and community building amongnational scientists, and produces a cadre of experts whooften assume leadership roles in environmental agenciesand NGOs.

� They ensure extensive participation by both domestic andforeign scientists, which encourages international coopera-tion in support of national goals.

� They are nonpartisan, which facilitates constructive work-ing relationships among experts and reformers associatedwith diverse political parties—a key ingredient for ensuringthat policy reform efforts continue across administrations.

Source: Steinberg (2001).

Box 8.2

“Coupling institutions” and policy entrepreneurs in Costa Rica and Bolivia


developed and developing countries.) Listing mayrestrict the ability of farmers or developers to drainand convert wetlands—or that of factories and waste-treatment plants to pollute them. But these restric-tions may also confer domestic benefits such asgroundwater recharge and flood prevention, whilealso providing global benefits such as maintenanceof migratory wildlife populations.

Although the Ramsar Convention has little en-forcement power, preliminary analysis shows thatprotection of listed wetlands has improved. This sug-gests that listing with Ramsar helps strengthen do-mestic commitments to wetlands protection. Simi-larly, accession to human rights conventions canstrengthen implementation of domestic laws onhuman rights.9 The Aarhus Convention, for exam-ple, appears to strengthen domestic commitments tofreedom of information on environmental issues.

Financial transfers are often designed to alignlocal actions with global interests. Many interna-tional agreements recognize that developing coun-tries may be unable to finance their commitments toimprove the global environment, even when thosecommitments provide some domestic benefits. TheGEF has approved about $2.7 billion in grants toreduce ozone-depleting substances, mitigate cli-mate change, protect biodiversity, and protect in-ternational waters. Depending on how the KyotoProtocol is implemented, developing countries andeconomies in transition could get billions of dollarsannually in market payments that would promoteclean energy technologies.

Standards, certification, and performancereporting—inducing socially responsible behaviorHow can society reward people, firms, organizations,and governments that behave well? Locally, a com-munity might patronize merchants who are friendly,civic-minded, and environmentally responsible—and do so happily even if their prices are a bit higherthan those of less respectable competitors. Outsidethe community, the scope for doing this diminishes,as information about reputation thins. Citizens mayappeal to the government to regulate or tax bad be-havior, and sometimes that works. But it does notalways work—it fails at the global scale, or whengovernment is unresponsive. An emerging set of in-stitutions and networks tries to fill this gap by gen-

erating information about performance, using thatinformation to set up incentives for socially respon-sible behavior.

Intentional oil pollution at sea was curbed throughclever use of standards and performance reporting.The problem had long been intractable: emptytankers filled their still-oily tanks with water for bal-last, then discharged the polluted mix. The 1958 In-ternational Convention for the Prevention of Pollu-tion of the Sea by Oil prohibited this practice, butenforcement was impossible on the wide dark seas.A new convention, MARPOL (1978) tackled theproblem afresh, requiring that all new ships have aballast tank separate from the oil tank. Independentverification bodies inspect ships and issue certificatesof compliance. Ships find it hard to get insurancewithout a certificate. The problem was partiallysolved10—though the lack of port facilities for oildisposal remains a problem.11

Private firms have great leeway in their choice ofproduction processes. These choices have environ-mental and social consequences, both local andglobal. They affect the quantity of industrial andagrochemical pollutants dumped into waterways,the care with which fish and timber are harvested,the treatment of low-wage workers, the release ofgreenhouse gases. But these choices are generally noteasily observable by outsiders.

Systems for environmental and social perfor-mance reporting (or certification) might help shiftfirms toward more socially responsible productionprocesses, for a variety of reasons. Consumers maypreferentially patronize more responsible firms—forinstance, those that produce sustainable timber orfish products. Communities may apply pressure tofirms that flout legal or social norms.12

Perhaps most importantly, financial markets mayreward companies with good performance indica-tors. Why? A growing literature suggests that betterenvironmental and social performance is no burdenand at best is associated with higher profits.13 Oneeconometric study found that multinational firmsthat apply self-imposed higher-than-U.S. standardsthroughout their global operations had higher mar-ket value than otherwise comparable firms.14 An-other study, of 614 U.S. firms, found that a 10 per-cent reduction in waste generation was associatedwith a 0.3 percentage point increase in the return on


assets.15 These associations may be causal: goodpractices reduce waste of valuable materials, improveworker morale and productivity, smooth communityrelations, and reduce liability. And it may be thatmanagers who deal well with complex environmen-tal and social issues are also good at other aspects ofrunning a business. Either way, if environmental andsocial performance is a proxy for profitability, thenfinancial markets will welcome and act on improvedinformation on such performance.

Various initiatives are beginning to publicizeinformation about environmental and social per-formance—and there is some evidence of firms re-sponding. Indonesia’s government-led PROPER pro-gram, which instituted audited self-reporting of firms’pollution levels, has now been emulated in China,India, the Philippines, and Vietnam (see World Bank2000d and Wang and others forthcoming). Non-governmental evaluation and certification systems aredeveloping quickly. The International Organizationfor Standardization has formalized certification forenvironmental management processes—systems thatgive firms the kind of internal feedback mechanismsthat figure prominently throughout this Report.Some NGOs have developed certification systems fortimber, labor standards in shoe and apparel assembly,organic food production, and other products andprocesses.16 For instance, the NGO-initiated ForestStewardship Council has set up criteria for sustain-able forest management and now accredits privatecertifiers. By 2001, 25 million hectares of forest(mostly plantation) were certified. Several private in-vestment firms have developed “triple bottom line”rating systems to assess firms’ social, environmental,and financial performances. And the Global Report-ing Initiative, a UNEP-sponsored organization, is try-ing to develop auditable standards for environmentaland social reporting, analogous to those for financialreporting.

There has been rapid growth in mutual funds andother investment vehicles that screen investments onsocial and environmental performance. In 1984, $40billion in professionally managed assets were sociallyscreened; in 2001, $2 trillion, of $19 trillion in pro-fessionally managed assets.17 The growing demandfor socially responsible investment and the growingsupply of environmental and social performanceindicators can interact in a virtuous circle. Better

information enables more discerning investment;greater interest in ethical investment elicits better in-formation. Similarly, as certification starts to becomethe norm in an industry, noncertified products findit harder to compete.

Who sets the standards and defines the indica-tors—and how? This is crucial to the future of such“bottom-up” approaches to regulation. Already thereare disputes about how strictly to set standards forcertification. Overly lax standards could defeat thepurpose of certification. But so too could overlystrict standards, if they are too expensive for firms toadopt and for outsiders to monitor. In logging regu-lation, overly strict standards can impose high costson loggers without yielding environmental bene-fits.18 This tradeoff is of crucial interest in trade ne-gotiations, especially where developing countries fearthat onerous standards would freeze them out of ex-port markets. It is worth considering whether globalenvironmental assessment institutions could serve arole in evaluating potential standards.

Standards and indicators are also being applied togovernments. TI assesses corruption in national gov-ernments, with ratings that catalyze domestic politi-cal pressure for reform and affect private sector in-vestment decisions. It has been credited with helpingto spur international efforts to reduce corruption (seechapter 7, box 7.3).19 The International MonetaryFund (IMF) has recently been promoting standardsfor reporting basic economic data, such as GDP,inflation, employment, and balance of payments. Ithas also prepared Codes of Good Practice on Fiscal,Monetary, and Financial Transparency, with the ex-plicit aim of promoting good governance. Countriesnaturally have different capacities to comply with thestandards, and the IMF gives them assistance to up-grade their capabilities. Ultimately, though, marketsand the global community may look at progress to-ward compliance as one indicator of a country’s com-mitment to good governance.

Conserving biodiversity: Maintaining current

services and future options

In a remote corner of Ethiopia a farmer clears wood-land for planting. In the process he eliminates oneof the few remaining stands of the wild coffee fromwhich all commercial coffee is descended—andwhich contains genes that protect against leaf rust, a


peril to worldwide coffee production. In the AtlanticForest of Brazil a prosperous cocoa grower chopsdown the forest trees that shaded his now-diseasedcacao plants, but which also provided habitat for thegolden-headed lion tamarin, an endangered speciesthat could be the prime attraction in a future eco-tourism industry. In the lowlands of Sumatra largecompanies convert forests of rich biodiversity to oilpalm plantations.

In all these cases, actors pursuing private profitnot only threaten biodiversity of global interest—they also damage resources valuable to their neigh-bors and country. The damage may be immediateand palpable, but sometimes it is hard to measure infinancial terms and its full impact may be deferred,since doomed ecosystems can take decades to un-ravel. That makes it hard to pick up signals of biodi-versity damage, difficult to balance diffuse nonmon-etary interests against focused profit-driven ones,and challenging to implement policies that shift in-centives from degradation toward sustainable use.The complexity of the problem, along with the pos-sibility of irreversible losses, motivates the attentionto biodiversity in this chapter.

The message here is that maintaining biodiversityand ecosystem functions is not an agenda solely ofwealthy countries, as some hold. To the contrary:biodiversity has a local constituency that values it foreconomic and noneconomic reasons. But where bio-diversity’s services do not yield revenues, it can bedifficult for those constituencies to protect their en-vironmental assets against liquidation. Poor societiesmay be unable, by themselves, to finance the optionvalues of ecosystem conservation. The challengethen is to find ways to ally domestic and global in-terests that support conservation and sustainable use.

The scale of the problemEcosystems are being disrupted on a large scale:

� A global satellite survey estimated a pantropicalgross deforestation rate of 0.52 percent annuallyover 1990–2000, or 9.2 million hectares a year, anarea the size of Portugal.20

� Coral reefs are being lost to bleaching,21 pollution,and destructive fishing. A worldwide bleachingevent in 1998, associated with El Niño, harmed16 percent of the world’s coral reefs, with possiblyhalf damaged irreversibly. Another 32 percent are

thought to be threatened over the next 30 years,and 11 percent have already been lost.22

� Three-quarters of all fish stocks are being ex-ploited at or above their sustainable limits. Totalharvests from capture fisheries have leveled off ordeclined. Some fisheries, such as the NorthwestAtlantic cod, have completely collapsed.23 In oth-ers, depletion of prized predatory fish have led toshifts in ecosystem structure. Almost 15 millionsquare kilometers of ocean bottom have beenscraped by ocean trawlers, possibly causing long-lasting damage to bottom-dwelling species.

What drives ecosystem degradation? People deliberately degrade ecosystems for profit. Toreach any kind of social consensus on policies to re-duce ecosystem degradation, it is essential to under-stand the actors involved, and the incentives that drivethem. Forest loss, for instance, results largely fromconversion to agriculture by small, medium, and largefarmers, though logging often plays a crucial catalyticrole in providing access and financing for conversion.Until recently, impoverished shifting cultivators werethought to cause much tropical deforestation. Whilethere are localized, poignant examples of poverty-driven deforestation of this type—for instance, inMadagascar (box 8.3)—shifting cultivation appearsto account for only a small proportion of the degra-dation of closed-canopy tropical forests (figure 8.1).24

Other small and medium farmers account for muchof African deforestation, and a small proportion butsignificant quantity of deforestation in closed forestselsewhere. This is a diverse group, including somesubsistence farmers but many commercially orientedand prosperous operators. And large-scale agriculture,including ranches and plantations, accounts for mostdeforestation in Latin America and Asia. Poverty,therefore, is not the immediate driver of most tropi-cal deforestation, but tropical deforestation can exac-erbate the poverty of communities dependent on theforest for their livelihood.

Returns to forest conversion by smallholders arevariable but often modest. Often the returns are lowerthan the option value of the forests (see section titled“Act now to reduce today’s emissions”) for carbon se-questration alone. Farmers’ conversion of Ecuadorianforest has been estimated to yield a present value of$376 to $1,721 a hectare,25 depending on the prox-imity to roads and access to credit.26 In Sumatra, con-


versions of forest to cassava, upland rice, or rubberagroforest yield negligible returns to land (that is,after the cost of labor is deducted).27 In Cameroonlong and short fallow cultivation of food crops yieldpresent values of, respectively, $288 and $644 perhectare. Intensive cultivation of cocoa offers returnsof $785 to $1,236 per hectare, depending on assump-tions about cocoa prices; interplanting with fruitboosts returns further.28 In the Atlantic Forest ofBahia, a highly fragmented long-occupied ecosystem,mean land values are only about $275 a hectare—andremaining forested land is worth (per hectare) 30 per-cent of equivalent land under agriculture.29

Large-scale conversion also yields varying returns.The returns to large-scale monoculture oil palm inSumatra are estimated at $617 a hectare, not includ-

ing the $876 that might be realized from sale of tim-ber.30 But large-scale conversion sometimes yieldsonly modest private and social returns. In the Brazil-ian Amazon, almost 90 percent of cleared farm prop-erty is in extensive pasture or abandoned. Althoughsome ranching may be sustainable, average stockingrates are very low: 40 percent of active pasture hasless than 0.5 cattle per hectare. And more than halfthe converted land is in the 1 percent of propertieslarger than 2,000 hectares.31

Similar variation in actors and profits is found in marine ecosystem degradation. Poor fishers inSoutheast Asia practice cyanide fishing to gain amere $50 a month, threatening reef ecosystems inthe process.32 But highly capitalized and industrialvessels, often subsidized, deplete large fisheries.

Madagascar’s biodiversity is among the richest and most un-usual in the world, an asset difficult to value in monetary termsbut with great potential to support ecotourism and perhaps bio-prospecting industries. Of its 12,000 plant species, 85 percentare found only on Madagascar. Its 32 endemic lemur speciesare an attraction for ecotourists. Alkaloids extracted from itsrosy periwinkle plant form the basis for some of the most ef-fective cancer treatment drugs, achieving a 90 percent remis-sion rate against childhood leukemia. Yet over the past 40years, Madagascar has liquidated about half its forests, whichcontain the overwhelming majority of its biodiversity assets,without realizing offsetting gains in other assets. The countryhas fallen deeper into poverty, with its GDP per capita fallingfrom $383 (in 1995 dollars) in 1960 to $246 today. In 1997, 16percent of children died before age five.

What happened? Agricultural productivity stagnated whilepopulation tripled. Madagascar’s people depend heavily on riceand a few other staple crops. In 1960 average rice productivitywas 1.8 tons a hectare—about the same as Indonesia, andmuch more than the 1 ton a hectare average in Mali. By 2000productivity had doubled in Mali and more than doubled in In-donesia, but it was almost unchanged in Madagascar. Staticproductivity—despite a substantial increase in irrigated ricearea—reflects in part the implosion of the nation’s road net-work, which fell from 55,000 kilometers in 1960 to 33,000 in2000. It reflects also a low and declining rate of fertilizer use:only 4 kilograms per hectare, against a Sub-Saharan averageof 12 and a developing country average of 96.* Meanwhile,population grew from 5.4 million to 15.5 million.

The combination of an expanding population and stagnantproductivity generated pressures for agricultural expansionthrough forest conversion. Small farmers expanded slash-and-burn cultivation of rice into forest lands officially belonging tothe state. The practice is attractive to farmers because of itslow labor and input requirements and relatively attractive yieldsin the first two years. But yields rapidly decline to less than half

a ton per hectare after a year or two. Subsequently, the land isused for even lower productivity uses, such as cattle, or it isabandoned. In drier parts of the country, grazing and fuelwoodextraction spur forest degradation. So, while 115,000 squarekilometers of forest have been lost since 1960, the area undercultivation for staple crops has expanded by only 15,000 squarekilometers.

Forest destruction has not only failed to yield new produc-tive land; it has degraded the productivity of existing farmlandsand infrastructure. Denuded hillsides are easily eroded: 130,000hectares of irrigated land have sustained damage or are threat-ened by sediment. Sediment also clogs hydropower facilitiesand threatens freshwater and marine ecosystems.

Madagascar hopes to alleviate poverty and reduce pressureon its biodiversity by boosting agricultural productivity. Improv-ing roads in agriculturally productive areas may increase farmerrevenues, reduce fertilizer prices, promote intensification, andabsorb labor—reducing incentives for farmers to migrate to theforest frontier. In addition, transferring property and manage-ment rights of natural resources to local communities is gen-erating incentives for more sustainable use and conservationof these resources. The country also aims to scale up promis-ing sustainable agricultural technologies, such as conservationtillage, that better protect natural resources and that have thecapacity to improve profitability. Expansion of the tiny indus-trial sector may also relieve pressure on the land.

In the medium to long run, Madagascar’s unique natural as-sets may provide the basis for a lucrative tourist industry basedon ecotourism and resorts. The country may also be able to benefit from global markets for biodiversity and carbonsequestration services—if these markets develop on a largescale.

* WRI 2000.Source: World Bank staff. Forest area, cultivated area, and yields fromFAOSTAT database; child mortality from Gwatkin (2000).

Box 8.3

Poverty and biodiversity in Madagascar


Sometimes ecosystem degradation is an unin-tended consequence of other activities. Irrigationand flood control, for instance, have altered manyecosystems. And there are growing threats to coastalecosystems as, worldwide, coastal cities grow, stimu-lated by booming transocean trade. Already, 20 per-cent of the world’s people live within 25 kilometersof the coast, 39 percent within 100 kilometers.33 Asurban populations grow along the coasts and majorrivers, waste streams grow too. The combination ofhuman waste, animal waste, fertilizer runoff, and ni-trous oxide emissions generates massive flows of ni-trogen into coastal waters. Nitrogen contributes toeutrophication, a major problem in coastal waters,and to the related phenomenon of hypoxia: oxygen-starved “dead zones.”34 It may also be associatedwith algal blooms, some of which are harmful topeople. Concentrated human populations also loadcoastal waters with sediments, pathogens, and toxicchemicals. And coastal population growth leads todestruction of mangroves and other habitats thatnurture biological resources, including the morethan 90 percent of the world’s marine fish harvestthat comes from coastal waters.35

Who has an interest in maintaining ecosystems? While some people gain from ecosystem damage,others suffer, both locally and globally. Some of the

local damage affects lives and livelihoods directly andimmediately:

� Run-downs of renewable stocks of fish, timber, orwildlife

� Decreased flood buffering and nutrient filteringdue to the loss of wetlands

� Increased flooding and sedimentation in small,steep watersheds due to upland land-use change

� Loss of water yield from cloud forests� Degraded drinking water quality � Health and other impacts of air pollution from

forest and land fires.

These damages can be large. The Indonesian for-est fires of 1997–98 caused an estimated $7.9 billionin domestic damages.36

Other keenly felt local ecosystem values are dif-ficult to assign a dollar value. Their constituenciesmay therefore find it hard to counterbalance the morefocused interests that derive benefits from ecosystemdegradation. For instance, natural habitats may be lo-cally valued for recreational, spiritual, and aestheticreasons. In a world where incomes are rising andtransport costs are dropping, rare ecosystems mayhave an option value as the basis for a future eco-tourism industry. And more speculatively, the genetic,biophysical, and ecological information embodied inbiodiversity may be valuable to future agricultural,pharmaceutical, chemical, materials, and informationindustries.37 For instance, gene bank collections cur-rently hold 15 percent or less of the genetic diver-sity of wild relatives of important crop species, includ-ing maize, rice, sorghum, millets, and peas.38 Loss ofsome of the remaining 85 percent might constrain de-velopment of improved varieties of these crops.

Biodiversity as a global public goodThe purely global interest in biodiversity focuses ontwo aspects: diversity itself and the maintenance ofglobal processes. The term biodiversity is often usedloosely to refer to biological resources. But those whosee biodiversity as a truly global public good see aproblem akin to Noah’s: making sure that a represen-tative selection of the diverse range of genes, organ-isms, and ecosystems survives the current onslaughtof habitat loss, invasions of alien species, overex-ploitation, pollution, and climate change. The Noah’sArk strategy reflects people’s desires, grounded in

0

Africa

Thousand square kilometers

Asia Latin America

50

100

150

200

250

300

350

400

450

Large-scale agriculture

Smallholders

Shifting agriculture

Figure 8.1

Current land use in closed canopy forest

deforested in 1990–2000

Source: Authors’ calculations based on FAO (2000) Table 46-3.


ethics and aesthetics as well as economics, to ensurethat future generations can benefit from biodiversity.This is not just a concern of the wealthiest nations.A 1992 survey found that world species loss was con-sidered a “very serious” problem by a larger propor-tion of people in Brazil, Chile, Mexico, and Polandthan in Germany, Norway, Switzerland, or the UnitedKingdom.39

Maintaining global biodiversity requires global co-operation. Think about Noah’s problem: how do wemaintain a representative set of the world’s biodiver-sity? Conservationists have attempted to identify setsof ecosystems, which taken together contain much ofthe world’s biological variety. One such exercise iden-tified a priority set of 233 terrestrial, freshwater, andmarine ecoregions based on distinctiveness of speciesand ecological processes.40 More than half cross na-tional boundaries, and so would require some kindof coordination for conservation and sustainable use.And as the Convention on International Trade in En-dangered Species demonstrates, international coop-eration in trade can help to reshape local incentivesdriving ecosystem degradation.

In addition to considerations of pure diversity,biodiversity is of global interest because the loss ofkey species or ecosystems could have transborder orglobal impacts. This is particularly the case for ma-rine ecosystems, where the loss of one species can fraythe food web half an ocean away, and for migratorybird species. Large-scale changes in land cover cancontribute to regional climate change. There is evi-dence that a loss of vegetation in West Africa and in the Eastern Amazon can start a self-reinforcingcycle of reduced rainfall and further vegetation die-offs.41 Deforestation is a major contributor to globalclimate change. And there is reason to apply theprecautionary principle: the global consequences ofmassive biodiversity loss are unknown.

Landscape approaches to biodiversity conservation:Ecosystems meet social systemsBalancing interests in biodiversity for the publicgood is going to require a new breed of ecosystemmanagement institutions. For the most part, prob-lems of biodiversity loss cannot be solved at thefarmer’s plot or fisherman’s territory. Solutions needto consider entire ecosystems and social systems forseveral reasons. First, the incentives driving biodi-versity loss must often be addressed at the market

level—or the political level that governs access toland and water. Second, actions in one part of anecosystem can affect a distant part, as when waterpollution harms a distant reef. Third, to reduce po-tential conflict, efficiency is necessary—through in-centives that keep agriculture on land with high eco-nomic value and low ecological value.

Ecosystem management institutions will takequite different forms, depending on the biodiversityinvolved and the prevailing systems of tenure andgovernance. Consider a stylized typology of situa-tions (actual situations will often have aspects ofmore than one type):

� Aquatic ecosystems, marine and freshwater, are farranging, involve many types of actors, and oftenspill over national boundaries.

� Frontier forests are sparsely settled sites of conflictand exploitation as both corporate and popular in-terests rush to seize rents and claim property. Bio-diversity conservation here is an outgrowth of themore fundamental need to establish governanceand rationalize land use. These important issuesare discussed at length in chapter 5 and so are nottreated here.

� Commons in transition are areas, often with fairlyhigh population densities, where management offorests, rangelands, or fisheries has broken down,caused often by government appropriation andmismanagement of commons, in some cases exac-erbated by population growth. Sustainable use ofbiodiversity depends on resolving disputes amongcommunities, and clarifying community and gov-ernment rights and responsibilities.

� Fragmented habitats with less-disputed tenure posedifficult policy questions. They tend to be mosaicsof agriculture and natural habitat, where both theprivate opportunity cost and social benefits of sus-tainable use are high. They include some of the“hotspot” areas where the risk of losing an entireecosystem is highest.

To give some flavor of how these stylized typesdiffer, consider the global map of population densityin forests (see figure 7 in the roadmap). The great,relatively unbroken, sparsely populated forests ofAmazonia, the Congo Basin, and Siberia exemplifyfrontier forests. The densely populated strands offorest in India and Nepal include commons areas


under transition from government to communityadministration. And the populated forests of CentralAmerica, coastal Brazil, and Madagascar are exam-ples of biodiversity-rich fragmented habitats.

Described here are some of the institutional chal-lenges in addressing the maintenance of these eco-systems. The point emphasized is that to a large ex-tent these are challenges for local management. Theglobal interest is in supporting these local institu-tions in maintaining assets of global significance andin coordinating action where management issuescross national boundaries.

Aquatic ecosystem managementThe need for an ecosystem-wide approach to fish-eries has long been obvious, underlined by the recentdisastrous crash of some fisheries. The advent of the200-mile exclusive economic zone places most (butnot all) fish stocks under predominantly nationalcontrol—and that puts nations in a position to reg-ulate these resources for sustainability. (Chapter 7discusses some of the factors that determine nations’success in doing so.)

But some fisheries require international manage-ment. The Convention on the Conservation of Ant-arctic Marine Living Resources (CCAMLR) repre-sents an international effort at sustainable ecosystemmanagement—in this case, the 35 million square kilo-meters of the circumpolar Southern Ocean. The Con-vention’s goal is to manage this area with attention notjust to economically exploitable species, such as krill,but to the ecosystem as a whole, encompassing otherspecies of concern, such as penguins and seals.

Similar to the CLRTAP, CCAMLR aims to be an adaptive, learning system. Two working groups,under the supervision of a scientific committee, mon-itor ecosystem and fishery data. The data help to cal-ibrate ecosystem models and guide decisions byCCAMLR on conservation measures, operationaliz-ing the precautionary principle to ensure that fishstocks do not crash. The Convention faces particularchallenges in deterring illegal, unreported, and un-regulated capture of Patagonian toothfish (Chileansea bass), a valuable but very slow-reproducing spe-cies. But innovations in monitoring and reporting—including requirements for vessel monitoring systemsthat permit satellite tracking and implementation of a catch documentation scheme for landings andtransshipments of fish—are changing incentives andimproving information for management.42

Many coastal and marine ecosystems cross na-tional boundaries and demand coordinated transna-tional action, particularly for enclosed seas and in-ternational lakes. The GEF, operating under variousmandates to support 45 international waters projectsby 2000, has pioneered transboundary diagnosticanalysis to identify problems and balance interestsacross stakeholders. The science-based analysis pro-vides a way of objectively assessing the nature of theproblem and engaging stakeholders. It then serves asthe basis for agreeing on a Strategic Action Plan. AGEF study found that the analysis and planning,when completed, substantially improved priority set-ting and consensus forging.43

Integrated coastal management is an approachthat systematically engages stakeholders in the di-agnosis and solution of coastal problems. A recentcount found 621 national and subnational examplesof integrated coastal management worldwide, with284 in 99 developing and transition economies.44

But many of these efforts exist only on paper. Ex-cluding the 110 integrated coastal management ef-forts in the United States (where the track record isgenerally longer), only 45 percent are in implemen-tation, and data are lacking on their effectiveness.While integrated coastal management exemplifiesthe institutional approach to collective action prob-lems championed by this Report, it has not yet fullydemonstrated its potential.

Sixty percent of the earth’s freshwater resources arefound in international river basins, within the bor-ders of more than one state.45 Forty percent of theworld’s people live in those shared basins, all withexpectations of using the rivers’ resources. Histori-cally, competing demands for shared waters have ledto tensions and conflict. As populations grow andeconomies develop, more pressure will be brought to bear on these shared resources. To promote peace,to sustain river basin ecosystems, and to meet thedevelopment needs of all those who depend uponshared water resources, it will become imperative thatcountries cooperatively sustain, manage, and developinternational river basins. The Nile Basin Initiativeresponds to this challenge (box 8.4).

Commons in transitionIn South Asia, much of Africa, and parts of SoutheastAsia there are regions where people have used forestsand woodlands for generations. Historically, some ofthese common property resources were well managed


by community institutions. Elsewhere the resourceswere so abundant that there was no need for elaboratemanagement. In both cases, many of these woodlandswere appropriated by colonial governments, ofteneager for timber revenues. The problem was that thesegovernments and their independent successors oftenlacked the ability to manage and protect these re-sources—and the interest in involving the communi-ties that used them. As population and economicpressures increased, these woodlands have become de-graded through conversion and overexploitation.

Since 1985 many countries have begun to trans-fer control of woodlands back to local communities.Bolivia, Colombia, and Peru transferred almost 50million hectares to community ownership; Bolivia,Brazil, India, and Peru set up community manage-ment over 111.1 million hectares. Indonesia, Nepal,Sudan, Tanzania, and a number of other countrieshave undertaken similar programs.46

Projects in these countries seek to foster commu-nity institutions for forest management, as well asformally transfer authority. Doing so often requireschanging the national policies and laws for forests

and land tenure—and changing the incentives andorganizational culture of the national forestry orland management authority. It also requires nego-tiating rights among traditional users of commonproperty resources—and building social capital andmanagement capacity in local communities. Theseare formidable challenges, but a decade of effort hasyielded some encouraging results—as well as cau-tionary lessons. Projects in India and Nepal showthat communities can realize greater income and en-vironmental gains through management and recu-peration of highly degraded forest areas. But therehas sometimes been less willingness of governmentto relinquish areas that still contain valuable timberresources.47

Fragmented habitats with less-disputed tenureThe tradeoff between biodiversity goals and privateprofits is most problematic in more extensively mod-ified areas where most of the original habitat hasbeen lost. These lands, attractive to settlement, re-tain less-disturbed natural habitat patches withinmosaics of agricultural land. One study identified a

An extraordinary example of cooperation in the management ofinternational river basins is evolving in the Nile River Basin. TheNile, at almost 7,000 kilometers, is the world’s longest river. Thebasin covers 3 million square kilometers and is shared by 10countries: Burundi, the Democratic Republic of Congo, the ArabRepublic of Egypt, Eritrea, Ethiopia, Kenya, Rwanda, Sudan, Tan-zania, and Uganda. Tensions, some ancient, arise because all ri-parians rely to a greater or lesser extent on the waters of theNile for their basic needs and economic growth. For some, thewaters of the Nile are perceived as central to their survival.

The countries of the basin are characterized by extremepoverty, widespread conflict, and increasing water scarcity in the face of growing water demands. This instability com-pounds the challenges of economic growth in the region, asdoes a growing scarcity of water relative to the basin’s bur-geoning population. About 150 million people live in the basintoday, with growing water demand per capita. More than 300million people are projected to be living in the basin in 25 years.The pressures on scarce water resources will be very great.

The countries of the Nile have made a conscious decisionto use the river as a force to unify and integrate—rather thandivide and fragment—the region, committing themselves to co-operation. Together they have launched the Nile Basin Initia-tive, led by a Council of Ministers of Water Affairs of the NileBasin, with the support of a Technical Advisory Committee, anda Secretariat in Entebbe, Uganda. The initiative is a regionalpartnership within which the countries of the Nile Basin have

united in common pursuit of the sustainable development and management of Nile waters. Its Strategic Action Programis guided by a shared vision “to achieve sustainable socio-economic development through the equitable utilization of, andbenefit from, the common Nile Basin water resources.” Theprogram includes basinwide projects to lay the foundation forjoint action, and two subbasin programs of cooperative invest-ments that will promote poverty alleviation, growth, and betterenvironmental management. The initiative enjoys the strongsupport of many donor partners through an International Con-sortium for Cooperation on the Nile, chaired by the World Bank.

The Nile waters embody both potential for conflict and po-tential for mutual gain. Unilateral water development strate-gies in the basin could lead to serious degradation of the riversystem and greatly increase tensions among riparians. But co-operative development and management of Nile waters in sus-tainable ways could increase total river flows and economicbenefits, generating opportunities for “win-win” gains that canbe shared among the riparians. The Initiative provides an insti-tutional framework to promote this cooperation, built on strongriparian ownership and shared purpose and supported by theinternational community. Cooperative water resources man-agement might also serve as a catalyst for greater regional in-tegration beyond the river, with benefits far exceeding thosefrom the river itself.

Source: World Bank staff.

Box 8.4

The Nile Basin Initiative


set of such areas, the hotspots that have lost morethan 70 percent of their original area and now holdabout one-third of the world’s terrestrial biodiversityon just 1.4 percent of the Earth’s surface.48

Fragmentation raises the risk of extinction. Smallerfragments support fewer species. Species caught inshrinking fragments may vanish locally; if they are un-lucky enough to be restricted to just a few fragments,they risk extinction. It takes time, though, for speciesto vanish in a newly isolated fragment, as their popu-lations dwindle slowly. In a 10 square kilometers frag-ment, half the threatened species—those unsupport-able by the smaller fragment—are lost in 50 years;49

in a 1 square kilometer fragment the half life is just 10years.50 So over the coming decades there is the riskof an avalanche of extinctions—and the consequentloss of entire ecosystems—if habitat loss and fragmen-tation continue. But there is also the possibility of re-versing the decline if action is swift enough now.

Because these areas have been settled longer, partsof them may exhibit reasonably well-defined landtenure for individuals or groups—though rarelywithout some degree of dispute. And tenure gener-ally carries with it some measure of legal or tradi-tional rights to modify land cover. So the problemof establishing governance is less pressing than infrontier forests (though rarely absent), and attentionfocuses on reconciling the interests of landholderswith those of the wider community.

The proximity of people and habitats increasesthe value of environmental services, such as floodprevention and recreation. But favorable agrocli-matic conditions and dense populations motivatelandholders to drain wetlands, to appropriate streamflows, to “mine” forests, and to expand their towns,croplands, and pastures. These areas thus have highconservation values for the local and global commu-nity—and often high exploitation values for thelandholder. How can these values be reconciled?

The general approach is to use markets, regula-tions, or inducements to change the landholder’s in-centives. It helps to distinguish between incentivesthat are self-enforcing and those that require exter-nal monitoring and enforcement.

Much project-oriented work in promoting biodi-versity (apart from establishing protected areas) hasbeen aimed at setting up self-enforcing incentivesthrough new technologies or through new markets.The dream is that a one-time intervention would be

sufficient to create a sustainable source of value inbiodiversity, one that the landholder would then bemotivated to maintain rather than mine. An elegantpilot project in Peru illustrates the principle. There,villagers will “ranch” valuable poison dart frogs inthe forest, using a technique that hatches and har-vests in a sustainable manner more juveniles thanwould normally grow. Only juveniles will be ex-ported; since they are impossible to catch in thewild, the scheme will not induce poaching if prop-erly enforced. The frogs fetch high prices, so there isa strong incentive to keep the forest in place.

But there is a growing consensus that this kind offully self-reinforcing approach, while locally impor-tant and worth pursuing where possible, may havelimited scope. Few wild biological resources are ex-tremely profitable, resistant to domestication, andmore attractive for a landowner to maintain than toliquidate. Large trees, for instance, grow more slowlythan money in the bank, so they are always temptingto liquidate in the absence of regulation or stronglyfelt nonmarket values. Ecotourism today rarely con-fers substantial per hectare returns, though there aresome examples of success (often partially subsidizedby donors) in community wildlife management inAfrica.51 Integrated conservation-development proj-ects, premised on the idea that improved local liveli-hoods would reduce pressure on habitats, have alsobeen disappointing. In some cases local agents werenot responsible for habitat degradation; in others un-conditional provision of additional income did noth-ing to diminish the attractiveness of overexploitingnatural resources.

A more promising approach to self-reinforcing in-centives seeks to shift farmers to more biodiversity-friendly forms of land management.52 This includespromoting agroforestry systems that mimic and com-plement the biodiversity and hydrological functionsof the original ecosystem while providing more in-come and employment than annual crops. In Suma-tra, smallholder rubber agroforests improved plant-ing stock may be able to maintain half the speciesrichness and carbon levels of primary forest, while of-fering profits and employment generation superiorto that of biodiversity-poor oil palm plantations.53

Such systems may help to restore biodiversity in de-graded ecosystems dominated by agricultural pro-duction, to reduce habitat damage downstream fromintensive agricultural areas, and to enhance the con-


servation effectiveness in protected areas by enhanc-ing the habitat quality of surrounding land uses.

But those introducing ecofriendly farming ap-proaches walk a knife-edge. Not profitable enough,and the approach will be shunned. Too profitable,and it could displace the habitats it is supposed tosave. So agroforests and similar approaches can com-plement but not substitute for the maintenance ofsome areas of natural habitat, and may not always beself-enforcing.

Equity and efficiency in blending development and conservationDisillusionment with the self-enforcing approach hasprompted interest in an alternative that compensateslandholders for agreeing to externally verified restric-tions on land use.54 Payments may be ongoing, orwhere legal institutions are strong, landholders mayagree to permanent conservation easements on theirproperty in return for a one-time payment. Paymentsmay be directly financed by the state on behalf of thebeneficiaries of environmental services. Or the statemay create a market for these services by imposing reg-ulatory requirements on environmental service users.

A well-known example is the U.S. ConservationReserve Program, which spends about $1.5 billion a year in incentives for landholders to remove envi-ronmentally sensitive land from production and es-tablish vegetation that prevents erosion. Funding isbased on a scoring system that considers a range ofenvironmental benefits as well as the farmer’s askingprice, resulting in a cost-effective award system. Eu-rope spends a comparable amount for conservationset-asides.55

In the developing world, Latin American coun-tries are leading the way. Costa Rica’s Payment forEnvironmental Services Program (box 8.5) aggre-gates financing for forest conservation from a vari-ety of dispersed beneficiaries:

� Urban water users (who pay for sediment reduc-tion).

� Run-of-river hydropower facilities (which careabout regulation of water flow).

� Domestic taxpayers (concerned with biodiversityand scenic beauty, for their own enjoyment and asa source of tourism and bioprospecting revenue).

� Foreigners (seeking carbon sequestration creditsto comply with voluntary or regulatory limits onnet CO2 emissions).

Funds are then used to purchase five-year renewableconservation easements on forested property.

Brazilian states have recently introduced two ex-tremely innovative financing mechanisms. One, theICMS Ecológico (box 8.6), modifies state revenue-sharing rules to reward municipios (districts) thatcreate public or private protected areas, or protectwatersheds. The other (box 8.7) introduces tradabil-ity of a long-standing obligation of landholders tomaintain a set proportion of each property as a for-est reserve. With tradability, farms that are out ofcompliance can potentially pay others to maintainand expand high-quality forest of biodiversity value,rather than uproot profitable, employment-generat-ing crops in a vain and expensive attempt to recreatea vanished forest. This reduces compliance costs bycreating a market for conservation services. Paranástate has recently used tradability as a means of se-curing stakeholder support for a new law that seeksto secure universal enforcement of the forest reserveobligation.

These examples point the way toward ecosystemmanagement institutions with three important fea-tures aimed at balancing interests and forging long-term commitments. First, they would foster a partic-ipatory formulation of a vision and specific goals forregional development and landscape management.Environmental goals might well include mainte-nance of representative ecosystems over areas largeenough to ensure their long-term viability. Second,they would allow for flexibility in achieving thosegoals, reducing the scope for conflict among stake-holders and reducing social and private costs of out-comes that are valued but hard to measure in finan-cial terms. Third, they would set up incentives forlandholders to realize the regional vision.

International contributions of funds to such do-mestic landscape management institutions might beone way to meet both international and domesticgoals, while keeping land ownership and manage-ment firmly in domestic hands. The domestic in-stitution would assess local goals and priorities, setup transparent rules for providing and distributingincentives, establish compliance and enforcementmechanisms, and receive domestic and internationalfinancing, both public and private. It might well beintegrated with regional development authoritiesand use funding to address poverty alleviation needsthat are only indirectly tied to land use but are per-


ceived as being part of a comprehensive vision of sus-tainable local development. Having such an insti-tution in place as a precondition for internationalconservation finance would allay international fearsthat the promise of funding would perversely inducegreater habitat destruction. It would also allay do-mestic fears of foreign control of land and threats tosovereignty.

Mitigating and adapting to risks

of climate change

People are changing the planet’s climate. Burningfossil fuels—and to a lesser but important extent, de-forestation and other land use practices—releasesCO2 and other greenhouse gases (GHGs). Accumu-

lating more rapidly in the atmosphere than can beremoved by natural sinks, these gases trap heat,changing climate in complex ways, with widespreadimpacts. This is quintessentially a global problem be-cause GHGs mix rapidly in the atmosphere and havethe same impact on climate change regardless ofwhere they are emitted. And it is a long-term prob-lem because the great inertia in social, economic, andphysical systems means that it would take decades tomoderate the rate of change substantially.

Because of its characteristics, climate change hasbeen a particularly difficult problem to solve. It hasbeen difficult for society to pick up signals—to un-derstand the causes, magnitude, and consequences ofclimate change. Atmospheric CO2 has been increas-

Costa Rica has pioneered a program that allows those whobenefit from the environmental services of forests to compen-sate those who bear the burden of maintaining those forests.The Payments for Environmental Services Program is an out-growth of a landmark 1996 Forestry Law, which recognizesfour environmental services provided by forest ecosystems:mitigation of GHG emissions; hydrological services, includingwater for human consumption, irrigation, and energy produc-tion; biodiversity conservation; and scenic beauty for recreationand ecotourism. Under the program, users of these servicesfinance a national forestry fund (FONAFIFO), which in turn con-tracts with private landholders for forest conservation and ap-plication of sustainable management practices.

The program arose from a growing awareness of forests’importance against a backdrop of rapid deforestation. In 1950forests covered approximately half of Costa Rica. But in the1970s and 1980s, the country’s deforestation rate was amongthe highest in the world. Appreciation of the importance ofCosta Rica’s biodiversity—both as an element of the nationalpatrimony and as a source of revenue through ecotourism—prompted the creation of an extensive national park system.Even so, much of the nation’s forest remained in private hands.And from a landholder’s viewpoint, extraction of all salabletimber and conversion to pasture was more profitable thansustainable forestry, and certainly more profitable than strictforest conservation. By 1995 forest cover had fallen to just one-quarter of Costa Rica’s territory. But from the early 1990s therehad been increasing attention by NGOs and government agen-cies to the environmental services of forests, catalyzed in partby a World Bank study that tried for the first time to place eco-nomic values on forest environmental services. These discus-sions culminated in the new forestry law.

The national forestry fund contracts with individuals (for upto 300 hectares of primary and mature secondary forest), withindigenous reserves, and with NGO groups representing small-holders. There are three types of contracts: for conservationof existing forests, for sustainable forest management, and for

reforestation. In all cases, participants must present a forestmanagement plan, certified by a licensed forester, that de-scribes the biophysical condition of the land, sets up a moni-toring schedule, and specifies actions for the prevention of for-est fires, illegal hunting, and illegal harvesting. The landholderscede rights to environmental services (such as sequesteredcarbon) to FONAFIFO. Payments differ by contract type. For-est conservation contracts, which constitute 85 percent of thecontracted area, pay $42 per hectare a year for five yearsagainst the completion of specified tasks. By the end of 2001,4,461 contracts covered 283,384 hectares, with 14 percent ofthe area belonging to indigenous groups.

The fund finances the program in part through the sale ofthese services. Hydropower producers, including both smallprivate facilities and the state-owned Compañía Nacional deFuerza y Luz, are interested in purchasing environmental ser-vices such as stream-flow regulation, sediment retention, anderosion control. These private and public sector companieshave signed multiyear contracts totaling more than $5.5 mil-lion. International sales of carbon offsets (carbon sequestrationservices) have netted $2 million. The GEF, through the WorldBank, recently provided $5 million to support forestry conser-vation contracts in priority areas of the Mesoamerican Biologi-cal Corridor as well as an additional $3 million to strengthenprogram implementation. This is supplemented by a $32 mil-lion World Bank loan to support the program while long-termfinancing mechanisms are developed and institutionalized. Sofar, the bulk of the $57 million expended has come from a na-tionwide fuel tax.

As a pioneering effort, the program faces a variety of chal-lenges—among them, reducing the costs of monitoring andenforcing thousands of small contracts, optimizing the Pro-gram’s impact on environmental quality, and securing long-term sustainable sources of finance.

Source: Ortiz Malavasi and Kellenberg, background note for WDR 2003.

Box 8.5

Costa Rica’s program of payment for environmental services


ing since 1750. Svante Arrhenius surmised in 1896that this might affect global climate, but emergingconsensus on aspects of the problem has beenachieved only a century later with the IPCC (de-scribed earlier). Dispersion of interests in mitigatingclimate change has been a barrier to achieving agree-ment on actions. Many of the people most vulnerable

to climate change are poor, live in remote regions—or have not even been born. Even the vulnerablewealthy—owners of oceanfront property, for in-stance—may not yet rank climate change among theirgreatest current concerns. The voice of these numer-ous but diffuse interests is weaker than that of indus-tries and consumers, especially wealthy ones, that are

A major source of state finance in Brazil is a value added tax,the ICMS. One-quarter of the tax is rebated by states to mu-nicipalities. Of this payment, three-quarters must be pro-portional to the municipality’s contribution; the rest may bedistributed according to criteria set by the state. Four states—Paraná, São Paulo, Minas Gerais, and Rondônia—now use thearea under protection as one criterion for redistribution.

The ICMS Ecológico is a unique Brazilian mechanism thatuses state-to-municipality (including rural districts) transfers toreward the creation and maintenance of protected areas forbiodiversity conservation and watershed protection. The intentis to counteract local perceptions that maintenance of pro-tected areas reduces municipal revenue. This provides an in-centive for local authorities and communities to support theestablishment of protected areas rather than permit, say, theexpansion of extensive cattle ranching. But the revenue trans-fers are untied and need not be devoted to park management.

The proportion devoted to protected area incentives variesfrom 0.5 percent in Minas Gerais to 5 percent in Paraná andRondônia. In Minas Gerais much of the redistributive portionof the ICMS is used to support social objectives other thanenvironment.

While the ICMS Ecológico represents only a small propor-tion of total ICMS disbursements, it constitutes a relativelylarge incentive by the standards of conservation programs.Annual budgets have been about R$50 million in Paraná andR$15 million in Minas Gerais. (Until 1999, the Brazilian real andU.S. dollar were roughly equivalent.)

Since the programs were adopted, about 1 million hectareshave been placed under environmental zoning restrictions inParaná, and about 800,000 in Minas Gerais. Field interviewssuggest that municipal authorities deploy local incentives to in-duce landholders to undertake these restrictions, in order toattract state funding. The ICMS Ecológico is thus an interest-ing mechanism because it affects landholder incentives with-out incurring the large transactions costs associated with pay-ments directly to landholders. Its effectiveness, however,depends on the ability of the state to monitor and enforce land-holders’ compliance with conservation commitments.

Source: May and others (forthcoming). See also Bernardes (1999);Grieg-Gran (2000).

Box 8.6

Municipal incentives for conservation

The Brazilian state of Paraná has created a market for conser-vation by allowing trade in landholder obligations to maintainforests. A long-standing Brazilian law has required that prop-erty owners maintain 20 percent of each property under nativevegetation (50 percent to 80 percent in the Amazon region).But noncompliance was common.

Paraná’s new law allows landowners to satisfy their forestreserve requirements off site, on areas of greater ecologicalsignificance but lower opportunity cost. “Trading” of forest re-serve is allowed only within biome–river basin combinations inorder to ensure full representation of the state’s biodiversity.As an incentive for compliance, landholders must prove thatthey are registered with SISLEG to carry out any legal transac-tion related to their land, such as sales.

A preliminary analysis of a hypothetical similar program forthe nearby state of Minas Gerais illustrates how efficiency-enhancing programs such as this might increase biodiversityconservation and economic output. In a scenario in which for-

est reserve requirements are enforced property-by-property,landholders with less than 20 percent forest cover achievecompliance by abandoning their land to spontaneous regrowth.Because this land is heavily worked and has sparse seedsources, this regrowth is likely to be of low quality, with littlereal environmental benefit. The private costs of compliance areestimated at about R$1.5 billion. In the trading scenarios, land-holders may achieve compliance in part by purchasing for-est protection or regeneration from others who have morethan 20 percent forest cover. Because of the proximity of for-est remnants, regeneration from this source is likely to bemore vigorous and of substantially greater ecological value.When landholders are free to trade within the same biome,compliance costs drop by almost three-quarters, while theproportion of higher-ecological-quality forest reserve increasesto 72 percent.

Source: Chomitz, Thomas, and Salazar Brandão (forthcoming).

Box 8.7

Tradable forest obligations efficiently meeting conservation goals


heavily reliant on fossil fuels and would bear the bur-den of control costs. Finally, climate change is anextreme example of the commitment problem de-scribed in chapter 3. Mitigation of climate change willrequire a concerted, decades-long effort.

With these barriers in mind this section starts byreviewing the consequences and sources of climatechange. Using this information, it assesses institu-tional aspects of undertaking the long-run miti-gation of climate change. Then, it examines issuesrelated to adapting to the climate change that pastactions have already made inevitable—and that lackof progress in mitigation will exacerbate.

Consequences and causes of climate changeClimate change is already here.56 Over the past cen-tury, mean global surface temperature has increasedby 0.4° to 0.8° Celsius (C). According to the IPCC,GHGs released by human action are likely to havebeen responsible for most of the warming of the past50 years. Other observed changes are consistent withthis warming. Sea levels rose 10 to 20 centimetersover the past century. Over the past 50 years, thesummer extent of arctic sea-ice has shrunk by 10 per-cent or more, and its thickness by 40 percent. Out-side the polar regions, glaciers are retreating, affect-ing mountain ecosystems and water flows. Droughtshave become more frequent and intense in Asia andAfrica. Many of the world’s coral reefs have beendamaged by bleaching (see note 21), associated withhigher sea temperatures. Animals and plants haveshifted their geographic ranges and behavior. Ex-treme weather events may have increased.

Unchecked, these impacts are predicted to inten-sify, posing risks of varying kinds for different coun-tries. Impacts will fall heavily on many developingcountries, including those that have not contributedto climate change. They are physically vulnerable.Climate-sensitive agriculture bulks large in theireconomies. And they have less institutional capacityto adapt to change.

Low-lying islands and coastal areas everywherewill be exposed to flooding and storm damage.Bangladesh, for instance, may be severely hit. A re-cent study predicts that by 2030 an additional 14percent of the country would become extremely vul-nerable to floods caused by increased rainfall.57 A10-centimeter increase in sea level would perma-nently inundate 2 percent of the country, with theadditional effect of making floods more severe and

longer lasting. Saltwater intrusions, and more severedry seasons, will reduce fresh water availability incoastal areas. As coastal populations swell world-wide, a 40-centimeter rise in the sea level would in-crease the number of coastal dwellers at risk of an-nual flooding by 75 to 206 million—90 percent ofthem in Africa and Asia.58 The starkest local impactsare faced by the low islands of the Pacific, some ofwhich could lose their freshwater and be largely in-undated during storm surges if sea levels rise.

Climate change could damage developing-countryagriculture. Even taking into account crop substitu-tion possibilities, one study finds that a 2° C temper-ature increase decreases the value of Indian agricul-tural land by 36 percent.59 Arid and semi-arid areasin Africa and Asia will probably face higher tempera-tures. Feedback between vegetation loss and reducedrainfall could result in faster desertification.60

Impacts on industrial countries are thought to bemixed, but may be generally negative.61 Agriculturalproductivity will likely improve, in the medium term,in some northern areas. But southern Europe willlikely suffer drier summers; much of Europe couldexperience river flooding. The Atlantic coast of theUnited States will be vulnerable to rising sea levels,and Australia will likely be more subject to drought.

Current understanding also depicts the global cli-mate as a finely balanced mechanism that goes awrywhen stressed, with prehistoric instances of 10° Cglobal temperature changes occurring within thespan of a decade.62 There is a risk of catastrophicconsequences of climate change that could be irre-versibly set in motion during this century. Therecould, for instance, be an abrupt failure of the greatocean “conveyor belt” currents that warm the NorthAtlantic and mix deep with surface waters. Biodiver-sity losses could be massive as habitat fragmentationmakes it impossible for plants and animals to mi-grate in response to rapidly changing temperatures.The risks are difficult to evaluate, but they affect in-dustrial as well as developing countries and are cred-ible enough to demand attention. At the very leastthey put a premium, or option value, on maintain-ing lower levels of atmospheric GHGs while theworld more carefully examines the consequences anddevelops options for mitigation.

What drives climate change? GHGs have built upin the atmosphere as a consequence of 250 years ofemissions from burning fossil fuel, deforestation,and other sources. Currently, about 40 percent of the


human-induced heating effect63 is from increased at-mospheric concentrations of methane (from land-fills, rice paddies, and cows), nitrous oxide (from in-dustry and agriculture), and halocarbons such asCFCs. The remaining 60 percent is CO2. Of theapproximately 28.2 billion tons of annual CO2emissions, 23.1 billion are from energy and other in-dustrial sources. This component is closely linked to

income, across countries, though there is consider-able variation in emissions per dollar of GDP andemissions per capita among the wealthier countries.The remaining 5.1 billion tons come from tropicaldeforestation.

A look at two scenarios64 for future CO2 emissionswill help provide background for understanding thechallenge of mitigating climate change (figure 8.2).

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Figure 8.2

Fossil fuel–intensive and climate-friendly scenarios 1990–2100

Fossil scenario: +3° to 6.9° C temperature increase by 2100. Climate-friendly scenario: +1.2° to 3.3° C temperature increase by 2100.Source: Emissions scenarios A1FI and B1 from Nakicenovic and Swart (2000); temperature predictions from Stott and Kettleborough (2002).


Both scenarios start in 1990, with emissions per capitain OECD countries six times the level in Asia (exclud-ing Japan), and with total emissions about equally di-vided between the developing and developed world.Both scenarios posit rapid economic growth—andsubstantial convergence of per capita GDP betweendeveloped and developing countries. The top panelscenario is not a static extrapolation of current tech-nologies. It already incorporates rapid technologicalprogress, with a 75 percent reduction in energy useper dollar of GDP, and increased use of renewables(up to 17 percent from 5 percent in 1999).

Nonetheless, emissions increase radically over thecentury, and industrial country emissions in 2100 arefar above world emissions in 1990. By 2100 the im-plied mean increase in global temperature is 3.0° to6.9° C.65 The bottom panel scenario posits more vig-orous technological change, with a much less energy-intensive economy and a 52 percent share of renew-able energy. This holds the temperature increase tothe range 1.2° to 3.3° C.66 In both scenarios, OECDemissions per capita are still twice the level of the de-veloping countries at the end of the century.

These scenarios are illustrative rather than predic-tive. But they convey three points that are essentialto understanding the problems of balancing inter-ests and executing agreements. First, emissions percapita in industrial countries are much higher thanin developing countries and are likely to remainhigher for some time. In response to this imbal-ance—richer countries imposing higher per capitaexternalities—the U.N. Framework Commission onClimate Change (UNFCCC) established different-iated responsibilities for developed countries, requir-ing them to take the lead in addressing climatechange and providing needed technology to the de-veloping world. Second, developing countries willnonetheless emit substantially more than developedcountries in the future and therefore must be in-volved in implementation. Third, pursuing the moreclimate-friendly scenario requires starting now. Muchcapital stock—such as power plants and buildings—has a working life of 50 years or more. And many of the renewable and low-carbon energy technolo-gies required for the favorable scenario will require10–20 years of research and development to bring to market. To have high-efficiency, low-carbon capi-tal in place in the latter half of this century, theprocess of research, development, and deployment

of human-made capital—incorporating greater en-ergy efficiency and increased use of renewables—hasto begin now.

In sum, those whose actions cause climate change,and those who bear its risks, form two diverse andonly partially overlapping sets of actors. This diver-sity raises issues of equity and efficiency in seekingoptions for climate change mitigation—and financ-ing for both mitigation and adaptation.

Mitigating climate changeConcerned about climatic risks, most of the world’snations agreed in 1992 to the UNFCCC. The con-vention’s objective is defined as the “stabilization ofgreenhouse gas concentrations in the atmosphere ata level that would prevent dangerous anthropogenicinterference with the climate system.” But the Con-vention itself did not quantify this level or specifyhow to achieve it.

As a first step the Kyoto Protocol to the UNFCCCwas negotiated in 1997. This agreement would re-quire industrial nations and economies in transi-tion—the Annex B countries—to accept specifiedlimits on emissions of GHGs for 2008–12. The Pro-tocol would decrease compliance costs by allowingAnnex B countries to trade their emissions allow-ances. It would also allow these countries to purchaseemissions reductions from developing countries, thereductions being reckoned against assumed “businessas usual” levels, since the developing countries’ emis-sions were not capped. The subsequent MarrakechAccords of 2001 allowed for developing countries togenerate emissions reductions from forestry projectsin only a limited way. At this writing, the Kyoto Pro-tocol has not entered into force.

It is important to recognize that the Protocol’scommitments for 2008–12, even if observed by allmajor emitters, would be only a first step toward the UNFCCC goal. Keeping this in mind, this chap-ter outlines some strategic considerations in pur-suing that long-run goal, a cornerstone of globalsustainability.

If the world is to stabilize atmospheric concentra-tions and provide good living standards to all itscitizens, it must switch in the long run to energytechnologies (such as wind, solar power, and hydro-gen, among others) that emit near-zero net amountsof CO2. Simple arithmetic shows why. The world’spopulation is now expected to stabilize at about 9 bil-


lion around mid-century. Suppose that people thenaspire to the current lifestyle of a prosperous country.Among the prosperous countries, Norway has one ofthe lowest ratios of CO2 emissions per capita fromenergy, owing in part to ample use of hydropower.Yet if the global population of 2050 emitted CO2 onaverage at this rate, the total would be about 2.5times current global emissions,67 which would greatlyexceed the planetary absorptive capacity.

Between now and the time the world switches en-tirely to near-zero-emissions technologies, GHGswill accumulate in the atmosphere. The amount ofdamage, and the risk of catastrophic changes, will berelated to the cumulative amount. To reduce thedamage, the world needs to accelerate the shift tolower-emissions energy technologies, increase the ef-ficiency of energy use, and reduce the emissions ofGHGs.

Although these actions provide some immediateside benefits in addition to their cumulative effecton reducing climate damages, they involve costs. Be-cause emissions reductions represent a global publicgood, burden sharing is inevitably contentious. Tofacilitate global coordination in this effort, a strat-egy has to reduce the overall cost of mitigating emis-sions and seek to align local and global interests asfar as possible. It also has to avoid free-rider prob-lems. This requires further institutional innovationat both national and global levels.

An adaptive strategy for mitigating climate changeprovides incentives for taking action now to reduceGHG emissions over three time horizons: near term(5–10 years), medium term (10–20 years), and longterm (20–50 years). The global climate change strat-egy has to be adaptive because climate change miti-gation will take most of this century to accomplish.Economic, environmental, and political conditions—and our understanding of climate change—will cer-tainly change markedly over this period. Some actionsneed to be undertaken now—the impact of those ac-tions will play out over these three time horizons:

� Vigorously pursue current options to cheaply abateGHG emissions, thus reducing the possibility oftriggering catastrophic climate changes and buy-ing time for longer-term, more fundamental ac-tions to take hold.

� Set up incentives to ensure that the next genera-tion of long-lived capital stock—transport, gen-

erators, and buildings—is energy efficient, toencourage agricultural intensification and main-tenance of carbon stocks in forests, and to shifturban structures toward lower energy use.

� Start now on research and development to ensurethat zero-emission energy technologies can be de-veloped and widely deployed by mid-century.

� Building on current efforts, create adaptive inter-national institutions for fostering cooperation andburden sharing.

Act now to reduce today’s emissions Although non-OECD countries use only about 20percent as much energy per capita as OECD coun-tries, they use 3.8 times as much energy per dollar ofGDP.68 This disparity suggests looking for ways thatdeveloping and transition countries can increase ef-ficiency and reduce fuel costs—with reduced GHGemissions as a welcome side-benefit. Why are theseapparent “win-win” opportunities so elusive? Twotypes of institutional failures get in the way. First,distortions in energy policy may disadvantage soci-ety at large, but benefit special interests. Second,firms and households neglect profitable ways of sav-ing energy because it is simply too much trouble topursue them. Fortunately, there are institutional so-lutions to both of these problems—though neitheris easy to solve.

Many energy-rich countries subsidize energy con-sumers or producers, resulting in inefficient fuel use,an inappropriate fuel mix, and needless CO2 emis-sions. Box 7.6 discussed Iran, which spends 18 per-cent of its GDP on petroleum product subsidies.Coal subsidies in OECD countries were $8 billionin 1997.69

Dismantling subsidies to energy—or to ineffi-cient energy-using industries—is no easy task, forreasons that this report has discussed at length. Butit is possible. China reduced CO2 emissions by 7.3percent over 1996–2000, largely through industrialrestructuring and fuel improvements, while increas-ing its GDP by 36 percent.70 These reductions wereaccompanied by a 32 percent reduction in particu-lates, which have severe health effects and contributeto global warming.71

In both industrial and developing countries house-holds and firms pass up energy-saving investmentswith extraordinarily high financial rates of return—on paper. Investments such as efficient electric mo-


tors, compact fluorescent lights, improved boil-ers, and insulation can often pay for themselves in a year or two, in the process yielding reductions ofboth GHGs and local air pollutants. But it takes ef-fort and attention to discover these opportunities,which may appear burdensome and risky to pursue.Consumers may legitimately wonder if an expensivelight bulb is really going to last long enough to pro-duce the advertised savings, or if the spectrum of theillumination will be unpleasant. They may not knowor much care that some appliances draw a couple ofwatts of stand-by power, though on a national scalethose watts add up to entire generating stations. Cor-porate executives or government facility managersmay not have the information or incentive to findopportunities for reducing heating bills.

New sets of institutions are making it easier forconsumers, business, and governments to take ad-vantage of energy efficiency opportunities. Theseinclude government initiatives to set standards anddisseminate information about efficiency. These ini-tiatives, pioneered in industrial countries, are nowbeing extended to developing and transition econo-mies. Thailand introduced a $189 million demand-

side management program in 1993.72 The programfirst targeted lighting, which accounts for 20 percentof Thai electricity consumption. The program per-suaded Thai manufacturers of fluorescent lights toswitch to a new design that consumed 10 percentless energy. The program eased consumer acceptancethrough a combination of advertising and imposi-tion of standards for light quality and durability.Within a year the new lighting commanded 100 per-cent of the market. Estimated benefit-cost ratioswere 54.6 for consumers and 13.8 for society as awhole, taking account of the program costs.

There appear to be many opportunities for devel-oping countries to reduce GHG emissions at a costjust high enough to be a local deterrent, but quitelow for the world. The capture of methane fromlandfills is an example with global applicability (box8.8). Examples such as these motivate the “carbonmarket,” which mobilizes funds from the industrialworld to tip the balance toward clean energy in thedeveloping and transition economies.

Agricultural intensification, combined with pro-tection of forests from wasteful destruction, has thepotential to dramatically reduce CO2 emissions while

The Prototype Carbon Fund is a pilot effort to “show how proj-ect-based greenhouse gas emissions reduction transactionscan promote and contribute to sustainable development andlower the cost of compliance with the Kyoto Protocol.” TheProtocol, if it comes into force, sets up opportunities fordeveloping countries and economies in transition to adoptcleaner technologies and sell the resulting reductions in GHGemissions to industrial countries that have committed to limitson their own net emissions. (Indeed such a market may comeinto being even if the Kyoto Protocol fails, arising from national-level policies and voluntary markets for emission reductions.)The carbon market offers tremendous potential. It could re-duce the cost to industrial countries of achieving any agreedgoal for emissions reductions. It could stimulate the develop-ment of renewable energy technologies. And it could providetechnology, environmental benefits, and export revenues tothe developing and transition world.

Achieving this potential, however, requires resolving a hostof technical and institutional problems. Can emission reduc-tions be produced at reasonable cost? How do you crediblymeasure them? How do you contract for them? Do they reallycontribute to sustainable development? Answering thesequestions is important not only for the implementation of car-bon markets, but for fostering consensus on their feasibility.

The Prototype Carbon Fund is a learning-by-doing enter-prise to help answer these questions. With $145 million con-tributed by six national governments and 17 private firms, itseeks to purchase emission reductions from 25–30 projects.Its first project finances methane capture and electricity gen-eration at a municipal landfill in Latvia. Without this financingthe city of Liepaja would not have found it attractive to capturethe methane that landfills emit. The capital costs are high rela-tive to the value of electricity; the economic rate of returnwould have been only 2.6 percent. A combination of carbonand grant financing for the initial investment boosts the city’sreturn to 22 percent. It will also result in an estimated reduc-tion of 681,000 tons (CO2 equivalent) of GHG emission, be-cause methane is a powerful heat-trapping gas; using it forelectricity not only directly reduces emissions, but also re-duces combustion of fossil fuels. The project also provides thecity with a landfill built to higher environmental standards.

In undertaking this transaction, the Prototype Carbon Fundpioneered the development of institutional tools for contracting,monitoring, and verifying emission reductions. This informationhas been widely disseminated as a global public good, reducingtransactions costs for future methane-capture projects.

Source: World Bank (2002h).

Box 8.8

The Prototype Carbon Fund and the carbon market


reducing rural poverty, protecting biodiversity, andproviding local environmental services. As mentionedearlier, land-use change contributes 5.1 billion tonsper year of CO2 to the atmosphere, plus or minus 50percent—that is, 10 percent to 30 percent of totalhuman emissions.73 Most of the land-use emissionsresult from the conversion of tropical forests. A sub-stantial portion of this conversion yields pasture orcroplands with modest returns. The agricultural in-tensification strategy described in chapter 5 keepsthese forests in place, for future sustainable use, andpromotes labor-intensive cropping in more suitablelands. Improved soils and denser crops also serve toabsorb CO2, which increases the land’s productivityand resilience. Timber plantations, agroforestry, andbiomass plantations could add substantially to seques-tration while improving rural livelihoods.

Incentives for forest conservation and soil carbonpresent implementation problems but offer a vastpayoff. Throughout the tropical world farmers mayburn a hectare of rainforest to get a one-off gain of afew hundred dollars—while releasing hundreds oftons of CO2 and destroying priceless biodiversity.Each year, according to FAO data, deforestationclaims 3.8 million hectares of tropical forest withbiomass greater than 200 tons per hectare, equiva-lent to about 370 tons per hectare of CO2 emissionsif fully cleared. This implies an abatement cost ofonly a dollar or two per ton.74

Meanwhile, energy users in industrial countrieswho desire to abate the same amount of CO2 athome—for voluntary reasons, or to meet a regula-tory requirement—may end up spending consider-ably more. In today’s nascent carbon market, buyersare paying $4.40 to $8 per ton to comply with na-tional regulations, and some scenarios for a globalcarbon market predict substantially higher prices.The potential gains from trade appear to be large. Bysplitting the difference, energy users in the devel-oped world could, in principle, save money in meet-ing their CO2 reduction obligation, help maintainthe many services and values of the tropical forest,and invest in a superior livelihood for the tropicalfarmer. As part of that livelihood improved soils andplantings would sequester even more CO2.

There are many practical problems in realizingthis vision, not least the danger that any particularplot of forest may eventually get burned or cut. Butthere are practical approaches to addressing these

problems.75 Most important, a global decision to in-vest in a portfolio of forest and agriculture carbonsinks diversifies this risk. Running these investmentsthrough locally controlled landscape managementinstitutions ensures that the arrangements are ac-ceptable. And it also helps shape the long-term in-centives for agricultural intensification that avertsthe long-term pressure for deforestation.

Act now to reduce emissions over the medium and long terms Actions now to affect the evolution of the capitalstock—vehicles, buildings, and generators—can yieldhuge and long-lasting reductions in GHG emissionsand improvements in economic efficiency. Producingthis equipment generates vast amounts of emissions.And once in place the equipment drives emissions fordecades. Turnover times are about 10 years for vehi-cles, 30–50 years for power plants, and 80 years forresidential buildings. This means great opportunitiesfor reducing long-term emissions and fuel costs byusing energy efficient technologies to expand the capital stock, or to replace equipment that is beingretired.

The opportunities are particularly great for devel-oping countries, which will be investing massively inlong-lived infrastructure as a keystone of develop-ment. Between 1997 and 2020 developing countriesare expected to expand their electricity-generatingcapacity by a factor of 2.5, investing $1.7 trillion innew plants and perhaps more in transmission anddistribution.76 Of China’s building stock in 2015,half is expected to be built between now and then.77

Once erected, those buildings are likely to be inplace for half a century or more. But current build-ing practices use antiquated technologies that leakheat, do not allow users to adjust heat levels, andconsume 50–100 percent more energy than build-ings in similar climes elsewhere. The coal to heatthese buildings already generates 350 million tons ofCO2 a year and much of northern China’s unhealth-ful levels of sulfur dioxide (SO2) and particulates.Clearly, a vigorous shift in building practices couldhave tremendous long-term benefits both for Chinaand for the world’s climate. According to a WorldBank study, such a shift will take substantial reformsin energy policies so that consumers have an incen-tive to conserve energy, but in a way to protect thepoorest. It will simultaneously require research, de-


velopment, and dissemination of improved buildingdesigns appropriate to local conditions.

Actions now can determine whether developmentpaths “lock in” to high- or low-energy regimes, withself-reinforcing patterns of policy, infrastructure,capital, and lifestyle. Land-rich countries includ-ing Australia, Canada, and the United States haveevolved energy-intensive lifestyles featuring low fuelprices and heavy reliance on automobiles.78 Socialnorms, infrastructure placement, and relative pricesdiscourage individuals from opting for lifestyles thatconsume fewer resources. And because individualsare locked in to high energy consumption, there islikely to be little political support for increasing en-ergy prices to levels that reflect environmental im-pacts. Once this lock-in occurs, it may take a gener-ation or more to change. Lock-in is prevalent in theenergy supply sector as well. Coal dependence, forinstance, creates infrastructure, communities, andpowerful political constituencies, making it difficultto shift to less carbon-intensive fuel sources.

Over the longer term the atmosphere’s level ofgreenhouse gases can be stabilized only by switchingthe world to zero-emission energy sources: windpower, solar power, renewable biomass, fusion, andfossil fuel (with equivalent physical sequestration ofCO2). A few, such as wind power in favorable loca-tions, have good short-term prospects. But most ofthese technologies are thought to be decades fromlarge-scale commercial realization—and then only if basic and applied research are more vigorouslypursued. Historically, new energy technologies havetaken half a century or more to displace earlier ones.Accelerated development and deployment of newtechnologies are therefore essential for substantial re-ductions of emissions in this century.

There is an urgent need to boost basic research inenergy technologies. The lag times between basic re-search and large-scale commercial deployment aresobering. Private industry is not willing to undertakethe necessary basic research in areas such as fusion,geological carbon sequestration, high-efficiency coalcombustion, or high-efficiency building technolo-gies for tropical climates. Moreover, there is at leastanecdotal evidence of high returns to governmentfunding even in relatively applied research. For in-stance, a $3 million public investment in technolo-gies for efficient windows is projected to yield $15billion in energy savings through 2015 in the UnitedStates alone.79 Yet public funding for basic energy

research has declined in Europe and the UnitedStates.80 Only 21.8 percent of the energy researchbudgets of countries belonging to the InternationalEnergy Association is devoted to renewable energyand conservation.81

Increased funding for research could substantiallyadvance the time at which low-emissions energy tech-nologies are deployed and thereby reduce the burdenof GHG emissions controls. This in turn could facil-itate international agreements on such controls. Newtechnologies could also provide a wide range of envi-ronmental benefits. Most important, new technolo-gies—especially those related to energy use and effi-ciency—may be able to reduce the energy bill of thedeveloping world. This provides a powerful rationalefor collaborative global research on energy, involvingscientists and engineers from both the developingand developed world. It also suggests efforts to en-sure that technologies derived from this research areavailable on favorable terms to all.

International cooperation to reduce emissionsShort horizon or long, these agendas require com-plementary actions now. Taxes and carbon marketshave a number of advantages. They can provide pricesignals that spur cost-efficient energy conservationand forest conservation. These signals may providethe demand stimulus that drives renewable tech-nologies such as wind power and solar power downthe learning curve, making them competitive withfossil fuels in some areas. This mechanism can there-fore support the development and transfer of tech-nology adapted to developing countries. Properly setup, carbon markets (such as those envisioned underthe Kyoto Protocol) can result in the decentralizedtransfer of resources and technology to sustainabledevelopment projects in developing and transitioneconomies.

Initiatives to encourage the adoption of low-emis-sion capital equipment, and development of low-emissions or efficient technologies, can complementcarbon markets and carbon taxes. Imposing energystandards (for instance, on cars or buildings) couldbe economically inefficient, but such regulationsmight have advantages. They might fight marketfailures for which price remedies are not apt, such asa tendency for building developers to shift recurrentenergy costs to ill-informed renters or buyers. Orthey might prove to be more politically acceptable,and more amenable, to a long-term commitment


than taxes. And as more people switch to efficientequipment, it becomes easier to support tighter lim-its on emissions associated with carbon markets.Similarly, accelerating research on new technologiescan nicely complement price policies and other poli-cies that encourage rapid development, dissemina-tion, and uptake of those technologies.

How can emissions reductions—beyond thosethat pay for themselves—be financed? This remainsthe most contentious issue in climate change mitiga-tion. In carbon markets, for instance, the allocationof emission allowances determines who pays for re-ductions. In the view of many, equal per capitaallocation of allowances across the world—perhapsentailing transfers from rich emitters to poorcountries—would constitute an equitable allocation.But such an allocation rule, if imposed abruptly,might disrupt the rich emitters’ economies and thuswould not secure their participation in the scheme.On the other hand, a strong link between past emis-sions and current allowances, applied globally, wouldhurt the development prospects of poor nations andthus be unacceptable. Hybrid allocation schemes thatblend per capita and “grandfathered” allocations andshift toward the former over time have been proposedas a compromise. Other alternatives include coordi-nated national carbon taxes, whereby each countryretains the tax revenue and combinations of al-lowances and taxes, and the taxes serve as a “safetyvalve,” limiting compliance costs if allowance pricesrise too high. Agreements on burden sharing arestymied in part by uncertainty about the actual eco-nomic burden that any of these systems would entail.

The experience of the CLRTAP suggests that itmay not be necessary to work out long-run burden-sharing formulas in great detail in advance. A prac-tical alternative is to engage all parties by startingwith confidence-building steps, while maintainingmomentum to tackle progressively more ambitiousgoals, more difficult decisions, and longer-term com-mitments as options are better understood. It is ur-gent, however, to develop a framework that does notpenalize nations or other actors that voluntarily re-duce their emissions in advance of commitments.

Adapting to climate changeThe climate system has considerable inertia. Even if GHG emissions were magically halted today, the ef-fect of past emissions would continue to raise temper-atures and sea levels for centuries to come. It follows,

then, that adaptation efforts are necessary—but theadaptation agenda has only begun to be addressed.

Some impacts of climate change are relatively pre-dictable and will play out inexorably over comingdecades. Dealing with them will require foresight,commitment, and resources. For instance, an obvi-ous way to reduce vulnerability to a rise in the sealevel is to avoid the emergence of large settlementsin low-lying areas. However, it is generally difficultto exclude urban settlers from areas attractive tothem. Adaptation considerations may therefore re-quire larger current investments in developing set-tlement alternatives, as a complement to the pro-tection of areas that are at increasing risk. Otherlong-horizon issues include advance planning to re-place threatened water supplies, developing drought-resistant crop varieties, and maintaining biodiversitycorridors so that wildlife can migrate in response tochanging temperature.

An immediate and enduring effect of climatechange is to increase climate-related risks, such asdroughts, floods, and storms. This occurs both be-cause the climate itself becomes more volatile andbecause the past becomes an ever less reliable guideto the future, especially for infrequent catastrophicevents. A recent study found that large floods are be-coming more frequent, as climate change modelswould predict.82 This suggests that the cost of build-ing (or insuring) infrastructure to a given risk stan-dard (say, to withstand a once-in-100-years flood) isrising even now.

There is growing appreciation that developingcountries, especially, are not dealing optimally withcurrent weather-related risks, let alone future ones.So efforts to reduce current vulnerabilities will notonly have immediate payoffs—they will increase thecountries’ capacity to deal with increasing vulnera-bilities to climate change.

One emerging set of innovative coping mecha-nisms involves the use of long-term weather forecast-ing and insurance markets to mitigate the risks ofextreme weather events. These events can be partic-ularly devastating to poor rural dwellers, whoseentire network of mutual support can be disabled by droughts, floods, and storms. An interesting by-product of global climate research has been the in-creasing ability to forecast seasonal climate patternsmonths in advance. For instance, sea temperaturesin the eastern Pacific can be used to predict season-ahead climate in Zimbabwe and thus potentially


to help poor farmers optimize their planting deci-sions.83 These predictions could also help marketingagents prepare for droughts, significantly reducingthe impacts on household welfare.84

There is also more interest in using insurance mar-kets to help poor farmers cope with weather risks—arole that traditional crop insurance has never beenable to play well because of the costs of enrollingsmall farmers, measuring damages and processingclaims, and avoiding moral hazard and adverse se-lection.85 Weather insurance, in contrast, depends on easily measurable temperature and precipitationdata—and facilitates reinsurance. A current Interna-tional Finance Corporation pilot project is exploringthe potential for this kind of insurance in the devel-oping world. These initiatives underline the value ofweather data as both local and global public goods.

Management of large-scale climate risks will be-come more important at the subnational and na-tional scale. Indeed, the financial damages fromweather-related catastrophes are increasing rapidly,though it is difficult to separate greater exposurefrom the higher frequency of extreme events. Thereis a strong role for individual nations, and the worldat large, to insure poor vulnerable regions againstthese catastrophes, a role already filled (on an ad hocand sometimes inadequate basis) through a patch-work of disaster relief responses. A key commitmentproblem in designing a more comprehensive systemis providing adequate insurance without encourag-ing risk-seeking or environmentally damaging be-havior, such as settlements in areas that are at risk oflandslides, or agriculture in fragile areas.86

The most general and effective way to help vul-nerable poor countries adapt to climate change is topromote rapid and sustainable development. Overthe coming decades more vigorous growth rates andaccelerated investments in human capital will shiftthese countries out of climate-sensitive sectors andimprove their capacity to cope with climate-relatedrisks.

Conclusion

The distinctive feature of global problems is the lackof a central authority for coordination and enforce-ment. Despite this obstacle, there are encouraging ex-amples of successful transnational institution build-ing to tackle transborder environmental problems.Success has been greatest in cases such as stratosphericozone and acid rain, where the problem can be madeoperational in precise technical terms; where interna-tional action can therefore focus on tightly definedinterventions; and where the perceived benefits ofcollective action have been high, for key actors, rela-tive to the cost. It will be more difficult for otherenvironmental and social problems—where the re-lationship between action and impact is less well un-derstood, and where the costs and benefits of actiondo not coincide. Yet an adaptive strategy of the typedescribed in this chapter has much to recommend it-self because the frequency and urgency of such prob-lems is bound to increase as globalization progressesalong many dimensions. The next chapter illustratessome ways of approaching the linkages among social,economic, and environmental issues within and be-tween countries in a shrinking world.


global problems and local concerns...entirely different purposes. acid rain, for instance, was taken...

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