By Karen Ellis, Head of the Private Sector & Markets Programme, Overseas Development Institute

Climate change, international mitigation, and natural resource scarcity will transform global trade patterns. What impact will this have on developing countries? How can they maintain their competitiveness, manage threats to their growth, and capitalise on new opportunities generated? And what does this mean for their potential to achieve low carbon growth?

At an ODI public meeting on 18th March, we presented emerging ODI research findings showcasing examples of firms in low income countries at the forefront of green production and low carbon competitiveness, and examined the key opportunities and challenges arising in the energy, manufacturing, tourism and forestry sectors. We also discussed how policymakers and donors can support these private sector efforts in ways that will underpin low carbon growth. Key findings include:

• Carbon markets have been a huge disappointment. Many firms built carbon credits into their investment business cases, but these have failed to materialise. Sometimes the incentives are strong enough for them to continue without, but there is a risk in some cases of a reversal of these investments.

• However, there are other private sector drivers resulting in low carbon outcome, and as a result some firms in low income countries are at the forefront of green production and low carbon competitiveness. For example, because energy costs are high, access is limited and services are unreliable, firms are forced to innovate to find new sources of energy and to improve their energy efficiency. Although this has been a disadvantage to their competitiveness historically, it could be a source of significant competitive advantage going forward, as energy prices rise and international regimes favour energy efficient technologies. This also suggests that, where fossil fuel subsidies undermine these incentives, long term competitiveness could be seriously jeopardised.

Other drivers include international standards and labelling schemes that encourage sustainable practices or carbon footprinting, new market opportunities in the tourism and forestry sectors which improve the returns to sustainable natural resource management, and increasing competition for land and water resources driven by growing international demand for food and biofuels.

• So a shift in the focus is required by the international development community. In the short term, focusing donor support at country level around carbon markets is proving disappointing for all concerned (though efforts to develop carbon markets should be continued post-haste at the international level). But by complementing other components of the business case, the development community could achieve a lot more in the short term before carbon markets are developed. There is scope to support these solutions more effectively, through awareness raising, lesson learning, and donor funding mechanisms that can be used to support and leverage such innovation.

• But there are also some major trade-offs that need to be weighed up. For example, Kenya is reaching a crunch point as the recent discovery of fossil fuels means key decisions will need to be made about the future energy strategy with major implications for competitiveness in the short vs. long run.

• The private sector is helping to solve some major policy problems. For example, the ‘Cool Farm Tool’ developed by Unilever and other private sector partners, helps suppliers and farmers to assess their carbon emissions, thus potentially contributing to MRV and facilitating the creation of carbon markets for the agriculture sector, which would be of huge potential benefit to LICs.

In sum, our study has identified many opportunities for economic, social and environmental wins, where improved competitiveness can be achieved at the same time as developing a more sustainable, low carbon growth trajectory. These opportunities would become more apparent if governments and donors were to analyse competitiveness and climate related issues together. Unfortunately, this rarely happens.

Read our full working paper here: http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/8282.pdf