Development actor, institutions and mechanisms
Development assistance, development finance, bilateral donors/donor countries, non-traditional donors, development agencies, export credit agencies (ECAs), multilateral development banks (MDBs) – see Box 2 for full definitions of each.
Fossil fuels, energy and infrastructure
Fossil fuels – All hydrocarbon fuels including oil, gas, coal and their derivatives
‘High-carbon’ fuels – Fuels that entail a high-carbon cost, mainly hydrocarbon fuels, including unsustainably produced and burned wood and charcoal.
Upstream (fossil fuel sector) – The exploration and production activities for oil, natural gas and coal including infrastructure e.g. drilling rigs, LNG terminals and pipelines to LNG terminals for export.
Midstream (fossil fuel sector) – Pipelines and other forms of transportation from production sites to refineries, power plants and natural gas processing plants.
Downstream (fossil fuel sector) – Natural gas processing, oil refining, and the marketing and delivery of refined products. This is different to ‘linked industries’ (see below).
Fossil fuel sector – All industries throughout the value chain, from the upstream to the downstream, as defined above, that are concerned with the direct production and marketing of fossil fuels.
Fossil fuel-linked industries – This includes thermal power generation, which relies on inputs of gas, coal or oil, and energy-intensive industries including steel and aluminium, petrochemicals, fertilizers and cement. It is worth noting the distinction between fuel used as an energy source and fuel used as a direct input – as with coking coal in steel production and oil and gas in the petrochemicals and fertilizers production. In this paper both types of input are considered as a ‘linkage’.
Energy sector – This refers chiefly to the industries and government agencies, which manage and deliver domestic energy needs in terms of electricity, transport and fuel and increasingly deal with energy services such as heating, lighting and cooking. Others may also use the energy sector to encompass the hydrocarbons sector.
Infrastructure – Built infrastructure in the upstream, energy and industrial sectors. See Chapter 3 for the scope of infrastructure considered by this paper.
High-carbon, low-carbon and transition
Decarbonization – The shift away from man-made systems that release carbon dioxide into the atmosphere, and towards a zero-carbon system. This can be through both ceasing emitting practices and by capturing CO2 via forest ‘sinks’ and NETs.
Low-carbon development – This is synonymous with low-emission development and low-carbon growth, and entails raising standards of living and eradicating poverty in ways that entail minimal output of carbon dioxide emissions. This can be understood as a subset of ‘green growth’ (see below).
Low-carbon transition – This is the process that countries with existing high-carbon industries and infrastructures undertake in order to reduce emissions intensity and continue development along a lower-carbon pathway. This could include retrofitting existing energy and energy-using infrastructure, and introducing economic mechanisms to put a price on emissions.
Carbon transition risks – In the context of this paper, these are factors that are likely to make low-carbon transition more expensive. The particular physical infrastructure, fiscal structure and political economy characteristics that fossil fuel-led growth encourages can undermine a country’s capacity to diversify the economy and may present particular obstacles to low-carbon growth, e.g. high-carbon power and energy using infrastructure, large carbon-intensive industries, fuel subsidies, low levels of private sector competition and vested interests in the status quo. Countries that have grown their economy around fossil fuels exports are likely to face increased transition risk.
Carbon risks – This term is often used in an investment context to refer to investor exposure to businesses or assets that may lose value in future due to decarbonization trends – particularly the transition of energy systems away from the use of fossil fuels. In this paper, the concept is broadened to refer to the economic risks that global decarbonization poses to countries either already dependent or considering increasing the export of high-carbon fuels and their use domestically. In this paper this term is treated differently to ‘transition risk’, although it is acknowledged that the two are used interchangeably in much of the commercial and institutional investment literature on the matter.
Low-carbon opportunities – These are opportunities that countries and businesses have to access cleaner forms of energy and more energy and resource-efficient industrial technologies, built infrastructure, and urban and architectural design. It also includes access to finance, including ‘green’ investment opportunities and ‘climate finance’ provided chiefly by MDBs and donor countries.
Diversification and sustainability
Economic diversification – This is the process of broadening the number of economic sectors that contribute to a country’s income and growth. As a strategy, it is mainly used when one sector (e.g. oil and gas or mining) effectively supports the rest of the economy, potentially leaving the country vulnerable to fluctuating export prices and failing to create broad-based employment. The traditional model of diversification in oil and gas-dependent developing countries has been the development of industry (e.g. petrochemicals, fertilizers, steel and cement) around the ‘leading sector’, often using cheap fuel inputs in industry and thermal power generation. This paper distinguishes between this ‘depletion-based diversification’, which is unsustainable, and ‘sustainable diversification’.
Sustainable diversification – This enables and promotes broad-based economic growth in ways that are not dependent on the fossil fuel sector and that can sustain themselves when fossil fuel sector revenues decline. In a country that is already highly dependent on fossil fuels, this term would also entail the shift away from a ‘rent-based’ economy towards stimulating greater ‘productivity’. It is also significant for countries developing their fossil fuels sector in terms of how they incentivize growth of other sectors.
Green Growth – There is no universally agreed formula for green growth. This report uses the concept of low-carbon green growth as set out by the Global Green Growth Institute: ‘fostering economic growth and development while ensuring that natural assets continue to provide the resources and environmental services on which our well-being relies. It focuses on the synergies and trade-offs between the environmental and economic pillars of sustainable development.’ Crucially, it ‘discards the traditional convention of “grow first, clean up later”’.
Unburnable reserves and stranded assets
Unburnable carbon – These are fossil fuel resources that cannot be burned within a 2°C carbon budget. The exact level of unburnable carbon will depend upon the chosen 2°C pathway. This does not mean political or legal restrictions on developing fossil fuels; it is more likely to mean that fossil fuels lose their value on the global market, due to changes in demand and technology, so the reserves are no longer commercially viable and do not attract the necessary investment to enable production. This is different to the concept of ‘stranded assets’.
Stranded assets – In the context of decarbonization, this refers to those physical assets that have received investment, and which lose their commercial value as other technologies displace demand for the product. Carbon Tracker defines them as ‘fossil fuel supply and generation resources which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (i.e. meet the company’s internal rate of return), as a result of changes associated with the transition to a low-carbon economy.’