November 3, 2023
10 am-12:30 pm
Hybrid Virtual and In-Person Meeting
| Time | Activity / Topic |
|---|---|
| 9:45 am | Webex Conference Line Opens |
| 10 am-10:20 am | Call to Order Shanta Devarajan, Chair Welcoming Remarks Alice Albright, CEO Overview of Meeting Mark Sundberg, Chief Economist |
| 10:20 am-12:15 pm | Prioritizing Growth and Climate Change: Can MCC Deliver on Both? Maitreesh Ghatak, EAC member and discussant Will Martin, EAC member and discussant |
| 12:15-12:20 pm | Administrative Next Steps Shanta Devarajan, Chair |
| 12:20-12:30 pm | Opportunity for Public Comment |
| 12:30 pm | Meeting Adjourns |
Welcoming Remarks, Overview of Meeting, and MCC Response to EAC Recommendations
Following the call to order, Alice Albright, MCC Chief Executive Office, offered welcoming and introductory remarks and highlighted several of MCC’s climate-related efforts across different projects. MCC Chief Economist Mark Sundberg shared some observations on past EAC recommendations in light of the operational and political constraints that shape MCC’s work. Sundberg also offered a remembrance of former EAC member David Dollar’s contributions to the economics profession.
Prioritizing Growth and Climate Change: Can MCC Deliver on Both?
A Topic Note, circulated in advance, served as background for discussion. Discussant Maitreesh Ghatak posed several questions about the centrality of climate to MCC’s analytic and project design work, given the array of other specialized actors and platforms in this area. Given its mission, should MCC focus on its core competencies and simply account for climate as an additional variable when assessing opportunities, constraints, and project design?
Discussant Will Martin emphasized climate’s analysis through the lens of risk management and identifying precise channels through which risk operates on an economy or sector. For example, temperature patterns are relatively well understood, but understanding the geography and volatility of precipitation remains murky, implying critical risks to water access for farm production. Knowing which sectors are more vulnerable to climate shocks can help inform investments decisions and associated policies. Meanwhile, efforts in mitigation and adaptation can work together in “green innovations” that lower emissions intensity and raise productivity simultaneously, which can incentivize adoption of new technologies.
The ensuing discussion covered a number of key issues:
- Mitigation versus adaptation Members highlighted the distinction between efforts in mitigation versus adaptation, emphasizing that MCC’s role should focus squarely on adaptation. This implies investments that help countries cope with changing climate conditions and achieve greater resilience to climate-related shocks. One reason pertains to equity, insomuch as any burden of mitigation should not rest on partner countries whose emissions, present and past, have contributed relatively little to the current climate crisis. A compact’s investments geared towards reducing greenhouse gas emissions, furthermore, constitute a global public good, the benefits of which accrue mostly outside the partner county.
- Link between climate and growth Rapid growth and poverty reduction should remain MCC’s priority. Where opportunities align, MCC should focus on investments that achieve complementary productivity gains and emissions reductions, e.g., solar or thermal energy. But in some cases, investments may trade emissions for higher growth. That said, adaptation to climate change can be costly, effectively imposing a “tax on development.” Setting the optimal level of adaptation requires a thorough understanding of counterfactual climate scenarios, the distribution of possible impacts across an economy’s different sectors, workers, and physical assets, and the consolidated losses which can be expected from them. Simultaneously, investments in climate-smart technologies may shift relative prices and open new opportunities to reduce costs and spur productivity, for example through the rapid decline in costs of solar power generation, allowing expansion of electricity to households and businesses.
CBA methodologies Given both the long-run nature of climate impacts and the uncertainty of their magnitude and time profile, members addressed MCC’s CBA methodologies, particularly the implicit rate of time discount in MCC’s calculation of economic rates of return (ERR) and the so-called “deep uncertainty” (see Hallegatte et al., 2012) associated with different climate outcomes. Some members advised MCC to adhere to its 10 percent hurdle rate, arguing that the poor today are a more compelling target than the future poor. Members agreed that future climate shocks could and should be captured in CBA models that reflect their impact through different channels of growth. MCC is working to adopt guidance it recently developed, relying on the decision-making under deep uncertainty approach, to incorporate climate uncertainty into project design and cost-benefit analysis.
That said, members raised several concerns and suggestions about MCC’s CBA policy. First, the hurdle rate renders climate effects on ERRs to be negligible, given the decades-long timeline of expected changes. Lowering the discount rate is appropriate for climate change mitigation as distinct from investment in adaptation that captures short run local benefits. Moreover, climate-related benefits could justify lower discount rates, given the possibility of “existential” risks arising from catastrophic climate scenarios. One suggestion was to assign a declining discount rate to benefits over time. However, questions arose as to whether a coherent and consistent framework possibly exists for using different rates.
Separately, another member urged MCC to consider its investment impacts in the context of broader “systems” that extend beyond narrow CBA methods. Systems approaches imply a consideration of the broader economic and institutional context that surrounds an investment, as well as the operation of other donor priorities. By zooming out to the systems level, a country can assess the tradeoffs it faces, rather than delegating such choices to donors while allowing actors like MCC to effectively play a more specialized role.
- Demographics and the poor EAC members highlighted the demographic features of populations most exposed to climate-related risk, namely young rural inhabitants in sub-Saharan Africa. Unlike other countries where urbanization rates exceed 50 percent, many MCC partner countries, particularly in Africa, have large rural populations with median ages below 20 years. The vulnerability of this population, particularly given its primary dependence on agricultural production and its propensity to migrate in response to climate stresses, deserves MCC’s special attention. As Africa’s youth bulge enters its prime wage-earning years, what does that imply for intersectoral choices of investment? What are the tradeoffs between more climate resilient infrastructure versus human capital development or agricultural research? What are the implications for long-run job creation and income growth?
- Macro and subnational perspectives. One member argued that macroeconomic and fiscal policies, including the enormous subsidies directed to fossil fuel extraction and consumption, are key to addressing climate change. Another noted that at the subnational level, municipalities are often hamstrung by lack of access to capital markets and the national regulatory environment, leaving them dependent on limited fiscal transfers.
Public Comment
A public participant urged MCC to ensure that its climate-related investments account for country ownership. MCC should not allow outside political motives, including climate goals determined outside of partner countries, to creep into its investments.
Members Present (virtually and in-person)
- Alan Gelb, Center for Global Development
- Caren Grown, Brookings Institution
- Celestin Monga, Harvard University
- Emmanuelle Auriol, Toulouse School of Economics
- Homi Kharas, Brookings Institution
- Lant Pritchett, University of Oxford
- Louise Fox, University of California-Berkeley
- Maitreesh Ghatak, London School of Economics
- Michael Woolcock, World Bank
- Mushtaq Khan, SOAS University of London
- Paul Smoke, New York University
- Raquel Fernandez, New York University
- Ravi Kanbur, Cornell University
- Shahrokh Fardoust, College of William and Mary
- Shantayanan Devarajan, Georgetown University
- Stefan Dercon, University of Oxford
- Syed Akhtar Mahmood, World Bank
- William Martin, International Food Policy Research Institute
- William Masters, Tufts University
Members Not Present
- Asli Demirgüç-Kunt, Center for Global Development
- Tauhidur Rahman, University of Arizona
- Ehtisham Ahmad, London School of Economics
MCC Staff Participating
- Alice Albright, Chief Executive Office, MCC
- Mark Sundberg, Chief Economist, EA-DPE
- Mesbah Motamed, Designated Federal Officer