Climate research and policy make extensive use of two concepts, ‘mitigation’ and ‘adaptation’. In the Kyoto Protocol(1997), and more especially the Bali Roadmap (2007) and the Copenhagen Accord (2009), action on climate change is organised under these two headings. The UNDP Human Development Report on climate change (2007) and the World Bank’s World Development Report on the same subject (2009) use the same distinction.

The two key documents many countries are preparing are their NAMA and NAPA: the former a country’s Nationally Appropriate Mitigation Action, the latter its National Adaptation Programme of Action. Crudely, NAMAs are about replacing coal mines with solar cell factories, and reducing carbon emissions by protecting forests; NAPAs are about flood defences and drought-proof crop varieties.

Mitigation is largely regarded as the responsibility of developed countries (the so-called Annex 1 countries) and now the larger and faster-growing developing countries, such as the BASIC countries (Brazil, South Africa, India and China). Adaptation is regarded as a requirement for all countries, with the poor in developing countries most likely to suffer the increased hazard and also most vulnerable to the consequences.

Mitigation and Adaptation thus defined are necessary components of a strategy to tackle climate change, but far from sufficient. Indeed, any national leader or planner would surely want to take account of a range of other, largely exogenous, factors, which will modify comparative advantage and shape development strategy. Some will be positive, some negative, but all are likely to be disruptive, possibly in a non-incremental way. In other words, some sectors or industries will find opportunities closed off, sometimes suddenly, others will find opportunities opening. This is not exactly ‘creative destruction’, a phrase coined by Joseph Schumpeter to describe the impact of innovation in capitalist societies; but climate change will certainly cause both creation and destruction, in ways not seen by those who focus only on mitigation and adaptation.

In terms of simple economics, climate change, or the measures taken to deal with it, can be expected to change:

• The relative prices of inputs;
• The relative prices of outputs; and
• The physical relationships between inputs and outputs.

Thus, the shape of the production possibility frontier will change, for firms and countries, and so will the price lines which determine the optimal balance of resource use and the optimal mix of outputs. All this can be analysed in the context of partial equilibrium, but will also have general equilibrium effects over the medium term, as resources shift between sectors. There are likely to be many winners and losers, within and between countries.

In practical terms, consider these challenges and opportunities:

• Exporters of all kinds affected by the rising cost of transport, or changing relative prices of transport types, perhaps challenging or requiring modification of export-oriented growth strategies;
• As a sub-set of the above, island economies dependent on tourism – indeed all developing country long haul destinations -  negatively affected by an increase in the cost of flying;
• Agricultural producers affected negatively (or positively, depending on location) by changes in temperature and the volume and distribution of rainfall, affecting agriculture-led development strategies, and perhaps especially agricultural export-led sectors like horticulture and flowers;
• Conversely, some developing country producers exploiting the demand for biofuels, or taking advantage of new market opportunities if greenhouse production in Northern countries becomes uneconomic, or carbon markets create incentives to conserve forest;
• Lower demand for carbon-based fuel sources (oil, gas), disrupting the development strategies of certain resource-rich countries;
• Conceivably, a shift away from energy-intensive sectors to the less energy-intensive, perhaps affecting resource-rich countries hoping to invest in processing;
• Globally, a rapid increase in technological innovation, offering opportunities for innovators’ rent, disadvantaging late adopters, but also, in some cases, offering opportunities for technological leap-frogging;
• New resource opportunities arising from technological innovation, as for example with lithium in Bolivia, in demand for a new generation of batteries.

None of these challenges and opportunities is easily captured by a focus on mitigation and adaptation, as normally understood. Of course, the economic impacts of climate change described above are on the agenda, and there is a respectable literature dealing with general equilibrium modelling of climate change. The Stern Review of 2006 provides a comprehensive overview of economic consequences, albeit not uncontroversial. Some authors have looked at wider development planning (see for example this paper by Richard Klein and others). Some agencies are working on comprehensive development challenges, for example through the World Bank Strategic Framework, or in non-governmental groups like Project Catalyst, The Climate Group, or McKinsey. ODIOverseas Development Institute (London) researchers, led by Karen Ellis, have reviewed the options for growth in a carbon-constrained world.

It remains true, nevertheless, that developing country governments are ill-served if asked to focus on mitigation and adaptation, rather than the transformatory challenge of climate change – and being offered fast start and other financing for these narrow purposes. That is why a term like ‘climate compatible development’ is more useful. It allows for mitigation and adaptation, but also for other effects. It also emphasises that decision-making on climate change needs to put development needs, including poverty reduction and human development, at the heart of the process. More on that shortly.

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Simon Maxwell is Executive Chair of the Climate and Development Knowledge Network.

July 2010