Before policies and measures that aim to reduce, or remove barriers that hamper, GHG emissions or enhance sequestration by sinks are analyzed, it is necessary to understand the substantial impact that other policies (such as the structural reforms of trade liberalization and liberalization of energy markets) have had on GHG emissions in several developing countries, economies in transition (EITs), and some developed countries. These policies, sometimes coupled with macroeconomic, market-oriented reforms, set the framework in which more specific climate policies would be implemented. Therefore, to assess correctly the feasibility of any particular policy, it is important to understand this new policy context. The effect of these reforms on energy use and GHG emissions is not clear a priori. Impacts can differ widely among countries, depending on implementation strategies and the existence of other regulatory policies designed to prevent the undesired effects of free market operation in the presence of externalities, information, and co-ordination problems.

6.2.1.1 Structural Reform Policies

During the 1990s, several countries, especially EITs and developing countries, implemented drastic market-oriented reforms that have had important effects on energy use and energy efficiency, and therefore on GHG emissions.¹² Most countries have undergone what has been called the first generation of structural reforms: trade liberalization, financial deregulation, tax reform, privatization of state-owned enterprises, and opening the capital account as part of a strategy to attract foreign investment. Some countries have also implemented macroeconomic stabilization packages that include fiscal discipline, independence of monetary policy from the public sector, and exchange rate unification.

The two largest countries in terms of population and coal reserves, China and India, have also started to reform their economic systems towards a more free-market orientation, although at a slower pace than many other countries. Since 1978, energy use in China has increased, on average, 4%/yr. However, the energy–output ratio in China fell 55% between 1978 and 1995.¹³ Garbaccio et al. (1999), using input–output tables, found that most of this reduction arose from technical change, a result supported by other studies (Polenske and Lin, 1993; Sinton and Levine, 1994). An increase in energy-intensive imports has also led to decreased energy use per unit of GDP. Others have attributed the reduction to sectoral shifts in the composition of output (Smil, 1990; Kambara, 1992). As reform-induced changes aimed at increasing GDP may increase the use of energy, the net effect on GHG emissions of structural reform in China is an empirical problem that depends on the choice of development strategies, technologies, and complementary policies.

Future economic growth in all countries may be accompanied by increases in GHG emissions. Even if economic growth increases energy efficiency (both in terms of production and consumption), the scale effect may dominate and GHG emissions may rise, depending on the extent to which other policies and measures are implemented to curb emissions (Fisher-Vanden, 1999).

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