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                                                    CHAPTER IV
TNCs are both major carbon emitters and low-carbon investors. They are therefore part of both
the problem and the solution to climate change.

TNCs can contribute to global efforts for combating climate change by improving production
processes in their operations at home and abroad, by supplying cleaner goods and services
and by providing much-needed capital and cutting-edge technology.

UNCTAD estimates that in 2009 low-carbon FDI flows into three key low-carbon business areas
(renewables, recycling and low-carbon technology manufacturing) alone amounted to $90 bil-
lion. In its totality such investment is much larger, taking into account embedded low-carbon
investments in other industries and TNC participation through non-equity forms. Already large,
the potential for cross-border low-carbon investment is enormous as the world transitions to a
low-carbon economy.

For developing countries, low-carbon foreign investment by TNCs can facilitate the expansion
and upgrading of their productive capacities and export competitiveness, while helping their
transition to a low-carbon economy. However, this investment also carries economic and social

“Carbon leakage” has implications for both global emission reduction efforts and economic
development. However, the extent of this phenomenon and its implications are hard to assess.
Instead of addressing the issue at the border (as discussed in the current debate), it could be
addressed at its source, working through corporate governance mechanisms, such as improved
environmental reporting and monitoring.

Policy needs to maximize benefits and minimize risks related to low-carbon investment, based
on individual countries’ social and economic conditions. UNCTAD suggests a global partnership
to synergize investment promotion and climate change mitigation and to galvanize low-carbon
investment for sustainable growth and development. This partnership should include establishing
clean-investment promotion strategies; enabling the dissemination of clean technology; securing
IIAs’ contribution to climate change mitigation; harmonizing corporate greenhouse gas emissions
disclosure; and setting up an international low-carbon technical assistance centre.
      100                         World Investment Report 2010: Investing in a Low-Carbon Economy

                                 A. Setting the context
Foreign investment           The global policy            climate change considerations with in-
can play a significant       debate on tackling           vestment policies.
role in meeting the          climate change is no      • International climate policy-making is,
challenges of climate        longer about whether        for the present, placing more emphasis on
change mitigation            to take action. Against     actions in the domestic arena – as dem-
by contributing the          the background of
needed financial                                         onstrated by country pledges, submitted
                             common but differen-        to the United Nations Framework Con-
and technological            tiated responsibilities
resources. This requires                                 vention on Climate Change (UNFCCC)
                             and respective capaci-      after the Copenhagen summit, in line with
a better integration         ties, it is now about
of investment policies                                   domestic legislation. To combat climate
                             how much action to          change (box IV.1), low-carbon policies
with the climate             take and which actions
change framework                                         including measures targeting TNCs and
                             need to be taken – and      foreign investment must therefore be
and sustainable
                             by whom. The fight          incorporated into national economic and
development strategies.
                             against global climate      sustainable development strategies.
                             change ranks high on
      global political agendas. 1 Policymakers,        • Developing countries are confronted
      however, are still struggling to formulate         with two major challenges in respond-
      and agree on respective international and          ing to climate change and the move to a
      national policy frameworks. While the              low-carbon economy: (a) financing and
      future of emission targets, the nature of in-      implementing investment in appropri-
      stitutions, concrete policy mechanisms and         ate activities; and (b) the generation,
      sources/disbursement of funding continue           diffusion and dissemination of relevant
      to be unclear, a set of broader observations       technology.
      can be made:
                                                       Taken together, this implies that TNCs can
      • It has become clear that the negotiation       make valuable contributions to climate
        process has gone beyond environmental          change mitigation, including in develop-
        issues, and extends to discussions on          ing countries. At present, however, policy
        economic development taking place un-          elements to harness TNC contributions
        der environmental constraints. Business        (e.g. investment and technology) remain
        is seen as a part of both the problem and      largely absent from climate change poli-
        the solution; international and domestic       cies. Similarly, climate change aspects are
        climate change policies must therefore         essentially absent from investment policies.
        encourage business to make a more posi-        There is therefore a need to synergize these
        tive contribution. This requires, among        two areas of policy-making, with a view
        others, incorporating guiding principles       to galvanizing low-carbon investment for
        on TNCs and foreign investment into            climate change mitigation – hence the focus
        climate regime policies, i.e. integrating      of the Report.
        international investment policies into the
        climate change framework.                      So far, the main international policy effort has
      • International governance mechanisms            been the Kyoto Protocol, which was signed
        need to support and enhance domestic           in 1997 and entered into force in 2005. The
        actions, including governments’ efforts        Protocol commits industrialized (known as
        to harness markets and firms for low-          Annex I) countries to reducing GHG emis-
        carbon 2 development, i.e. to integrate        sions by an average of 5.2 per cent from 1990
CHAPTER IV         Leveraging Foreign Investment For A Low-Carbon Economy                               101

Box IV.1. Mitigation and adaptation in a climate change context

 Mitigation: “In the context of climate change, a human intervention to reduce the sources or
 enhance the sinks of greenhouse gases. Examples include using fossil fuels more efficiently for
 industrial processes or electricity generation, switching to solar energy or wind power, improving
 the insulation of buildings, and expanding forests and other “sinks” to remove greater amounts
 of carbon dioxide from the atmosphere.”a
 Adaptation: “Adjustment in natural or human systems in response to actual or expected climatic
 stimuli or their effects, which moderates harm or exploits beneficial opportunities.”b Adaptation
 not only covers actions undertaken to reduce the adverse consequences of climate change, but
 also those harnessing the beneficial opportunities it generates. In terms of corporate activities,
 adaptation covers company actions to adapt to the direct physical impacts of climate change, but
 it does not include mitigation measures by companies in response to climate policies.
 The stronger mitigation actions are and the earlier they are undertaken, the smaller the costs
 from adaptation are likely to be. Yet even strong and immediate mitigation does not obviate the
 need to adapt to changing climate conditions triggered by emissions that have already occurred
 or cannot be stopped immediately.
 Source: UNCTAD, based on UNFCCC information.
     UNFCCC Glossary website at: (accessed 25
     June 2010).

levels until the period 2008–2012 (United               also called assigned amount units (AAUs),
Nations, 1998). In line with the UNFCCC                 which correspond to their agreed targets.
(1992), which determined that countries have            These countries can then decide whether it is
to act or be supported according to their               cheaper to reduce emissions domestically or
“common but differentiated responsibili-                to acquire instead AAUs from other Annex
ties and capabilities”, the Kyoto Protocol              I countries. Further, Annex I countries can
acknowledges that developing countries                  decide to generate additional project-based
have the right to develop their economies as            emission allowances by investing in GHG-
developed nations did in the past, and thus             reducing projects in other Annex I countries
does not assign them binding GHG reduc-                 (JI) or other countries (CDM) (Grubb,
tion targets. This does not preclude them               Vrolijk and Brack, 1999). Of these last two
from exploring options in the context of                mechanisms, the CDM was implemented
the global battle against climate change. In            much earlier, has a larger market size and
addition, some developed countries did not              is more politically significant, as it is the
ratify the Protocol. The Protocol’s lack of             only mechanism seeking to lower emissions
coverage and of participation by a number of            in developing countries (box IV.2).
countries has been criticized, together with
its short-term nature, lack of stringency and           While having a set of global agreements and
lack of compliance incentives (Aldy and                 emission reduction targets – albeit incomplete
Stavins, 2007). At the same time, the Kyoto             – for developed countries seems to have trig-
Protocol has been applauded for allowing                gered some innovation activities (Johnstone,
Annex I countries to reach their targets                Haščič and Popp, 2010), these mechanisms
cost-efficiently through the establishment              are mainly designed for compliance at the
of flexible mechanisms: Emission Trading,               country-level and thus do not directly create
Joint Implementation (JI) and the Clean                 incentives at the firm level. As a result, it is
Development Mechanism (CDM).                            left to national (or supranational) govern-
                                                        ments or institutions to decide how to involve
Emission trading is based on the distribution           different economic actors. For example, the
to Annex I countries of emission allowances,            European Union (EU) member States passed
102                             World Investment Report 2010: Investing in a Low-Carbon Economy

Box IV.2. The Clean Development Mechanism – some headway, but not enough

 The Clean Development Mechanism (CDM) allows developed country investors to acquire credits
 for GHG emission reductions that result from climate mitigation projects in developing (host)
 countries. The purpose is to help (a) developed countries comply with their emission commit-
 ments under the Protocol; and (b) host countries develop in a sustainable fashion and contribute
 to the ultimate objective of the UNFCCC. To date, over 2,250 projects in 68 countries have been
 registered, and over 420 million credits have been issued.
 Criticisms of the current CDM setup have arisen on several grounds. First, it has generated mixed
 benefits for many host countries, including with respect to expected cross-border investment and
 technology flows. While several studies find that the CDM contributes to technology transfer in
 around 40 per cent of projects, this process depends strongly on project size, technology type
 and host country characteristics (Seres, Haites and Murphy, 2009; UNCTAD, 2009i). Second,
 it is struggling to cope with the unexpectedly high demand for registering projects and issuing
 credits, particularly in guaranteeing additionalitya; and the governance of the CDM Executive
 Board has also attracted criticism. Third, projects have been unequally distributed geographi-
 cally: countries combining market attractiveness, robust overall institutional frameworks and
 well-functioning CDM institutions have dominated CDM activities, with African countries, as
 well as LDCs and other structurally weak economies, being largely left out. It has to be kept in
 mind, however, that many developing countries are not large GHG emitters in the first instance,
 thereby limiting the potential for reducing emissions.
 With respect to FDI, results have been varied. Although initial estimates forecast much less
 FDI involved in CDM projects than first expected (Arquit Niederberger and Saner, 2005), it is
 now estimated that CDM projects entering the pipeline since 2002 represent an estimated $150
 billion in clean energy investments if they all come to fruition (UNEP Risoe, 2010), including
 many FDI projects. Project sponsors from developing countries have sometimes financed their
 own projects, especially in major emerging economies (Seres and Haites, 2008; Lütken and
 Michaelowa, 2008). In these cases, the sale of certified emission reductions (CERs) – while
 reducing emissions and contributing to less carbon intensive development options – does not
 constitute low-carbon foreign investment (or FDI in general). Further obstacles to FDI include
 weak institutional frameworks – an issue that UNCTAD and other partners under the UNFCCC
 Nairobi framework have sought to address through technical cooperation and Regional Carbon
 Business Fora.
 At the Copenhagen summit in December 2009, Parties to the Kyoto Protocol overwhelmingly
 called for the reform and strengthening of the CDM. In addition, Parties discussed the possibil-
 ity of creating new instruments to complement and to go beyond the scope of the CDM in an
 attempt to deliver emission reductions and FDI on a larger scale. Such moves give hope that
 mechanisms engaging the market are likely to be part of the new emerging climate regime.
 Source: UNCTAD, Partly based on input from UNFCCC.
  Additionality is a key criterion in the registration of projects. It is meant to avoid free-riding on the
   process, i.e. to not allocate credits to projects that would have happened in any case in the absence of
   the CDM.

down part of their emission reduction obliga-          those pertaining to TNCs and foreign invest-
tions to industry, and together launched the           ment – for moving towards a low-carbon
EU emission trading scheme (EU ETS) to                 economy, the existing climate change regime
help firms comply. Similar “cap-and-trade”             exhibits a number of shortcomings vis-à-vis
schemes were debated and/or established in             private sector investment. First, the Kyoto
other countries, such as the United States             Protocol and its flexible mechanisms are, in
and Australia.                                         the first instance, targeted at the country-
                                                       level. Accordingly, each government must
While representing a first step towards                decide how to bring in the private sector,
investment-related policies – and especially           which results in a lack of common metrics
    CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                      103

    and policies and can lead to very fragmented      change mitigation and development; and
    markets, thereby reducing demand for low-         underlying this difficulty is the more fun-
    carbon investment. The country level focus        damental question of the priority they give
    of the Kyoto Protocol also results in a situa-    to low-carbon strategies (UNCTAD, 2009f)
    tion where the current international regime       and, in that context, to foreign investment.
    does not contain adequate and effective           Many developing countries have limited re-
    provisions related to investment. Secondly,       sources and capabilities, including requisite
    although the CDM and JI were expected to          technologies and skills for investment in ap-
    generate foreign investment and technology        propriate activities; and, moreover, the costs
    flows, in the main this expectation has not       of access to necessary low-carbon know-how
    been met. Finally, the current international      are high. As a result, focussing on moving
    climate regime – which remains in a state         towards a low-carbon economy holds the
    of flux – lacks what the private sector needs     danger of slowing much needed growth. At
    most to reorient its strategies: a “loud, long    the same time, there are first-mover and other
    and legal” international and national com-        advantages that could be derived from such
    mitment by governments (WBCSD, 2005).             a move. TNCs can make particularly strong
    Uncertainties about the post-Kyoto frame-         contributions to the technological aspects of
    work weaken the private sector’s ability and      the move towards a low-carbon economy,
    willingness to make decisions in the area of      as well as to the financing and investment
    climate change.                                   challenge it poses – if leveraged by sup-
                                                      portive policies. However, in this context,
    Developing countries in particular are            current policy regimes – at the national and
    grappling with the need to create a policy        international levels – are perceived as fall-
    framework that effectively leverages foreign      ing short of effectively harnessing (foreign)
    and domestic private investment for climate       private sector investment.

                    B. The characteristics and scope of
                       low-carbon foreign investment
    1. Low-carbon foreign investment                  circumstances (box IV.3).5 Low-carbon for-
       and the value chain                            eign investment also includes FDI undertaken
                                                      to access low-carbon technologies, processes
TNCs can lower              Low-carbon foreign        and products.
global GHG emissions        investment 3 can be
through foreign             defined as the transfer   Low-carbon foreign investment can poten-
investments that            of technologies, prac-    tially reduce GHG emissions in host countries
upgrade technologies        tices or products by      in two ways:
and processes in their      TNCs to host coun-        • TNCs’ operational processes and those
operations and value        tries – through equity      of related firms along their global value
chains. They can also       (FDI) and non-equity        chains can be upgraded (fig. IV.1) by
supply low-carbon           forms of participa-         introducing low-carbon processes that
products and services.      tion – such that their      reduce GHG emissions. Although this
                            own and related op-         type of investment usually requires
    erations, as well as use of their products and      R&D in both hard and soft technologies
    services, generate significantly lower GHG          when undertaken in home countries, it
    emissions4 than would otherwise prevail in          often involves only the dissemination
    the industry under business-as-usual (BAU)          of technology to the host economy when
104                            World Investment Report 2010: Investing in a Low-Carbon Economy

Box IV.3. The business-as-usual scenario

 Business-as-usual (BAU) scenarios for anthropogenic GHG emissions are counterfactual as-
 sessments of the level or change in these emissions (in different contexts) over a period of time,
 based on the assumption that no (additional) actions to mitigate GHGs are taken by govern-
 ments, companies or individuals. For example, McKinsey & Company, by drawing on widely
 acknowledged sources, calculate a BAU scenario as a basis for their “Global Greenhouse Gas
 Abatement Cost Curve”. They project that GHG emissions in the BAU case will increase by
 around 55 per cent in the period from 2005 to 2030 (from 46 to 70 GtCO2e (giga tons of CO2
 equivalent) per year).
 Key assumptions in this particular BAU case are:
 •    An annual GDP growth of 2.1 per cent in developed countries and 5.5 per cent in develop-
      ing countries;
 •    Global population growth of 0.9 per cent per annum, with 0.2 per cent in developed countries
      and 1.1 per cent in the developing countries; and
 •    An oil price of $60 per barrel.
 A further assumption is made regarding the amount of GDP produced per unit of CO2e emitted.
 The BAU scenario factors in that, over the period 2005–2030, the carbon content of GDP will
 be reduced by 1.2 per cent annually, which is broadly in line with historic improvements of this
 measure. This “decarbonization” is largely due to energy efficiency improvements most likely
 to happen as a by-product of economic development, in the past characterized particularly by
 structural change. Behavioral change is not factored into the BAU scenario, e.g. in the transport
 sector by people switching from private vehicles to using public transportation.
 The assumptions made for the estimate by McKinsey hold substantial uncertainty, mainly due
 to underlying uncertainties about future GDP and population growth, as well as country choices
 defining the carbon-intensity of their development paths. Hence BAU scenarios can differ con-
 siderably based on the assumptions made.
 Source: UNCTAD, based on McKinsey & Company, 2009; IEA, 2007.
 Note:   McKinsey & Company took most assumptions from the International Energy Agency’s (lEA)
         World Energy Outlook for 2007 (IEA, 2007).

     undertaken abroad.6 Foreign investment            or improving process automation in order
     in low-carbon processes occurs through            to use less energy). Finally, a company
     the upgrading of existing TNC operations          can attempt to recycle or dispose of
     as well as new investments. Firstly, com-         wastes originating from its operations in
     panies in all industries and sectors can,         a low-carbon manner. In the power sec-
     in principle, switch to inputs with lower         tor, carbon capture and storage (CCS) is
     GHG emissions (input substitution in the          the prime example: companies continue
     figure). In the case of power utilities, for      with a high-carbon technology, such as
     example, this might involve a shift from          coal power plants, but capture the CO2
     fossil fuels towards biomass, renewable           at the end of the process and sequester
     resources or nuclear energy7 for electric-        it underground. Along its value chain
     ity generation.8 Secondly, a company can          or in its other networks, a firm can also
     change processes in order to consume              require suppliers, industrial customers
     less of a particular input (i.e. increasing       or other partners also to upgrade to low-
     material- or resource-efficiency). Thirdly,       carbon processes as part of its objective
     a company can change processes so as              to switch to lower-carbon inputs. In such
     reduce related emissions (e.g. increasing         cases, companies can also offer partners
     efficiency in power supply by installing          technological support, guidance or alli-
     more efficient fossil fuel power plants,          ances in creating new technologies. For
CHAPTER IV                  Leveraging Foreign Investment For A Low-Carbon Economy                                 105

                  Figure IV.1. Introduction of low-carbon processes leading to GHG emissions
                                      reductions along a typical value chain

                                                Principal firm’s core operations

                                                                                                                    Final consumers
Raw materials

                       Suppliers               Input         Process        disposal/                 Industrial
                                            substitution     changes        recycling                customers

                            Support and influence                                   Support and influence
                             from principal firm                                     from principal firm
                                                      Technological upgrading
                                                       in low-carbon process

Source: UNCTAD.
Note:   The value chain depicted in this figure is “typical” for the manufacturing sector. Analogous activities
        in other value chain or network activities, e.g. in financial services or utilities, can also be depicted.

                example, TNCs in agribusiness can influ-               and other organizations in host countries.
                ence their suppliers to change towards                 This enables firms to upgrade their own
                more sustainable, low-carbon farming                   operations and businesses to repackage
                practices (e.g. through contract farming               their knowledge and reach new markets.
                arrangements).9                                        Such foreign investment in low-carbon
• TNCs can create or promote products                                  technology services may not be large yet,
  and services that are low carbon in how                              especially in developing countries, but firms
  they are used (not simply in how they are                            are increasingly offering such services. For
  made). Such low-carbon products and                                  example, in view of the rise of the clean
  services include, for instance, electric                             energy market, Ricardo Consulting Engi-
  cars (which have lower GHG emissions                                 neers (United Kingdom) – which started
  than conventional cars), “power-saving”                              designing and building motor car engines
  electronics and light bulbs, renewable                               in 1915 – has repackaged its technology
  energy equipment or integrated mass                                  into a series of new businesses focusing on
  transport systems. Most low-carbon                                   low-carbon technology services. Ricardo has
  products and services require a change                               become active in markets with alternative
  in behaviour and demand patterns on the                              uses for its technology, such as renewable
  part of users, however. Whereas market                               energy, power generation and transportation
  demand is a significant incentive for such                           and infrastructure.10 This has led to various
  investments in home countries, demand                                new spin-out businesses, such as product
  for such products is unlikely to be the                              and process development services for wind,
  same in different economies. In the case                             solar and tidal energy systems and energy
  of export-orientated foreign investment                              storage systems in Asia, Europe and North
  in tradable products, the investment                                 America.11
  can be considered low-carbon, even if                                Establishing the scale and scope of low-
  100 per cent of the output is exported,                              carbon foreign investment carries some
  because GHG emissions are reduced at                                 complications, however. Firstly, the iden-
  the global level.                                                    tification and measurement of low-carbon
A special case of the second type consists                             foreign investment is not straightforward,
in TNCs providing low-carbon technology                                given the lack of an absolute measure, the
services by reengineering GHG emitting                                 different types of such investment and the
processes in independent local companies                               context specificity (section B.3). Secondly,
     106                           World Investment Report 2010: Investing in a Low-Carbon Economy

     the above typology of low-carbon foreign           challenges; and host countries, including
     investment applies equally well, with ap-          those who themselves are not large emitters
     propriate modifications, to both equity and        of GHGs, can use this as a basis to assess
     non-equity forms of TNC participation.             the likely impact and net benefits of foreign
     For example, the notion of technological           investment relative to other options.
     upgrading of operations to reduce GHG
     emissions can be readily applied to build-         The main sectors which dominate GHG
     operate-transfer (BOT) projects.12                 emissions – and hence require the attention
                                                        of policy-makers in order to reduce these
     Thirdly, while a TNC can reduce GHG emis-          emissions – are sectors where TNCs play
     sions in facilities it owns or runs, it can also   a strong role as emitters (i.e. power and
     influence emissions along its value chain          industry), sectors where emissions largely
     (fig. IV.1). Suppliers in a host country, for      result from consumption and public use (i.e.
     instance, can be persuaded or supported to         transport, buildings and waste management)
     switch to low-carbon technologies in order         and sectors where emissions are due to
     to reduce GHG emissions associated with            changes in land-use such as deforestation
     the TNCs’ inputs. TNCs can also work to            and land degradation (i.e. forestry and ag-
     help reduce GHG emissions in their custom-         riculture). These sectors – which represent
     ers’ operations. They usually are in a better      areas of GHG emissions rather than economic
     position to provide technological support          areas – are based on the classification used
     to their suppliers and customers than local        by the Intergovernmental Panel on Climate
     companies, and – in the context of inter-          Change (IPCC) in their Fourth Assessment
     national value chains – may also be more           Report (IPCC, 2007).
     likely to do so in order to meet demands
     for low-carbon products from their final           Emissions vary substantially across these
     customers in developed countries. Moreover,        sectors, and their relative weight will con-
     TNCs may be more advanced in reducing              tinue evolving over time. Estimated annual
     GHG emissions than their local suppliers           global emissions by sector in 2030, using
     and customers, which may result in these           the business-as-usual scenario described
     local partners modifying their technology          in box IV.3,14 are presented in table IV.1.
     accordingly.                                       The mitigation potential in each sector
                                                        is estimated taking into account existing
     2.    The demand for low-carbon                    technologies and emitting entities, and the
                                                        additional investment needed to achieve this
           foreign investment by sector                 potential is then calculated. Some sectors,
An effective way            The climate change          such as power, are projected to be among
of leveraging the           debate is framed in         the largest emitters of GHGs in 2030, but
contribution of             terms of sectors, 13        their impact can potentially be mitigated
TNCs to lower GHG           such as power, trans-       more cost effectively than in other sectors,
emissions is to channel     portation, buildings        such as transport.
low-carbon foreign          and agriculture, which
investment into key                                     The types of low-carbon foreign investment
                            are deemed significant      described in the previous section carry vary-
sectors with high           in achieving GHG
mitigation potential.                                   ing relevance across emission sectors. Much
                            emission reductions.        of the potential demand for foreign invest-
                            These sectors offer a       ment focusing on low-carbon processes,
     concrete framework within which low-carbon         for example, lies in sectors where TNCs
     investments – domestic and foreign – are           themselves are major emitters relative to
     defined and required to meet GHG emission          other entities, essentially power and industry
CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                       107

(manufacturing and heavy industry). The           those involved in oil & gas, cement, iron
demand for foreign investment focusing on         & steel, and chemicals. TNCs, which are
low-carbon products and services – includ-        major global industrial players, are in a
ing technology services – is spread more          prime position to diffuse cleaner technolo-
evenly across sectors (as indicated in the        gies and processes in their own operations
right column of table IV.1).                      overseas, as well as via their value chains
                                                  (section B.1). Cemex (Mexico), for ex-
In terms of direct and indirect GHG emis-         ample, is upgrading its cement plant in the
sions, as well as mitigation potential using      city of Sant Feliu de Llobregat (Spain), in
available technology, the power sector is the     particular the electro-filter system, in order
cornerstone of any global effort to reduce        to guarantee that GHG emission levels are
GHG emissions. TNCs can play a significant        a fifth of the maximum level set by existing
role in these efforts, both through process and   legislation.17 Beyond these improvements
product/services low-carbon foreign invest-       to their own processes, TNCs in industries
ment. There is plenty of scope for TNCs in        such as machinery, electronics and energy
the power industry, whose foreign expan-          services can potentially provide the equip-
sion has accelerated since the early 1990s,       ment, appliances and know-how for emission
to improve their processes in host countries      mitigation in all sectors worldwide.
(WIR08). CEZ Group (Czech Republic),
for example, is investing $1.62 billion in a      The transport sector is forecast to be re-
wind park in Romania to offset emissions          sponsible for roughly one sixth of global
from dirtier coal-fired power plants it owns      emissions by 2030, over 60 per cent of
in the country.15                                 which will originate from passenger cars and
                                                  small commercial vehicles. Key mitigation
Yet local private and state-owned enter-          actions, such as the introduction of more
prises (SOEs) still dominate the power            fuel-efficient, electric, hybrid or simply
sector in most countries and are therefore        lighter vehicles, depend on companies, many
a significant source of potential demand for      of which are TNCs, developing and dissemi-
foreign investment in low-carbon products/        nating these technologies. Nissan Motors
services. While established TNCs are still        (Japan/France), for example, is progressively
the main suppliers of goods and services in       moving the production of its subcompact
traditional power technologies, new TNCs          car, the Micra, from Japan to Thailand for
– mostly from developed countries, but also       sale both locally and in export markets;
from some developing countries (section           the Government of Thailand is keen for
B.3) – are emerging in renewable energy,          the Micra to be the first in a series of “eco-
including manufacturing power generation          cars” to be manufactured in the country.18
equipment (see also Kirkegaard, Haneman           Beyond technological solutions, there is a
and Weischer, 2009). An example show-             need to induce behavioural changes among
ing how foreign investment in low-carbon          consumers which might, for example, under-
product/services is set to burgeon is the         pin a shift towards mass transport systems
case of SPX (United States) in India. The         such as urban railways. Providers of such
company has announced a joint venture with        products/services also include TNCs, many
Thermax – an Indian company specializing          of which are already active in rising urban
in energy and environmental engineering           centres. In Nigeria, for instance, the China
based in Pune – to make emissions-control         Civil Engineering Construction Company
equipment for large power plants.16               (CCECC) has started work on the Lagos
                                                  Rail Mass Transit project;19 similarly, a joint
Many companies in the industry sector             venture between Odebrecht (Brazil) and
are major emitters of GHGs, in particular

                                         Table IV.1. Mitigation potential and TNC involvement in sectors of emission
           Sectors of emission                 Sector definitionb and relevant               Key mitigation technologies and                           Demand for low-carbon foreign investment
                                               emitting entities                            practices currently commercially
   Projected annual emissions in 2030                                                                   availablec                     Low-carbon process foreign investment         Low-carbon product/services
   (GtCO2e)d                                                                                                                                                                             foreign investment
   Mitigation potential in 2030 (GtCO2e)d
   Additional annual investment needs                                                                                                 (i.e. impacts on TNCs’ own operations or      (i.e. TNCs supplying products
   (over existing levels of investment in                                                                                                          their value chain)              and services to entities in sector)
   these areas, in Euro billions)a
                                                                                                                                                      (examples)                              (examples)
Sectors with TNCs playing a strong role as emitters
                                              Direct emissions from the combustion          Improved supply and distribution         Input switching                               • Power machinery and
                                              of fossil fuels or biomass for the            efficiency; fuel switching from coal      • Use renewable/low-carbon energy               infrastructure manufacturers
                                              production of electricity and heat.           to gas; nuclear power; renewable            sources                                    • Energy Services Companies
                  18.7 GtCO2                                                                heat and power (hydropower, solar,       Input reducing                                  (ESCOs)
            10 GtCO2                           Emitting entities: utilities; operators of   wind, geothermal and bioenergy);         • Increase efficiency of existing facilities   • Grid optimizing firms
               148 €                           standalone power plants                      combined heat and power; early           Enhanced recycling                            • Engineering / environmental
                                                                                            applications of carbon capture and       • Capture heat for other uses                   consulting firms
                                                                                            storage (CCS) (e.g. storage of           • CCS
                                                                                            removed CO2 from natural gas)
                                               Direct emissions from the combustion         More efficient end-use electrical         Input switching                               • Equipment manufacturers
                                               of fossil fuels and industrial processes     equipment; heat and power                • Source low-carbon energy                    • Engineering / environmental
                                               (for example, from chemicals,                recovery; material recycling and         • More use of biomass                           consulting firms
                                               aluminum and cement), and indirect           substitution; control of non-CO2         Input reducing
                                               emissions from electricity and heat          gas emissions; and a wide array of       • Process improvements
                              29.1 GtCO2       consumption.                                 process-specific technologies CCS         • Increase efficiency of existing facilities
           7.3 GtCO2                                                                                                                 Enhanced recycling
               113 €                           Emitting entities: all manufacturing and                                              • Reduce or eliminate flaring from oil and
                                               heavy industry companies, including                                                      gas production and refining
                                               petroleum & gas, cement, iron & steel,                                                • CCS
                                               and chemicals.                                                                        Value chain – upstream
                                                                                                                                     • Support to and influence on suppliers
Sectors with emissions largely by consumers and public use
                                             Direct emissions from the combustion           More fuel efficient vehicles; hybrid      Input switching                               • Transportation equipment
                                             of fossil fuels for transportation             vehicles; cleaner diesel vehicles;       • Use biofuels                                  manufacturers (car, air, rail
                                             activities and services (air, rail etc.),      biofuels; modal shifts from road         Input reducing                                  etc.)
                                             This sector does not include emissions         transport to rail and public transport   • Make use of more efficient vehicles,         • Systems providers (e.g. mass
                                             pertaining to the manufacture of motor         systems and reduced transport               planes etc.                                  transit railways)
                                             vehicles or other transport equipment,         needs (e.g. through telecommuting /      • Make use of non-emitting vehicles           • Biofuel producers
             11.4 GtCO2                      which are included in the industry             behavioural change); non-motorised                                                     • Engineering / environmental
    3.2 GtCO                                 sector.                                        transport (cycling, walking); land-                                                      consulting firms
                                 300 €                                                      use and transport planning
                                               Emitting entities: governments,
                                               households (61 per cent of emissions
                                               originate from passenger cars
                                               and small commercial vehicles),
                                                                                                                                                                                                                         World Investment Report 2010: Investing in a Low-Carbon Economy
                                          Table IV.1. Mitigation potential and TNC involvement in sectors of emission
                Sectors of emission                Sector definitionb and relevant            Key mitigation technologies and                         Demand for low-carbon foreign investment
                                                   emitting entities                         practices currently commercially
       Projected annual emissions in 2030                                                                availablec                   Low-carbon process foreign investment          Low-carbon product/services
       (GtCO2e)d                                                                                                                                                                         foreign investment
       Mitigation potential in 2030 (GtCO2e)d
                                                                                                                                                                                                                         CHAPTER IV

       Additional annual investment needs                                                                                            (i.e. impacts on TNCs’ own operations or       (i.e. TNCs supplying products
       (over existing levels of investment in                                                                                                     their value chain)               and services to entities in sector)
       these areas, in Euro billions)a
                                                                                                                                                     (examples)                               (examples)
                                                   Direct emissions from the combustion      Efficient lighting and daylighting;     Input switching                                • Appliance manufacturers
                                                   of fossil fuels and indirect emissions    more efficient electrical appliances    • Source low-carbon energy                     • Building materials
    Buildings                                      attributable to public heat and           and heating and cooling devices;       Input reducing                                   manufacturers
                                                   electricity consumption in residential,   improved cook stoves; improved         • Make use of more energy efficient             • Heating/cooling
                 12.6 GtCO2
                                                   commercial, and public buildings.         insulation; passive and active solar      appliances, lighting etc.                     manufacturers
          3.5 GtCO2                                                                          design for heating and cooling;        • Improve insulation of facilities to reduce   • Lighting manufacturers
                       198 €                       Emitting entities: households (62         alternative refrigeration fluids,          emissions due to heating/cooling            • Architecture services
                                                   per cent of emissions), companies,        recovery and recycle of fluorinated                                                    • ESCOs
                                                   governments                               gases
                                                   Direct emissions from landfills,           Landfill methane recovery; waste        Enhanced recycling                             • Waste management services
    Waste management                               wastewater treatment, human sewage,       incineration with energy recovery;     • Capture and use methane emissions              firms
                                                   and others.                               composting of organic waste;                                                          • Engineering / environmental
        1.7 GtCO2
                                                                                             controlled wastewater treatment;                                                        consulting firms
        1.5 GtCO2                                 Emitting entities: landfill operators       recycling and waste minimization
         8€                                       (private & public), wastewater
                                                  treatment facilities (private & public)
    Sectors largely with emissions from changes in land use
                                                  Direct emissions due to deforestation,     Afforestation; reforestation;          Enhanced recycling                             • Technology services
    Forestry                                      decay and peat.                            forest management; reduced             • Use bio waste                                  companies
             7.2 GtCO2                                                                       deforestation; harvested wood          Value chain – upstream                         • Environmental services
                                                   Emitting entities: forestry companies,    product management; use of             • Wood and wood product manufacturers            companies
             7.8 GtCO2
                                                   private forest owners, governments        forestry products for bioenergy to       supporting and influencing their suppliers
          43 €
                                                                                             replace fossil fuel use                  in the sector

                                                   Direct emissions from livestock,          Sustainable agricultural practices,    Input switching                                • Seed companies
                                                   manure, cultivation of crops, soil        such as improved crop and grazing      • Less use or improved types of fertilizer     • Fertilizer producers
                                                   management, and others.                   land management to increase            Enhanced recycling                             • Technology services
                                                                                             soil carbon storage; restoration of    • Use bio waste
    Agriculture                                    Emitting entities: households             cultivated peaty soils and degraded    Value chain – upstream
                                                                                                                                                                                                                         Leveraging Foreign Investment For A Low-Carbon Economy

                                                   (farmers), governments, plantation        lands; improved rice cultivation       • Food & beverage manufacturers, food
             7.9 GtCO2
                                                   companies and other agribusiness          techniques and livestock and              retailers (supermarkets) supporting and
          4.6 GtCO2                                                                          manure management to reduce               influencing their suppliers (farmers,
     0€                                                                                      CH4 emissions; improved nitrogen          plantations) in the sector
                                                                                             fertilizer application techniques to
                                                                                             reduce N2O emissions; dedicated
                                                                                             energy crops to replace fossil fuel
                                                                                             use; improved energy efficiency
Source: UNCTAD, partly based on IPCC, 2007; McKinsey & Company, 2009.

      Projected emissions in 2030, mitigation potential in 2030 and additional investment needs are taken from McKinsey & Company, 2009.
      Sector definitions are based on IPCC, 2007; and Baumert, Herzog and Pershing, 2005, but differ slightly, thus the mitigation potential and investment needs are
      also slightly different from IPCC’s.
      Key mitigation technologies are taken from IPCC, 2007.
      GtCO2 stands for gigatons of CO2 equivalents.
110                         World Investment Report 2010: Investing in a Low-Carbon Economy

Graña y Montero (Peru) has recently won          as air-conditioning and ventilation systems
a competitive bid to finish a line of Lima’s     that include heat recovery systems, LED
integrated urban bus system, also known as       lighting technology, but also rain harvest-
the COSAC 1 project.20                           ing techniques and a wide-spread use of
                                                 recycled of products, from plastic bottles
Low-carbon process foreign investment can        to beds. 22 Thus changing patterns in one
also occur in transport for example foreign-     industry affect demand patterns in many
owned transport companies can shift to           other industries.
alternative fuels such as biodiesel; or, in a
similar vein, car rental companies can alter     In comparison to transport and buildings,
their vehicle ranges towards more efficient      the waste management sector 23 – mainly
or battery-powered ones.                         landfills and wastewater treatment – is
                                                 forecast to account for relatively few emis-
The buildings sector is expected to generate     sions in 2030, and almost all of these can be
the third highest level of projected GHG         reduced at a relatively low cost (table IV.1).
emissions in 2030, 62 per cent of which origi-   The abatement potential lies to a very large
nate from households. Along with industry,       extent in landfill methane recovery. While
it is the sector most responsible for indirect   this sector is often dominated by the public
emissions from electricity consumption           sector, TNCs can invest in low-carbon tech-
related to heating, cooling and lighting. As     nology services such as waste management
well as using less energy in their own build-    and consultancy services. Veolia (France) is
ings – which involves TNCs’ investment in        active in waste management across the globe,
low-carbon processes – investment by TNCs        including in developing countries (WIR08).
in low-carbon product/services, especially       As a mixed example of foreign investment
from the industry sector, can substantially      in low-carbon process and product, Anmol
improve efficiency in buildings, even in         Group (India) has recently invested in a
relatively poor regions. For instance, Philips   large paper making plant in Ethiopia us-
(Netherlands) has established a manufac-         ing waste paper which would normally be
turing facility of energy-efficient compact      incinerated.24 TNCs are also increasingly
fluorescent lamps (CFL) in Lesotho, includ-      involved in establishing waste treatment
ing a CFL recycling plant alongside – the        facilities alongside their other operations,
first in Africa. Much of the facility’s output   often as services to external users as well
will be exported across Southern Africa,         as for their own processes.
where demand for energy-efficient lamps is
increasing. This demand is partly driven by      Of the two land-related sectors, agriculture
the large role played by CFLs in regional        is projected to have the higher level of GHG
power utility Eskom’s (South Africa) pro-        emissions in 2030; forestry, however, has
gramme to reduce electricity consumption         the higher abatement potential – indeed
in South Africa and neighbouring countries       one greater than its emissions – due to
where it operates.21 TNCs offering building-     potential afforestation25 and reforestation.
related services, such as property developers    Though there are large TNCs involved in
and hotels, can also contribute to emission      agriculture and forestry, overall, TNCs are
reduction in the sector. For instance, hotel     little involved in these sectors’ direct GHG
companies are increasingly integrating a         emissions. However, in the context of global
range of products and technologies which         value chains, they can potentially help dif-
allow them to reduce GHG emissions in a          fuse more climate-friendly (e.g. organic)
traditionally high-emission industry. Ex-        farming and other sustainable practices
amples of such products and technologies         across the globe through their suppliers
include energy-saving technologies, such         or customers (WIR09). Supermarket chain
     CHAPTER IV        Leveraging Foreign Investment For A Low-Carbon Economy                                           111

     Tesco Plc (United Kingdom), for instance, is             In the database on greenfield investments29
     working with its global suppliers – along its            identifiable low-carbon FDI projects are
     value chain – to reduce the carbon intensity             primarily found in alternative/renewable
     of the products it sells,26 or to reduce the             energy (which accounts for the bulk of
     number of miles their farm-produce trucks                cases), recycling activities and environ-
     travel every year.                                       mental technology manufacturing. During
                                                              2003–2009, there were 1,725 such projects.
     3. Low-carbon FDI is significant and                     To these projects can be added 281 cross-
        its potential huge                                    border M&A operations in renewable elec-
                                                              tricity generation concluded during the same
In three key low-carbon        The estimated costs            time period (the number and value of these
business areas alone,          of climate change              combined deals amounts to 2006 and $344
FDI flows are estimated        mitigation vary con-           billion, respectively) (table IV.2).
to have amounted to            siderably. UNFCCC
$90 billion in 2009.           (2007) projected          In 2009 low-carbon FDI in these activities
Low-carbon foreign             that an additional        alone amounted to roughly $90 billion (fig.
investment is growing          global investment         IV.2). This is a conservative, lower-end
rapidly and new players        of $200–210 bil-          estimate since there are also some low-carbon
are emerging, including        lion per year would       foreign investments in other industries and
from the South.                be required just to       activities. However, renewables, recycling
                               maintain the current      and environmental technology manufacturing
     levels of GHG emissions in 2030. Taking a           form the core of initial new low-carbon
     different methodological approach in terms          business opportunities. In addition to
     of assumptions and targets to be achieved,          FDI, low-carbon foreign investment also
     Stern’s (2009) estimate goes as high as $1.2        prevails in non-equity forms of TNC
     trillion, while McKinsey & Company (2009)           participation, such as build-operate-transfer
     arrive at €810 billion – used for a sectoral   Table IV.2. FDI in three low-carbon business
     picture in section B.2 (see UN-DESA,                    areas, cumulative, 2003–2009
     2009 for an overview). As global FDI                                   (a) Number
     flows equal roughly 15 per cent of total                               Reporting (investing) regions
     gross domestic fixed capital formation Partner (host                    Developed Developing

     today, low-carbon foreign investment will    regions)
                                                                             economies economies
                                                                                                       Europe and
                                                                                                         the CIS
     constitute a significant proportion of the World                 2 006       1 741         226          21
     total, whichever figure is chosen.           economies
                                                                      1 244       1 172          56           7
                                                                               684         503           166        6
     Identifying low-carbon foreign invest-            South-East Europe
                                                                                78          66             4        8
                                                       and CIS
     ment is not straight forward in practice;
     for instance it is not feasible to scrutinize                            (b) Value ($ million)a

     each individual FDI case to separate out                                      Reporting (investing) regions
     those which are definitively low carbon           Partner (host
                                                                                    Developed Developing
                                                                                    economies economies
                                                                                                              Europe and

     from a total numbering some 22,00027 in           World               344 057     304 469       35 601
                                                                                                                the CIS
                                                                                                                  3 890
     2009 alone. The analysis below there-             Developed
                                                                           194 618     188 995          5 377     242
     fore attempts to obtain an estimate by            Developing
                                                                           135 840     104 991         28 988   1 768
     examining FDI in greenfield projects and          economies
                                                       South-East Europe
                                                                            13 599       10 482         1 237   1 880
     cross-border M&As data that UNCTAD                and CIS

     collects regularly,28 bearing in mind other       Source: UNCTAD, based on data from the Financial Times,
     forms of foreign investment.                              the FDiIntelligence database (
                                                               and the UNCTAD FDI/TNC database.
                                                           Includes announced project values for some 930 projects
112                                        World Investment Report 2010: Investing in a Low-Carbon Economy

(BOT) arrangements. Moreover, over time,                              Further evidence of low-carbon FDI’s growing
low-carbon investment will permeate all                               prominence comes from UNCTAD’s World
industries, for example, as TNCs introduce                            Investment Prospects Survey 2010–2012,
processes to reduce GHG emissions.                                    which highlights the involvement of the larg-
                                                                      est TNCs – including their climate-change
Apart from the huge number of cases of FDI                            related plans – from a range of industries
to be considered, there are other problems                            (box IV.4; UNCTAD, forthcoming a).
hampering estimation of the overall level
of low-carbon foreign investment. In most                             Returning to identifiable cases only, the pat-
cases, the data do not specify the produc-                            tern of low-carbon FDI is diverse in terms of
tion processes involved (i.e. does the new                            geography and the types of TNCs’ involve-
investment utilize low-carbon processes)                              ment. Greenfield investments in alternative/
or the specific output being produced (i.e.                           renewable power generation (728 in total
are they energy saving products, such as                              during 2003–2009), for example, have gen-
compact fluorescent lamps). Low-carbon                                erally been on the rise since 2003, except
foreign investment is a relative concept                              for a recent dip in developed and transition
based on a business-as-usual scenario, which                          economies due to the financial and economic
further complicates measurement (section                              crisis. The majority of these investments
B.1). Low-carbon investments also occur                               were in developed economies, but over
in industries other than those considered                             a quarter were in developing economies;
here, as the examples by sector in section                            with countries such as Brazil, Chile, China,
B.2 indicate – but data on those industries                           India, Indonesia, Morocco, Pakistan, Peru,
are not yet systematically available. There                           Philippines, South Africa, Tunisia, Turkey,
is also the question of non-equity forms                              Viet Nam and Zambia among the recipients.
of low-carbon foreign investment that are                             Cross-border M&A operations in renewables,
not captured in traditional data sources on                           on the other hand, are concentrated in a hand-
FDI.                                                                  ful of countries (primarily in Brazil, China,
                                                                      India and Turkey). This is due to the dearth

          Figure IV.2. FDI in three low-carbon business areas, by group of economies,

                                Number                                                        Value ($ million)
   700                                                               140

   600                                                               120

   500                                                               100

   400                                                                80

   300                                                                60

   200                                                                40

   100                                                                20

      0                                                                0
      2003      2004     2005       2006        2007   2008   2009         2003      2004   2005     2006         2007   2008   2009

                South-East Europe and the CIS                 Developing economies                    Developed economies

 Sources: UNCTAD, based on data from the Financial Times, the FDiIntelligence database (
          and the UNCTAD FDI/TNC database.
 Note:       The three business areas are alternative/renewable energy, recycling and manufacturing of environmental
CHAPTER IV          Leveraging Foreign Investment For A Low-Carbon Economy                                113

Box IV.4. TNCs’ climate change-induced investments, 2009

 UNCTAD annually carries out a survey of the largest TNCs and the investment plans they hold
 for the two years to come. The 2010–2012 survey results, based on some 240 TNCs, give some
 insights into climate change-induced investments. Although the findings should be treated as
 illustrative rather than conclusive since the survey was not primarily concerned with climate
 change issues, there are some interesting results. For example, 45 per cent of respondent TNCs
 across all industries indicated that host countries’ GHG emissions reduction needs and policies
 were taken into consideration in their plans; 31 per cent had made cross-border acquisitions
 to obtain technologies and other created assets related to emission reductions; and 32 per cent
 exploit their own technologies, know-how and skills pertinent to GHG emission reductions in
 their foreign investments. These findings differ somewhat by industry. For instance, 37 per cent
 of respondent TNCs in chemicals and chemical products have a limited (5–10 per cent of total
 FDI), significant (10–20 per cent) and very significant (more than 20 per cent) share of climate
 change induced investments in their total foreign investments, compared to an average level of
 30 per cent for manufacturing as a whole. The equivalent share for TNCs in transport, storage
 and communications was 40 per cent, compared to 32 per cent in all services.

  Box table IV.4.1. Share of climate-change induced investments in TNCs’ foreign investments

                                      Limited     Significant      Important                  Number
         Sector/industry      Nil                                                Unknown
                                    (up to 10%) (10% to 20%)   (more than 20%)             of responses
 Primary                       ..          ..          ..              ..            ..            7
 Manufacturing                18          45          11               5            21           106
  Chemicals and chemical
  products                    16        42          21                -             21           19
  Electrical and electronic
  equipment                   11        53          11                5             21           19
 Services                     27        40           5                8             19           62
  Trade                       40        40           -                5             15           20
  Transport, storage and
  communications              27        40          13                7             13           15
 Total                        21        46           9                6             19          175

   Source: UNCTAD, forthcoming a.
   Note:   Based on 175 responses.

 Source: UNCTAD.

of companies with advanced technologies                  Judging from greenfield investment data,
in renewable electricity generation in many              low-carbon FDI in recycling has been
of these economies.                                      more modest (a total of 191 cases during
                                                         2003–2009), but this small number may be
Established power utilities top the list of the          more apparent than real because such activi-
TNCs most actively investing in renewables               ties are often not reported separately. As in
(table IV.3), suggesting that low-carbon pro-            renewable/alternative power generation,
cess investments dominate. The emergence                 about two thirds of projects are in developed
of new players, either new companies or                  countries. Investors range across a large
established ones crossing over from other                number of industries, mostly manufacturing,
sectors, indicates growing competition in                suggesting that most of these projects focus
this field. So does the nearly 10 per cent               on reducing emissions in these TNCs’ own
share of investment projects, in number,                 operations or along their value chain. The
held by TNCs from developing countries,                  presence of TNCs such as Veolia (France) and
the bulk of which are South-South (table                 Norsk Hydro (Norway), however, suggests
IV.3); these investments are concentrated                that some may be investing in host countries
among a small number of TNCs, which are                  to offer low-carbon technology services
primarily utilities or conglomerates.30
114                                   World Investment Report 2010: Investing in a Low-Carbon Economy

     Table IV.3. Top 20 investors of greenfield                                 Developing economies are becom-
  investments in alternative/renewable electricity                              ing increasingly popular investment
               generation, 2003–2009                                            destinations in this industry, attract-
                                      Developed Developing
                                                           South-East           ing more projects than developed
TNC name                      World
                                      economies economies
                                                           Europe and
                                                                                economies over the past two years.
Iberdrola (Spain)              33         29       4           -                Nearly half of the 806 reported
Electricite de France (EDF)
                               21        18           3             -           investments over 2003–2009 are in
E.On (Germany)                 21        21           -             -           developing countries, over 85 per
Acciona (Spain)                16        10           6             -           cent of which involved developed
Enel (Italy)                   16        13           3             -
RWE (Germany)                  14        13           -             1           country TNCs. Investments are oc-
OPDE (Spain)                   12        12           -             -           curring in a number of developing
Energias de Portugal (EDP)
                               12        12           -             -           countries, with Algeria, Argentina,
Endesa (Spain)                 11          4          7             -           Brazil, China, India, Indonesia,
Econcern (Netherlands)         10          8          2             -           Libyan Arab Jamahiriya, Malaysia,
Vattenfall (Sweden)             9          9          -             -
BP (United Kingdom)             9          9          -             -           Mexico, Mozambique, Philippines,
Enex (Iceland)                  8          7          1             -           Singapore, South Africa, United
National Toll Roads (NTR)
                                8          8          -             -           Republic of Tanzania and Viet
Mainstream Renewable
                                8          2          6             -           Nam, among the largest or key
Fersa (Spain)                   7          3          4             -           recipients. These investments focus
NeoElectra (France/Spain)       7          7          -             -           on low-carbon products, mostly
Gamesa (Spain)                  7          5          2             -
                                                                                with businesses as customers.
AES Corporation (AES) (US)      7          2          4             1
Sowitec (Germany)               7          3          4             -           Very few of the TNCs mentioned
                                                                                in table IV.4 – apart from the likes
Source: UNCTAD, based on data from the Financial Times, the
        FDiIntelligence database (
                                                                                of General Electric (United States)
                                                                                and Siemens (Germany) – are
to local enterprises                                                            established players in this field,
(see also WIR08).
                                      Table IV.4. Top 20 investors of greenfield investments in
Apart from Semb-                       environmental technologies manufacturing, 2003–2009
corp (Singapore) and
                                                                                  Developed   Developing     South-East
Chuang Tieh (Taiwan           TNC name                                  World
                                                                                  economies   economies    Europe and CIS
Province of China),           Vestas Wind Systems (Denmark)               21           13            8               -
very few developing           Siemens (Germany)
                              General Electric (GE) (United States)
country TNCs appear           Abengoa (Spain)                             12           10            2               -
to be investing in            BP (United Kingdom)                         12           10            2               -
                              LM GlasFiber (Denmark)                      11            7            4               -
recycling.                    Areva Group (France)                        10            6            4               -
                              SW Umwelttechnik Stoiser & Wolschner
                                                                          10           10            -               -
Greenfield invest-            (Austria)
                              Sanyo Electric (Japan)                       9            6           3               -
ments in the manu-            Alstom (France)                              8            -           8               -
facturing of environ-         Kyocera (Japan)                              8            2           6               -
mental-technology             BioDiesel International (BDI) (Austria)      7            7           -               -
                              Hyflux (Singapore)                            7            -           7               -
products (806 in              Bronzeoak (United Kingdom)                   6            -           6               -
total during 2003–            Archer Daniels Midland (United States)       5            1           4               -
2009) – such as wind          First Solar (United States)
                              D1 Oils (United Kingdom)
turbines, solar panels        EVN (Austria)                                5            1           1               3
and biodiesel plants,         Owens Corning (United States)                5            -           5               -
                              Carl-Zeiss-Stiftung (Germany)                5            5           -               -
as well as associated
parts – has expanded          Source: UNCTAD, based on data from the Financial Times, the FDiIntelligence
rapidly since 2003.                   database (
     CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                     115

     mostly because the market is relatively new.     Kyocera (Japan) and several conglomerates
     Some of these new players in the industry        from developing countries31 – crossed over
     began as start-ups, growing with the tech-       from other industries.
     nologies they created, while others – such as

          C. Drivers and determinants of low-carbon foreign
     Drivers are factors that push companies to       TNCs may also seek out new customer seg-
     invest abroad, while locational determinants     ments which may not (or only partially) be
     influence where they choose to invest. Al-       found in the home country. For example,
     though TNC strategies are also affected by       while small-scale low-carbon electricity
     firm-specific factors such as physical assets,   alternatives may not make much sense in a
     knowledge32 or senior management beliefs         country with a good, dependable electricity
     and ideologies, effective policies to har-       grid, there may be viable markets in coun-
     ness low-carbon foreign investment cannot        tries with poorly developed, remote rural
     be devised without first understanding the       areas. Trade barriers restricting access to a
     drivers and locational determinants.             potential foreign market, or the lack of trade
                                                      agreements, are examples of a host (rather
     1.    Drivers                                    than home) country driver, which can result
                                                      in “tariff-jumping FDI” (section C.2).
Government policies,         Four main catego-
market conditions,           ries of drivers (push    In the climate change context, brand strat-
costs of production and      factors) – mostly        egies that put explicit emphasis on being
business conditions          home-country 33 re-      “green” or “low-carbon” can induce low-
all influence TNC            lated – influence        carbon foreign investment, for example to
decisions to invest          companies’ decisions     be consistent throughout the value chain or
abroad. This includes        to invest abroad. Al-    across different countries, or to capture new
climate change-specific      though these drivers     customers. The existence of a carbon market
factors, such as green       can affect foreign       and supply mechanisms for emission-rights
branding strategies,         investment in gener-     can also, in principle, create incentives to
regulations and pressure     al, some aspects are     invest abroad (as discussed in the context
from consumers and           specific to climate      of the JI and CDM in section A).
                             change (table IV.5).
                                                      Home government policies and regulations.
     Home market and trade conditions. For            Low-carbon foreign investment is contingent
     firms operating in a limited home market         upon technological capabilities developed by
     (whether due to overall scale, narrow market     companies, partly in response to domestic
     niche, competition or other factors), foreign    policies in their home countries. Home-
     markets represent additional sources of          country policies and regulations related to
     revenue. In the climate change context, this     energy and the environment, for instance,
     means opportunities to sell new low-carbon       promote low-carbon technologies and prac-
     products and services designed in the home       tices,35 which TNCs spread throughout their
     jurisdiction in foreign markets.34               international network of operations, thus
                                                      inducing foreign investment in low-carbon
116                                 World Investment Report 2010: Investing in a Low-Carbon Economy

        Table IV.5. General and climate change-specific foreign investment drivers
Drivers category General factors                             Climate change-specific factors
                 • Limited home market in terms of scale
                   and opportunities to expand
                 • Availability of new products/services
Home market and                                              • Green/low-carbon brand strategies
                   from parent company or TNC network
trade conditions                                             • Carbon market trading
                 • Opportunities in new customer
                 • Need to circumvent trade barriers
                 • Government tax policies or incentives
                 • Governments’ general trade policies
                   and trade promotion efforts (export       • Specific trade policy changes such as border measures
                   credits)                                  • Specific environmental regulations
                 • Government foreign investment
                   guarantees / insurance; ODA
                                                             Cheaper low-carbon energy
Costs of          • Scarcity of resources or factor inputs
                                                             Operational and energy-efficiency improvements
production        • Rising labour costs
                                                             Optimization of carbon tax exposure
                                                             Conformity to industry best practice in the area of
                  •   Global company reputation              environmental management systems (e.g. ISO 14000) and
                  •   Conformity to industry best practice   sustainability reporting (e.g. GRI “G3”)
                  •   NGO / consumer demand patterns and • Consumer pressure leveraged through environmental
                      conditions                             labelling schemes (e.g. FSC certified wood)
                  •   Investor requirements                • Investor demands (e.g. PRI) and access to finance issues
                                                             (e.g. UNEP FI)

Source: UNCTAD, based on WIR06; Ernst & Young, 2009.

processes.36 Some home countries also en-                        the home country. The DESERTEC project,
courage their firms to export (low-carbon)                       for instance, aims to supply electricity from
technologies and products or to expand                           solar power plants from Northern Africa
overseas through export credits, export                          (where costs of production are lower) to Eu-
sales guarantees and investment guarantees,                      rope (where the technology was developed).
thereby building on capabilities developed                       Operational and energy efficiency improve-
at home and benefiting from economies of                         ments (including cost reductions resulting
scale. In addition, some developed coun-                         from material, resource and energy savings)
tries have developed technical cooperation                       may also spread out across global TNC op-
programmes with developing countries in                          erations as low-carbon foreign investment,
order to promote low-carbon development                          thus contributing to lowering emissions in
and create additional export and investment                      locations where the respective technologies
opportunities for their firms in areas such                      or practices were not developed in the first
as rural electrification through renewable                       place. Costs of production also relate to
energy. In developing home countries (and                        carbon leakage (section D.6), as TNCs try to
some developed ones) low-carbon devel-                           optimize their exposure to carbon taxes.
opment strategies, policies and regulations
might also support their TNCs’ outward                           Business conditions. Business trends,
foreign investment to obtain assets in low-                      investor pressure and stakeholder expecta-
carbon know-how (section C.2; section D                          tions have become a significant driver of
for a more detailed treatment).                                  low-carbon foreign investment. Low-carbon
                                                                 investment can be influenced by the “court
Costs of production. Companies’ constant                         of public opinion”; and civil society organi-
need to reduce costs also drives foreign                         zations (CSOs) have put pressure on some
investment. Some energy-generation tech-                         companies in this regard. The Royal Bank
nologies – solar technology being a typical                      of Scotland and BP (both United Kingdom),
example – are best used in countries other                       for example, started facing strong opposi-
than where they were developed because                           tion (including from shareholders) regarding
the costs of production are prohibitive in                       the oil sands development in Canada, even
    CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                       117

    before recent developments in the Gulf of        is presented in table IV.6, detailing deter-
    Mexico;37 and Greenpeace has stirred Nestlé      minants related to (a) the general policy
    (Switzerland), Unilever (Netherlands and         framework; (b) economic factors; and (c)
    United Kingdom) and Cargill (United States)      business facilitation.41
    to reconsider their operations and suppliers
    by issuing a damning report on oil-palm          Specific policies that exercise a significant
    plantations in Indonesia.38 To fend off CSO      pull on low-carbon foreign investment are
    pressure, an increasing number of compa-         countries’ environmental, industrial, pub-
    nies have strengthened their environmental       lic procurement, energy and trade policies
    reporting or adopted carbon and environ-         – with nationally appropriate mitigation
    mental labelling, as well as environmental       actions (NAMAs) and national adaptation
    management systems (like ISO 14000) that         programmes of action (NAPAs) cutting
    include emission-related aspects (section        across them (section D.2). Such market-
    D.7). Companies in sectors such as industry,     creating or -defining policies can foster
    transport, waste management, agriculture         demand for new low-carbon products and
    and forestry are particularly sensitive to       services, particularly in the energy, transport,
    civil society pressure and international envi-   buildings and industry sectors (section B.2);
    ronmental standards, hence their increasing      renewable energy markets, for instance, are
    engagement in low-carbon activities.             almost entirely created by policy. A stable
                                                     and enabling regulatory environment is a
    Shareholders are also increasingly calling       key element in the locational determinants
    for greater transparency in the disclosure       of low-carbon investment, reflecting the
    of climate change risks and opportunities        concern of the business sector for national
    facing publicly-held companies. This emerg-      policies that are enabling but not overly
    ing trend, part of the broader responsible       regulating, so as to trigger an optimal re-
    investment movement,39 is already relatively     sponse by private-sector actors (section A;
    common among large institutional investors.      WBCSD, 2005).
    A recent UNCTAD study of the world’s larg-
    est 100 pension funds found that nearly half     Low-carbon foreign investment follows,
    of them report that they are incorporating       by-and-large, the same types of economic
    environmental, social and governance (ESG)       determinants as foreign investment in gen-
    issues into their investment processes. 40       eral. Foreign investment has traditionally
    Approximately a third of these funds are         been categorized into four types of TNC
    reporting active ownership policies and are      motives for setting up operations abroad:
    promoting responsible investment practices       (a) market seeking (accessing new markets
    among their peers within the investment          by investing in production and distribution
    industry.                                        in the host country); (b) natural-resource
                                                     seeking (gaining access to particular raw
    2. Locational determinants                       materials); (c) efficiency seeking (split-
                                                     ting the value chain and locating various
Tailored policy             Locational determi-      functions/activities in different locations
frameworks and              nants (pull factors)     to exploit differential factor advantages
business facilitation,      are host country-        between countries); and (d) strategic-asset
building on countries’      specific factors that    seeking (acquisition of enterprises or shares
economic conditions,        influence TNCs’ de-      of enterprises abroad or participation in
are essential to attract    cision on where to       alliances to access new technology, skills
low-carbon foreign          set up operations;       or infrastructure – or thwart competition)
investment.                 a broad framework        (table IV.6).
118                                   World Investment Report 2010: Investing in a Low-Carbon Economy

             Table IV.6. Locational determinants of low-carbon foreign investment

General policy framework
General policies                                   Climate change-specific policies
• Economic, political and social stability         • Nationally Appropriate Mitigation Actions (NAMA)
• Good governance                                  • National Adaptation Programmes of Action (NAPA)
• Policies on functioning and structure            • Environmental policy (environmental standards, carbon taxes, cap-
  of markets (esp. competition, M&A and              and-trade schemes for greenhouse gas reductions)
  simple, transparent reporting standards in       • Industrial policy (incl. energy efficiency standards)
  line with common international practise)         • Public procurement of energy efficient products
• Protection of property rights (including         • Energy policy (e.g. requirements of renewable/low-carbon energy
  intellectual property)                             shares in energy mix of utilities, feed-in tariffs, subsidies and
• Industrial and regional policies;                  incentives for low-carbon investments)
  development of competitive clusters              • International/domestic financial mechanisms (carbon markets, public/
• Trade policy (tariffs and non-tariff barriers)     private finance mechanisms)
  and stable exchange rates                        • National JI or CDM policy framework
• International investment agreements (IIAs)       • Technology policy (related to generation, dissemination and diffusion
                                                     of low-carbon know-how)
                                                   • Trade policy adjustments for low-carbon activities (e.g. tariff reductions
                                                     for capital goods/inputs for low-carbon activities, tariff policy of the
                                                     home country with respect to potential host countries – for export
                                                     activities of TNCs)
Economic determinants
General                                            Climate change-specific
TNC motive       Economic determinants             Specific economic determinants Relevant TNCs
Market-          •   Per capita income             New or expanding, often policy- • Power utilities
seeking          •   Market size                   created (see above), markets    • Energy efficiency or process
                 •   Market growth                 for:                              improvement technology services
                 •   Access to regional/global     • Low-carbon products (in       • Producers of low-carbon goods
                     markets                         general)                        (e.g. carmakers, appliance
                                                   • Low-carbon energy               manufacturers)
                                                   • Energy efficiency/carbon
                                                     market services
Natural          • Access to raw materials         • Access to sun, wind, water,      • Utilities and independent power
resource-                                            natural gas or nuclear fuel/       producers
seeking                                              precious metals                  • Energy services companies
                                                   • Access to precious metals,
                                                     e.g. for solar batteries
Efficiency-       • Different comparative       • Technology upgrades of               • Manufacturers
seeking            advantages of countries       existing foreign affiliates to        • Power utilities
                 • Better deployment of global   gain advantage/or remain in
                   resources                     local market
Strategic     • Access to new competitive • Access to low-carbon know-                • TNCs seeking to fill knowledge
asset-seeking   advantages                      how/project pipelines                   and skills gaps in their product/
              • Availability of and access to • Leveraging of existing                  service lines specific to low-carbon
                skilled labour                  industrial know-how for low-            technologies
              • Strategic infrastructure (e.g. carbon goods                           • TNCs seeking to enter new markets
                oil pipelines, power grids) • Local R&D into low-carbon                 beyond their traditional activities
                                                technologies                          • TNCs desiring to “follow”
                                              • Participation in low-carbon             developments in a key market
                                                “clusters” (agglomeration             • Manufacturers of low-carbon goods
                                                effects facilitating rapid              to gain access to local knowledge
                                                learning and uptake of new
Business facilitation
General measures                                   Climate change-specific measures
•   Investment promotion                           • Incentives for manufacturers of low-carbon goods and/or providers of
•   Investment incentives                            energy efficiency or process improvement services (e.g. tax benefits,
•   Reduction of hassle costs                        subsidies, concessionary loans, export guarantee insurance)
•   Availability of one-stop shop services         • Support for JI, CDM or other carbon market operations
•   Provision of social amenities
•   Provision of after-investment services

Source: UNCTAD, based on WIR98: chapter IV.
CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                     119

For each type of motive there are climate-       foreign investors can either acquire or gain
change specifities which affect the pattern of   access to existing created assets such as
low-carbon foreign investment (table IV.6).      low-carbon technologies or expertise held
For market-seeking foreign investment, host      by companies in the host country: As with
country policies can play a significant role,    any dynamic developing technology, con-
e.g. for renewable energy, where the connec-     solidation by M&A activity occurs in the
tion to the electricity grid and pressure to     low-carbon arena; and investors may also
move from carbon-intensive technology fre-       seek to participate in industry or technol-
quently requires legislation. Another example    ogy clusters to gain from agglomeration and
concerns producers of low-carbon consumer        related effects.
goods, which seek markets with consumers
particularly aware of (and responsive to)        Business facilitation (section D.2) poli-
the company’s “green” credentials. Natural       cies favouring low-carbon investments
resource-seeking low-carbon investors may        can contribute to creating viable markets
seek a windy location, a tidal bay or pre-       (table IV.6). These business-facilitation de-
cious metals for solar batteries. However,       terminants may largely involve refocusing
because of the definitions of low-carbon         practices already in general use in the field,
and business-as-usual, even natural gas may      e.g. investment promotion activities such as
for instance be eligible if its use replaces a   providing one-stop shop services to better
higher emission source, such as coal. The        inform prospective investors about envi-
efficiency-seeking motive can induce TNCs        ronmental and related investment policies;
to shift large shares of their operations to     facilitating clearance procedures to reduce
the most advantageous site, which for some       hassle costs; and providing better social
technologies – as in the case of renewable       amenities and aftercare services. Incentives
electricity generation – is linked to natural    will also play a major role in inducing low-
resources. However, capturing comparative        carbon investments. In this context support
advantages might also involve seeking juris-     for potential JI and CDM investors can be
dictions with laxer environmental standards      seen as facilitating access to an incentive
(section D.6). Strategic-asset-seeking 42        provided by external sources.
      120                         World Investment Report 2010: Investing in a Low-Carbon Economy

            D. Strategies for low-carbon foreign investment:
                              policy options

      1. Weighing the pros and cons of                 In addition, a number of co-benefits may arise
         promoting low-carbon foreign                  from moving towards a low-carbon economy,
                                                       including specific sectoral benefits such
                                                       as rural electrification; safety and security
Low-carbon foreign           Developing countries      offered by stricter building codes; energy
investment can facilitate    are faced with two        security through diversification of energy
the expansion and            major challenges in       sources and energy efficiency improve-
upgrading of developing      responding to climate     ments; positive effects on the local natural
countries’ productive        change and moving         environment; and opportunities arising from
capacities and export        towards a low-car-        international funding and resources for mov-
competitiveness, while       bon economy: first,       ing into a low-carbon economy.
helping their transition     the mobilization of
to a low-carbon                                        On the demand side of the global economy,
                             needed finance and
economy. However, such                                 a growing pool of responsible consumers
                             investment; and, sec-
investment also carries                                and the rise of a sustainability-oriented civil
                             ondly, the acquisition,
economic and social                                    society shaping consumer preferences, sug-
                             generation and dis-
risks.                                                 gest that there will be an increasing market
                             semination of relevant
                                                       for low-carbon products and services. These
                             technology. Both are
                                                       changes in global demand patterns could be
      areas where foreign investment can make
                                                       seized as export opportunities by develop-
      valuable contributions – hence the discussion
                                                       ing countries by encouraging low-carbon
      below focuses on the implications of low-
                                                       foreign investment. Reasons for developing
      carbon foreign investment and not on those
                                                       countries to encourage low-carbon invest-
      of moving towards a low-carbon economy
                                                       ment, including through TNC involvement,
      in general.
                                                       are discussed in a recent study. The study
      Nevertheless, while the future international     identified three key “poles of clean growth”:
      climate change regime – including specific       energy efficiency, sustainable agriculture and
      carbon reduction commitments and financial       renewable energies (UNCTAD, 2010c).
      and technological support for developing
                                                       A number of possible disadvantages or
      countries – is still to be agreed upon, coun-
                                                       concerns must be weighed against the above
      tries need to examine whether it is in their
                                                       benefits, however, in pursuing low-carbon
      interest to facilitate low-carbon foreign in-
                                                       foreign investments. Equipped with cutting-
      vestment. When adopted, such strategies are
                                                       edge technology and implementing more
      likely to help improve production processes
                                                       efficient production processes, TNCs may
      and the emergence of new technologies
                                                       effectively crowd-out domestic companies
      (including enhancing their energy-, mate-
                                                       in developing countries, particularly those
      rial- and resource-efficiency) and industries.
                                                       who are still operating at an (overall) lower
      Other advantages for early adopters include,
                                                       level of efficiency, output and quality. Among
      among others, leapfrogging to new clean
                                                       other consequences, this can lead to reduced
      and environmentally friendly technologies
                                                       competition in host country markets and
      and gaining first-mover advantages giving
                                                       thereby to the potential for market dominance
      them an edge over competitors and attendant
                                                       and restrictive business practices. With their
      export opportunities in key industries.
                                                       nascent regulatory and institutional structures,
CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                       121

their small markets and their emerging            When choosing to promote low-carbon
indigenous firms, developing countries are        foreign investment, countries need to put
particularly vulnerable to large TNCs and         in place policies to minimize its potential
their potential for anti-competitive practices.   negative effects, while maximizing its posi-
A related danger is developing countries’         tive impact. A number of policy options are
heightened risk of dependence on TNCs’            highlighted in the discussion below, which
technology 43 and the goods and services          countries can choose to implement to vary-
they sell.44                                      ing degrees, based on their specific circum-
                                                  stances, in order to: (a) avail themselves of
Taken together, the above factors can result      new business development opportunities,
in important social costs, ranging from job       including in terms of exports; (b) increase
losses to the reduced affordability of es-        productive capacities; (c) reduce the carbon
sential services, and/or reduced tax bases.       footprint of traditional forms of foreign
These consequences are likely to hit LDCs         investment by encouraging the adoption of
and other vulnerable countries the hardest.       more climate friendly modes of production;
When promoting low-carbon foreign in-             and particularly (d) foster progress towards
vestment policy makers have to weigh the          other development objectives.
advantages and disadvantages, both in terms
of economic growth on the one hand, and           2.   Strategizing national clean invest-
environment, human health and sustainable
development on the other.                              ment promotion

It must be emphasized that the Kyoto Proto-                 Effective strategies to attract low-
col does not impose obligations with regard                 carbon foreign investment require
to climate change policies on developing                         a coherent policy framework,
countries. Developing countries are free to                  promotion programmes aimed at
choose whether they want to move towards                  targeting and clustering activities in
a low-carbon economy, and if so, to what                    key low-carbon areas, as well as a
extent. Countries may adopt different views                                     proficient IPA.
about the necessity and urgency of such a
policy shift, the policies to be applied, and          a. Mainstreaming foreign investment
their potential for effectively using low-                into low-carbon development
carbon technologies. Governments may                      strategies
therefore arrive at diverging conclusions
concerning the potential impact of low-carbon     Developing countries have accumulated
foreign investment in their countries, and the    decades of experience in foreign investment
desirability of promoting it. It also needs to    promotion strategies and policies, from the
be emphasized that choosing to implement          early stages of opening up to foreign invest-
low-carbon policies is not an either/or choice    ment to proactive promotion efforts through
but rather a continuum of options with vary-      the establishment of investment promotion
ing implications, development benefits and        agencies, sectoral liberalization and selective
costs. There is no one-size-fits-all solution.    targeting of TNCs and facilitation of their
In all of this, consideration has to be given     investments. Through targeting strategies,
to the fact that, to a large extent, much low-    they have, among others, sought to attract
carbon foreign investment is evolutionary         investments that suit their needs and are
rather than revolutionary in the sense that       most likely to make the strongest contribu-
by adopting more efficient production meth-       tion to the achievement of their national
ods, foreign investors become low-carbon          development goals.
by making an improvement relative to the
business-as-usual scenario.45
122                          World Investment Report 2010: Investing in a Low-Carbon Economy

Over the past decades, more and more                  ranging from comprehensive approaches to
developing countries have paid increasing             the practical absence of such policies. For
attention to the issue of sustainable devel-          example, in many instances, investment
opment. Many TNCs have also attempted                 promotion strategies are only beginning
to integrate sustainable development issues           to target new opportunities in low-carbon
into their strategies. As of end-2009, more           investment, and few consider the carbon
than 5200 corporations had signed up to the           intensity of traditional forms of foreign
United Nations Global Compact, including              investment. The potential contribution of
almost 170 from the Financial Times list of           foreign investment to achieving climate
500 of the world’s largest companies. To a            change related objectives, including NA-
large extent, this has resulted from pressure         MAs, is generally overlooked. Nevertheless,
from consumers and advocacy groups.                   various approaches, such as for example
                                                      low-carbon special economic zones (SEZs)
This combination of factors is an opportunity         are being developed (box IV.5).
for developing countries to integrate “green
and responsible” elements in their foreign            UNCTAD’s recent survey of investment
investment promotion strategies. The role             promotion agencies (IPAs)46 illustrates the
that TNCs can play in achieving sustain-              existence of varying national strategies for
able development – of which a low-carbon              low-carbon foreign investment. More than
economy is an integral part – deserves to be          half of the respondents indicated that both
fully taken into account. New market oppor-           climate change adaptation and mitigation
tunities arising from changes in consumer             have an important impact on their policies
behaviour in the main developed country               and have resulted in concrete action to attract
markets should also be tapped, including              low-carbon investments. For some agencies
for bio food, goods produced under respon-            the main concern is the potential impact on
sible practices (fair trade, no child labour,         climate sensitive sectors such as agriculture
fair treatment of workers), and low-carbon            and tourism. Others are trying to catch up
products. Appropriate policies can help pro-          with global developments, for instance to
tect and promote a host country’s economic,           develop or support value added production
social and other interests.                           or create a green energy sector.

Current national strategies and policies for          Most IPAs seek to attract foreign investment
low-carbon investment differ significantly,           into renewable energy, although other sectors,

Box IV.5. Low-carbon (Green) Special Economic Zones

 SEZs have played an important role in advancing industrial development, attracting foreign
 investment and creating jobs in developing countries for the last thirty years; and governments,
 developers, and companies are increasingly considering SEZs’ potential contribution to envi-
 ronmental sustainability and lowering GHG emissions.
 Low-carbon (Green) SEZs can be defined as SEZs that are designed, developed and operated in a
 low-carbon, sustainable way. They go beyond simple environmental compliance and management
 and aim at more energy/resource efficient practices, a low-carbon footprint, and GHG mitiga-
 tion actions. Core elements for low-carbon SEZs include a GHG mitigation target, sustainable
 infrastructure, a smart incentives/policy regulatory framework, and carbon finance.
 This new trend towards Low-carbon (Green) SEZs is being explored by China, India, and the
 Republic of Korea, as well as many other developing and developed countries. These countries
 hope to use Low-carbon (Green) SEZs to leverage and promote investment in low-carbon de-
 velopment efforts in a more concrete and effective ways.
 Source: Investment Climate Advisory Service, World Bank Group.
CHAPTER IV         Leveraging Foreign Investment For A Low-Carbon Economy                           123

are also well represented among their targets             and emerging business opportunities, but
for such investment (fig. IV.3). IPAs also                also about encouraging foreign invest-
indicated that they target naturally low-                 ments in traditional sectors, with a view
carbon sectors such as services, e.g. ICT                 to improving their energy-, material- or
services and investments related to energy                resource-efficiency. The contribution of such
efficiency.                                               investments to the reduction in the carbon
                                                          intensity of production in developing country
  Figure IV.3. Sectors that IPAs target                   could be very significant. Putting in place
  with respect to attracting low-carbon
            foreign investment                            policies to reduce the carbon intensity in
         (Percentage of responses)                        traditional industries through foreign invest-
                                                          ment could thus go a long way in helping
                                        Power             developing countries achieve a low-carbon
                                                          economy without compromising growth
                                                          and development objectives. Adopted by
  Industry                                                developing countries, such policies could
    18%                                                   also partly address the concern of carbon
                                                          leakage (section D.6).
              Waste and     Transport     and forestry    It should be noted that developing low-carbon
               water           11%           12%          economies will require more than changes
                                                          to investment policies. Most elements of na-
Source: UNCTAD, forthcoming f.                            tional development policies, including energy,
Note:   In the sector classification in section B.2 oil   technology, industry, transport, construction,
        & gas is considered to be part of industry. In
        addition this figure has “other” as a category,   urban development, as well as environmental
        as IPAs listed industries that in general have    policies, will have to be involved. The goal
        limited emissions, particularly services.
                                                          should be to create synergies and ensure a
Despite the fact that more than half of the               mutually supportive relationship between
IPAs promote low-carbon foreign invest-                   different areas of policy-making. Similarly,
ments, only 17 per cent of the respondents                changes to consumers’ behaviour will be
indicated that they have some supporting                  required. The effectiveness and success
policy or strategy document. One important                of investment policies to steer traditional
step forward would therefore be to integrate              investment towards lower carbon content
the potential role of low-carbon foreign                  and to attract new forms of low-carbon in-
investment into NAMAs and other climate                   vestments will thus hinge upon integrating
change mitigation strategies of developing                climate change issues into a wide range of
countries. This emerging framework for                    strategic choices.
establishing sectoral low-carbon policies                     b. Creating an enabling policy frame-
in developing countries was initiated by                         work
the Copenhagen Accord which encouraged
non-Annex I Parties (i.e. developing and                  The regulatory framework for investment
transition economies) to the UNFCCC to                    is a key determinant of foreign invest-
submit policy proposals for climate change                ment, and one that governments can shape
mitigation – the NAMAs. By 30 June 2010                   and tailor to their needs. While there is no
40 countries had submitted NAMAs to the                   single “right” regulatory framework, some
UNFCCC (fig. IV.4); and more countries                    elements are essential in order to promote
are expected to follow.                                   investment in general and foreign investment
                                                          in particular. Inasmuch as certain forms of
As indicated above, attracting low-carbon                 low-carbon foreign investment respond to
foreign investment is not only about new
124                           World Investment Report 2010: Investing in a Low-Carbon Economy

      Figure IV.4. National mitigation action documents submitted to the UNFCCC

Source: UNCTAD, based on submissions to UNFCCC.
Notes: A = Annex I country; NA = Non-Annex I country; Annex I countries were required to provide such
        plans under the UNFCCC. Figure contains information on submissions up to 30 June 2010.

specific determinants (section C.2), it is          example, various countries keep the energy
important for countries to also address these       sector under state ownership or control, or
issues from a regulatory perspective. To the        consider it as being of strategic importance
extent that investors that use state-of-the-art     and restrict or prohibit foreign investment
technologies or production processes are            in the sector (WIR08). Countries may thus
likely to have the most positive impact, they       wish to review their entry regulations for
are also the most sought after. Attracting          foreign investment in energy, weighing the
“quality” and low-carbon foreign investment         pros and cons of preserving the strategic
thus implies that host countries also offer a       nature of the sector against the potential
high-quality regulatory framework: quality          benefits arising from attracting low-carbon
attracts quality.                                   foreign investment.
        (i)   Foreign investment entry,
                                                    Foreign investors are particularly sensitive to
              treatment and protection
                                                    the standard of treatment and protection that
The majority of countries in the world have         they are accorded. A good general standard is
adopted a relatively open attitude towards          essential to attract quality investors, includ-
foreign investment, and many proactively            ing those most prone to using low-carbon
seek to attract TNCs in a wide range of             modes of production. To the extent that TNCs
sectors. However, in some cases regula-             operate in low-carbon industries where the
tions may prevent TNC entry into important          pertinent policy framework in many de-
sectors from a low-carbon perspective. For          veloping countries is still at a rudimentary
                                                    stage, sufficient investment protection is
CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                     125

particularly important, including through        limited to tariff reduction or elimination,
guarantees of fair and non-discriminatory        while others go as far as customs unions
treatment (section D.5).                         and cover a wide range of economic issues,
                                                 including investment. Cooperation in the
With respect to major foreign investment         energy sector in Southern Africa provides
projects direct investment contracts between     a good example of how regional integration
foreign investors and the host country are       mechanisms and the policy processes they
another policy option to provide legal cer-      entail can help promote low-carbon foreign
tainty. Such contractual arrangements also       investment (box IV.6).
present host countries with the possibility
to negotiate specific aspects with foreign       In the regional context, there may also be
investors, for instance with regard to the       scope for international cooperation between
transfer of know-how (box IV.8). Invest-         Governments in targeting and promoting
ment contracts can also lay the foundation       low-carbon investment opportunities. For
for public-private partnerships related to the   example, two countries could jointly promote
development and deployment of low-carbon         investment in a large biomass generator that
technologies, such as large-scale renewables-    could supply energy cross-border, rather
based power generation (e.g. hydroelectricity)   than engaging in a “bidding war” to attract
or joint research activities.                    a smaller one that does not realize sufficient
                                                 economies of scale.
       (ii) Market access and regional
            integration                                 (iii) Incentivizing low-carbon
Many developing countries have internal
markets that are of insufficient size to jus-    While taking advantage of new markets (or
tify the local production of goods by TNCs.      creating them) can be costly and difficult to
This holds true for all types of foreign in-     manage (section C), it is within the capac-
vestments, and may even more be the case         ity of most developing countries to put in
in low-carbon foreign investment to the          place a limited mix of fiscal and regulatory
extent that they make use of more modern         measures (including incentives to the extent
technologies. For instance, the upgrading        appropriate) in order to promote low-carbon
of local plants in developing regions may        forms of foreign investment in “traditional”
be justifiable from a cost perspective only      host industries. Various tools can be estab-
to the extent that there are sound growth        lished, for example to promote the use of
perspectives. However, in addition to the        more energy efficient modes of production
growth of host country markets, constraints      and machinery. Allowing the accelerated
created by limited domestic markets can be       depreciation of assets put in place to reduce
overcome through, for example, encouraging       energy needs (e.g. more efficient trucks,
efficiency-seeking low-carbon foreign invest-    machinery, better insulation or cooling of
ment (section C.2) focused on home-country       buildings) can encourage investment in low-
or global markets; or through widening the       carbon production of any good or service
local market by regional integration.            (from garments to electronics to hotels).
                                                 Similarly, developing countries could im-
Indeed, in order to overcome the constraint      pose lower withholding taxes on payments
of market size, most developing countries        abroad for intellectual property licences, to
have entered into regional economic and/         encourage the use of intellectual property
or trade agreements. The degree and scope        for low-carbon objectives. Facilitating the
of integration varies widely from region         importation of inputs needed by low-carbon
to region. Some agreements are strictly          investors can also play a positive role.
126                            World Investment Report 2010: Investing in a Low-Carbon Economy

Box IV.6. Investing in energy efficiency: the Southern African Power Pool

 Hence, regional integration deserves to be strengthened and deepened, building on liberalizing,
 institution-building and regulatory functions in order to provide a more attractive environment
 for low-carbon foreign investment. In addition, developing countries need to continue to push
 for better market access to major developed countries, particularly if they wish to be in a posi-
 tion to foster export-oriented low-carbon foreign investment.
 The Southern African Power Pool (SAPP) was created in 1995 to provide a reliable and eco-
 nomic electricity supply across the Southern African Development Community (SADC), con-
 sistent with a reasonable utilization of natural resources and the effect on the environment. As
 the increasing requirement for power in the region has become a critical challenge, SAPP has
 embarked on a regional energy efficiency programme which has created opportunities for firms
 to do business across SADC.
 For instance, the market for energy-saving lighting in South Africa – SAPPs largest market – is
 growing rapidly and is expected to accelerate even further as the Government implements its
 energy saving policies (with a stated intention of replacing 80 per cent of all incandescent light
 bulbs within the next four to six years).
 Against this background, Philips (Netherlands) entered into a joint venture with the Central
 Energy Fund (South Africa) and Karebo Systems (South Africa), and in March 2009 opened a
 new plant in Lesotho to produce energy-saving light bulbs, with the bulk of the plant’s output
 to date (more than one-million bulbs) being sold to the South African power utility Eskom. as
 part of a tender by the latter. Sales are also growing to other parts of the region.
 Sources: UNCTAD, based on the SAPP website, available at: (accessed 18 June
          2010), and “Lesotho plant supplies first million CFLs to Eskom“, Engineering News, 10 May
          2010, available at:
          cfls-to-eskom-2010-05-10 (accessed 9 June 2010).

      c. Policies to build on new business             market creation. Because of the high costs
         opportunities                                 involved, many new low-carbon products
                                                       and services can only develop and emerge
The move to low-carbon economies around                on a sustainable basis if they are supported
the world and the push to establish new                by market-creation mechanisms, even if only
modes of production and technologies imply             on a temporary basis. These can take various
that a number of new business opportunities            forms, from internalizing the externality
are emerging. These include power generation           costs of carbon emissions (e.g. a fuel tax
through renewable and low-carbon resources             establishing a market for fuel-efficient cars)
and associated products and technologies,              through mandated standards (e.g. legally
fuel-efficient or alternative-fuel modes of            required fuel-efficiency standards) or direct
transport and new building materials, among            government support (e.g. subsidies for
others. Of course, as production costs de-             households to install solar panels).
crease over time and low-carbon products
become affordable to broader parts of a                Such market-creation mechanisms have been
country’s population, the need to support              used predominantly in developed countries
emerging markets becomes less important.               and emerging economies so far. For instance,
                                                       several countries offer incentives to their
Tapping into new business opportunities                domestic industries to facilitate the shift
is likely to require specific policies to              to low-carbon technologies and production
complement the measures highlighted                    methods, which in some cases also extend
above, which focus on steering “traditional”           to foreign investors. These incentives are
investments towards a lower carbon content.            granted either directly to the industries
Key among these measures is policies for               concerned or indirectly through the granting
CHAPTER IV       Leveraging Foreign Investment For A Low-Carbon Economy                          127

of subsidies to the buyers of the low-carbon           main approaches: feed-in tariffs, when a
products.47                                            preferential price is guaranteed for a certain
                                                       period of time, or green certificates, when
Developed countries and the largest emerg-             in addition to the electricity market price an
ing markets will continue to take the lead in          additional price is paid for each certificate
putting in place market-creation mechanisms.           issued as a proof of origin for the power
This will generate new opportunities for               produced. Experience shows that the system
export-oriented developing countries. At the           of feed-in tariffs is easier and more attrac-
same time, however, developing countries               tive. A number of developing countries have
may wish to adopt market-creation policies             enacted feed-in tariffs, including Thailand,
in order to build local markets for certain            Uganda, Kenya and South Africa (REN21,
low-carbon products and services. This                 2009).
could support their own export-capacity,
and facilitate the introduction of technolo-           Another approach is the adoption of renew-
gies adapted to their development needs,               able portfolio standards. These standards
such as rural electrification using renewable          mandate utilities to include a fixed percent-
energy sources.                                        age of renewable energy within their overall
                                                       generation portfolio by a certain period. This
Most developing countries, however, have               approach increases investor certainty about
limited financial means to set up market               the size and time dimensions of a country’s
creation programmes to match those of                  market for renewable energy. Developing
developed economies, which puts them in                countries such as Chile, India, and China
a disadvantageous position concerning the              have all successfully implemented such
attraction of low-carbon foreign investment;           standards (box IV.7; REN21, 2009).
it is therefore imperative for more advanced
countries to take care not to undermine efforts        Similarly, countries wishing to create markets
being made in poorer countries’ transition             for biofuels can do so by setting blending
towards a low-carbon economy. Further,                 mandates. These requirements mandate fuel
home countries can assist by actively pro-             wholesalers in the country to blend a certain
moting outward low-carbon foreign invest-              percentage of biofuels into their products
ment and by avoiding distortions of market             by a given period. The adoption of such a
mechanisms (section D.8).                              requirement serves to create demand within
                                                       the country for biofuel products. Blending
Policy instruments to create a market vary             mandates have helped to secure biofuel
by sector. For instance, in the case of the            foreign investment projects in a number of
market for renewable energy, there are two             developing and transition economies.48
Box IV.7. Creating demand for renewable electricity in Chile

 Chile’s 2008 Renewable Energy Law required that at least 5 per cent of electricity must come
 from renewable sources by 2010. This percentage must increase by 0.5 per cent each year to
 reach an overall goal of 10 per cent in 2024. The Government of Chile is promoting renewable
 energy development by supporting private initiatives through: guaranteed access to the grid for
 renewable energy projects, a reduction of the toll fee for renewable energy projects whose capac-
 ity is under 20 MW, entitlement to sell energy at marginal (spot) or stabilized (node) prices, new
 promotion instruments for transmission lines to enable renewable energy projects to reach the
 grid and overcome specific barriers, and credit lines available for non-conventional renewable
 energy (NCRE) projects with preferential condition, up to $15 million, including guarantees for
 loans. This new framework has created a surge in renewable energy projects, including those
 from TNCs such as Seawind (United Kingdom), GDF Suez (France), and ENEL (Italy).
 Source: UNCTAD.
128                           World Investment Report 2010: Investing in a Low-Carbon Economy

With regard to attracting foreign investment         eign investment and with scarce financial
that increases energy efficiency, the setting of     resources to promote it. Different categories
energy performance standards or mandatory            of low-carbon foreign investments (includ-
energy labelling schemes can indirectly help         ing export-orientated investments) require
to create a market for new technologies. This        different enabling frameworks, including
can induce a shift towards more low-carbon           regarding the issue of how to balance invest-
investment in this area (box IV.8).                  ment incentives with investment regulations.
                                                     Effective implementation and monitoring of
Public procurement of low-carbon products            the enabling framework create additional
and technologies can also play an important          significant challenges for local capacities.
role as a catalyst for low-carbon investment.        This includes keeping an eye on the risk of
For example, policies could be adopted re-           crowding out (sections D.1 and D.4).
quiring government buildings to use highly
insulated windows, or a certain percentage               d. Promoting low-carbon foreign
of public administration fleets to consist of               investment
electric vehicles. Public procurement can
provide new investors with the security of           Developing countries need to give
having a buyer for their products.                   consideration to how they enhance the
                                                     Figure IV.5. Importance of regulatory and
According to UNCTAD’s Survey of IPAs                  institutional frameworks for attracting
(UNCTAD, forthcoming f), IPAs consider                   low-carbon foreign investments
the creation of a market for renewable en-                 (High importance; percentage of
ergy to be the most important supporting
policy for attracting low-carbon foreign                   Renewable energy markets
investment (fig. IV.5). Other policies play-                       Technology transfer

ing a very significant role include to the                       Promotion of linkages

same end, inter alia, promoting technology                       Regulatory standards
                                                                      Carbon markets
dissemination and creating linkages with
                                                                           Bilateral aid
domestic investors.                                                          CDM or JI
Setting up the “right” policy framework to            International public carbon funds
support the creation of markets and take                        Institutional capacities
advantage of business opportunities is a                    Intellectual property rights
complex task, and a particular challenge                                                   0   10   20   30   40   50
for developing countries with little or no
                                                     Source: UNCTAD, forthcoming f.
experience in attracting low-carbon for-

Box IV.8. Stimulating demand for high-efficiency home appliances in Ghana

 The Government of Ghana recently adopted a number of policies in recognition of the fact that
 the low efficiency of home appliances, such as air conditioners and refrigerators, represents a
 huge cost to the national economy (Van Buskirk et al., 2007).
 For instance, in order to implement the transformation of the refrigerator market, the Govern-
 ment is entering into a public-private partnership (PPP) with the Bosch and Siemens Home
 Appliances Group. The PPP will support the process of creating a market low-carbon in refrig-
 erators in a number of ways, including assisting in the establishment of appropriate metrics to
 assess efficiency improvements in refrigerators in use, and developing CO2 offset possibilities
 by sharing knowledge and expertise of refrigerator programmes under the CDM. Essentially,
 this is a PPP to support institutional capacity building, as well as create pathways for future
 foreign investment.
 Source: UNCTAD.
CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                       129

role of national IPAs in the attraction of         businesses that are involved in research, in-
low-carbon foreign investment. IPAs can            novation and the commercialization of clean
identify opportunities for such investment         technologies, relating to renewable energies
and promote policies to encourage it. Investor     or aiming, more generally, to increase the
targeting, aftercare and policy advocacy           energy-, material- or resource-efficiency of
are key functions that IPAs should use to          relevant processes. They are also designed to
this end.                                          be eco-friendly and are often located close to
                                                   universities and research centres to promote
Investor targeting. It is important to consider    the exchange of knowledge.
that few economies can offer an internation-
ally competitive environment for all types         Aftercare. IPAs can also help build networks
of low-carbon foreign investment. Country          and connect low-carbon investors with local
IPAs should therefore carefully review and         entrepreneurs, innovators and researchers.
identify the specific economic activities          When IPAs engage in matchmaking, they
where they see a potential to develop low-         should look for complementarities with lo-
carbon activities or growth poles. On this         cal firms. Even if these firms do not have
basis, they can then design investment pro-        a low-carbon profile, they may possess
motion packages in these areas, positioning        skills and technologies that could be used
the country as a location for particular low-      for low-carbon projects. Examples include
carbon foreign investment and proactively          skills and technologies in the field of elec-
target relevant TNCs. This review required         tronic components, computer software, and
to put these actions into place could include      various biological processes that could be
assessing:                                         used in the production of biofuels. Fur-
• The nature of the global market for rel-         thermore, IPAs can encourage partnerships
  evant low-carbon foreign investment;             among foreign investors, governments and
                                                   research institutions for the development of
• The country’s current circumstances as           low-carbon technologies and products. The
  a location for low-carbon foreign invest-        agency could also facilitate investor access
  ment, taking into consideration develop-         to test and demonstration facilities for new
  ment objectives and related policies;            low-carbon products.
• Comparative and competitive advantages
  in specific areas of low-carbon invest-          Policy advocacy. As highlighted above, only
  ment;                                            a relatively small number of developing
                                                   countries have adopted explicit low-carbon
• Specific investment opportunities, rel-          development strategies so far. However,
  evant TNCs, and how these could be               specific policy measures are necessary in
  matched;                                         order both to evolve towards low-carbon
• Key success factors for attracting foreign       economies and to attract low-carbon foreign
  investment and for the implementation of         investment. Among the key measures and
  relevant measures required.                      issues to be considered are market-creation
                                                   mechanisms, foreign investment entry and
Several measures can be taken to facilitate        treatment and specific incentives for low-
the entry and establishment of low-carbon          carbon investments. In order to ensure that
foreign investors. One such measure would          such issues are given due consideration by
be to set up CleanTech parks. Initiatives of       governments and that they are in a position
this kind are taking place in several countries,   to proactively market the country as a low-
including for example Denmark and Singa-           carbon investment destination, IPAs need
pore. Such parks accommodate clusters of           to pay particular attention to their advocacy
                                                   function. IPAs can be more up to date on
     130                             World Investment Report 2010: Investing in a Low-Carbon Economy

     the latest trends in foreign investment flows       TNCs can play a major role in diffusing
     and serve as the primary interface between          low-carbon technologies to developing
     TNCs and government. Their role in making           countries. Proactively involving them in the
     policy makers aware of regulatory needs to          dissemination process, so as to maximize the
     promote low-carbon investment are thus be           supportive role they play can be useful – if
     crucial.                                            not necessary.

     3.    Building an effective interface               Technology dissemination is a complex
                                                         process (box IV.9) and many developing
           for low-carbon technology                     countries face difficulties in establishing
           dissemination                                 effective policies. Among the key issues to
                                                         be considered are: targeting and prioritiz-
Sustainable cross-border    Over 80 per cent             ing low-carbon foreign investments where
technology dissemination    of global R&D is             technology diffusion to local firms is most
calls for technology        conducted in just            favourable; creating an environment con-
targeting, conducive        10 countries,49 the          ducive to technology flows from parent
frameworks, effective       majority share of            companies to affiliates or domestic firms
linkages and domestic       which is directly            in the host countries; establishing a basis
enterprises with enhanced   undertaken by
absorptive capacities.                                   for interaction between TNCs and domestic
                            TNCs, including              firms to maximize chances of diffusion; and,
                            in technologies              finally, fostering absorptive and adaptive
     required for climate change mitigation              capacities enabling domestic firms to build
     (National Science Board, 2010; Tomlinson,           on and develop further the knowledge they
     Zorla and Langley, 2008). With a vast               have acquired.
     pool of technology and know-how,

      Box IV.9. International technology dissemination

      International technology dissemination entails the acquisition, mastery, diffusion and indigeni-
      zation of knowledge, technology and skills in a host country. Importantly, the knowledge is not
      only transferred across borders, but also absorbed by local actors. In this context, “acquisition”
      means movement of the technology to local players; and “mastery” requires that local actors are
      fully capable of using the knowledge and building on it (i.e. they have the “absorptive capacity”
      to do this). “Indigenization” of technology is a long-term concept, implying that the technology
      has become part of the national knowledge and innovation system, including diffusion to other
      enterprises and further research, development and innovation in the host country.
      Technology includes a range of both hard and soft elements, e.g. intellectual property; produc-
      tion and organizational knowledge and skills; managerial, engineering and other skills; even
      corporate culture, values, norms and standards. Complexity is one reason that makes it difficult
      to disseminate technology. In addition, there are proprietary/appropriability issues; i.e. firms
      which possess the knowledge create barriers to easy dissemination.
      Direct flows of technology to host country firms take various forms, including licensing, transfers
      to partners (including joint venture partners/alliance members), or support given to suppliers.
      Indirect flows are unintended spillovers or externalities, such as staff turnover, or knowledge
      transferred to partners “leaking” to other host country firms.
      In order to maximize technology dissemination, it is imperative for governments to establish
      and implement policies enhancing the absorptive and adaptive capacities of local firms, as well
      as to create a framework providing opportunities for them to access and acquire the know-how
      in the first place.
      Source: UNCTAD.
CHAPTER IV       Leveraging Foreign Investment For A Low-Carbon Economy                                131

    a. Technology targeting                           In specific segments of industries and
                                                      value chains, where absorptive capacities
A number of factors might affect host govern-         of domestic companies are high, but low-
ment’s prioritization and targeting of foreign        carbon technology and know-how is lack-
investment to boost prospects for technology          ing, governments can target specific foreign
dissemination. For instance, a government             investors in order to acquire the necessary
may identify targets for promotion efforts by         know-how. The approach of the Republic
comparing potential growth sectors with an            of Korea demonstrates a selective, targeted
assessment of the country’s natural resources         policy approach that can help a country enter
and created assets. For example, Morocco              rapidly into high-end, low-carbon industries
has chosen to enter into renewables power             (Shim et al., 2009; box IV.10). Similarly, in
generation and environmental technologies             the area of clean transport equipment, the
manufacturing for a number of reasons,50              Government of Malaysia adjusted its Na-
including an assessment of where the tech-            tional Automotive Policy, which has opened
nology can best be secured, as well as an             up opportunities for foreign automakers
analysis of patterns of low-carbon foreign            to invest in the production of hybrid and
investment in the sector.                             electric vehicles.

Box IV.10. Promotion of low-carbon foreign investment in the Republic of Korea: a selective approach

 Green growth is a top policy priority of the Republic of Korea. In August 2008, the Government
 set “low-carbon, green growth” as the new national vision, in response to the growing threats of
 climate change and the depletion of natural resources. In 2009, it announced a comprehensive
 five-year plan to spend 107 trillion won (approximately 2 per cent of its GDP) to support green
 growth between 2009 and 2013 – double the proportion recommended by the United Nations. In
 the same year, it announced its GHG emissions reduction goal of 30 per cent from the business-
 as-usual level by 2020. The Framework Act on Low-Carbon, Green Growth attained bipartisan
 support in the National Assembly, passed in December 2009 and took effect in April 2010.
 At present, the Republic of Korea relies on foreign countries for low-carbon technologies, as its
 green industries are still at the fledgling stage. For example, imports account for approximately
 70 per cent of all products and components used in solar energy facilities and approximately 96
 per cent of those used to generate wind power.
 Against this background, the Government is actively promoting foreign investments into “green
 industries.” The Government believes that foreign investments in green industries are essential
 to develop them as new national growth engines. To this end, the Government has designated
 key sectors, including smart grids and LED panels, as targets of investment in green technology-
 related R&D projects
 Moreover, the Government has introduced numerous incentives such as cash grants and corporate
 tax breaks for companies that develop cutting-edge green technologies. Examples of TNCs that
 are taking advantage of the incentives include the photovoltaic module manufacturer Solarworld
 (Germany), the wind power company Acciona Energia (Spain), and Robert Bosch (Germany),
 manufacturer of Li-Ion batteries. According to the Industrial Bank of Korea, investment in
 green technology by the top 350 companies in the Republic of Korea rose by 34 per cent in
 2009 compared to 2008.
 Considering the Government’s strong commitment to green growth and the public funding for
 related R&D, its green industries appear to have a great potential to grow up rapidly. For ex-
 ample, the Republic of Korea is proud that some domestic companies already excel in the fields
 of LED display panels and rechargeable batteries.
 Source: UNCTAD, partly based on information supplied by the Ministry of Knowledge Economy, Republic
         of Korea.
132                          World Investment Report 2010: Investing in a Low-Carbon Economy

      b. Creating a conducive framework           Evidence on the implications of IP protec-
         for cross-border flows of tech-          tion for cross-border dissemination of clean
         nology                                   technologies is still inconclusive (ICTSD,
                                                  2008). Some preliminary evidence from
Elements of a conducive framework specific        renewable energy sectors indicates that
to cross-border flows of low-carbon tech-         strong IP protection may in some cases have
nology include the availability of requisite      facilitated the dissemination of technologies
skills, appropriate infrastructure (e.g. some     to relatively advanced developing countries
countries are setting up low-carbon special       where there were large number of competi-
economic zones (box IV.5)), measures to           tors in the market, such as China and India
define and create markets in low-carbon           (Barton, 2007; Abbott, 2009).
technology products (section 2), targeted
incentives (e.g. to invest in the necessary       In the area of the CDM, some host-country
R&D or technology adaptation) and a               governments use the screening and approval
strengthened legal system. How these issues       process to influence the content and extent
play out varies between economies.                of cross-border technology flow and dis-
                                                  semination, even though the CDM does
As one example, some developing countries         not have an explicit technology dissemina-
possess or have the resources to bolster edu-     tion mandate. All CDM projects need to be
cation and training in the necessary skills;      approved by the host country government
for instance, Malaysia has a significant          and countries such as China, India and the
scientific workforce in electronics which         Republic of Korea have included technology
companies such as Osram (Germany) and             dissemination requirements in the eligibil-
Philips (Netherlands) are using to produce        ity criteria for CDM project approval.53 For
goods, such as LEDs, with lower GHG emis-         most other developing countries, however,
sions for export.51 However, many countries       the major challenge is still how to establish
still suffer from skills shortages, and TNCs      basic administrative capabilities in order to
may need to rely on expatriate personnel          attract CDM projects.
for key functions, particularly when they
operate in sectors with high-technology               c. Promoting transmission of tech-
content. Being able to recruit expatriate                nology through linkages
personnel – and to train local staff – can be
important in securing the cross-border flow       Whether domestic companies acquire tech-
of technology. In some cases, because of          nology from TNCs, to what degree and at
this, incentives are given to TNCs or local       what speed, depends on the type, scale and
companies to invest in the requisite training     quality of the interface that exists between
of the local workforce.                           them. The type of interface may involve joint
                                                  venture partners, competitors, suppliers or
Another important issue for cross-border          public-private partnerships; and all have pros
flows of technology, e.g. transmission of         and cons (WIR01). Some governments are
know-how from parent TNCs to affiliates, is       keen to promote joint ventures (JVs) since
intellectual property (IP) rights protection in   this interface between TNCs and domestic
host countries. Many TNCs perceive strong         companies can often result in effective
IP protection and enforcement as a precondi-      transmission/acquisition of technologies:
tion for their transmission of technologies       both parties have reciprocal knowledge and
to host countries. At the same time, from         assets to share (e.g. the TNC may possess
a host country perspective, the IP regime         low-carbon technology, while its domestic
needs to be shaped and enforced in a manner       partner has the tacit know-how about local
that guarantees wide access to appropriate        industrial customers). However, JVs require
technologies (UNCTAD and ICTSD, 2003).            high levels of mutual trust between partners,
CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                      133

as well as transfer/absorption capabilities      creating a special purpose vehicle (typically
(Demirbag and Mirza, 2000).                      a company or partnership), funding using
                                                 principally private sources, acquiring the
Linkages between TNCs and domestic firms         assets to generate a cash flow stream and
are also among the key channels of transmis-     then entering into contracts to secure the
sion of know-how and technology. They can        cash flow stream for the payment of the
be major contributors to the development of      product or service. The contract can be a
low-carbon economies in developing coun-         concession or an explicit commitment by
tries. Inasmuch as domestic firms are often      a public entity, such as the electricity grid
linked into TNC’s domestic and global value      provider. It is possible to structure PPPs
chains, there are good reasons for technology    as, for instance, build-operate-transfer
transmission to host country firms to occur      (BOT) arrangements with TNCs, whereby
(for instance, to meet product specifications    technology is disseminated to local part-
and quality standards). However, linkages do     ners; such arrangements would normally
not necessarily occur in and of themselves       involve training and transfer of the facility
and frequently require supportive policies in    or plant to the local enterprise(s) after an
order to fully materialize (WIR05; Liu, Wang     agreed period. As with other interfaces, the
and Wei, 2010). UNCTAD’s programme               effectiveness of PPPs/BOTs depends on a
on business linkages actively promotes the       number of factors, including the quality of
establishment of such connections between        the negotiations/contractual arrangements
TNCs and SMEs in a number of developing          (see also WIR08).
                                                     d. Boosting the absorptive capacities
According to the IPA survey (UNCTAD,                    of domestic enterprises
forthcoming f), the development of linkages
between low-carbon foreign investment and        As mentioned earlier, whether technologies
domestic companies is among the key policy       are acquired and mastered by local firms de-
objectives when promoting such investment.       pends not only on the quality of the interfaces
There are different models for creating link-    between TNCs and local firms, but also on
ages between low-carbon foreign investment       the absorptive capacities of the latter. Host
and the domestic economy. One option is          developing countries should thus put in place
to promote the establishment of local tech-      a strategy to develop domestic capacities to
nological and industrial clusters. With the      absorb technology and know-how. As part of
participation of both domestic firms and         such strategies, government-driven R&D in
foreign affiliates, these clusters can help      cutting-edge “green” technologies can play
enhance the exchange of knowledge and            an important role, because private investors
manpower and the establishment of joint          tend to under-invest in public goods, such as
ventures between local and international         the environment. Public-private partnerships
companies. They therefore serve as incu-         to facilitate the development and deployment
bators for the development of low-carbon         of new environmentally-friendly technologies
industries and capabilities, as highlighted in   and to adapt them to local circumstances can
the case of the Binhai New Area in China         also be helpful. Particularly valuable would
(box IV.11).                                     be the establishment of Regional Technology
                                                 Synergy Centres (RTSCs) to formulate and
Some significant low-carbon technologies         coordinate a coherent programme responding
such as power, waste management and in-          to the demands, opportunities and options
dustrial cogeneration projects are well suited   in low-carbon technologies in developing
for public-private partnerships (PPPs). These    countries.
complex project financing structures involve
134                            World Investment Report 2010: Investing in a Low-Carbon Economy

Box IV.11. Foreign investment and formation of a low-carbon cluster – the case of China

 In late 2009, the Chinese Government announced its commitment to reduce the country’s carbon
 dioxide emissions per unit of GDP within the next 10 years by at least 40 per cent compared to
 2005 levels. To reach these targets, the Government has allocated significant financial resources
 to support the development of a range of renewable energy technologies. This has resulted in
 the emergence of a number of regional green energy clusters, bringing together manufacturers,
 suppliers and research and development centres. The latest example is the Binhai New Area
 located within the confines of the north-eastern port city of Tianjin.
 The Municipal Government of Tianjin has committed RMB200 million (about $14.6 million)
 annually to support companies engaged in the development and manufacturing of wind and solar
 technology as well as rechargeable batteries. In addition, the city offers prospective investors a
 variety of discount loans, tax rebates, and rent subsidies.
 Tianjin’s favourable conditions have proven attractive to both domestic and foreign energy
 companies. Within only a few years, Binhai has become China’s largest wind power manufac-
 turing centre, bringing together a range of internationally leading turbine manufacturers and
 component suppliers. As a result, Binhai’s wind power companies account for 40 per cent of
 all wind power installations in China.a In addition, Binhai has attracted a growing number of
 leading foreign suppliers of key components.b The concentration of top-level transnational wind
 power companies in the Binhai area has attracted a growing number of domestic firms special-
 izing in components, parts, and supporting services to complete the supply chain. The Binhai
 New Area is also becoming a major centre for China’s solar industry, particularly with respect
 to research and development.
 Source: UNCTAD, based on, and
   Topping the list is the Danish investor Vestas. Since 2005 the company has invested more than $370
   million in what is today Vestas’ largest integrated production facility worldwide.
   Including Hansen Transmissions – a major gearbox design and manufacturing company from Belgium,
   with a total investment in Tianjin amounting to about €200 million.

A regional basis to these centres recognizes          among them absorptive capacities in key
that many issues (e.g. low-carbon electrifica-        technologies and industries, with the help
tion, transport infrastructure or housing for         of development partners – including TNCs,
burgeoning rural and urban populations) are           ODA and others – supplying financial and
common features across developing countries           technological assistance.
and have regional ramifications; although
RTSCs will also have national windows                 Promoting technology dissemination may also
and be allied internationally (including              necessitate the strengthening of the financial
with existing R&D centres, as well as other           capacities of local firms. One possibility is
RTSCs). The synergy arises from a careful             to select financial investors who are will-
matching, harmonization and utilization               ing to accept a higher than usual degree of
of all salient technological resources, be            risk, for example venture capital firms. Host
these from TNCs, the local private sector or          countries could further encourage financial
public sources (including universities); and          institutions to develop evaluation criteria
mechanisms will need to be put in place to            and special financial tools for supporting
adapt technologies to local needs, or gener-          local entrepreneurship in the area of low-
ate new ones if necessary (especially in and          carbon investment. In this context, consid-
for LDCs). However, the possibility of local          eration could be given to the establishment
or regional low-carbon technology genera-             of “green development banks”. This could
tion depends very much on administrative,             open credit markets, motivate business to
scientific, industrial and enterprise-level           invest and enable clean-energy technologies
capabilities. Thus much of the early work of          to be deployed on a large scale and become
RTSCs will entail boosting these capabilities,        commercially viable.55 Compared to existing
     CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                    135

     incentives, such as public loan guarantees       foreign low-carbon technology suppliers.
     or tax rebates, a green development bank         Industrial policies, for example, can help
     would have the advantage of being more           strengthen indigenous capacities so as to
     flexible in addressing critical barriers to      reduce undue dependence on foreign compa-
     investment. It would allow for tailor-made       nies and technologies and, at the same time,
     solutions as opposed to the more rigid tax       allow domestic firms to seize opportunities
     regulations and other official government        for low-carbon growth (UNCTAD, 2010c).
     programmes. Another approach that may            This issue becomes particularly acute in
     be considered is the creation of so-called       the face of market entry by technologically
     “green” funds that provide funding to local      advanced TNCs. To the extent that develop-
     firms at concessionary rates. For example,       ing countries have the financial means to do
     Kenya has announced the creation of a            so, they may wish to consider subsidies to
     green energy fund to help firms and other        domestic firms as a support for low-carbon
     institutions to generate clean energy and        alternatives during their start up phase. An
     manufacture energy-efficient light bulbs         effective competition policy framework could
     and other appliances.56                          help control the emergence of monopolies
                                                      and prevent the abuse of a dominant market
     4. Addressing the negative effects of            position by low-carbon investors.
        low-carbon foreign investment                 In the short run, social policies can also
                                                      help cushion employment impacts and so-
Industrial,               Developing countries
                                                      cial consequences. For instance, re-skilling
competition and           can experience adjust-
                                                      measures can help workers adjust to new
social policies need      ment costs when transi-
to be put in place to                                 professional requirement or facilitate their
                          tioning to a low-carbon
overcome potentially                                  move to emerging industries. In the mid to
                          economy with the help
negative effects of                                   long term, new fields of economic growth
                          of low-carbon foreign
low-carbon foreign                                    need to be opened, often requiring a differ-
                          investment. The chal-
investment.                                           ently and more skilled workforce, which
                          lenges are many, particu-
                                                      has implications for the education systems
                          larly in the short term
                                                      and related policies.
     (section D.1). The most important challenge
     is how to support countries’ transition to a     There is no one-size-fits-all model for the
     low-carbon economy and use of low-carbon         transition to a low-carbon economy. It is
     foreign investment in this process, without      particularly important for developing coun-
     sacrificing or unduly constraining access to     tries that they are granted the necessary
     essential resources, productivity and growth     policy space and flexibility to identify and
     that can pull people out of poverty. Proper      implement domestic strategies that best fit
     assessment of the issues, with a view to         their particular contexts. The paradigm of
     improving a common understanding of the          sustainable development, and the concept of
     opportunities and threats from low-carbon        common but differentiated responsibilities,
     strategies supported by low-carbon foreign       requires respect for the policy space of each
     investment, is an essential first step. This     country to define its own path towards a low-
     assessment can also help devise viable regu-     carbon economy, in accordance with their
     latory and institutional responses.              own circumstances and priorities. Avoiding
                                                      top-down and encouraging bottom-up solu-
     Effective industrial and competition poli-
                                                      tions may prove beneficial in this context.
     cies are central to tackling the challenge of
     crowding out and attendant dependency on
      136                         World Investment Report 2010: Investing in a Low-Carbon Economy

      5.    International investment agree-           centives, government promises of support
            ments and climate change                  and specific regulatory frameworks (e.g.
                                                      market creating climate change regula-
Securing IIAs’           International invest-        tions, (section 2.c.(i)). To the extent that
contribution to climate  ment agreements (IIAs)       IIAs can strengthen investors’ confidence
change mitigation        can support govern-          regarding the continuity and enforceability
entails introducing      ments’ endeavours to         of such enabling frameworks or promises of
climate-friendly         attract low-carbon FDI.      support, they can positively impact firm’s
provisions into future   However, attention has       investment-decisions (Boute, 2007; 2009;
IIAs. A multilateral     to be given to the dual-     2010). The possibility for investors to resort
understanding is         edged nature of such         to international arbitration, with a view to
needed to ensure the     agreements. IIAs can         enforcing the enabling framework that had
coherence of existing    be both an incentive for     influenced a particular investment decision,
IIAs with international  encouraging low-car-         is crucial in this context.
and national policy      bon foreign investment,
developments related                                  However, these very characteristics of IIAs
                         as well as a constraint
to climate change.                                    – i.e. their stabilizing effect with respect to
                         on governments’ poli-
                         cies for transitioning       host country laws, regulations and policies
      towards a low-carbon economy.                   – have also given rise to concerns. Notably,
                                                      IIAs can constrain governments’ regulatory
            a. The dual-edged nature of IIAs          prerogatives with respect to measures that
                                                      aim to facilitate a transition to a low-carbon
      As foreign investment determinants, IIAs        economy. More specifically, there are fears
      can influence a company’s decision on where     that investors, whose investments have been
      to invest. While there is no – and there can    hampered by climate change measures, may
      never be – a mono-causal link between the       bring claims against host States, based on the
      conclusion of an IIA and FDI flows, there       violation of an IIA provision (Johnson, 2009;
      is an indirect investment promotional effect    IISD, 2009). The range of climate change
      of IIAs that stems primarily from the pro-      related policies that could be perceived to
      tection that they offer to foreign investors.   negatively impact on foreign investment is
      IIAs that combine protection with liberal-      large and differs across sectors.
      ization commitments and those that embed
      the investment issue in a broader regional      Two recent ISDS disputes – Allard versus
      trade context (section D.2.b) can also have     Barbados and Vattenfall versus Germany
      a direct FDI promotion effect (UNCTAD,          – demonstrate the dual nature of IIAs with
      2009d).                                         respect to general environmental policies,
                                                      suggesting that similar scenarios could also
      While the above applies to all types of FDI,    occur with respect to climate-change poli-
      IIAs might have a particular relevance for      cies. Allard versus Barbados57 shows how
      attracting low-carbon foreign investment.       investors whose business case relies on the
      To the extent that low-carbon foreign in-       enforcement of environmental laws use
      vestment materializes in capital-intensive      IIAs to induce countries to implement and
      sectors, such as energy, the role of IIAs       enforce their environmental laws. Vattenfall
      in stabilizing legal regimes – a role that      versus Germany 58 indicates that IIAs can
      generally affects all investment over long      be used to challenge environmental laws
      periods of times – is particularly relevant.    and regulations. Under both scenarios, it is
      Moreover, more than in any other sector,        the IIA’s stabilizing effect, and particularly
      investors in renewable energy/low-carbon        the potential for ISDS cases to enforce this
      activities build their business cases on in-    stabilizing effect, that plays a central role.
CHAPTER IV     Leveraging Foreign Investment For A Low-Carbon Economy                    137

Arbitral decisions suggest that the following   of the applicable IIA (including exceptions
IIA rules merit particular attention when       for environmental laws and regulations)
it comes to strengthening or challenging        and on the composition of the tribunal that
climate change related policies.                is handling the case. An increasing lack
• Fair and equitable treatment (FET)            of predictability regarding the outcome of
  and minimum standard of treatment             ISDS cases further increases uncertainty in
  (MST): IIA rules on FET and MST tend          this context (see also chapter III).
  to be interpreted as protecting inves-            b. Synergizing IIAs and climate
  tors’ legitimate expectations – including            change policies
  those expectations on which firms relied
  when making their investment decisions        Think tanks, academia and commentators
  (UNCTAD, forthcoming d). These obli-          have contributed their views of possible ways
  gations could be used to challenge the        to achieve coherence between countries’
  refusal of expected government sup-           climate change and international investment
  port, the dismantling of market-creating      policies with a view to strengthening the
  mechanisms or a tightening of emission        positive and minimizing the negative effects
  standards for production processes.           that IIAs may have on climate-change re-
• Expropriation: IIA rules on direct and        lated policy measures (Baumert, Dubash and
  indirect, expropriation (UNCTAD, forth-       Werksman, 2001; Gentry and Ronk, 2007;
  coming c), could be used to challenge         Boute, 2007; 2009; Miles, 2008; Johnson,
  climate-related measure that reduce the       2009; Marshall, 2009). Issues related to
  economic value of a particular investment     climate change and future IIAs have also
  (e.g. a prohibition of certain economic       been mentioned in the context of reviewing
  activities or operating techniques).59        the United States model BIT (United States
                                                Department of State, 2009: Annex B).
• Umbrella clause: Some IIAs allow
  investors to bring ISDS claims based          Harnessing the potential of IIAs to ensure
  on the violation of specific contractual      positive climate change related effects.
  arrangements governing the relationship       Policy makers could devise IIA language
  between the host country and a particular     that strengthens the role of IIAs in help-
  investor (including arrangements that         ing attract low-carbon foreign investment
  require continuity in the legal regime        and encouraging the diffusion of relevant
  applicable to the investor’s operations).     technology.
  Umbrella clauses could be used to chal-
  lenge governments’ activities to induce a     • Options include (a) preambular language,
  transition towards a low-carbon economy,        affirming that IIAs and attendant FDI
  which – their very nature – will involve        flows aim to help address the climate
  changes to the regulatory regime govern-        change challenge (inspired by e.g. Japan-
  ing economic activities.                        Switzerland FTA (2009)); (b) provisions
                                                  on “investment promotion”, strengthened
The potential for ISDS cases must be viewed       through a reference to home and host
it in its proper context. It is impossible to     country activities for the promotion of
anticipate all situations where investors         low-carbon investment; (c) provisions on
might successfully rely on ISDS or where          technology transfer, specifically referring
investors’ claims will remain unsuccess-          to climate change-related technologies
ful. Instead, this depends largely on the         (inspired by e.g. Japan-Switzerland FTA
specific business operations, on the type         (2009) or Brunei-Japan FTA (2009)); (d)
of the measure challenged, on the language        provisions on “scope and definition”,
138                          World Investment Report 2010: Investing in a Low-Carbon Economy

   amended so as to refer to investments          Interpretative approaches towards inte-
   that meet certain “climate-friendly”           grating IIAs and climate change policies.
   criteria.                                      Recognizing that modifications to the IIA
                                                  regime along the above lines would require
Preserving policy space for climate change        a lengthy as well as time- and resource-
measures, including for regulatory and policy     intensive process of amending the more than
changes that negatively affect carbon-inten-      3,000 BITs and other IIAs with substantive
sive investors. This would offer an important     investment obligations that were concluded
step towards addressing the contradiction         between almost all countries of the world,
between the stabilizing function of IIAs and      policy makers may wish to consider cross-
the need for a dynamic legal framework that       cutting, interpretative approaches. Even
enables, and at times enforces, the transition    if non-binding in nature, pursuing policy
towards sustainable patterns of production        integration and coherence through interpre-
and consumption.                                  tative means could provide “interpretative
• Options include (a) climate change-             guidance” to arbitral tribunals adjudicating
  specific exceptions (inspired by excep-         climate change related ISDS claims and be
  tions for legitimate public policies, e.g.      a significant step, particularly in scenarios
  Canada-Chile FTA (1996), Republic               where ISDS tribunals have a certain margin
  of Korea-United States FTA (2007),              of discretion in the interpretation of the IIA
  Singapore-United States FTA (2003)); (b)        provision at issue.
  clarifications to obligations specifying        • The principle of systemic integration
  that climate change related regulatory            codified in the Vienna Convention on the
  actions do not amount to an indirect              Law of Treaties61 could open a role for
  expropriation; or (c) ISDS carve-outs             environmental law principles in ISDS.
  for climate-change measures (inspired             For example, the polluter-pays principle
  by carve-outs in Belgium/Luxembourg-              – a central tenet in environmental law and
  Colombia BIT (2009)).                             policy – requires that economic operators
                                                    assume the costs of internalizing their
Increasing institutional and practical              pollution (United Nations International
linkages between IIA and climate change             Law Commission, 1998; United Nations
policies would recognize that IIAs operate          Commission on Sustainable Develop-
in the broader context of sustainable devel-        ment, 1997) – could play a role when it
opment objectives and help ensure that IIAs         comes to interpreting IIA rules on ex-
contribute – rather than undermine – climate        propriation and the extent to which they
change related objectives.                          require States to compensate investors
• Options include (a) permitting – or requir-       for increased costs arising from climate
  ing – ISDS tribunals to appoint experts           change measures (Hunter and Porter,
  to report on factual issues concerning            1999; Mann, 2001; CIEL, 2010).
  climate change (inspired by the Republic        • A multilateral declaration could help
  of Korea-United States FTA (2007)); (b)           enhance coherence between the IIA and
  requiring climate change impact assess-           the climate change regimes. By clarifying
  ments of future IIA negotiations; or (c)          that IIAs do not constrain climate change
  specifically referring to international legal     measures enacted in good faith, such an
  or policy documents on climate change             instrument could help ensure that the IIA
  (inspired by Canada-Chile FTA (1996)              framework is in line with multilaterally
  and Canada-Peru FTA (2008)).60                    agreed global priorities.
     CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                      139

     6.   Dealing with carbon leakage                  sible or may entail high costs (Kasterine
                                                       and Vanzetti, 2010). One option would
Carbon leakage has             One notion often        therefore be to implement border measures
implications for both          referred to when        for all products of a given category from a
economic development           discussing the regu-    country or a region. On the legal side, it is
and climate change.            lation of emission-     unclear, which type of border adjustment
Instead of addressing          intensive economic      measures would be consistent with WTO
the issue at the border        activities (sections    rules (Tamiotti and Kulaçoglu, 2009). Fi-
this can be done at its        D.1 and D.4) is that    nally, one would also need to consider the
source.                        of carbon leakage.      possibility that carbon-related policies serve
                               Concerns have been      as a pretext for investment protectionism,
     voiced that some TNCs might pursue global         particular with regard to efficiency-seeking
     production strategies with a view to avoid-       and export-oriented outward investment.
     ing increased production costs arising from       From the point of view of export-oriented
     carbon tax obligations and/or other climate       developing countries such border adjustment
     change regulations. Particularly TNCs in          measures would put a burden on carbon-
     energy-intensive industries are feared to         intensive exports, and as a consequence,
     relocate their emission-intensive activities to   also act as a deterrent to export-oriented
     jurisdictions with laxer emission standards or    carbon-intensive investments.
     to have them done for them in such places.
     There are fears that by “free-riding” on a par-   Some suggest that carbon leakage is not
     ticular country’s effort to reduce emissions,     occurring at a large scale (see for instance
     host countries who receive “carbon-leakage”       Reinaud, 2008). In practice, however, the
     investment benefit from regulatory arbitrage      extent of carbon-leakage related investment
     and impedes global emission reduction ef-         re-location and its impact on global efforts
     forts. Moreover, there are concerns that such     to reduce emissions is hard to quantify.
     a re-location of production may result in loss    For example, the difference in countries’
     of investment related benefits, including tax     business-as-usual scenarios makes it hard
     revenues and employment opportunities, in         to determine the relevant parameters for
     the home country.                                 determining carbon leakage. Indeed, there
                                                       could be scenarios which would constitute
     There is currently an international debate        both, carbon leakage and low-carbon foreign
     focussing on border adjustment measures as        investment at the same time. This would be
     a possible tool to discourage TNCs’ carbon        the case, for instance, if emissions of re-
     leakage-related relocation strategies. Such       located TNC facilities (which moved because
     border measures (e.g. tariffs, taxes or other     of tighter emission standards at home) would
     levies) could help create a “level playing        be lower than those of replaced domestic
     field” between domestic goods, whose              operations in a host country. Under such
     producers are subject to stricter emission        a scenario, the facility in question would
     regulations and imported goods whose pro-         emit more than comparable home-country
     ducers abroad are not confronted with extra       production sites that had to upgrade their
     carbon-related compliance costs.                  carbon-performance, but less than its host
                                                       country peers that operate with less advanced
     There are open technical and legal ques-          technologies and production processes.
     tions arising from the implementation of
     border adjustment measures for high carbon        Moreover, particularly for very poor coun-
     imports. On the technical side, establishing      tries, who most likely are not large emitters
     the level of carbon embedded in a specific,       of GHGs, but are in dire need of expanding
     imported product may not always be fea-           their productive capacities, such carbon-
140                          World Investment Report 2010: Investing in a Low-Carbon Economy

leakage investment could potentially generate     in line with the logic of the value chain and
much needed development gains, including          would also facilitate the implementation of
(skilled) employment, infrastructure, export      corporate carbon policies.
and tax revenues as well as multiplier effects
and other positive externalities, particularly    Another reason that might induce TNCs to
in the short run. In the long run, however,       refrain from engaging in carbon-leakage type
each country would benefit from enhanc-           operations is the need to safeguard their cor-
ing the energy-, material- and resource-          porate image in the face of increasing public
efficiency of its production processes which      concern on climate change, environmental
the move towards a low-carbon economy             or other public policy issues. Particularly
would entail.                                     for firms producing consumers goods, cus-
                                                  tomers’ perceptions about the producing
Instead of addressing the issue of carbon         company and the extent to which it operates
leakage at the border, it could also be dealt     in line with particular value sets is of utmost
with at its source. Regulatory options in this    importance. This is particularly the case for
regard include building on TNCs’ investment       export-oriented foreign investment. Hence,
decision-making and corporate governance          a company perceived as a “good corporate
mechanisms, through improved environmen-          citizen” might derive economic benefits from
tal reporting and monitoring.                     acting in a low-carbon manner.

In terms of TNCs’ investment decision             This raises further issues about private stan-
making, it remains to be seen whether firms       dards and TNCs’ reporting on the carbon
would ultimately engage in carbon leakage         footprint of their activities. Improved climate
at a large scale. Notably, carbon policies are    reporting, particularly when undertaken in a
only one element of the broader industry          harmonized and verifiable manner, can help
picture, which influences TNCs’ decisions         ensure that a company’s branding is based on
about their investment locations and it may       solid ground, as it increases the transparency
not necessarily be in the best interest of TNCs   and accountability of company operations.
to relocate polluting facilities to developing    A noteworthy example in this respect is the
counties with lower emission standards.           nearly two decade old Forest Stewardship
                                                  Council, a global multi-stakeholder initiative
One significant factor in this respect might      that provides standard-setting and accredi-
be the economies of scale that are created        tation services to companies. Such private
by using common global technologies and           standard setting, especially in the context of
standards across countries. The cost of op-       multi-stakeholder initiatives, can be an ef-
erating facilities in different jurisdictions     fective tool for inducing behavioural change.
with different technologies – so as to take       Exposing carbon leakage, for example
advantage of laxer regulations in some of         through a “Climate Stewardship Council”,
them – is often higher than operating one         can help to incentivize firms to take action,
“clean” (i.e. less carbon-intensive) technol-     with a view to meeting stakeholder expec-
ogy across all relevant TNC facilities. In        tations (section C.1). The related package
earlier versions of the “pollution haven”         of monitoring tools could include, amongst
discussion, efficiency savings and cost           others, standardized reporting, audits, prod-
reductions resulting from the application         uct certifications, and management system
of stricter environmental standards across        standards, which could be based on – or
the board were cited as a factor for less         linked to – existing initiatives (e.g. ISO
environmentally harmful foreign invest-           14 000). In addition, policy makers could
ments (WIR99). Consistency throughout a           consider the promotion of the monitoring
company’s integrated production system is         of and standardized reporting on (private)
   CHAPTER IV     Leveraging Foreign Investment For A Low-Carbon Economy                       141

   standards to strengthen emission reduction      that 73 of the 100 enterprises have been
   efforts of TNCs (see next section).             certified to one of the ISO 14000 series of
                                                   management system standards; 87 report at
   7.   Harmonizing corporate GHG emis-            least some data on GHG emissions; and 46
        sions disclosure                           include an external assurance statement in
                                                   their reporting of GHG emissions.
There is a need             The effective im-
for internationally         plementation of a      However, a closer look at the information
harmonized corporate        number of policy       being reported indicates a lack of
GHG emissions               options, such as       harmonization, and consequently a lack of
disclosure, so as to        “cap-and-trade” and    comparability and usefulness. This is made
effectively strengthen      “carbon taxes” re-     clear by an analysis of corporate reporting
the accurate monitoring     quire the standard-    using as a benchmark the Greenhouse Gas
of firms’ GHG               ized measurement       Protocol,64 which defines three “scopes” for
emissions.                  of corporate GHG       GHG accounting and reporting purposes.
   emissions. Currently, however, there is no      Scope 1 emissions are direct GHG emissions
   universally applied standard to calculate       that occur from sources that are owned or
   and report GHG emissions. Improving the         controlled by the company, e.g. gases emitted
   accuracy, comparability and credibility of      directly from a company’s operations.
   emissions reporting would enable policy         Scope 2 emissions are indirect GHG
   makers to develop more targeted emissions       emissions from the external generation
   reduction strategies, help integrate climate    of electricity consumed by the company.
   risk information into investment decisions,     Scope 3 emissions are other (non-electricity
   and allow for improved monitoring of GHG        related) indirect emissions in the value chain
   emissions and clean-tech diffusion throughout   that are a consequence of the activities
   TNCs’ value chains. Thus an internationally     of the reporting company, like emissions
   harmonized approach to measuring and re-        from suppliers related to work done for
   porting climate change related emissions is     the reporting company (such as business
   an important enabler of policies to promote     flights or transport). These scopes can also
   low-carbon economies. There are three re-       be identified in figure IV.1 (section B.1).65
   lated aspects to this:                          Figure IV.6 below shows the level of detail
                                                   of GHG emissions data broken down into
   • Management systems that generate inter-       the three scopes in the reporting of the 87
     nal data on environmental control systems     TNCs among the top 100 TNCs that report
     and emissions;                                GHG emissions.
   • Reporting systems that meet internation-
     ally recognized quality characteristics       This analysis of reporting at the level of
     (comparability, relevance and material-       individual scopes of emissions reveals inad-
     ity, understandability, and reliability and   equacies in the quality and comprehensive-
     verifiability);62 and                         ness of TNC reporting. Nearly half of the 87
                                                   companies reporting GHG emissions data
   • Assurance standards63 that can enhance        did so at scope 1, or with indistinct data, i.e.
     the credibility of corporate reporting.       without a clear distinction as to the source of
                                                   the GHG emissions. To clearly distinguish
   The current state of TNC practices indicates    between different scopes, company reports
   a widespread adoption of climate related        must include information on such things
   management systems and reporting frame-         as whether electricity generation or other
   works. Analysis of corporate reporting for      sources of fuel are included, whether all
   the largest 100 TNCs, for example, finds        foreign affiliates are included, whether the
142                         World Investment Report 2010: Investing in a Low-Carbon Economy

emissions of the value chain are included,          Hence, while the world’s largest TNCs have
and how the emissions are calculated. Of-           already begun to adopt a range of voluntary
ten missing, this information is crucial to         practices to address issues of climate change
providing investors, other stakeholders and         and make related information available in
particularly policy makers with a complete          their public reports, problems with the qual-
understanding of the nature of a company’s          ity and consistency of reporting remain. In
emissions, and the potential impact of GHG          the absence of standardized and mandated
reduction mechanisms on a company’s                 reporting frameworks for GHG emissions,
operations.                                         inconsistencies are likely to continue, result-
                                                    ing in significant obstacles for meaningful
Another weakness in current reporting               monitoring.
practices is the lack of country specific in-
formation on GHG emissions, for example a           The disclosure of GHG emissions would
breakdown of a TNC’s global emissions by            benefit from an internationally harmonized
country of origin. Of the 87 TNCs reporting         approach to the way companies explain,
GHG emissions noted above, only 21 were             calculate and define emissions. In the same
found to report country specific information.       way national tax policies benefit enormously
Given the increasing number of national             from having a regulated accounting standard
initiatives to curb GHG emissions, country          to determine income, national low-carbon
specific data is necessary to provide policy        strategies would benefit enormously from
makers and investors with information to            a mandated standard for calculating and
gauge the impact of current or proposed             reporting GHG emissions. Furthermore, in-
policy on industry in specific jurisdictions.       ternationally harmonized reporting would be
Such data will also, over time, provide             extremely useful for further climate change
crucial information to policy makers on the         policy work at the global level, as well as
effectiveness of specific policies, and thus        providing investors and other stakeholders a
inform future policy decisions. The data are        clear, comparable view of emissions around
equally useful for management in evaluating         the world.
investments in GHG reducing technology,
and other stakeholders in monitoring trends         As a start, policy makers could encourage
in the GHG emissions throughout a TNCs              wider adoption of one of the existing gen-
global network.                                     erally accepted frameworks for emissions
                                                    reporting in order to improve the transpar-
      Figure IV.6. Use of GHG Protocol              ency of calculations and the comparability
      “scopes” in emissions reporting               between companies. Ultimately such frame-
              (Number of TNCs)                      works will need to move from the testing
 Scope 1 and 2 only
                                                    grounds of voluntary initiatives into the
       (34)                                         world of regulatory initiatives: one policy
                                 Scope 1, 2 and 3
                                                    option for this is to specify an existing GHG
                                      (12)          reporting framework and make reporting on
                                                    it a listing requirement for companies listed
                                                    on stock exchanges (e.g. South Africa has
                                                    done something similar when requiring all
                                    No GHG
                                                    listed companies to report using the sustain-
                                      (13)          ability guidelines of the Global Reporting
   Scope 1 only or                                  Initiative).
    indistinct data
                                                    For international harmonization purposes, the
Source: UNCTAD, 2009e.                              United Nations Intergovernmental Working
  CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                    143

  Group of Experts on International Standards      vestment into account when calculating the
  of Accounting and Reporting (ISAR) is one        “price” of the investment guarantee. Foreign
  vehicle through which member States could        investors making a positive contribution to
  work. ISAR can serve three primary func-         lowering GHG emissions in the host coun-
  tions in this area: (a) facilitate an exchange   try could be “rewarded” by receiving more
  of experiences between government regula-        favourable guarantee terms, for instance in
  tors and various global multi-stakeholder        form of a reduced guarantee fee, a broader
  initiatives working on standardizing climate-    scope of coverage or an extended guarantee
  change related reporting (including the          period.
  Climate Disclosure Standards Board and the
  Global Reporting Initiative); (b) engage in      Another means to promote low-carbon for-
  consensus building with a view to promot-        eign investment in developing countries is
  ing harmonization between existing national      to create a mechanism whereby the home
  regulatory and voluntary multi-stakeholder       government of a foreign investor issues
  reporting standards; and (c) provide technical   credit risk guarantees. Such instruments can
  cooperation to member States to assist with      considerably lower the investment barriers
  implementation of best practices in the area     for many investors and keep the risk asso-
  of corporate disclosure on climate change.       ciated with the investment at a reasonable
                                                   level (UNEP FI, 2009).
  8.   Supporting developing countries             In addition, it would be helpful if more ODA
Home-country measures, such                        could be channelled into low-carbon growth
as investment guarantees and                       programmes in developing countries. What
risk insurance, could be used to                   is needed is a stronger re-orientation from
support developing countries. A                    economic assistance schemes for “traditional”
multi-agency technical assistance                  industries to potential low-carbon growth
body should be established to help                 poles. Under such an approach, ODA funds
developing countries to tap-into                   could become instrumental for the implan-
TNCs’ low-carbon related financial                 tation of host country strategies that seek
and technological resources.                       low-carbon growth through the involvement
                                                   of foreign investment. To maximize the
       a. Home-country measures                    benefits of ODA, home-country assistance
                                                   programmes should be coordinated with
  Numerous developed countries promote             those of international financial institutions
  low-carbon activities abroad, including          (see section D.8.b). There is also a need for
  foreign investment, through various means,       capacity building in developed countries
  such as investment guarantees and financial      with regard to effectively accessing and
  assistance (box IV.12).                          using these funds.
  As far as investment guarantees for outward      At the bilateral level, cooperation between
  investment are concerned, their granting         developed and developing countries have
  can be made subject to an environmental          produced promising results. For instance,
  impact assessment. However, this usually         China and the EU have established a pro-
  does not include an explicit evaluation of the   active and pragmatic climate change part-
  potential effects of the investment on climate   nership with a strong focus on technology
  change. To further enhance the promotion         cooperation and the engagement of the busi-
  of low-carbon outward investment, national       ness community. The creation of EU-China
  investment guarantee agencies could take         Low Carbon Technology and Investment
  the low-carbon character of an outward in-       Demonstration Zones aims at providing an
144                             World Investment Report 2010: Investing in a Low-Carbon Economy

Box IV.12. Promotion of outward foreign investment and climate change

 Numerous home countries, e.g. Germany, Japan and the United States, take measures to sup-
 port outward low-carbon investment. This assistance can take many different forms, including
 subsidies, guarantees, concessional financing and equity investments.
 Germany supports FDI projects with negligible environmental impacts, those that create a sus-
 tainable improvement of the environment, or those with environmental impacts that can be bal-
 anced out with other positive effects. To this end, the government has systemized its procedure
 to consider investment guarantee applications under environmental aspects.a
 In Japan, the Japan Bank for International Cooperation (JBIC) has established specific guide-
 lines in order to judge the environmental and social impacts of supported projects. It provides
 favourable loan terms to environmental conservation and improvement projects. Additionally,
 the bank established the JBIC Facility for Asia Cooperation and Environment with three objec-
 tives: (a) mobilize private capital to the maximum extent possible, through the use of equity
 participation measures and guarantees in JBIC’s International Financial Operations; (b) support
 projects that contribute to mitigating climate change, e.g. projects promoting energy conserva-
 tion, new energy resources, and forest conservation; and (c) promote projects in Asian countries,
 e.g. infrastructural development and energy projects (JBIC, 2009).
 In the United States, the Overseas Private Investment Corporation (OPIC) has committed to
 reducing the greenhouse gas (GHG) emissions in OPIC supported projects by 30 per cent over
 a ten-year period and to shift investment focus to renewable and energy efficient projects.b To
 this end, OPIC offers various forms of financial and insurance support to the private sector to
 encourage and support renewable energy projects and projects that incorporate energy efficiency
 Source: UNCTAD.
   “Leaflet Environment“, June 2001, Investment Guarantees of the Federal Republic of Germany - Direct
   Investment Abroad. Federal Ministry of Economics and Technology, PriceWaterhouseCoopers and Euler
   “Update – Greenhouse Gas / Clean Energy Initiative“, Fact sheet, 1 March 2009, Overseas Private
   Investment Corporation. Available at:
   pdf (accessed 17 June 2010).

innovative platform for such cooperation                to developing countries to help them build
(box IV.13).                                            low-carbon economies. What is needed is a
                                                        global partnership package for supporting
      b. International support                          the move towards a low-carbon economy.
                                                        As far as the encouragement of low-carbon
While national policies can go a long way               foreign investment is concerned, this pri-
towards the creation of low-carbon econo-               marily translates into the need for financial
mies, including through the attraction of               support for developing countries.
low-carbon foreign investment, a coordinated
international approach to climate change                Developing countries are already being
and low-carbon economies is crucial for                 hit by the effects of climate change. In the
several reasons. Climate change is a global             future, they are also likely to suffer more
problem that requires a global approach                 from the consequences of global warming
and solution. Most countries will remain                than developed countries. Building on the
reluctant to act forcefully unless they have            well-accepted principle of common but dif-
assurances that others will take action as              ferentiated responsibilities and capabilities,
well. In addition, international and national           more international financial support for the
policies should and will reinforce each                 poorest and most vulnerable countries is
other if properly coordinated. In particular,           urgent to help them to: (a) be prepared to
international support should be provided                adapt to the consequences of climate change;
CHAPTER IV      Leveraging Foreign Investment For A Low-Carbon Economy                        145

Box IV.13. EU-China Low Carbon Technology and Investment Demonstration Zones:
an example of international low-carbon technology cooperation

 Under the overall China-EU climate change partnership, the creation of EU-China Low Car-
 bon Technology and Investment Demonstration Zones (LCTIDZs) aims to help China meet the
 region-specific needs for its low-carbon economic transition. LCTIDZs are building on existing
 high-tech zones with a strong focus on low-carbon technology cooperation. The objectives of
 cooperation in LCTIDZs are:
 To facilitate technology upgrading and accelerate joint development of new technologies by China
 and the EU, thereby helping to achieve short- and long-term CO2 emissions reduction targets.
 To allow the EU and China to work with the business community to build a new “protect and
 share” IP regime that can facilitate rapid and large-scale diffusion of low-carbon technology
 and help to prevent protectionist measures.
 To identify and establish innovative mechanisms/financial instruments to help both Chinese and
 European enterprises, in particular small and medium sized enterprises, to overcome barriers to
 innovation and market entry through joint EU-China public and private partnerships.
 Source: UNCTAD, based on E3G.

and (b) be in a position to build low-carbon       International financial institutions (such as
economies so as to contribute to the fight         the World Bank Group)66 are actively engaged
against global warming without compromis-          in supporting the move towards a low-carbon
ing their legitimate aspiration for poverty        economy in developing countries. The same
reduction and wealth creation.                     is the case for various regional develop-
                                                   ment banks, including the ClimDev-Africa
Support by international financial institu-        Special Fund (CDSF), which is managed
tions for low-carbon growth in developing          by the African Development Bank,67 and
countries can have an important promotional        the Asia Pacific Carbon Fund, – an Asian
effect on foreign investment. To the extent        Development Bank initiative supporting
that financial assistance is granted to the        clean energy projects in the Asia and Pacific
host government, the latter can use these          region.68 Their support plays a crucial role
funds to encourage low-carbon investment           in situations where private financial institu-
projects with foreign participation. Such          tions shy away from financing a low-carbon
encouragement can also take indirect forms,        investment project because they consider
for instance if the government decides to          the credit risk as too high, or compensate
subsidise consumers buying low-carbon              for the perceived higher risk through higher
products or using energy efficient equip-          interest rates and more restrictive lending
ment. By increasing demand for such items,         conditions (UNEP, 2008).
the government influences the determinants
for low-carbon foreign investment. Last not        Efforts should be made to further enhance
least, international financial assistance can      international financial assistance for low-
support host country policies to create link-      carbon growth in developing countries.
ages between low-carbon foreign investors          Funding for market-creation measures in
and the domestic economy. Financial support        renewable energy, fuel efficient transport
to domestic entrepreneurs engaged in low-          and low-energy buildings and equipment
carbon activities increases their chances to       should be a priority.
cooperate with foreign investors, for instance
with regard to the supply of low-carbon            One option is to seek an improvement in the
equipment, and to become integrated in             way the CDM operates. Questions remain
international low-carbon value chains.             about the extent to which it has produced
146                          World Investment Report 2010: Investing in a Low-Carbon Economy

the desired outcomes – namely promote             and economic development strategies in a
sustainable low-carbon foreign investment         coherent and sustainable way, all the while
in the countries that need it the most for        considering how to best access and utilize
development purposes and generating tech-         the requisite investment, technological and
nology dissemination. Changes to the exist-       other resources. This policy challenge is
ing system are necessary in order to attract      a combination which calls upon multiple
more private capital in terms of the sector       sources of expertise – such expertise being
(e.g. energy efficiency), region or scale (e.g.   scarce and not readily available in many
smaller project sizes, programmatic activi-       developing countries.
ties). In the context, UNEP has suggested
an expansion of small-scale CDM as well as        In this light, L-TAC would, among others,
programmatic CDM.69 The UNEP Finance              leverage expertise via existing and novel
Initiative (UNEP FI) has made some sugges-        channels, including multilateral agencies such
tions in this regard (UNEP FI, 2009).             as the UNFCCC secretariat, the World Bank,
                                                  United Nations Development Programme
International support is needed for develop-      (UNDP), UNEP, UNCTAD and others. This
ing countries to engage on low-carbon de-         partnering of the agencies would allow L-
velopment paths and to enhance technology         TAC to act as a hub in terms of, among oth-
dissemination.70 An international low-carbon      ers, providing technical assistance, acting as
technical assistance centre (L-TAC) could be      a repository of expertise (e.g. best practices
established to support developing countries,      in NAMA implementation) and being an
especially LDCs, in formulating and imple-        effective conduit to specialized knowledge.
menting targeted and synergistic national         With the governance and modalities of imple-
climate change mitigation strategies and          mentation of such a mechanism remaining
action plans, including NAMA programmes.          to be determined, characteristics such as
The centre would help devise strategies, poli-    being needs based and demand driven are
cies and programmes that allow beneficiaries      to be taken into consideration. L-TAC could
to meet their development challenges and          also help developing countries build their
aspirations, including by benefiting from         own expertise and institutions to devise and
low-carbon foreign investment and associated      monitor policies related to climate-change
technologies. Developing countries would          issues, including regarding to the promotion
benefit from such services, when aiming to        of low-carbon investment and technology
integrate their climate change mitigation         dissemination.

E. Summing up: a global partnership to further low-
   carbon investment for sustainable development
It bears repeating that the global policy de-     the generation and dissemination of relevant
bate on tackling climate change is no longer      technology. TNCs are both major carbon
about whether to take action. It is now about     emitters and low-carbon investment and
how much action to take and which actions         technology providers. They are therefore
need to be taken – and by whom. When              inevitably part of both the problem and the
moving towards a low-carbon economy, de-          solution to climate change.
veloping countries are faced with two major
challenges (a) financing and implementing         While a large number of developing countries
investment in appropriate activities; and (b)     are not major GHG emitters, attracting low-
CHAPTER IV        Leveraging Foreign Investment For A Low-Carbon Economy                                 147

carbon foreign investment and technology                    and implementing promotion programmes
can still offer opportunities for them. Benefits            to attract low-carbon investment with
could include: (a) strengthened productive                  key functions being investor targeting,
capacities; (b) enhanced export competitive-                fostering linkages and investment after-
ness; (c) a contribution to global climate                  care. International financial institutions
change mitigation; and (d) an acceleration                  and home countries need to support low-
of developing countries’ own transition to                  carbon investment promotion strategies,
a low-carbon economy, which is inevitable                   including through outward investment
in the long term.                                           promotion, investment guarantees and
                                                            credit risk guarantees.
Policy makers need to maximize the benefits
and minimize the risks of low-carbon foreign • Enabling the dissemination of clean
investment but this is not straightforward,                     technology. This involves putting in
especially since most developing countries                      place an enabling framework to facilitate
have little experience in this area. In addition,               cross-border technology flows, fostering
national strategies to promote low-carbon                       linkages between TNCs and local firms
foreign investment and related technology                       to maximize spillover effects, enhanc-
dissemination need to be synergized with                        ing local firms’ capacities to be part of
climate change and                                                                       global value chains,
investment policies Fig IV.7. Global partnership for low-carbon strengthening devel-
at the international
                                                investment                               oping countries’ ab-
level. However, many                                                                     sorptive capacity for
developing coun-                                   Strategizing                        clean technology, and
                                                clean investment
tries lack financial                                promotion                          encouraging partner-
resources and insti-                                                                   ship programmes for
tutional capabilities                                                                  technology genera-
to do this effectively.                                                     Disclosing tion and dissemina-
An international sup-
                               L-TAC                                     corporate GHG
                                                                                       tion between coun-
                                               Investing in a                          tries.
porting structure is                      Low-Carbon Economy
thus essential.                               for Sustainable                          •      Securing IIAs’
                                               Development                             contribution to cli-
Against this back-                                                                     mate change mitiga-
ground, cognisant of                                                                   tion. This includes
the manifold challeng-                 clean                     Securing IIAs’        introducing climate-
es of climate change,              technologies                   contribution
                                                                                       friendly provisions
and the opportunity                                                                    (e.g. low-carbon in-
to harness TNCs for Source: UNCTAD.                                                       vestment promotion
development in the                                                                        elements, environ-
process of meeting them, UNCTAD proposes                        mental exceptions) into future IIAs, and
a global partnership to synergize investment                    a multilateral understanding to ensure the
and climate change policies to promote                          coherence of existing IIAs with global
low-carbon foreign investment (fig. IV.7).                      and national policy developments related
The key elements of the partnership would                       to climate change.
                                                           • Harmonizing corporate GHG emissions
• Establishing clean-investment promotion                       disclosure. This involves creating a single
   strategies. This includes developing con-                    global standard for corporate greenhouse
   ducive host-country policy frameworks                        gas emissions disclosure, improving
   including market-creation mechanisms                         the disclosure of foreign operations
148                                World Investment Report 2010: Investing in a Low-Carbon Economy

    and activities within value chains, and                    lifetime than traditional ones. While this includes
    mainstreaming best practices in emis-                      an absolute notion, the term is also used for prod-
    sions disclosure via existing corporate                    ucts/processes that still emit GHGs, but less than
                                                               “business-as-usual” (BAU) options (box IV.3).
    governance regulatory mechanisms (such
                                                               For the purpose of this report, low-carbon also
    as stock-listing requirements).                            includes avoidance of GHGs other than CO2; (b)
• Setting up an international low-carbon                       the term “green” has a longer tradition and refers
  technical assistance centre (L-TAC).                         to technologies/activities that take into account a
                                                               much larger set of environmental issues, and not
  L-TAC could support developing
                                                               just climate change; and (c) sustainable develop-
  countries, especially LDCs, in formulating                   ment is a broad concept that combines concern
  and implementing national climate change                     for the carrying capacity of natural systems with
  mitigation strategies and action plans.                      economic and social concerns. In addition, for
  The centre would help beneficiaries                          the purpose of this chapter, the terms “clean” and
  meet their development challenges and                        “low-carbon” are used interchangeably.
  aspirations, including by benefiting
  from low-carbon foreign investment and                       The term “foreign investment” as used in this
                                                               chapter excludes (foreign) portfolio investments.
  associated technologies. Among others,
                                                               In addition, most of the argument in this section
  L-TAC would leverage expertise via                           relates to greenfield FDI, although the analysis
  existing and novel channels, including                       can be adapted for cross-border M&As. For ex-
  multilateral agencies, and engage in                         ample, an acquired host country facility may be
  capacity and institution building.                           upgraded to reduce GHG emissions.
                                                               Carbon intensity must be understood as a con-
Channelling investment and technology,                         tinuum. On the one end, there are zero-carbon
including from TNCs, to meet the challenge                     technologies like wind power or nuclear power
of climate change is crucial. In doing                         which emit (almost) no GHG. On the other hand,
                                                               there are technologies with high carbon intensity
so, developing countries can look to the
                                                               such as technologies that rely on fossil fuels and/
opportunities arising from the transition                      or are in-efficient in energy use and/or emit very
to a low-carbon economy, as well as the                        potent GHGs such as methane or nitrous oxide.
challenges, and take advantage of them in                  5
                                                               Defining low-carbon technologies and practices
line with overall developmental objectives.                    relative to a BAU situation is commonplace in the
The global partnership outlined is aimed to                    climate change debate; however, it exhibits two
support these efforts.                                         central limitations. First, various technologies or
                                                               processes emit different amounts of GHG emis-
                                                               sions per unit of output, which complicates the
                     Endnotes                                  establishment of thresholds to define low-carbon.
                                                               Second, the term low-carbon is relative, as it is
    For an introduction to the issue and particularly          based on a comparison with BAU emissions that
    a macroeconomic perspective see also UNCTAD,               can be different in different countries.
    2009f.                                                 6
                                                               This distinction is more applicable when con-
    This chapter focuses on “low-carbon” issues,               sidering TNCs’ investments in host developing
    which are in some cases quite different from the           countries. In some developed hosts, relevant R&D
    related notions of “green” or “sustainable”. In            to reduce carbon emissions is quite likely to oc-
    climate-related and, more generally, environment-          cur. This may also be the case in some larger or
    related public discussions, the above terms are            more advanced developing countries especially
    sometimes used almost interchangeably when                 for adaptation of technology to local conditions,
    talking about investment, technology, growth,              and if appropriate and reliable incentive structures
    growth paths or development. There are sub-                are in place.
    stantial differences, however: (a) “low-carbon”        7
                                                               Using nuclear energy is controversial; and other
    is a concept emerging from the climate change              very important considerations need to be taken
    debate and refers to a process or product that emits       into account when devising national energy poli-
    fewer greenhouse gases (GHGs) in its operational           cies.
CHAPTER IV           Leveraging Foreign Investment For A Low-Carbon Economy                                     149

     This process also includes switching away from                in some technical progress reducing emission
     fossil fuels in activities other than electricity gen-        intensity of economic activity by 1.2 per cent
     eration: for instance, from oil to biomass as a basis         per annum, but leaving out any specific efforts
     for plastics production; from coal to biomass for             to reduce emissions or behavioural changes that
     cement or iron & steel production. Examples also              might occur, be this for mitigation or other pur-
     include switching from one fossil fuel to another             poses. See also box IV.3.
     that creates fewer emissions, i.e. switching from             Company press release, 27 August 2008, avail-
     coal to gas for power production.                             able at:
     Similarly, wood processing TNCs may influ-                    press-releases/2081.html (accessed 9 June
     ence their suppliers to adopt more sustainable                2010). The two-stage, 600 megawatt project
     practices (e.g. with respect to logging and re-               is being built in the Black Sea and will be one
     forestation).                                                 of the largest of its kind in Europe.
     Within the automotive industry itself Ricardo has             Information retrieved from company website at:
     refocused on the development of advanced clean      
     diesel technology, hybrid and electric vehicle                Events-and-Happenings/Thermax-SPX-Energy-
     systems, fuel efficient gasoline engines, efficient           Technologies.aspx (accessed 9 June 2010).
     transmission systems and vehicle electronic sys-              Company press release, 27 July 2005, available
     tems integration.                                             at:
     In North America, for instance, Ricardo is                    html (accessed 9 June 2010).
     involved in a wind energy start-up project for                See “Nissan to shift subcompact car production
     wind turbine energy storage systems, as well                  to Thailand in 2010”, Intellasia News Online, 19
     as a concentrated solar power project aimed at                January 2009, available at: http://www.intellasia.
     reducing production costs and improving manu-                 net/news/articles/regional/111255998.shtml (ac-
     facturing process and system performance. The                 cessed 9 June 2010).
     company has affiliates in the United States, Ger-             Lagos State Governor website, available at
     many, Italy, the Czech Republic, India, China,       (accessed 16 June
     Japan and the Republic of Korea. Customers                    2010).
     in the clean energy industry include system                   Segregated High-Capacity Corridor or COSAC
     developers, investors, utilities and government               by its Spanish-language acronym. “After Two
     agencies. See the company website at: http://                 Decades, Lima’s Electric Train Gets Second (accessed 15 June 2010).                     Chance”, Dow Jones Newswire, 29 March
     There are a wide variety of variations on “BOT”               2010.
     types of non-equity arrangements, especially                  See “Lesotho plant supplies first million CFLs
     in sectors and industries such as infrastructure              to Eskom”, Engineering News, 10 May 2010,
     (WIR08).                                                      available at:
     Usage of the term sector: traditionally the economy           article/lesotho-jv-supplies-first-million-cfls-to-
     is divided into three broad sectors: the primary              eskom-2010-05-10 (accessed 9 June 2010).
     (e.g. agriculture), secondary (e.g. manufacturing)            For example Hotel Rafayel (United Kingdom),
     and tertiary (or services) sectors; these are then            uses these technologies and products specifically
     broken down into industries, into which companies             to promote low-carbon luxury hotel services.
     are grouped according to their main outputs, e.g.             Practices such as re-use and recycling would
     the financial or automotive industries. In climate            largely be captured in the “industry” sector.
     change-related discussions, however, the term sec-            Press release of the Indian Embassy in Ethiopia,
     tor is used differently – essentially to consolidate          2 August 2009, retrieved from website: http://
     what might be referred to as “areas of emissions”   
     – instead of the traditional breakdown. This clas-            press_release.htm#88 (accessed 9 June 2010).
     sification is adopted in this chapter; industry is            For example, Factor Consulting & Management
     still used in the traditional way, however, as it             AG – a Zurich-based firm in energy, forestry and
     groups business activities that emit or provide               emission trading – is investing in wood processing
     solutions.                                                    from sustainable forests in Argentina for export
     In essence, using the business-as-usual scenario              to Switzerland and Germany.
     means applying some projections regarding eco-                Company website, available at http://www.tes-
     nomic growth and population growth, factoring        (accessed 12 May 2010).
150                                 World Investment Report 2010: Investing in a Low-Carbon Economy

     There were 13,727 greenfield investments and                meeting-1956210.html (accessed 11 May 2010)
     8,123 cross-border M&As in 2009.                            and “Shareholders Try to Pull Oil Companies Out
     CDM projects that encompass FDI are included                of Canadian Tar Sands”, by MatteR Network, 14
     in this data.                                               April 2010, available at:
     Original data from the Financial Times, the FDi-            article/idUK269907062220100414 (accessed 11
     Intelligence database (                 May 2010).
     Such as Eletrobras (Brazil), KEPCO (Republic                See media reports, e.g. “Nestle says drops palm
     of Korea), CLP Holdings (Malaysia), China                   oil supplier after report”, Reuters, 17 March
     Southern Power Grid (China), Allgreen Proper-               2010, available at:
     ties (Singapore) and Abu Dhabi Future Energy                ticle/idUSTRE62G3PM20100317 (accessed 11
     Company (Abu Dhabi).                                        May 2010) and “Unilever unit says Indonesia
     These conglomerates include CNOOC (China),                  remains key palm oil supplier”, Reuters, 5 May
     Hyflux (Singapore) and Suzlon Energy (India).               2010, available at:
     Firm-specific advantages are the basis for TNC              idUSJAK34489520100505 (accessed 11 May
     internationalization, including for low-carbon              2010).
     foreign investments. As discussed in section B.1,           Responsible investment refers to investors’ ef-
     TNCs utilise their knowledge, skills and other as-          forts to incorporate environmental, social and
     sets to invest in processes, products and processes         governance (ESG) issues into investment deci-
     host countries. Without these assets, they would            sions and to engage actively with their affiliates
     not enjoy any competitive advantages over local             and associated companies to encourage improved
     firms. A twist to this occurs in the case of strate-        ESG practices.
     gic asset seeking investments, where companies              See UNCTAD, forthcoming e.
     without such firm-specific advantages conduct               Locational determinants only include host country-
     (cross-border) acquisitions to own or access                specific factors, and not international frameworks
     technology, skills and other resources.                     that also influence the attractiveness of individual
     Although most drivers are home-country factors,             countries as investment locations. In the climate
     some relate to host countries. A good example is a          change context, these policy frameworks include,
     targeted investment promotion effort by a potential         for example, the Kyoto Protocol.
     host country offering a package of inducements to           The natural resource-seeking and strategic-asset-
     foreign companies. Another example of a similar             seeking motives are sometimes combined under a
     “host country driver” that is simultaneously a              strategic-asset-seeking motive (e.g. see Dunning
     determinant is a call for tender issued by a coun-          and Lundan, 2007). However, as created assets
     try, e.g. for an infrastructure project. Such “host         and natural resources are distinct, it is worth
     country drivers” are dealt with in more detail in           considering them separately. As the global low-
     section C.2, but only their locational determinant          carbon market burgeons, it is becoming more vital
     aspect is particularly emphasised.                          for companies to possess the requisite technology
     Many relevant technological developments occur              and skills sets; strategic-asset-seeking foreign
     in response to government policies, regulation              investment (as used in this Report) is likely to
     and support, which play a role in the determina-            come more to the fore.
     tion of country-level comparative advantage and             High royalty costs associated with foreign technol-
     firm-specific advantages.                                   ogy licenses and fees, for example, are costly and
     A common example is energy policy with re-                  can have negative effects on competitiveness.
     spect to renewable power generation. A number               Other risks might also arise from knowledge
     of countries have successfully used feed-in                 asymmetries between countries and TNCs. One
     tariffs to support renewables, thus giving in-              example is manipulative transfer-pricing, whereby
     centives to invest in relevant technologies.                TNCs fix the prices of goods and services in their
     In earlier pollution haven discussions, this                cross-border intra-firm transactions, in order to
     was cited as a factor for less environmentally              locate profits (and thereby funds) in particular
     harmful foreign investments (WIR99: 298).                   locations (WIR99).
     See media reports, e.g. “Diggers drawn as tar               As a result, countries are in a position to intro-
     sands protesters target RBS meeting”, The In-               duce a low-carbon component in their efforts to
     dependent, 28 April 2010, available at: http://             attract traditional forms of foreign investment                   in all sectors. Some of the policies to attract
     diggers-drawn-as-tar-sands-protesters-target-rbs-           low-carbon foreign investment are thus varia-
CHAPTER IV          Leveraging Foreign Investment For A Low-Carbon Economy                                      151

     tions or adaptations of well-established policies          (UNCTAD, based on the Brazilian Institute for
     to attract traditional foreign investment. In              Energy Efficiency and “Morocco, Rabat targets
     order to tap into new and specific low-carbon              independent energy”, Middle East Economic
     business opportunities such as renewable ener-             Digest, 23 October 2009).
     gies or energy-efficient modes of transport or             See Philips plc website available at http://www.
     construction, however, developing countries      
     need to put in place dedicated policies. This              local/ourhistoryinmalaysia/ (accessed
     adaptational form of low-carbon foreign in-                14 June 2010) and Osram website available at
     vestment can prove beneficial to investors and   
     host countries alike, as it frequently entails             fessional/Cleanroom_OSRAM_Waferfab_Penang.
     higher energy efficiency, lower waste and a                jsp (accessed 17 June 2010).
     more efficient use of inputs leading to more               See e.g. ICTSD, 2008.
     competiveness in international markets.                    For example, the Indian Government requires
     UNCTAD forthcoming f. UNCTAD conducted                     that the “the CDM project activity should lead to
     this questionnaire-based survey of 238 investment          transfer of environmentally safe and sound tech-
     promotion agencies (IPAs) from December 2009               nologies that are comparable to best practices in
     – February 2010. A total of 116 questionnaires             order to assist in upgrading of the technological
     were completed, representing an overall response           base”. Similarly, the Korean Designated National
     rate of 49 per cent.                                       Authority for the CDM requires that “environmen-
     For example, a number of countries, such as                tally sound technologies and know how shall be
     Canada, France, Germany and the United States,             transferred.”
     include major investments in household renova-             See and (ac-
     tions to improve energy efficiency. In the automo-         cessed 8 June 2010).
     tive industry, for example, China subsidizes the           See “The Green Bank - Financing the Transition
     development of alternative-energy vehicles for             to a Low-Carbon Economy Requires Targeted
     three years ($1.5 billion) and has cut the sales           Financing to Encourage Private-Sector Participa-
     tax for vehicles with engines below a certain              tion”, by John Podestra and Karen Kornblum, 21
     threshold (i.e. 1.6 litres). Germany stimulates the        May 2009, Center for American Progress, Wash-
     development of low-carbon engines by providing             ington, DC. Available at: www.americanprogess.
     EUR0.5 billion in loans over the next two years            org/issues/2009/05/green_bank.html (accessed 12
     (HSBC Global Research, 2009).                              June 2010).
48                                                         56
     Some developing countries host biofuel FDI proj-           See “Kenya plans open-ended green energy
     ects that are focused on serving export markets,           fund: government”, Reuters, 14 January 2010,
     regardless of whether local blending mandates              available at:
     exist or not. The issues regarding biofuel projects        TRE60D2CS20100114 (accessed 9 June 2010).
     are dealt more fully in UNCTAD, 2009b (see                 It has to be noted that thus far, the dispute has not
     also, (accessed 23 June           yet been submitted to arbitral proceedings under
     2010)).                                                    ICSID or UNCITRAL
49                                                         58
     The United States, Japan, China, Germany, France,          In March 2010, arbitration proceedings were
     the Republic of Korea, the United Kingdom, the             suspended based on both parties’ agreements.
     Russian Federation, Canada and Italy. The re-              In cases involving environmental regulations,
     maining global R&D is also mostly in developed             some arbitral tribunals have put attention on public
     countries, apart from a few developing countries           policy purposes (Methanex), while others have
     such as Brazil, India and South Africa.                    stressed economic effects above public interest
     Morocco has been shifting towards the use                  (Metalclad, Santa Elena) or resorted to propor-
     of renewable resources to generate power for               tionality assessments of the financial impacts and
     three reasons: first, to reduce its dependence             the police power doctrine (Tecmed).
     on foreign supplies of fossil fuels; secondly to           These agreements mention select multilateral
     eventually supply power – as an export – to the            environmental agreements such as the Con-
     EU single energy market; and, finally, to en-              vention on International Trade in Endangered
     courage rural electrification. TNCs, as providers          Species of Wild Fauna and Flora, the Montreal
     of technology as well as finance, are playing a            Protocol and the Basel Convention.
     significant part in this. For instance Temasol             United Nations, 1969: Art. 31.3.c. This principle
     (a joint venture between the French companies              was subsequently conceptualized by the United
     EDF, Total and Tenasol) in rural electrification           Nations International Law Commission (ILC)
152                                 World Investment Report 2010: Investing in a Low-Carbon Economy

     as the process whereby international obligations       67
                                                                 See “Climate for Development in Africa Ini-
     are interpreted by reference to their normative             tiative “ , African Development Bank Group.
     environment. United Nations International Law               Available at:
     Commission, 2006, para. 420.                                sectors/initiatives-partnerships/climate-for-
     For more on the quality characteristics of corporate        development-in-africa-climdev-africa-initiative/
     reporting see UNCTAD, 2008b.                                (accessed 16 June 2010).
     There are various assurance standards in use, in-      68
                                                                 See Asian Development Bank, 2006.
     cluding the two most frequently used: AA1000AS         69
                                                                 CDM Programme of Activities or “programmatic
     produced by AccountAbility and the International            CDM” refers to CDM projects that in themselves
     Standard on Assurance Engagements (ISAE3000)                are a bundle of many dispersed small-scale proj-
     produced by the International Accounting and                ects, e.g. small-scale biomass projects. Taken
     Auditing Standards Board.                                   together small-scale emitters of GHGs are an area
     The Greenhouse Gas Protocol was created by the              that was difficult to address in standard CDM
     World Resources Institute and the World Business            projects due to high transaction costs. In addition,
     Council for Sustainable Development. The three              this project type is envisaged to be particularly
     scopes are meant to help delineate direct and               suited to the situation of LDCs. Programmatic
     indirect emission sources, improve transparency,            CDM has thus been suggested to be designed
     and provide utility for different types of organiza-        and implemented with the help of micro-finance
     tions and different types of climate policies and           institutions, who’s loan officers can provide
     business goals.                                             not only the necessary credit, but also fulfil the
     In terms of parts of figure IV.1 in section B.1,            monitoring function (Bahnsen et al., 2009).
     reducing scope 1 emissions relates to introduc-        70
                                                                 An example of ongoing activities is UNEP’s
     ing low-carbon processes in the principal firms             Green Economy Initiative; see UNEP (2008)
     core operations, while scopes 2 and 3 relate to             and the UNEP website available at http://www.
     suppliers that can be supported and influenced     (accessed 18 June
     by the principal firm.                                      2010).
     See World Bank, 2009d.

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