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Mission Innovation: a Much Needed Policy-Innovation for International Climate Policy

16 March, 2016
Johannes Ackva, adelphi

At the beginning of last year’s COP in Paris, political leaders from twenty countries came together to announce Mission Innovation, a commitment to double publicly funded Research & Development (R&D) into low-carbon energy alternatives over the course of the next five years. Together with its private sector counterpart, the Breakthrough Energy Coalition, this effort gives an unprecedented role to energy innovation policy, particularly noteworthy in the context of international climate policy, which has traditionally focused on emission targets and carbon pricing. This post will argue that Mission Innovation provides an essential addition to the climate and energy policy mix that should receive far more attention in the future.

I Why bother? Does Mission Innovation matter in the energy policy mix?

With much of the climate debate focusing on carbon pricing or subsidies for renewable deployment (such as feed-in-tariffs in Germany driving the Energiewende or the Renewable Energy Production Tax Credit (PTC) in the US), one might wonder why the strengthening of a third element – energy innovation policy – should be crucial in tackling the climate challenge (see Figure 1 visualising the triangle of instruments).

An Energy Policy Instrument Triangle. Mission Innovation.

After all, if the only market failure leading to climate change was that the negative effects of carbon emissions are not considered in economic decisions, then putting a price on carbon – through emission trading systems (ETS) or carbon taxes – should be sufficient to solve the climate crisis. This view, once held by Thomas Friedman, is still influential as carbon pricing arguably dominates the international climate policy debate. Similarly, proponents of low-carbon technologies such as renewables or nuclear often argue that all necessary technologies already exist and it is simply a matter of the political and economic will to deploy them. In both of these views, Mission Innovation, an increase in public R&D for the development of new technologies, is a side-show or even unnecessary. To make the case that this is a dangerous misperception, section II will argue that the underlying assumptions of these views are likely false, whereas section III will provide the positive case for a much stronger role for energy innovation policy.

II An increased focus on energy innovation policy as exemplified by Mission Innovation is essential solve the climate crisis.

There is a massive need for additional technological innovation
When considering projected energy demand, most energy scenarios compatible with the 2°C target assume historically unprecedented rates of renewable energy expansion and/or a significant share or even expansion of nuclear power, the latter – for better or worse – seen as undesirable by many environmentalists.

While sometimes argued for by advocates, it is a fairly questionable and highly risky assumption that all technologies for global decarbonisation are already available and that they will take the form of present-day renewable technology (even leaving aside the many technological hurdles to be solved relating to intermittency, storage and non-electric forms of energy). Indeed, as argued for in detail by the authors of a recent review of global decarbonisation scenarios, it is likely that “deep energy system decarbonization [will] require an ambitious, focused agenda of rapid innovation and improvement in every critical technology area, even those commercially available today.” Given that the deployment of low-carbon technologies is still marginal compared to the required scale for decarbonisation, it also makes sense to judge current policies – be them deployment, carbon pricing or explicit RD&D – by their ability to facilitate future deployment by reducing cost and increasing efficiency and reliability.

Carbon pricing alone does not induce sufficient innovation
Carbon pricing, either through emission trading or carbon taxes, has been the prime focus of international climate policy and it plays a central role in shifting to a low-carbon energy transition. However, pricing carbon alone and leaving innovation to the market is unlikely to induce sufficient innovation. There are at least two reasons for this – one political-economic and the other related to the economics of innovation.

First, it is very unlikely that a carbon price that fully reflects the negative effect of carbon emissions is ever reached on a global scale. While the estimates for the social cost of carbon vary widely and by orders of magnitude (for example, the US Environmental Protection Agency considers values between USD 11 and 105 per metric tonne of CO2 for 2015 in 2007 USD), even the lower bound of these values is higher than the carbon price in the EU ETS in 2015, a polity far more concerned with climate change than the global average. Higher estimates of the social cost of carbon (e.g. USD 105), associated with the more catastrophic climate change scenarios we should be most worried about, seem politically infeasible to ever be reflected by carbon pricing instruments.

Second, even if there was a carbon price high enough to fully internalise the negative externalities of carbon emissions, innovation suffers from the additional market failure that the gains from technological innovation are, to a large degree, public goods – accruing to entire sectors and the world economy and thus being under-provided by profit-maximising firms as well as national governments. From this analysis, which is broadly shared among economists, follows not only a mandate for national governments to step in to facilitate innovation nationally, but also a clear rationale to jointly commit internationally to overcome the under-provision that would likely follow from national interest calculations alone.

Apart from this consensus on the importance of basic research government R&D, there is also a somewhat narrower but still solid consensus among innovation scholars that governments have played a very active role in most fundamental technological breakthroughs – such as nuclear energy, microchips, hydraulic fracturing and the internet –  and that there are good reasons for government involvement far beyond basic R&D (for example, see these detailed case studies and analysis on the American case here; and here for an excellent discussion of the development of the energy innovation consensus).

Deployment support, such as feed-in-tariffs, is unlikely to induce sufficient innovation
If we know that innovation will not be incentivised sufficiently/optimally by a carbon price alone, the question arises what the right role of innovation policy should be vis-à-vis the other major class of policy instruments – deployment subsidies, such as feed-in-tariffs, for low-carbon technologies. Unlike carbon pricing that is politically difficult, support for renewables has until now been much more politically feasible, with subsidies corresponding to a carbon price of EUR 174 per ton of CO2 in Germany in 2012 (compared to an EU-ETS carbon price in the range of EUR 3-5 during that time). Apart from spurring an unprecedented rise in the installation of renewable capacity, the recent surge in policy support for renewable deployment has also contributed to radical cost declines of solar and wind through learning-by-doing and economies of scale. There is thus reason for optimism that the increased deployment, cost reductions, and incremental innovation are inciting an accelerated adoption of renewables that goes far beyond most expectations. However, there are two caveats:

First, existing policies for renewables support are usually not rewarding innovation but deployment of existing technologies and, given the increasing political and economic clout of existing renewable industries, this is unlikely to improve.

Second, and relatedly, policies explicitly focused on supporting innovation have – at their current level of application – consistently been found to be much more cost-effective in inducing innovation than the innovation created as a by-product of increasing deployment (peer-reviewed articles, here, here and here). This does not mean that deployment subsidies such as the German feed-in-tariff do not induce innovation and cost reductions at all (arguably they do, as demonstrated by the rapid decline of costs for solar). Rather it means that the current balance between deployment and innovation subsidies is extremely tilted towards deployment and that this is extremely inefficient. A strong example for this comes from estimates of innovation effects from additional effort on deployment or RD&D policies in Germany between 2002 and 2009. In these estimates, visualised in Figure 2, a one standard deviation increase in RD&D would have increased patents (a proxy for innovation) by over 120%, whereas a one-standard deviation increase in deployment support would only have led to around 20% of additional patenting.

What difference would it make. The effect of additional deployment or RD&D on wind patents in Germany.

In a world of limited funds for climate mitigation and a rapidly decreasing carbon budget consistent with the 2°C goal, choosing the most effective mix of policy instruments matters a great deal, not only for cost efficiency but also for successful mitigation being feasible at all.

III A low-hanging fruit is a cheap lunch: The positive case for increased attention to energy innovation policy

Thus far, the argument has focused on the necessity for increased attention to energy innovation policy. But, just like decarbonisation would have many benefits even if climate change was a hoax, increased energy innovation policy has many benefits even if the above arguments failed to convince.

The main reason for this is that energy innovation policy has been neglected in the energy policy mix despite its fundamental importance to providing cheap, clean and affordable energy. Whether compared to innovation activity in other sectors of the economy, to resources allocated to deployment support (lesser by two orders of magnitude) or to expected returns, energy innovation has been woefully neglected.

This makes it likely that there are substantial gains to be realised from increased spending from innovation as visualised in Figure 3.

Optimal and actual mix of RD&D and deployment for innovation.

Estimates for the optimal ratio of RD&D to deployment subsidies for wind/other renewables and solar suggest that at least one third of spending should be devoted to explicit RD&D in order to optimally induce innovation. In comparison, actual RD&D spending in the six largest European economies in 2010 in comparison to the total of RD&D and deployment subsidies was close to only 0.01%.

As a recent report from the Grantham Institute at the LSE citing these numbers in the analysis of policy choices put it, themarginal euro [...] spent on low-carbon technologies should go to R&D [e.g. innovation policy such as Mission Innovation] rather than deployment [such as feed-in-tariffs].” 

In other words, since innovation has been so neglected compared to deployment and explicit R&D support is much more effective inducing innovation than deployment, an increase in funding for innovation policy will have a much higher impact than increased subsidies for low-carbon deployment (estimates vary across analyses and stages of technological maturity, but the effect can be huge, as illustrated by Figure 2 showing estimates for the case of wind).

IV Conclusion

As innovation policy is likely to be neglected by both fossil fuel industry interests as well as the interests of existing renewable technologies, and many of its likely beneficiaries (companies and entrepreneurs profiting from innovation support) are diffuse and in the future, it is of utmost importance that those concerned with climate change and clean energy for non-economic reasons aggressively push for the realisation of Mission Innovation to achieve the decarbonisation objectives so important to us.

 

Data sources of graphics

Fischer, Carolyn, Richard G. Newell, and Louis Preonas. (2013) "Environmental and technology policy options in the electricity sector: Interactions and outcomes." RFF DP  13-20. http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-13-20.pdf

Zachmann, Georg, Amma Serwaah-Panin, and Michele Peruzzi. "When and How to Support Renewables?—Letting the Data Speak." Green Energy and Efficiency. Springer International Publishing, 2015. 291-332. http://link.springer.com/chapter/10.1007/978-3-319-03632-8_12

ArticleClimate Diplomacy
Topic
Climate Change
Energy
Private Sector
Sustainable Transformation
Technology & Innovation

Region
Global Issues

Topics

Adaptation & Resilience

All countries will need to adapt to some of the environmental, social and economic impacts of climate change that are already unavoidable. Food security, livelihoods, water resource availability and public health are some affected areas. People living in poverty are more vulnerable, having a lower capacity to adapt. Thus, it is essential to promote resilience building. The adaptation and resilience aspects need to be mainstreamed into planning by policy makers and the private sector as well as integrated into development strategies.

Biodiversity & Livelihoods

Nature protection is most sustainable if it essentially contributes to the long-term stability of human needs. Today many regions around the world are confronted with increasing destruction of the natural foundations of life. The consequences of wide-ranging resource destruction are no longer regionally limited, but rather represent a global threat. Those affected are mainly rural populations, who find the sources of their income and the foundations of their way of life swept away. The depletion and destruction of natural resources goes hand in hand with decreasing agricultural yields and increasing poverty, which in turn forces the affected populations to deplete the remaining resources.

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Capacity Building

On the one hand, conflicts are caused by structural factors, such as economic and social inequality or environmental destruction. On the other hand, conflicts are fuelled by a lack of democratic structures, deficient mechanisms of non-violent conflict settlement, inadequate rule of law, the destruction of social and cultural identity and the disregard of human rights. Against this backdrop, development policies have been dedicated to a broad concept of security, which comprises political, economic, ecological and social stability. As a consequence, development cooperation agencies and actors have developed a broad spectrum of approaches for conflict prevention and transformation as well as for sustainable use of natural resources.

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Cities

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Civil Society

Civil society is the first victim of environmental pollution, under-development and conflicts. Economically disadvantaged and politically marginalized population groups are particularly affected by violent conflicts as well as increasing resource degradation. Simultaneously, civil society is a fundamental pillar for implementing sustainable development. It contributes in many ways to strengthening conflict prevention and plays a significant role in the peaceful and democratic development of states. It must be supported to strengthen civil rights, adherence to human rights in general and democratic participation.

Climate Change

Climate change resulting from the emission of greenhouse gases represents one of the vital challenges for international environmental policy. Flooding, droughts, shifting of climate zones and increasingly frequent and intense extreme weather events will have serious economic and social consequences for entire regions. The climate problem is also directly linked to the question of future energy generation.

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Climate Diplomacy

To address the challenges posed by climate change, a new profile of climate diplomacy is evolving. This utilises a full range of policies, including development cooperation, conflict prevention efforts, and humanitarian assistance, in addition to more traditional measures of climate change adaptation and mitigation. Moving from a risk analysis of climate-related threats to well-timed preventive action requires a greater commitment to integrating climate change concerns into development, foreign, and security policies. Examples include strengthening diplomatic networks, building new alliances with partners, and raising awareness – not only of potentially negative climate change impacts, but also of opportunities to embark on a sustainable transformation of our societies.

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Co-Benefits

Climate action entails an array of economic, social, political and environmental co-benefits. It provides an opportunity for economic growth and new jobs. Many investments can take into account climate considerations without becoming more costly. Further important co-benefits include: improved energy security, less local air and water pollution, health benefits as well as ecosystem and biodiversity protection.

Conflict Transformation

In order to overcome the structural causes of violent conflicts and thus bring about an improvement in the framework conditions for peaceful and fair development, it is essential to have long term and broadly planned peace development and peace advancement. Various governmental and non-governmental, national and international actors and groups are involved in these processes.

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Development

Climate change and development are inextricably linked. Climate change endangers the development agenda and has the potential to reverse development goals. Furthermore, successful mitigation of climate change heavily depends on development choices around the world. Therefore, development strategies need to be climate-compatible to provide long-term success, and there are viable policy options that support this compatibility. Many mitigation and adaptation activities can present development opportunities to developing countries and avoid the lock-in to environmentally damaging technologies.

Early Warning & Risk Analysis

The reasons for the development and escalation of conflicts and the incidence of risks are multifaceted and complex. Simultaneously, the assessment of the specific causes in the form of risk and conflict analyses can contribute to a better understanding of these processes and make it possible to provide warning of negative developments, or ideally help prevent them. In the context of natural resource use, risks and conflicts have gained increasing attention in the past years. The debate on possible future water wars is merely one example.

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Energy

The well-being of individuals, communities and nations depends on the availability of energy resources. The gap between energy supply and demand appears to be growing, making the world vulnerable to serious economic shocks. At the same time, the burning of fossil fuels causing climate change is one of the vital challenges of international environmental policy. So far, only rudimentary approaches exist for shaping climate and energy security in a sustainable way. The components of a strategy that can contribute to reducing vulnerabilities related to climate change and energy policy include a greater role for renewable energies, the improvement of energy efficiency and a stronger decentralisation of energy supply.

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Environment & Migration

The economic, social and environmental consequences of climate change aggravate the breakdown of eco-system-dependent livelihoods and are likely to become dominant drivers of long-term migration. Natural disasters already cause massive shorter-term displacement and the number of temporarily displaced people is likely to further increase with climate change. For vulnerable populations in vulnerable regions, such as the Sahel zone or the Ganges delta, migration often becomes the sole survival strategy. In order to address climate-related displacement and migration successfully, knowledge of effective adaptation and an improved understanding of how environmental change affects human mobility is essential. 

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Finance

Climate finance, from all sources, plays a key role in supporting and enabling adaptation and mitigation action as well as climate and energy innovation. The Paris Agreement ensured that the Green Climate Fund and the Global Environment Facility are at the core of climate finance architecture as entities entrusted with the operation of the Financial Mechanism of the UNFCCC. Increasing climate finance from all relevant public and private sources is crucial. Furthermore, much needs to be done to redirect finance flows to sustainable paths, e.g. reducing fossil fuel subsidies, introducing maritime and air transportation taxes. The conditions for green investment in developing countries should also be improved.

Forests

Forests are disappearing at an alarming rate. Competition for forest resources triggers, exacerbates, or finances numerous crises and conflicts in tropical developing countries. Illegal logging and timber trade foster instability and sometimes violent conflict by strengthening illegal and armed groups, increasing corruption and exacerbating use and claim conflicts among local communities, the state and the business sector. Forests are a vital resource to poor people but they can also become areas of conflict. Sustainable management of forest resources is therefore key to preventing violent conflict over and within forests.

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Gender

Gender plays an important role as a category of conflict for many reasons. The interlinkages between gender, environment and conflicts are complex and much research is still needed. Existing insights suggest that conflicts may worsen gender inequalities that existed before the outbreak of violence. The unequal distribution of land property rights in many parts of the world serves as an example. Moreover, women (and children) are among those most affected by both violent conflict and natural disasters. At the same time, women carry much of the burden of trying to implement rehabilitation measures after crisis events.

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Land & Food

Increasing water scarcity, desertification and crop failures due to extreme weather events are becoming more and more of a threat to global food production. While the world’s population continues to grow rapidly, food production is unable to keep pace. Due to the global food crisis in 2008, the number of hungry people reached the symbolic one billion threshold for the first time – corresponding to about 16 percent of world population. Food insecurity may be a consequence or cause of conflicts. Violent conflicts often lead to the destruction of agricultural infrastructure and means of production, as well as to the displacement of local communities.

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Minerals & Mining

In the past, the discovery and tapping of valuable or strategic resources like valuable minerals, oil and natural gas, particularly in developing and emerging countries, has often led to large scale environmental contamination and negative development. The "resource curse" of some countries shows that the wealth from resource yields is frequently unfairly distributed; instead of serving development it advanced the formation of corrupt elites and in some cases even led to conflicts and civil wars. Measures in various sectors and at all levels are important in order to use the potential of these natural resources in a manner that is sustainable and prevents conflicts.

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Private Sector

The spread of violent conflict not only affects people but also companies located in such regions. Destruction of investments and infrastructure, collapse of markets and trade partnerships, flight and expulsion of employees are phenomena of conflicts and environment-induced crises that directly affect companies in unstable regions. Almost all branches of the economy thus have a clear interest in a stable and peaceful environment for their activities. Conversely, the business sector plays an important role in the interaction of economic growth, social development and a healthy environment, all of which can advance peace and sustainable development. 

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Security

Environmental issues have a significant security dimension. Access to, and overuse of, natural resources often play a key role in civil wars or other forms of internal domestic conflict. This is compounded by climate change and environmental degradation. Climate change is now widely recognised as a non-traditional, risk-multiplying threat that will have increasing security impacts. Key risks with possible implications for human and national security include water scarcity, food crises, natural disasters, and displacement. More preventive diplomacy and advocacy is needed to address the strategic implications of climate and environmental change.

Sustainable Transformation

Sustainable Transformation allows societies to profit from a growing, environmentally sustainable and socially inclusive economy – especially in emerging and developing countries. This requires a higher up-front investment, but the benefits of a sustainable transformation in the medium and long term are significant. For instance, energy cost savings and reducing the impact of price volatility offer major incentives for deploying renewable energies and promoting energy efficiency. Such benefits exist in all key sectors of the economy.

Technology & Innovation

Innovations and technologies are already readily available and affordable but their global diffusion and uptake remains a challenge. Innovation and technology are crucial to achieving ambitious climate change mitigation and adaptation targets. However, research and development often do not receive appropriate public support. Developing countries can leapfrog high-carbon industrialisation phases by adopting, deploying and improving existing innovations and technologies. For this, it is essential to minimise financial, administrative and political barriers.

Water

The availability of freshwater resources in sufficient quantity and quality is essential for the preservation of human health and sound ecosystems. The use of water resources is also vital, however, for economic development: whether for agriculture, industrial production or for electricity generation. The world's freshwater resources are distributed very unevenly in terms of geography and seasons. In addition, water shortage is becoming more prevalent in several regions due to population growth, economic development, urbanisation and increasing environmental pollution. Thus, water resources can hold potential for conflicts between parties who have different interests and needs.

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Regions

Asia

The environment in Asia is already under tremendous pressure as a result of the unsustainable use of land, forests, water and even air in many regions. Climate change will only exacerbate these challenges. Rising sea levels will likely endanger densely populated areas, changes in the monsoon patterns can strongly impact agriculture, melting glaciers will increase long-term water scarcity, and extreme weather events such as heavy rainfall and cyclones can pose further hazards.

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Central America & Caribbean

Natural disasters and water scarcity are key challenges for most of Central America and the Caribbean. These challenges will become even more pronounced as the climate changes. Weak resource and disaster risk management and land disputes pose additional security challenges for large parts of the region. Several countries of Central America and the Caribbean have limited adaptive capacities as they face political instability caused by high social inequality, crime, corruption, and intra-state conflicts.

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Europe

As one of the most developed and most densely populated regions in the world, Europe makes heavy use of its resources, resulting in difficult trade-offs and negative consequences for the environment and ecosystems. Land is used for settlements, agriculture and dense infrastructure, creating problems of soil degradation. Water resources are stressed due to unsustainable agricultural practices. Despite nature protection policies, Europe continues to lose biodiversity at an alarming pace. Some of these trends are exacerbated by climate change, which is expected, for instance, to lead to shifts in water availability.

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Global Issues

Resource scarcities, environmental pollution and climate change are not limited by national borders, but often have a transboundary or even global impact. These issues interact with political stability, governance structures and economic performance, and can trigger or worsen disputes and violent conflicts. Exacerbating some of these trends, climate change is likely to lead to the degradation of freshwater resources, declines in food production, increases in storm and flood disasters and environmentally induced migration. All these developments pose potential for conflict.

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Middle East & North Africa

The geopolitical position of the Middle East and North Africa (MENA), its fossil fuel resources, high population growth and the political changes spurred by the Arab Spring all make the region one of the most dynamic in the world. Nevertheless, it is also one of the most arid and environmentally stressed. Dwindling water resources, limited arable and grazing land, high pollution from household and industrial waste, remnants of conflicts and increasing desertification are key environmental challenges.

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North America

Climate change has various impacts on the three North American countries of Canada, Mexico and the US. Canada and the US have well-developed adaptive capacities and foster the strengthening of capacities in other regions as well. With high per capita emissions, these two countries also bear a greater responsibility for a changing climate. Mexico has a sound national strategy for climate change adaptation, yet fewer capacities than Canada and the US. The poorer and rural populations of Mexico are especially vulnerable to climate change, due to an increased sensitivity and a lower adaptive capacity.

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Oceania & Pacific

In Oceania, population growth and economic development trends put a strain on oceanic and island ecosystems. Freshwater scarcity, overexploitation of fisheries, loss of land biodiversity, forests and trees, invasive species, soil degradation, increasing levels of settlement, poor management of solid and hazardous waste and disproportionate use of coastal areas are some of the problems. Climate change exacerbates most of these trends, while also raising questions about the future sovereignty of some island states.

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South America

South America has diverse and unique ecosystems and is very rich in biodiversity. Weak natural resource management, land disputes and extreme weather events bring about significant challenges for the region. While South America accounts for relatively few CO2 emissions, the changing climate will alter its ecosystems and greater climate variability will lead to more hurricanes, landslides, and droughts.

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Sub-Saharan Africa

In many African states, environmental security issues rank high on the political agenda. Throughout the continent, countries suffer from water scarcity, food insecurity and energy poverty. These chronic and worsening resource scarcities have severe livelihood implications and are exacerbated by political conflicts over access to and control over these resources. Climate change may seriously threaten political and economic stability in Africa. It may also put a severe strain on the capacities of states and societies to co-ordinate activities, to communicate and to organize.

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