Could the UK’s shale-gas tax break be a hidden blessing for developing countries?

As the UK and USA and other high income countries race to take advantage of existing and potential shale-gas deposits – using a controversial procedure called fracking – by providing incentives such as reducing corporate tax (for example, the UK government is currently planning the world’s most generous tax breaks for shale-gas investment), developing countries such as Kenya, Cambodia or Tanzania are also weighing up their fossil-fuel deposits. Whilst a large number of high-income countries are already soft-locked into a fossil-fuel consumption system aimed at meeting growing energy needs and providing some form of national energy security, many low-income countries are now choosing what energy path to follow. Their road could fork many ways. First, they could simply continue to invest in fossil-fuel energy systems (i.e. coal and gas), which may seem like an especially appetising proposition, given the amount of fossil-fuel reserves a lot of low-income countries are currently discovering. Second, they could invest in renewable energy, but the short-term investment costs are high and the technology is fairly new. A third path would be to mix the two as required by a country’s energy needs.

So, the first solution may seem simplest, especially in the face of dire energy emergencies that can cripple productivity (for example, in Nepal where 14-hour blackouts are part of the daily routine). Why not just invest in cheaper fossil fuels, and emulate high-income countries like the UK? But what may seem like a guaranteed win-win situation could actually become a lost opportunity for low-income countries to gain a long-term competitive advantage over more sluggish high-income economies. But Bangladesh’s energy story (heavily investing in natural gas and then running out of reserves, leaving them with an energy crisis equal to that they had initially) should serve as a warning for other developing countries.

The idea is simple – many low-income countries are rich in renewable energy sources. Nepal is estimated to be able to potentially produce a total of about 10,000 megawatts of hydro-electrical energy; similarly, Kenya has (a currently underused) reserve of about 5,000 MW of geothermal energy, and other countries could take advantage of other plentiful resources for cheap renewables such as wind power, solar energy or biogas. Even assuming negative impacts on hydrology and agriculture from future climate-change effects, the energy that could be produced in these countries through renewables would greatly exceed their current and future needs. Whilst high-income countries will be struggling to discover and exploit ever-dwindling supplies of fossil-fuel reserves, and will potentially face high readjustment costs once it is necessary to switch to renewables, low-income countries need not lock themselves into a similar pattern. Investing now in renewable energy could provide a number of potential wins for developing countries. For example, energy security will be a non-issue if they rely on locally available resources. Additionally, they could potentially become leaders in the green energy sector; for those that have proven fossil fuel reserves, the initial investments in renewables could be driven by profitably exporting fossil fuels to high-income countries (which will be especially lucrative if prices increase in the long term).

As they find themselves with cheap energy, this kind of competitive advantage could be great for developing countries – and it may well provide all kinds of positive knock-on effects on their economies, such as lower manufacturing costs, or the potential to build green energy as a profitable export. At the same time, currently ‘developed’countries will find themselves facing greater fossil-fuel costs, implementing subsidies which will become ever harder (especially in political terms) to remove, and eventually relying on obsolete energy production systems. At the moment, shale gas is big business in the USA and UK, but the incentives proposed by the UK government provide an excellent opportunity for developing countries to break the mould and head out in a new and competitive direction. 

Authors

Research Fellow
Alberto specialises in private sector development, specifically in access to finance, business [...]