A Stern Review

A quasi-standing ovation greeted Nicholas Stern in the LSE’s packed Old Theatre last night, on the occasion of the presentation of his Review on the Economics of Climate Change. So many students and external visitors wanted to hear his recommendations, that a separate video link had to be set up in the New Theatre, and even that failed to accommodate the hundreds of people who were left waiting outside. Clearly, this was more than just an ordinary lecture on an ordinary topic. Whether or not there is a politically-motivated conspiracy behind many environmental discourses today – as some would argue – it is obvious that people are concerned. Very concerned.

This is clearly not the right place to summarize the 600-page long Review. I am certainly not an economics or climate change expert to offer any insights into the recommendations put forward by Sir Nicholas in the Executive Summary, which you can access here. What I can do, however, is to jot down a few ideas that I found particularly interesting during his presentation, and which will hopefully contribute to a more informed debate on the matter within GlobaLab and the broader blogsphere:

– The effects of climate change are – in pure economic terms – an externality, which occurs when a decision causes costs to stakeholders other than the person making the decision. In other words, the decision-maker does not bear all of the costs (or reap all of the gains) from his or her action. Stern deems these a market failure of global magnitude, which is probably an important turning point in the way we frame the argument on climate change.

– The Review concentrates on the economics of risk, looking at the probabilities of this risk and on whom the impacts will fall. It also concentrates on the options for mitigation and adaptation, analysing costs, timing and scale, but also looking at more specific policy recommendations at the international level.

Business as usual is not an option. At the current rate of carbon emissions, which are adding 2.5 ppm CO2e in the atmosphere every year, we’ll have a 50% chance of increasing the world temperature of 5 degrees over the next century. In aggregate terms, using a prediction model illustrating risk, Stern calculated something between 7.3% and 13.8% loss in GDP per capita by 2200.

– The economics of mitigation are instead much more affordable, with annual resource costs of about 1% GDP in 2050. Mitigation is fully consistent with the aspirations for growth and development in poor as well as rich countries. Establishing a carbon price would be the most effective mitigation strategy, including through greenhouse gas taxes, capping emissions and setting up a market in permits, or directly through regulation.

– Alongside carbon pricing, the Review recommends incentives and regulations to promote effective technologies that can address the problem. This implies a stronger push in R&D (Stern suggests a doubling of funding, to bring it back to the levels of 20 years ago), to lower the costs of low-emission technologies especially for developing countries. Beyond pricing and technology, regulation, information and a shared understanding of responsible behaviour play an equally important role.

Costs, however, should not be evenly distributed, but should take into account the moral aspects of this problem – i.e. it’s the developed nations which have been contributing historically to carbon emissions most, and the impact of climate change will be felt harder in the developing world, both because of climatic reasons and because of their limited socio-economic resources to cope with the effects of climate change. In this sense, development itself will enhance the capacity of LDCs to cope with, address and adapt to these challenges.

The conclusions of the Review are clear and well focused, concentrating on 3 aspects:

1. Goals

  • Unless emissions are curbed, climate change will bring high costs for human development, economies and the environment.
  • Limiting concentration withint the range of 450 and 550 ppm CO2e is possible and the costs would be modest relative to the cost of inaction.
  • Further delays will cause greater risks and higher costs in the long run.

2. Principles

  • The foundations of action include: a common understanding of the scale of the problem; transparency and mutual understanding of actions and policies and structures that sustain cooperation.
  • Effective action requires: long-term quality goals to limit risk; flexibility to limit costs; a broadly comparable global price for carbon; equitable distribution of efforts; cooperation to bring forward technology; moving beyond sticks and carrots.

3. Financing

  • International finance flows should be scaled up for effective and equitable mitigation; the IFIs can play a strong role in shaping investment frameworks and piloting new approaches, while increase resources are required for technology cooperation and transfer.
  • The climate is already changing and will change further: all countries will face costs, but developing countries will be hit hardest and earliest; development itself must be central to the respose; it is crucial to deliver on the committments of Monterrey 2002 and Gleneagles 2005.

There has already been quite a lot of interest in the Review (see amongst others BBC, the Royal Society, First Post), but I think the implications of it are still being processed by the different governments, think tanks and policy centres. This has not prevented a number of people from being very critical about the report, such as Luboš Moti on his rabid blog, listing a number of individual scientists (such as Lomborg on the Wall Street Journal on line) and institutions that have slammed the Review. A better and more balanced review of critiques can be found on the excellent Euractiv website.

Most criticism revolves around the old scientific dispute on whether this is just a natural phenomenon and we should stop fretting about it, or whether Armageddon is actually upon us. But other critics concentrate on the figures themselves, with an IPCC/UN leaked report suggesting the actual costs of keeping carbon levels at 550 ppm would be closer to 5% of world GDP, not 1% as Stern suggests. Personally I am more enclined to believe in Stern, who was Chief Economist at the EBRD as well as the World Bank (the first non-American in the Bank’s history), than in a random UN report leaked to some business magazine in London.

Moreover, I am under the impression that most critics are either financially motivated (Ryanair’s O’Leary, for example, who displayed once again his style and class by calling Stern an idiot economist) or politically motivated (is the Daily Telegraph perhaps trying to ensure the green agenda remains firmly in the Tory camp?). Once again, however, all these flying accusations are not helping those of us who are trying to look at the issue in a rational, impartial and far-sighted manner. Although clearly scientific consensus is hard to reach on the subject, the public’s concern now rightly expects at least a few solid benchmarks, so that the debate can move beyond this absurd and disappointing cat-fight which has so far dominated the policy debate on climate change.

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