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Stern Review Lays Out Economic Argument for Urgent Action on Climate Change

30 October 2006

Stern1
Projected losses in GDP per capita due to climate change over the next 200 years, according to three of the main scenarios of climate change and economic impacts. The range of estimates from the 5th to the 95th percentile is shaded grey. Click to enlarge.

HM Treasury (UK) today published the much-anticipated Stern Review Report on the Economics of Climate Change, the most comprehensive review yet carried out on the economics of climate change.

The Review estimates that while the cost of stabilization could be 1% of global GDP by 2050, the longer-term costs of a narrow range of effects of unabated climate change would be at least 5% of global GDP. Considering more recent scientific evidence (for example, the risk that greenhouse gases will be released naturally as the permafrost melts), the economic effects on human life and the environment, and approaches to modeling that ensure the impacts that affect poor people are weighted appropriately, the Review estimates that the dangers could be equivalent to 20% of global GDP or more.

In other words, the benefits of strong and early action far outweigh the economic costs of not acting.

Stern2
Stabilization levels and probability ranges for temperature increases. This illustrates the types of impacts that could be experienced as the world comes into equilibrium with more greenhouse gases. The top panel shows the range of temperatures projected at stabilization levels between 400ppm and 750ppm CO2e at equilibrium. The solid horizontal lines indicate the 5 - 95% range based on climate sensitivity estimates from the IPCC 20012 and a recent Hadley Centre ensemble study. The vertical line indicates the mean of the 50th percentile point. The dashed lines show the 5 - 95% range based on eleven recent studies. The bottom panel illustrates the range of impacts expected at different levels of warming. Click to enlarge.

The Review, which reports to the Prime Minister and Chancellor of the Exchequer, was commissioned by the Chancellor in July last year and was carried out by Sir Nicholas Stern, Head of the Government Economic Service and former World Bank Chief Economist.

The conclusion of the Review is essentially optimistic. There is still time to avoid the worst impacts of climate change, if we act now and act internationally. Governments, businesses and individuals all need to work together to respond to the challenge. Strong, deliberate policy choices by governments are essential to motivate change.

But the task is urgent. Delaying action, even by a decade or two, will take us into dangerous territory. We must not let this window of opportunity close.

—Sir Nicholas Stern

Noting that emissions have been, and continue to be, driven by economic growth, the Review concludes that stabilization of greenhouse-gas concentrations in the atmosphere is feasible and consistent with continued growth.

...central estimate is that stabilisation of greenhouse gases at levels of 500-550ppm CO2e will cost, on average, around 1% of annual global GDP by 2050. This is significant, but is fully consistent with continued growth and development, in contrast with unabated climate change, which will eventually pose significant threats to growth.

Resource cost estimates suggest that an upper bound for the expected annual cost of emissions reductions consistent with a trajectory leading to stabilisation at 550ppm CO2e is likely to be around 1% of GDP by 2050.

...Stabilisation at 450ppm CO2e is already almost out of reach, given that we are likely to reach this level within ten years and that there are real difficulties of making the sharp reductions required with current and foreseeable technologies. Costs rise significantly as mitigation efforts become more ambitious or sudden. Efforts to reduce emissions rapidly are likely to be very costly.

An important corollary is that there is a high price to delay. Delay in taking action on climate change would make it necessary to accept both more climate change and, eventually, higher mitigation costs. Weak action in the next 10-20 years would put stabilisation even at 550ppm CO2e beyond reach—and this level is already associated with significant risks.

—The Review Report

The first half of the Review focuses on the impacts and risks arising from uncontrolled climate change, and on the costs and opportunities associated with action to tackle it. A sound understanding of the economics of risk is critical. The Review emphasizes that economic models over timescales of centuries do not offer precise forecasts, but are an important way to illustrate the scale of possible effects.

The Review finds that while all countries will be affected by climate change, the poorest countries will suffer earliest and most. Unabated climate change risks raising average temperatures by more than 5°C from pre-industrial levels. Such changes would transform the physical geography of our planet, as well as the human geography— how and where the planet’s population lives.

The Review calculates that if no action is taken to control emissions, each tonne of CO2 emitted now is causing damage worth at least $85—a cost not considered when investors and consumers make decisions about how to spend their money. Emissions trading schemes have demonstrated that there are many opportunities to cut emissions for less than $25 a tonne. In other words, according to the Review, reducing emissions will make us better off. According to one measure, the benefits over time of actions to shift the world onto a low-carbon path could be in the order of $2.5 trillion each year.

The shift to a low-carbon economy will also bring huge opportunities. Markets for low-carbon technologies will be worth at least $500 billion by 2050 if the world acts on the scale required.

Tackling climate change is the pro-growth strategy; ignoring it will ultimately undermine economic growth.

The Review looks at what this analysis means for the level of ambition of global action. It concludes that the levels of greenhouse gases in the atmosphere should be limited to somewhere within the range 450 - 550ppm CO2e (CO2 equivalent). Anything higher would substantially increase risks of very harmful impacts but would only reduce the expected costs of mitigation by comparatively little. Anything lower would impose very high adjustment costs in the near term and might not even be feasible, not least because of past delays in taking strong action.

The second half of the Review examines the national and international policy challenges of moving to a low-carbon global economy.

Calling climate change “the greatest market failure the world has seen,” the Review identifies three elements of policy are required for an effective response:

  1. Carbon pricing through taxation, emissions trading or regulation, to face people with the full social costs of their actions. The aim should be to build a common global carbon price across countries and sectors.

  2. Technology policy to drive the development and deployment at scale of a range of low-carbon and high-efficiency products.

  3. Removing barriers to energy efficiency, and to inform, educate and persuade individuals about what they can do to respond to climate change. Fostering a shared understanding of the nature of climate change, and its consequences, is critical in shaping behaviour, as well as in underpinning both national and international action, the Review asserts.

Key elements of future international frameworks should include:

  • Emissions trading. Expanding and linking the growing number of emissions trading schemes around the world is a powerful way to promote cost-effective reductions in emissions and to bring forward action in developing countries: strong targets in rich countries could drive flows amounting to tens of billions of dollars each year to support the transition to low-carbon development paths.

  • Technology co-operation. Informal co-ordination as well as formal agreements can boost the effectiveness of investments in innovation around the world. Globally, support for energy R&D should at least double, and support for the deployment of new low-carbon technologies should increase up to five-fold. International cooperation on product standards is a powerful way to boost energy efficiency.

  • Action to reduce deforestation. The loss of natural forests around the world contributes more to global emissions each year than the transport sector. Curbing deforestation is a highly cost-effective way to reduce emissions; large-scale international pilot programs to explore the best ways to do this could get underway very quickly.

  • Adaptation. The poorest countries are most vulnerable to climate change. It is essential that climate change be fully integrated into development policy, and that rich countries honour their pledges to increase support through overseas development assistance. International funding should also support improved regional information on climate change impacts, and research into new crop varieties that will be more resilient to drought and flood.

Transportation. The Review identifies transportation as one of the two global sectors (along with power generation) requiring special attention. Transportation currently represents 14% of global emissions, and is the fastest growing source of emissions because of continued growth of car transport and rapid expansion of air transport.

The current incremental improvements to existing technologies have been “more than offset” by the growth in demand and shift towards more powerful and heavier vehicles.

The improvements in the internal combustion engine from a century of learning by doing, the efficiency of fossil fuel as an energy source and the existence of a petrol distribution network lead to some “lock-in” to existing technologies. Behavioural inertia compounds this “lock-in” as consumers are also accustomed to existing technologies.

The Review suggests that although some further innovative activity could be delivered through market forces,

Markets alone, however, may struggle to deliver more radical changes to transport technologies such as plug-in hybrids or other electrical vehicles. Alternative fuels (such as biofuel blends beyond 5-10%, electricity or hydrogen) may require new networks, the cost of which is unlikely to be met without incentives provided by public policy.

The environmental benefit of alternative transport fuels will depend on how they are produced. For example, the benefit of electric and hydrogen cars is limited if the electricity and hydrogen is produced from a high emission sources. Obstacles to the commercial deployment of hydrogen cell vehicles, such as the cost of hydrogen vehicles and low-carbon hydrogen production, and the requirement to develop hydrogen storage further, ensure it is unlikely that such vehicles will be widely available commercially for at least another 15 to 20 years.

Resources:

  • Stern Review on the economics of climate change (website with full report)

October 30, 2006 in Climate Change, Policy | Permalink | Comments (15) | TrackBack (0)

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Comments

Sadly, this should be common sense, but isn't. I tire of chicken littles who scream about how "it will wreck the economy". What we need to do is cheap compared to what it will cost if we do nothing.

But a lot of people who make a lot of money off doing nothing can buy a lot of noise to confuse people, and rile up their natural sympathizers (like the radical free market types).

Here's a tidbit which I found worthy of emphasizing from the Executive Summary:

"The loss of natural forests around the world contributes more to global emissions each year than the transport sector. Curbing deforestation is a highly cost-effective way to reduce emissions; large-scale international pilot programmes to explore the best ways to do this should get underway very quickly."

Very interesting and timely report.

The global effects of a rise in CO2 level to 500 - 550 ppm may be underestimated. Past periodic CO2 peaks evaluated at 300 - 380 ppm may have provoked global temperature rises betwen +6C to +9 C. Wouldn't 550 ppm do much more?

A rise of +10C would be a major catastrophe and many inhabited areas and major cities would disappear. Many may go hungry.

A cost of 1%, of the current global economy, for immediate corective actions, seems to be very acceptable to address such a major global problem. We owe that much to our children, grandchildren and future generations.

Let's hope that our politicians and the majority of us read this report. It is time to collectively and actively contribute to CO2 emission reduction.

The new Altairnano Nanosafe quick charge (8 minutes) 150 000 cycles batteries may be part of the solution.

"It is essential that climate change be fully integrated into development policy"

Finally a plan that involves stopping them from becoming poluters before they do, rather than trying to change them after.

I like the fact that the two graphs included here indicate confidence intervals. We clearly have a collective problem, and it's getting worse. You can argue about how fast its getting worse, depending on a myriad assumptions.

Moreover, whenever valuable resources such as fossil fuels, water or arable land become scarce, armed conflict is not far behind. WW2 was largely about oil. Mr. Bush's War on Terror has its roots in the Cold War, when East and West competed for influence over the oil & gas fields over Middle East by supporting autocratic regimes - triggering the inevitable backlash by the indigenous Muslim peoples.

Given that history, it should be obvious that we need to stop flaring natural gas (~200 BCM per year, equivalent to ~30% of total US demand). After all, the flared gas has substantial economic value. If the price of gas is high enough, technology to curb flaring becomes economical. Currently, the global market in gas in illiquid and not at all transparent. What little is traded on the spot market tends to be priced in line with barrel of oil equivalents. The pricing link between these two very different resources needs to be broken (i.e. gas should be worth more).

Tackling deforestation will be much harder, because the locals don't immediately benefit from leaving their timber be/foregoing agricultural land. Brazil is the world's largest exported of soy beans, which are used as cattle feed in the developed world. Ergo, if the Amazon rain forest is to be preserved, we will have to provide financial incentives to a lot of farmers in both Brazil and the West. In addition, we will have to curb our collective appetite for meat. No easy marketing feat, that.

Moreover, all efforts to mitigate the impact of the human species on the global environment are doomed as long as global population continues to grow exponentially. That will be an even harder sell.

It's annoying when politicians say that we need to invest in technology before we can implement a price signal on carbon. We have the technology now - all that's needed is sustained R&D to keep on improving it.

If climate change leads to permanent drought and massive crop failures, you could see a major distruption in world economies. If Kansas becomes a Sahara, it would not be worthwhile to say, "we told you so". These kind of thoughts may seem alarmist, but they might be just what we need to wake some people up.

Given that we're already seeing large effects with a mere 390 ppm of CO2 (and its full effects not yet realized), I'm sure that 550 ppm or even 450 ppm are not something we can allow without horrendous damage.  I suspect that we need to mitigate warming by reflecting radiation, while we try to reduce atmospheric CO2 to 350 ppm or less.

I'm a little surprised, and also heartened, that we haven't heard from any GW denialists yet. (Is there a gun show in town?) I agree with E-P on the idea of reflecting radiation. That idea is starting to go mainstream.

Hey, stop stereotyping.  I was at that gun show!

Rafael:

WW2 was not about oil, but mostly about Mr’s Hitler ambitions. Or you think that Holocaust was too about
oil?

Cold War was not about competing of East and West. It was about US confronting expansionist ambitions of USSR, and it was all around the world, like in Korea, Vietnam, Cuba, Afghanistan, West Berlin, etc. – not only in oil-rich regions. But I like your idea that global terror, suicide bombers, televised beheading and alike is the only response “indigenous Muslim people” could offer as their natural response.

Global population does not grow in exponential manner, for developed countries it is quite opposite. Also developed countries are chronically plagued with overproduction of any commodity, especially meat. They do depend on oil export, but also on export of banana, pineapple, avocado, caviar, and alike. That’s what world trade is about – every country should supply what they have in plenty, and not to base their economy on self-sufficient medieval natural market.

Cultivated land in developed countries is shrinking, making way to massive reforestation.

Now, developing and underdeveloped countries – in order to become “developed” and begin to consume natural resources in quantities, they have to civilize themselves, which enviably means reduction of birth rate.

Reference to lack of fresh water could only be attributed to lack of comprehension of global water cycle, and especially magnitude of it numbers.

As you posted before, miserable condition of people in poor countries is attributed to their social and governmental deficiencies, not lack of natural resources. As an example take a look at Israel's (not a hack blessed with natural recourses) massive import of fruits, vegetables, flowers, and poultry to European and American markets.

You just having same bad nightmare dreams as Maltus had more then century ago, my friend.

Andrey -

I was referring to the Russian and North African campaigns as well as the US-imposed oil embargo on Japan. Of course oil was not the only reason for WW2, or even its root cause. But it did play a very large role in how the war unfolded.

I wish Moslims could muster a robust intellectual and political response to what they perceive as oppression and exploitation by outside powers, rather than resort to violence. In the Middle Ages, the Arab World was far ahead of Europe in terms of science, technology, medicine - you name it. Sadly, those days are long gone, as the murderous sectarian strife in Iraq shows. Europe was mired in religious wars for centuries and we could be looking at a long period of high supply risks for the crude oil virtually all of our vehicles run on today.

There may well be enough fresh water around the world, but its not evenly distributed. The Israeli-Syrian conflict over the Golan Heights is largely about control of the watershed of the river Jordan. Saudi Arabia operates huge - and hugely vulnerable - reverse osmosis desalination plants. In the developed world, aquifers are becoming increasingly polluted by industrial wastes. In India, many villages have lowered the water table so much that arsenic from deep strata is now poisoning their wells.

And so on. The point is, potable fresh water is an essential resource for survival, one liable to be used as a weapon. Sensing an opportunity, shipping magnates are already developing a market in transporting fresh water. But as you rightly point out, this can only be a drop in the bucket:

http://www.csmonitor.com/2004/1230/p13s01-sten.html

Rafael:
That’s more like it. Agree on most points. Couple of comments:

Middle Ages cultural superiority of Eastern countries converted to Islam compare to Europeans was mostly due to terrible cultural degradation of Europe between fall of Western Roman Empire and early Renaissance. That’s why we also call it Dark Ages.

Israel occupation of Golan Heights is 90% because of strategic military necessity. Control of most Jordan River watersheds were in Israel hands even before occupation.

Quality of watersheds in developed countries improved dramatically over last 25 years, due to strict wastewater control legislation and trillions of dollars spent. And no reduction in spending in site – wastewater purification spending will be high forever. In developing countries picture is grim, and India is just a catastrophe.

Proper collection, distribution, purification, and re-use of water assures adequate fresh water supply almost in any country, unless one is planning to establish rise puddles in the middle of Arabic Desert. The problem is that it requires money and effective governing, which many countries are lacking. Modern technologies, like RO desalination of sea or better yet brackish water is quite cheap. 2-3 dollars per day per capita to satisfy 100% urban demand of about half ton per capita, which water could be (and actually are in many arid countries, notably Israel) purified and reused, partially for irrigation and cultivation. Recycled portion of mentioned half ton per capita is enough for minimal cultivation of vegetables and fruits for local market, but of course competitive cultivation of basic food crops in this scheme is out of question. There international trade is kicking in.

I've been waiting for a response from an economist before posting on this issue. I'm going to simply post a link to it. Warning: It's in MS Word format.

The response is from economist Richard S. Tol. Tol concludes:

In sum, the Stern Review is very selective in the studies it quotes on the impacts of climate change. The selection bias is not random, but emphasizes the most pessimistic studies. The discount rate used is lower than the official recommendations by HM Treasury. Results are occasionally misinterpreted. The report claims that a cost-benefit analysis was done, but none was carried out. The Stern Review can therefore be dismissed as alarmist and incompetent.

This is not to say that climate change is not a problem, nor that greenhouse gas emissions should not be reduced. There are sound arguments for emission reduction. However, unsound analyses like the Stern Review only provide fodder for those skeptical of climate change and climate policy.

only provide fodder for those skeptical of climate change and climate policy

Looks like Dr. Tol is right at least on that count.

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