Stern Review Lays Out Economic Argument for Urgent Action on Climate Change
30 October 2006
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.
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:
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.
Technology policy to drive the development and deployment at scale of a range of low-carbon and high-efficiency products.
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.
Stern Review on the economics of climate change (website with full report)
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