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Stern Review on Climate Change:Shift to Low-Carbon Economy

Mon, 11/06/2006 - 6:38am

The Stern Review on climate change, released at the end of October, presents a bleak picture of an economic future devastated by higher than average global temperatures. At the same time, however, it pinpoints opportunities for minimizing the impact of increased levels of carbon dioxide in the atmosphere. The market is not working to cut carbon emissions yet, but with more than a little help it might.

As eminent economists have noted in response to the review, the dangers of climate change need to be addressed sooner rather than later. "To be sure, there are uncertainties, but what it [the Stern Review] makes clear is that the downside uncertainties — aggravated by the complex dynamics of long delays, complex interactions, and non-linearities — make a compelling case for action," says Joseph Stiglitz, who was a Nobel prize economist in 2001.

The review draws up an agenda for action and what might or might not be feasible. Nicholas Stern, former World Bank chief economist and head of the UK government economic service, says his conclusions are essentially optimistic. "There is still time to avoid the worst impacts of climate change, if we act now and act internationally," he says. But climate change could have a negative impact on GDP (gross domestic product) of 5 percent a year or, if the affects on poorer nations are weighted appropriately, equivalent to 20 percent or more.

Each metric ton of carbon dioxide emitted now is causing damage worth at least $85, the report estimates. Somehow that has to be paid for. On the positive side, a shift to a low-carbon economy could bring benefits to the tune of $2.5 trillion each year. Markets for low-carbon technologies could be worth at least $500 billion, and the report suggests perhaps much more if by 2050 the world acts to the scale required.

It is the scale required, however, that is immense.

The review calls climate change "greatest market failure the world has seen" and suggests building a common global carbon price across countries and sectors through taxation, emissions trading, or regulation. The risks of uncontrolled climate change are immense. The critical point is that all countries will be affected. Left unabated, the world's physical and human geography would be transformed.

Demand side factors will bring about some change but probably not enough. Some industries will bear the brunt of change although the review suggests that regional solutions for the worst affected sectors might be forthcoming.

The Stern Review is as measured as it is detailed. There are options but also some unpalatable risks to be addressed. It proposes three elements of policy required for an effective response: carbon pricing through taxation, emissions trading, or regulation; technology policy; and action to remove barriers to energy efficiency.

Moving to a low-carbon economy presents huge opportunities but also huge economic and political risks. Tackling climate change is the pro-growth strategy; ignoring it will ultimately undermine economic growth.

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