While the U.S. was absorbed in the midterm elections, a major report on the economics of climate change was launched in the U.K. The weighty “Stern Review” — 700 pages in all — was the work of Sir Nicholas Stern, ex-chief economist at the World Bank. Produced at the behest of the chancellor, Gordon Brown, it has had a profound impact on political and business attitudes in this country.
This is not surprising when the headline message of the report is that climate change could shrink the global economy by a fifth, equivalent to the Great Depression of the 1930s.
Stern’s analysis shows that taking action now will cost an average of 1 percent of global GDP a year over the coming decades, whilst not acting will cost between 5 and 20 percent of GDP a year over the same time frame.
All countries will be affected by climate change, but it is the poorest countries that will suffer earliest and most.
It’s not all doom and gloom, though. The report argues that the shift to a low-carbon economy will bring huge opportunities, with markets for greener technologies being worth at least $500 billion by 2050.
Stern’s conclusions were well-received in the U.K. Even the more right-wing newspapers gave the report lots of column inches and wrote largely favorable editorials (although none of them are that keen on the idea of green taxes). Even our biggest and most influential business association, the Confederation of British Industry, gave its seal of approval: “Act early on climate change and both the environment and the economy can be secure.”
Countries across Europe seized on the findings. The European Commission welcomed Sir Nicholas’s review, saying “It clearly makes a case for action … It is not an option to wait and see, and we must act now.”
In the U.S., the response was, of course, more muted. The White House issued a noncommittal statement welcoming the report as a contribution to the body of knowledge on climate change. It will be interesting to see if the review — which is, after all, the first major contribution to the climate-change debate by an economist rather than a scientist — finds more resonance over the coming months. I would hope that Stern’s past experience — as the World Bank’s chief economist — will add weight to his words in Washington.
For me, the take-home message of the report is that tackling environmental issues is no longer thought of as something that costs money; rather, not tackling environmental issues will cost us dear. The calculation that investing $1 in preventing climate change would save between $5 and $20 in impacts is pretty compelling. People would pay a little more for carbon-intensive goods, but our economies could continue to grow strongly.
Despite the dire economic predictions, Stern has produced a fundamentally optimistic report, stressing that we can still address the problem if we act soon, and that business and society can continue to prosper. (This is useful in countering the argument that it’s too late, which is being heard in the U.K. debate, where some people seem to have leaped in a single bound from denial to fatalism.)
The big question here is what Gordon Brown — likely successor to Prime Minister Tony Blair — will do in response to the report’s findings. He does not have the greenest of CVs, but he does have a record of acting on the big external reports that he has personally commissioned. I suspect that he, and the U.K. government, will go big on three of the report’s recommendations: a push for an international carbon-trading system, support for innovative technologies, and the setting up of new international frameworks to bring in non-Kyoto countries.
The report, however, raises a bigger issue for climate-change policy in the U.K. Stern is very clear that we need early action on climate change for both economic and scientific reasons. He and the British government are putting most of their faith in market-based systems, such as the European Emissions Trading Scheme, to reduce emissions. Yet it is pretty clear that these fledgling schemes will not produce a high and stable price for carbon soon enough to drive behavior change here, let alone across the world.
So, while we must continue to argue for international market-based schemes, we are also going to need some fairly radical interventionist policies to drive action further and faster at home. Business will not put serious resources into tackling climate change without some long-term certainty. We cannot wait 15 years for an international market to develop and deliver credible and stable prices. By then it will be too late. I think that in order to trigger the early investment we need from business, governments will have to intervene now to help guarantee a long-term price for carbon. That is the challenge for Gordon Brown.