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2. Stern views

In his long awaited report for the Treasury on the cost of climate change, Sir Nicholas Stern argues that acting now to cut greenhouse gas emissions would be vastly cheaper in the long run than doing nothing- countering some prognosticators who say that some short term climate impacts will actually be positive and/or that responding later will be cheaper as technology will improve. Stern estimates that, if nothing is done, the global cost of climate damage will be around £3.684 trillion, 20% or more of global Gross National Product, whereas the cost of taking action will only be around £184 billion- or about 1% of global GNP. In terms of action, he saw carbon trading as a key.

Sir Nicholas said: ‘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.’

He added ‘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.’

In response Tony Blair agreed about the need to move quickly- he wanted to extend the EU Carbon Trading System and the get early agreement on a post-2010 Kyoto II protocol.

The Stern Review in summary

The Stern Review was billed as ‘the most comprehensive review ever carried out on the economics of climate change’. It was carried out by Sir Nicholas Stern, Head of the Government Economic Service and former World Bank Chief Economist, and as an economic rather than ecological review, had a significant media impact.

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. The Review finds that all countries will be affected by climate change, but it is the poorest countries that will suffer earliest and most. Unabated climate change risks raising average temperatures by over 5°C from pre-industrial levels. As the summary says ‘such changes would transform the physical geography of our planet, as well as the human geography- how and where we live our lives’.

Adding up the costs of a narrow range of the effects, based on the assessment of the science carried out by the Intergovernmental Panel on Climate Change in 2001, the Review calculates that the dangers of unabated climate change would be equivalent to at least 5% of GDP each year.

The Review then considers more recent scientific evidence (for example, of the risks that greenhouse gases will be released naturally as the permafrost melts), the economic effects on human life and the environment, and approaches to modelling that ensure the impacts that affect poor people are weighted appropriately. Taking these together, the Review estimates that the dangers could be equivalent to 20% of GDP or more. In contrast, the costs of action to reduce greenhouse gas emissions to avoid the worst impacts of climate change can be limited to around 1% of global GDP each year.

The summary suggests that ‘People would pay a little more for carbon-intensive goods, but our economies could continue to grow strongly’. However, it says ‘if we take no action to control emissions, each tonne of CO2 that we emit now is causing damage worth at least $85- but these costs are not included when investors and consumers make decisions about how to spend their money. Emerging schemes that allow people to trade reductions in CO2 have demonstrated that there are many opportunities to cut emissions for less than $25 a tonne.’ So, reducing emissions will make us better off: ‘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' and the shift to a low-carbon economy will bring huge opportunities. Markets for low-carbon technologies will be worth at least $500bn, and perhaps much more, by 2050 if the world acts on the scale required. So Stern claims that ‘Tackling climate change is the pro-growth strategy; ignoring it will ultimately undermine economic growth’.

Action on Climate Change

The second half of the Review examines the national and international policy challenges of moving to a low-carbon global economy. The Stern review notes that ‘climate change is the greatest market failure the world has seen’ and says that three elements of policy are required for an effective response:

The first is carbon pricing, through taxation, emissions trading or regulation, so that people are faced with the full social costs of their actions. The aim should be to ‘build a common global carbon price across countries and sectors’.

The second is technology policy, to drive the development and deployment at scale of a range of low-carbon and high-efficiency products. And the third is action to remove 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 Stern report says that effective action requires a global policy response, ‘guided by a common international understanding of the long-term goals for climate policy and strong frameworks for co-operation’. It says that key elements 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 low-carbon technologies should increase up to five-fold.

*Global co-operation on product standards- 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 programmes to explore the best ways to do this should 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.

The Stern Review can be downloaded at http://www.sternreview.org.uk

Stern on REFIT/RO

In addition to calling for the development of a carbon pricing regime and a 2-5 times increase in R&D funding for renewable energy, in his report on the economics of climate change (see previous page), Sir Nicholas Stern also came out in favour of German style Renewable feed-in tariffs as opposed the the UK’s Renewabes Obligation quota/trading system.

The Stern report commented that: ‘Comparisons between deployment support through tradable quotas and feed-in tariff price support suggest that feed-in mechanisms achieve larger deployment at lower costs. Central to this is the assurance of long-term price guarantees. The German scheme... provides legally guaranteed revenue streams for up to twenty years if the technology remains functional. Whilst recognising the importance of planning regimes for both PV and wind, the levels of deployment are much greater in the German scheme and the prices are lower than comparable tradable support mechanisms (though greater deployment increases the total cost in terms of the premium paid by consumers).’

It added: ‘Contrary to criticisms of the feed-in tariff, analysis suggests that competition is greater than in the UK Renewable Obligation Certificate scheme. These benefits are logical as the technologies are already prone to considerable price uncertainties and the price uncertainty of tradable deployment support mechanisms amplifies this uncertainty. Uncertainty discourages investment and increases the cost of capital as the risks associated with the uncertain rewards require greater rewards.’

Just what many commentators have been saying all along- see p.3. We wonder if the DTI will take notice?

Shell Agree with Stern

In parallel, research by Shell Springboard shows that the challenge of tackling climate change could create a market of up to £30bn for British business over the next ten years. It also estimates that the cost of tackling climate change in the UK in 2010 will be affordable at 0.3% of GNP. It also notes that concerted international action to avert climate change could create a global market worth $1 trillion in the first five years alone. The research identifies major opportunities for small and medium sized enterprises in a wide range of markets, by both responding to consumer demand for environmentally friendly goods and to demands created by government action. It says the biggest markets for SMEs in 2010 will be:

• Building regulations for commercial and industrial use - £950m

• Renewable electricity - £800m

• Renewable road transport fuels - £500m

• Domestic energy efficiency - £400m

• Building regs for domestic use - £275m

In addition, the study identifies the UK as a world leader in the international emissions offset market, with UK firms already involved in about £400 million of projects a year, with the market rapid increasing. The UK voluntary offsets market could be worth another £100-200m p.a.