The Economics of Climate Change - Stern 5 Years On

Lord Nick Stern tonight gave the first of three lectures on the ethics and economics of climate change as the annual lecture series in honour of Lionel Robbins started at the LSE.

It is over five years since the publication of the Stern Report and much has happened in the intervening period. Stern however was at pains to emphasise that his core message remained undimmed, namely that the costs of inaction are enormous but the costs of early action to cut emissions are manageable. We have seen in recent years rapid technological change much of which is hugely encouraging in taking us closer to de-coupling the relationship between production and consumption and carbon emissions. But more is needed, Stern is arguing in these three lectures for a new industrial revolution, a deep set of changes to production processes and technologies that happens across every sector. The economics and politics of how progress might be made in moving towards a new revolution will be the focus of the second and third lectures.

LECTURE 1 - Tuesday 21 February 2012 What we risk and how we should cast the economics and ethics

LECTURE 2 - Wednesday 22 February 2012 How we can respond and prosper

LECTURE 3 - Thursday 23 February 2012 How we can get there: building national and international action

In the first lecture Lord Stern reviewed some of the science of climate change, he addressed those who remain in denial and touched briefly on the vexed on the issue of discounting the future benefits arising from climate change interventions.

The science tells us a lot about the link between changes in the flow and stock of emissions and the likely changes in average temperatures. There is a clear trend in temperature but lots of oscillations, and whilst uncertainty is fundamental and we can never be sure, he argues that

(i) The the scale of the likely effects are enormous

(ii) The time lags are long

(iii) The consequences are public - the effects of climate change are blind to where the emissions are generated and the wholly public nature of emissions-related carbon change is now well understood around the world, especially in countries where the impact is being seen now in increasingly volatile weather patterns.

To hold to a 50-50% chance of holding the rise in average global temperatures to 2 degrees centigrade, we need CO2 emissions to peak and start falling rapidly before 2020.

There are big dangers in delaying not least because holding to existing technologies and processes are likely to lock-in up the majority of hydrocarbons and make any attempt at cutting the stock of emissions difficult and costly in the future.

Ethics:

As social scientists we must not be afraid of bringing our core values to the fore when thinking about policy options and policy architecture. The ethics and the economics of climate change are intertwined and will always be so. The issue raises all kinds of ethical debates, for example the rights of future generations and their ability to enjoy liberty and justice. The question of how a virtuous person ought to behave. And also the vexed issue of intra-generational equity across countries.

Stern argued that rich advanced nations have duties and responsibilities. It is immoral for countries with high per capita incomes to deny rights to the remaining carbon space (the scope for the annual flow of emissions to rise without jeopardising a target for the overall stock of emissions) to those in emerging / developing lower-income countries.

Discounting

Stern’s review came under criticism from some quarters about the low discount rate chosen for calculating the present value of the benefits of climate change policies whose impact will be many years into the future. He argued in his lecture tonight that the debate over the discount rate essentially diverts attention away from what really matters which is that we are dealing with risk management and effects that could have catastrophic human, economic, social and political consequences for many millions of people. Those who come after us are worth just as much as we are. We need to make long-term collective decisions and there are few if any market interest rates (set in capital markets) that capture the risks and uncertainties for a time frame that is a hundred or more years into the future.

Economic growth will not be positive if we mis-manage climate change. There is a strong probability that the next generation will be poorer than the current one not least with the fragilities laid bare but the continued fall-out from the global financial crisis.

The scale of emissions reduction needed

* The world is currently emitting around 50 billion tonnes of CO2 each year. Even with all of the commitments and plans for action made at Copenhagen, Cancun and Durban at previous summits it is likely that this annual flow of emissions will plateau (developed country emissions falling, fast-growing emerging countries seeing their emissions rising as consumption grows).

* If the world economy grows at an annual rate of 2.5% for the next forty years, this implies a world economy nearly three times bigger than it is now

* We need to cut emissions per unit of output by a factor of eight - this requires an industrial revolution and you cannot leave sector out

* This industrial revolution needs strong policy interventions to nurture it and to correct for the many market failures. Investment in low carbon technologies and processes might have to grow by 2 or 3% of global GDP, and the majority of this will come from the private sector, we can see already many firms taking a very long view.

We should not simply focus on improving energy efficiency (although this is important and can be done at a relatively low marginal abatement cost). We should also look seriously at ways to reduce consumption and change the pattern of consumption on different goods and services. Just stopping economic growth does not deliver the deep cuts in emissions that are needed.

Emissions trading has a role to play. The current low price for carbon credits within the European Union emissions trading scheme is not surprising if you have macro policies sending the EU into a state of semi-permanent depression whilst at the same time national governments hand out carbon credit quotas that pretend the EU economy was continuing along previous growth trajectories. Some intervention is justified to support the carbon price because it is confidence in the price in a market-based mechanism that drives investment

Developing countries leading the way

Growing evidence that many less developed countries see low carbon technologies as offering huge opportunities for growth, development and over-coming poverty. They are likely to lead the way not least in disruptive innovations that can then be licensed and sold to rich nations!