The Stern Review: Editors Comment
1st December, 2006
Sir Nicholas Stern was asked to find out what way of averting climate change was economically feasible. A loaded question that has allowed him to find a perverse solution to a fatal problem.
Economists are not generally associated with emotive language, which is what makes the Stern Review at first seem so striking. Sir Nicholas Stern is one of the world’s leading economists – a former chief economist with the World Bank and now chief economic adviser at the Treasury – and is steeped in the market language and form of his profession. So when his report employs phrases such as ‘averting catastrophe’, ‘urgent action is required’, and, most tellingly of all, ‘the greatest and widest-ranging market failure ever seen’, we can be left in no doubt as to how severe he thinks the problem we face is.
In July 2005, the Chancellor of the Exchequer, Gordon Brown, commissioned Stern to provide an economic assessment of the impacts of climate change, to be used as a basis for policy making. Stern presented his findings on October 30, 2006. In the review he studies three scenarios: firstly, business as usual; secondly, stabilising carbon dioxide (CO2) in the atmosphere at 450 parts per million (ppm); and lastly, stabilising CO2 somewhere between 500 and 550ppm.
The outcome of carrying on with business as usual is, he says, ‘catastrophic’, occasioning an economic collapse akin (in today’s money) to the cost of fighting the two World Wars and the 1930s stock market crash combined.
Stabilising atmospheric CO2 at 450ppm is what the science tells us we have to do. This is the only reasonable ‘safe’ option. The one that gives us a 50-50 chance of stopping climate temperature rising by more than 2°C, sending the polar caps and Antarctic ice sheets into terminal meltdown, the rainforests perishing or sea levels rising to levels that would drive two hundred million people from their homes.
The third option is to stabilise atmospheric CO2 at somewhere between 500 and 550 ppm, where collapse is not inevitable, only considerably more likely.
The report then looks at what would be needed to achieve these latter two targets and at what economic cost, and concludes that two courses of action need to be started ‘urgently’. One is mitigation – acting to prevent the situation becoming worse; the other, adaptation – modifying the way we behave as a society in light of the changes we already know are on their way as a result of climate change. Both of these need to be started without delay, warns Stern.
It is at this point that the review was destined to become controversial. Putting a price on the cause and effect of climate change and biosphere couldn’t be anything but, as Stern himself acknowledges. How much is a life worth? What level of climate shocks are we prepared to accept to maintain the convenience and consumer culture in the developed world for a little while longer? How much of the world’s peoples and species and habitats can we ‘afford’ to save? How much are we prepared to lose?
In some quarters, Stern has been accused of being morally repugnant for attempting to do this. This is erroneous and a smear. Stern is the messenger. If there is a criticism to be levelled about addressing a predominantly moral issue in economic terms, it should be against Gordon Brown, who posed the question. Stern simply gave the answer he was asked to provide.
To which end, Stern has given us a cost. The gross domestic product (GDP) of a country, or in this case the world, is defined as the market value of all final goods and services produced within the specified area in a given period of time. As it incorporates the sum of value added at every stage of production of all goods and services, including wages and consumption, transportation etc, it is often used as a crude measure of per capita income and therefore wellbeing. To head off and hopefully halt the worst ravages of climate change (stabilising CO2 at 550ppm), says Stern, will cost $1 trillion annually from world GDP, which equates to one per cent.
How has he arrived at his figure? Stern has factored in the social and environmental consequences of benchmark temperature rises associated with the three scenarios. So any rise above 2°C threatens agriculture across the globe and will lead to food shortages; there will also be mass epidemics of diseases such as malaria and dengue fever in Africa; up to 10 million will be affected by coastal flooding. Sea levels and temperatures will rise, causing climate shocks and homelessness, as witnessed after Hurricane Katrina, and water shortages will become more severe, occasioning desertification; and so starts an uncontrollable vicious cycle.
These fatal events will all impact on world GDP by reducing productivity and output. With each rise in temperature the devastation gets worse. At above 2°C we are entering the realms of what has been termed ‘the economics of genocide’. Essentially, the whole of Africa becomes scorched and famines and disease caused by water and food shortages will increase in intensity by 60 per cent. Quite simply, millions upon millions of people will die. Bangladesh will disappear under the sea, as will East Anglia – the bread-basket of the UK.
With each incremental rise in temperature, Stern gives a corresponding GDP cost, culminating in a 5°C rise in temperature costing in the region of 10-20 per cent of annual world GDP.
The analysis has sparked furious debate among economists. For example, if (say some) the economy grows at current levels, the cost of mitigation in the future will be less than Stern estimates – therefore we would be paying more to act now. We could save money by addressing the issues as and when they erupt. This is a fallacious argument. Firstly, it presupposes business will continue as usual. And secondly, by delaying the efforts to reduce the levels of CO2 in the atmosphere, it means that when we do finally tackle the issue we will be dealing with a far greater total volume.
As Stern says, ‘the risks are too high’, adding, ‘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 (equivalent) beyond reach.’
That’s not to say we can take his figures at face value. As Stern himself is at pains to make clear, the figures are illustrative as it is impossible to give fixed economic forecasts. It is also impossible to give fixed climate change forecasts. These were changing even as Stern created his own models (as can be seen from the most up-to-date pictures from the Met Office’s Hadley Centre for Climate Change, pages 10-14). While he has endeavoured to factor in elements such as positive feedbacks – eg permafrost melting, releasing methane, and the loss of the Greenland ice sheet – he can’t predict intervening climate shocks such as Katrina. But, as the Government’s chief scientist Sir David King recently warned at the Mexico G8 summit on energy, even if we stabilised at the level of CO2 in the atmosphere now, we’re in for 30 years of these kind of unpredictable events.
Neither has Stern put a price on the degradation of the biosphere. What value can you put on the icecaps, which regulate temperature and rainfall? What price on the lungs of the world, the Amazon rainforest, which starts to die off if temperature rises hit 3°C?
Your money, or your life
The current level of greenhouse gases (GHG) in the atmosphere is 430ppm, and rising at 2.3ppm annually. To stabilise at 450ppm, Stern says, would then require global emissions to peak in the next 10 years and then fall at more than five per cent per year, reaching 70 per cent below current levels by 2050. ‘Stabilisation at 450ppm CO2 is already almost out of reach,’ he says, ‘given that we are likely to reach this level within 10 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.’
He says aiming for 450ppm would cost three per cent of world GDP annually to achieve. This is the economist’s cold hard stare. Stern is a man who knows about the major capital investments around the world from his time at the World Bank. For instance, he will instantly know that the Bank currently has $US25 billion tied up in carbon-emitting projects. This is the same bank that in 1992 signed the Climate Convention calling for the backing of such projects to be phased out. Stern, more than most, will know the consequences of pulling the plug, as countries will have opened their books to secure these investments.
So his review takes the realpolitik view that we should aim for somewhere between 500 - 550ppm, as it is more politically achievable. His ‘one per cent plan’ is costed on this upper target. Yet this will take the climate beyond tipping point in all probability. The increase in climate temperature will be hovering around the 2.5°C range – the increase that Stern makes plain carries ‘significant risk’ of an environmental apocalypse, but less risk of economic meltdown.
You can’t blame Stern. Economic orthodoxy largely dictates that he has to reach this conclusion. Stern, like an insurer, is measuring risk. Business as usual will cost 20 per cent of annual world GDP and more, as in terms of climate change this takes us into the unknown. The 450ppm CO2 stabilisation target will cost three per cent, 550ppm, one per cent.
This is a hell of a bet against a scenario that the science says has a 63-99 per cent chance of failure; a 63-99 per cent probability of sending the climate irreversibly over the edge.
It boils down to this: we can’t ‘afford’ to carry on as we are, because the cost of letting the environment collapse will be too much. We can’t ‘afford’ the most effective and intensive action to stop this happening, because the cost to our wallets will be too much. The safest option – economically speaking – is to play a game, lasting decades or more, where we risk a 63-99 per cent chance of environmental collapse, but at a cost of only one per cent to our GDP.
Put in crude human terms, and it’s worth repeating again and again and again. If we lose this game, we lose Africa, Bangladesh, the Amazon, the Maldives and most of the Netherlands. We see agriculture collapse, water shortages and floods. Two hundred million migrants on the march from coastal areas at first rendered brackish by the onrush of the sea and then submerged. A large, angry march, exacerbated by higher temperatures and met with resistance at every turn.
Correct economic reasoning or not, this is a conclusion devoid of humanity, without conscience. Stern may have shown the economists of the Treasury that it is economically feasible to tackle climate change. But in so doing he has shown the rest of us the perversity of the economic principles that have brought us to this point.
‘The greatest and widest-ranging market failure ever seen,’ is how Stern describes it.
How do we get there?
One of the key policy changes he promotes to mitigate the looming catastrophe is that of carbon pricing, which is designed to end this cavalier economic approach and put the social and environmental impacts of business activity on the balance sheet.
If (and it’s a big if) carbon is priced at a level to make this effective, this policy could act as the catalyst to the kind of change that is required (see Nick Robins’, p22). Its impact would be evident on world GDP, realigning the values of all final goods and services produced. It could serve to break the chains of global production and supply, and open the door to local sourcing, as items produced close to the point of consumption, using non-carbon intensive methods, would benefit most from such a scheme. A strict carbon pricing regime would be a first step to relocalising the economy.
It would also naturally impact on energy production, encouraging diversified, localised, non-polluting sources of power. However, there could be an unwanted downside, and this needs to be protected against. If carbon is priced at a level to be an effective weapon against polluters, it increases the economic viability of nuclear power.
As the Dow reported in the days after Stern was released: ‘Every €5/ton increase in long-term CO2 prices increases the British Energy value target by 17 per cent.’ The world, however, does not need nuclear power to meet the energy challenges of climate change, although in the coming years we can expect its case to be made with ever-growing urgency by its supporters.
Stern’s other key initiative rests on new technologies delivering the goods in the next decade or two. He is not explicit about what these might be. They could be wind or wave power, they could be nuclear. They could be carbon scrubbers or carbon capture. They could be GM food expansion to counteract the changing climate and loss of moisture in soils, which in the UK alone is predicted to decline by 20 per cent over the next few decades. He doesn’t tell us.
These currently abstract and long-term policy initiatives, Stern says, need to be embarked on ‘urgently’, and underpinned by a programme of behaviour modifi cation, which means we have to be taxed and incentivised to become more energy-efficient (in all its forms: household, transportation, consumerism and so forth).
So we have a job on. The end of the world as we know it is nigh. We need a wartime-type effort, to be galvanised with urgency to stop this cataclysmic event occurring. But what do we get? A vague and rushed Climate Change Bill that sets targets to cut carbon emissions not to even the minimum required level of 70 per cent but 60 per cent; not on an annual basis but on a five-year basis. This is the wartime leadership of a Chamberlain when what is required is a Churchill.
It is baffling why the government response to Stern has been so muted. There is plenty in the report that could have been used to say we stand at the gates of a second industrial revolution and we should grasp this opportunity with both hands, for the good of mankind – as the following extract clearly shows:
‘There are also significant new opportunities across a wide range of industries and services. Markets for low-carbon energy products are likely to be worth at least $500bn per year by 2050, and perhaps much more. Individual companies and countries should position themselves to take advantage of these opportunities.
‘Climate-change policy can help to root out existing inefficiencies. At the company level, implementing climate policies may draw attention to money-saving opportunities. At the economy-wide level, climate-change policy may be a lever for reforming inefficient energy systems and removing distorting energy subsidies, on which governments around the world currently spend around $250bn a year.
‘Policies on climate change can also help to achieve other objectives. These cobenefits can significantly reduce the overall cost to the economy of reducing greenhouse-gas emissions. If climate policy is designed well, it can, for example, contribute to reducing ill-health and mortality from air pollution, and to preserving forests that contain a significant proportion of the world’s biodiversity.’
But instead of delivering Stern’s message with such a positive spin, the government has been timid and negative and shown a paucity of ambition.
It has left the door open for siren voices to wail about stealth taxes and say that whatever we do to effect change and reduce emissions will be negated by China in 10, 20, 60 days, depending what sector is being discussed. This is not leadership but an abdication of responsibility, tantamount – in government terminology – to ‘maladministration’. It seems that we are waiting for China to take the lead. Or India. Or Brazil. America even. Why should China and India curb their development when our political leadership is so palpably resistant to change?
Brazil is entering a period of prosperity that was unthinkable 20 years ago. Are they going to put the brakes on when we won’t? And America? There might be a chance in two years, but for now we are left clinging to the dim hope that after the thumping the Republicans took in the mid-term elections, George Bush embraces the issue of climate change as a clear and present opportunity to salvage his party’s hopes of re-election in 2008.
Carbon pricing is the one tangible policy initiative from Stern that can, if introduced in double-quick time, help to avert this problem. For it to be successful, it requires an international consensus. The imperative is to sell the message Stern has clearly given and not stand like shy schoolboys on the edge of the disco, knowing what needs to be done but being too scared to take the first step onto the dancefloor.
By November 1, two days after it was released to the press, Stern’s review had slipped off the media radar. So too had the issue of climate change. Why else would the media have practically ignored another report, released just a week after Stern’s that shows up the huge holes in the Stern report?
In ‘High Stakes’, the Institute of Public Policy Research argues that the time left for action is just about zero, and that we need cuts in greenhouse gases in the UK that achieve not a 60 per cent reduction but 84 per cent, and that the risk of catastrophe is about 80-90 per cent if we do not. Yet, it adds, there is no obvious political mechanism or programme in existence that is going to do the political and technical job.
This is desperately concerning when you look at the political calendar ahead. We have the local elections in May 2007, then a leadership election that will result in a new PM and then in reality the general election campaign begins. Who, we have to ask, is going to be big enough to keep climate change at the top of the agenda and enter the election calling for tax increases and carbon pricing?Sweden, without a whimper, has set a course to become oil-free by 2020, with attendant costs to society. Germany, without a whimper, is changing its power supply to wind-generation. These are adult countries, where the electorate is kept aware of the pressing issues of peak oil and energy security alongside climate change. Stern’s review has highlighted the fact that in the UK, as a society we have over the past two decades been rendered politically illiterate by successive governments that have found it convenient to infantilise us.
Commenting on the willingness of the British public to make the changes necessary, Blair showed once again his disconnection from both the issue and his electorate when he said: ‘British people show a real passion to play their part, whether by driving less, not leaving their TV on standby, or just buying greener products.’
Ask yourself this question: is that all you are you prepared to do? Are you willing to risk genocide in Africa, Bangladesh, Southern America and beyond, to retain your current lifestyle? Our answer is straightforward: Not in my name.
Staying silent – to your family and friends, the media and MPs – makes you a collaborator. Don’t stand idly by and let them take us to the gates of hell ■
For more information on the Stern Review, visit www.hm-treasury.gov.uk
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