Thursday, 15 January 2009

Stern Review on the Economics of Climate Change

The Stern Report (Nicholas Stern, Wikipedia & Stern Review, Wikipedia)

Its main conclusions are that one percent of global gross domestic product (GDP) per annum is required to be invested in order to avoid the worst effects of climate change, and that failure to do so could risk global GDP being up to twenty percent lower than it otherwise might be. Stern’s report suggests that climate change threatens to be the greatest and widest-ranging market failure ever seen, and it provides prescriptions including environmental taxes to minimize the economic and social disruptions. He states, "our actions over the coming few decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century."

In June 2008 Stern increased the estimate to 2% of GDP to account for faster than expected climate change.

Download Stern Report from
HM Treasury.

In this post I have reviewed the key points I've taken from the Executive Summary (4 page short pdf).

A longer 22 page Executive Summary pdf has diagrams.

  • There is still time to avoid the worst impacts of climate change, if we take strong action now.
  • the benefits of strong and early action far outweigh the economic costs of not acting.
  • if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more. In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1% of global GDP each year.
  • The investment that takes place in the next 10-20 years will have a profound effect on the climate in the second half of this century and in the next. Our actions now and over the coming decades could create risks of major disruption to economic and social activity, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century. And it will be difficult or impossible to reverse these changes. (I understand by this that if we dont take action then these will be the consequences)
  • So prompt and strong action is clearly warranted. Because climate change is a global problem, the response to it must be international.
  • Climate change could have very serious impacts on growth and development.
  • If no action is taken to reduce emissions, the concentration of greenhouse gases in the atmosphere could reach double its pre-industrial level as early as 2035, virtually committing us to a global average temperature rise of over 2°C.
  • In the longer term, there would be more than a 50% chance that the temperature rise would exceed 5°C. This rise would be very dangerous indeed; it is equivalent to the change in average temperatures from the last ice age to today. Such a radical change in the physical geography of the world must lead to major changes in the human geography – where people live and how they live their lives.
  • All countries will be affected. The most vulnerable – the poorest countries and populations – will suffer earliest and most, even though they have contributed least to the causes of climate change. The costs of extreme weather, including floods, droughts and storms, are already rising, including for rich countries.
  • Adaptation to climate change – that is, taking steps to build resilience and minimise costs – is essential. It is no longer possible to prevent the climate change that will take place over the next two to three decades, but it is still possible to protect our societies and economies from its impacts to some extent – for example, by providing better information, improved planning and more climate-resilient crops and infrastructure. Adaptation will cost tens of billions of dollars a year in developing countries alone, and will put still further pressure on already scarce resources. Adaptation efforts, particularly in developing countries, should be accelerated.
  • The costs of stabilising the climate are significant but manageable; delay would be dangerous and much more costly.
  • The risks of the worst impacts of climate change can be substantially reduced if greenhouse gas levels in the atmosphere can be stabilised between 450 and 550ppm CO2 equivalent (CO2e). The current level is 430ppm CO2e today, and it is rising at more than 2ppm each year. Stabilisation in this range would require emissions to be at least 25% below current levels by 2050, and perhaps much more.
  • Ultimately, stabilisation – at whatever level – requires that annual emissions be brought down to more than 80% below current levels.
  • This is a major challenge, but sustained long-term action can achieve it at costs that are low in comparison to the risks of inaction. Central estimates of the annual costs of achieving stabilisation between 500 and 550ppm CO2e are around 1% of global GDP, if we start to take strong action now.
  • It would already be very difficult and costly to aim to stabilise at 450ppm CO2e. If we delay, the opportunity to stabilise at 500-550ppm CO2e may slip away.
  • Action on climate change is required across all countries, and it need not cap the aspirations for growth of rich or poor countries.
  • The costs of taking action are not evenly distributed across sectors or around the world. Even if the rich world takes on responsibility for absolute cuts in emissions of 60-80% by 2050, developing countries must take significant action too. But developing countries should not be required to bear the full costs of this action alone, and they will not have to. Carbon markets in rich countries are already beginning to deliver flows of finance to support low-carbon development, including through the Clean Development Mechanism.
  • The world does not need to choose between averting climate change and promoting growth and development. Changes in energy technologies and in the structure of economies have created opportunities to decouple growth from greenhouse gas emissions. Indeed, ignoring climate change will eventually damage economic growth.
  • Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries.
  • A range of options exists to cut emissions; strong, deliberate policy action is required to motivate their take-up.
  • Emissions can be cut through increased energy efficiency, changes in demand, and through adoption of clean power, heat and transport technologies. The power sector around the world would need to be at least 60% decarbonised by 2050 for atmospheric concentrations to stabilise at or below 550ppm CO2e, and deep emissions cuts will also be required in the transport sector.
  • Even with very strong expansion of the use of renewable energy and other low carbon energy sources, fossil fuels could still make up over half of global energy supply in 2050. Coal will continue to be important in the energy mix around the world, including in fast-growing economies. Extensive carbon capture and storage will be necessary to allow the continued use of fossil fuels without damage to the atmosphere.
  • Key elements of future international frameworks 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 cooperation: Informal co-ordination as well as formal agreements can boost the effectiveness of investments in innovation around the world.
  • 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; largescale international pilot programmes to explore the best ways to do this could 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.

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