December 20, 2006

The Stern Review on the Economics of Climate Change

The Stern Review on the Economics of Climate Change is a 700 page report on the effect of climate change on the world economy written by Sir Nicholas Stern for the government of the UK. Sir Nicholas is an economist.
The main conclusion is that an investment of one percent of global GDP is required to prevent a recession, caused by climate change, that could be worth up to 20% of global GDP. The report says that climate change could cause the greatest market failure ever seen, including major disruption to the economy and social activity later in this century, on a scale similar to that associated with great wars and the great depression. British Prime Minister Tony Blair stated that the review demonstrated that scientific evidence of global warming was "overwhelming" and its consequences "disastrous" if the world failed to act.
Brendan Barber, General Secretary of the Trades Union Congress, was optimistic about the opportunities for industry to meet demands created by investment in technology to combat climate change. The Prince of Wales’ Corporate Leaders Group on Climate Change shared this hope and James Smith the Chairman of Shell UK would like to obtain 'first mover advantage' in 'massive new global markets'. Economist William Nordhaus criticised the report's assumption of a near-zero discount rate, wheras Professor Bill McGuire says that Stern may have underestimated the effects of global warming. Ruth Lea of the Centre for Policy Studies writes that the Review was designed to cloak the motives of a government that wanted some moral justification for increasing taxation on fuels. Jerry Taylor of the Cato Institute writes, “Stern’s investment advice makes sense only if you think that warming will hammer GDP by 10% a year. You don’t gain much at all from emission cuts, however, if you think GDP will only drop by 5% a year if we do nothing. And if you think warming will only cost the global economy 2% of GDP every year, [...] then Stern’s investment advice is lunacy.”
Economists seem to believe that there is a big box called the economy with a couple of little arrows representing exchanges with the environment. For example the environment provides inputs of fish and timber that can be obtained at a certain price. As I see it the economy is a tiny subset of the environment. Global environmental catastrophe, which is in the cards, implies economic disaster. If you think the phrase 'global environmental catastrophe' is alarmist or knee jerk, consider what life will be like when the Arctic ice cap melts. Sure the Northwest Passage will be open but perhaps the least of the problems will be the loss of polar bears, the traditional Inuit lifestyle and snow crabs. If there is no ice there will be profound impacts on the environment. Right now the ice cap reflects sunlight which open ocean would absorb, accelerating climate change. The circulation of the world's oceans, driven by deep water formation in the Arctic, would change, as would global weather patterns. Consider what life will be like if the oceans rise by 20 feet. I have a hard enough time giving up a white Christmas, and that is only the start.
We receive an enormous quantity of services from the environment for free. What is the worth of clean air and wilderness? I like the idea of the white snows of Kilimanjaro and Mt. Fuji, and Glacier National Park, but all of these will be lost in the coming decades. I like the idea of canoeing through the wilderness, but the wilderness we know will be destroyed by climate change.
A frequent critique of doing something is the cost-benefit analysis given by Bj?rn Lomborg, found his book The Skeptical Environmentalist and also in a recent op-ed piece in The Wall Street Journal. He does not dispute anthropogenic climate change, but says that the economic costs of avoiding CO2 emissions are so high and the benefits to the climate so small that it is not worth the effort. One lesson from the CFC/ozone depletion issue is that technological alternatives can sometimes be cheaper than the status quo technology they replace. There is significant industrial inertia, but once people are convinced change is inevitable it is relatively easy to achieve. When was the last time you missed using CFCs? We still have aerosol cans (many use alternative hydrocarbon propellents) and refrigerators and plastic foam, no problem. In my own life, commuting by train uses 1/100th of the carbon that driving would, plus it gives me time to work and write my blog. The key to reducing CO2 emissions is to be smart. Denmark gets 20% of its electricity from wind power, and Sweden gets a similar amount from hydroelectric power. Second, we have Lomborg's argument that limiting CO2 emissions is not worth the effort. The lifetime of CO2 in the environment is about 100 years which means that will have elevated CO2 concentrations and climate change throughout the 21st century even if all CO2 emissions were stopped tomorrow, simply because of the CO2 released by our parents, grandparents and great grand folks. The argument is, 'Its too late!' But you could also say that each additional ton of CO2 is going to be affecting the climate for another 100 years. Seen from this point of view, our choice today is between disasterous climate change if we do nothing and bad climate change if we act. Disasterous means large scale ecological problems whereas bad means climate change on a scale and at a rate not previously seen. There is a big difference between climate change anno 2100 under the IPCC's worst-case scenario (temperature increase on average of 5 C = 9 F, much more at the poles) vs. the best case scenario (2 C = 3.6 F). What makes the difference is how we decide to act.


At December 22, 2006 5:37 AM , Anonymous Tim said...

good essay. My conciousness of this has been on the rise lately. I think the reason is education. Papers from Stern and others as well as carbon exchange programs all help. I'm changing habits, riding my bike everywhere. but it's mainly for my own peace of mind. The semi that roars by me while I'm pedalling has just made up for all the green commuting I've done all year.

Hopelessness can have the opposite effect on my habits. Several times over the past 20 years, I've decided that it's pointless and gone off to well, pointedly indulge in carbon, I guess. But If I or we see everyone else stopping and becoming concerned, well, that sways a man.

So when it comes to changing people's behavior, my vote is for constant educational reminders and for "heartening positive behavior happenings". Seriously. The sight of one guy riding his bike to work can keep me going for weeks.


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