The economics of climate change

It is still possible to avoid the worst risks and impacts of climate change at an affordable cost.

air pollution 88 (photo credit: )
air pollution 88
(photo credit: )
Last summer the British Chancellor of the Exchequer, Gordon Brown, asked me to examine the economics of climate change, basing the analysis on sound science and the latest economic literature. The "Stern Review of the Economics of Climate Change," which reported last month to Prime Minister Tony Blair and the Chancellor, accepts the overwhelming scientific evidence that climate change is a man-made, global threat to the sustainability of life on earth. But our research indicates that it is still possible to avoid the worst risks and impacts of climate change at an affordable cost, if well-designed and coordinated action at a national and global level is taken forward as a matter of urgency. The annual flow of carbon dioxide and other greenhouse gases that warm Earth's atmosphere has accelerated ever since coal, then oil and gas too, began to fuel the industrial revolution which has brought better lives to so many. The billions of tons of carbon dioxide and other greenhouse gases still accumulating in the earth's fragile, protective atmosphere have already raised concentrations to around 430ppm (parts per million) of carbon dioxide equivalent (CO2e), compared to 280ppm before the industrial revolution. Human activities are pouring 45 billion tons of greenhouse gases (in CO2e) into the atmosphere a year, and rising. Earth's intricate ecosystems currently absorb around half, but the rest is retained in the atmosphere, pushing the accumulated stock of gases higher every year. Our research indicates that global efforts should concentrate on limiting the ultimate level of greenhouse gases in the atmosphere to between 450 and 550ppm. This is achievable, economically feasible, and will significantly reduce the risk of extreme temperature changes. Such a goal requires us to reduce the annual flow of emissions by at least 25% from today's levels by 2050, and to keep cutting until emissions eventually fall to a level at least 80 per cent lower than now, which would allow stabilization. ECONOMISTS describe human-induced climate change as an "externality" and the climate as a "public good." Those who produce greenhouse gases as they generate electricity, power factories, flare off gases, cut down forests, fly in planes or drive cars do not have to pay for the damage caused by their emissions. Analysis identifies three elements of policy required for an effective global response. The first is carbon pricing, through tax, trading or regulation, so that people pay the full social cost of their actions. The second is policy to support innovation and deployment of low carbon technologies. The third is removal of barriers to energy efficiency and measures to inform, educate and persuade. Policies should tackle non-energy emissions as well, one third of the global total. Action to avoid further deforestation should be an urgent priority. Clear policy signals, credible over the medium to long term, will help motivate the private investment which will drive down emissions. As understanding builds, people will increasingly demand a strong response from governments. Public discussion is itself a crucial ingredient of policy. Effective, action to curb emissions could keep the cost of mitigation to around one per cent of global GDP every year. Crucially, on this basis, the world economy would continue to grow while the transition to a low carbon economy will open up exciting business opportunities, by raising demand for new products and financial services worth hundreds of billions a year. Business as usual is not an option. Attempts to continue along the current unsustainable pathway will increasingly be thwarted as melting ice-caps, higher temperatures, heavier storms, longer droughts, more frequent floods and rising sea levels exert an ever heavier toll of wellbeing and lives. Ignoring the problem will undermine our standard of living, and eventually harm economic growth. Unabated climate change risks raising average global temperatures by over five degrees - equivalent to the difference between now and the last Ice Age. This would take humankind into uncharted territory. The higher the average temperature, the greater the risk of irreversible ecological changes and amplifying destructive impacts. Such changes would transform the physical geography of the planet, as well as the human geography - how and where we live our lives. ALONGSIDE mitigation to reduce emissions, we also have to encourage adaptation, or action to limit the damage caused by the climate change already built into the global ecosystem by past emissions. Eventually the world will run out of the carbon-based fuels that cause the problem. If we continue to use them on a business as usual basis, however, the world will be irretrievably damaged well before they are exhausted. For this reason, the rapid development of carbon capture and storage technology is essential to reconcile the continued use of fossil fuels, particularly coal, with climate change objectives. Coping with climate change also poses important questions about equity and how to work together internationally. Historically the bulk of accumulated emissions have come from the pioneers of the industrial revolution - essentially Europe and North America. But their demand for energy is now, on average, relatively slow-growing. Tomorrow's high emitters are the fast-growing and highly populated developing countries, such as China and India. Ambitious targets will drive the new markets which will channel financial flows from the private sector to the large-scale investment needed for low-carbon energy in these countries. The additional costs to developing countries of adapting to climate change makes it more urgent than ever for developed countries to honor their commitments - made in Monterrey in 2002, and strengthened at the G8 Gleneagles meeting in 2005 - to double aid flows by 2010. If we act now, and work internationally, we can reduce the risks drastically at modest cost. But if we delay just 10 or 20 years, the costs will be much higher, and the risks much greater. With strong and urgent action, governments, businesses and individuals, working together, can safeguard our future growth and prosperity. We must not waste this opportunity. Our childrens' future depends on what we decide now. The writer is head of the British government's Economic Service, and a former chief economist of the World Bank.