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Managing Climate Change. Climate, Growth and Equitable Development

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Nicholas Stern

Managing Climate Change. Climate, Growth and Equitable Development

Nicholas Stern

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1Monsieur l’Administrateur,
Chers collègues, chers amis,
Mesdames et Messieurs,

2The world, the planet, is at a crossroads. If we fail to act strongly now to reduce emissions of greenhouse gases, if we continue with the pattern of high-carbon growth of the last century, we incur grave risks of a catastrophic destruction of the physical geography of the planet. The implications would likely be the re-drawing of where people could live and how they could live their lives: thus we risk movements of population on a massive scale, with the probable consequence of severe, extended and global conflict. Inaction is the most pernicious of policies. But it is all too easy a path in a world dominated by the politics of the short term, narrow self-interest and a suspicion of others.

3There is another, and very attractive route. If we act together as a world, strongly, collaboratively, creatively, justly, we can create a new era of low-carbon growth and development. It will be more energy-efficient, more energy-secure, more equitable, safer, quieter, cleaner and more bio-diverse. We can create a new definition of, criteria for, and approach to development that will be far more attractive than what has gone before. Further, the transition to low-carbon growth could be the most dynamic and innovative period in world history. On the other hand, high-carbon growth will kill itself: first on high prices for hydro-carbons and second, and more fundamentally, on the very hostile physical environment it would create.

4The choice is ours and it is urgent. We can identify the scale of action necessary – the topic of the next section –, the areas of action and the necessary technologies. We understand the basic economic policies to encourage the reduction of emissions – the topic of section 2. The challenge now is creating the political will. We saw in Copenhagen in December 2009 just how difficult that can be. We will not create, or deserve to create, the necessary political will and collaboration, unless we recognise that there are two defining problems of this century: managing climate change and overcoming world poverty. We will succeed or fail on these two together. Creating an international agreement will be the topic of section 3. The sequence of these sections reflects the structure of the course.

Scale and Risks

5Analysis and the making of policy on climate change must start with an examination of the consequences of various forms of action and indeed of inaction. The problem starts with the actions of people in their daily lives and their consequences influence directly the capability of people to live their lives. The chain of causation is the following. Step 1: through their activities, in production and consumption, people cause the emissions of greenhouse gases. The emissions have, for much of the last century or more, been above the level that the planet can absorb via “the carbon cycle”. Step 2: the flows therefore result in an increase in the stock or concentrations of greenhouse gases in the atmosphere. Step 3: the increased concentrations of greenhouse gases in the atmosphere imply that more heat radiating from the earth is trapped in the atmosphere and temperature rises. The magnitude of the increase is shaped by the “climate sensitivity”. This is global warming. Step 4: global warming causes climate change. This manifests itself in large measure through water in some shape or form: storms and hurricanes; floods and inundations; droughts and desertification; sea-level rise and changing flows and courses of rivers. Step 5: these climate changes have an impact on peoples’ lives and livelihoods to which they will have to adapt in some way or another. In many cases, the impacts will re-define where people can live and thus adaptation, for many, will involve dislocation and migration.

6The basics of this logic were understood by the end of the 19th century. In the 1820s, Joseph Fourier, the great French mathematician and physicist, calculated heat balances for the planet and realised, because the actual temperature of the planet was much higher than the equilibrium temperature, that something was trapping heat in the atmosphere. The British physicist John Tyndall identified, in 1861, the types of gases responsible for the effect and the Swedish chemist, Svante Arrhenius, provided at the end of the 19th century the first calculations of the possible effects of doubling the concentration of greenhouse gases in the atmosphere. The physics of the effect are essentially that a gas can vibrate in a way which impedes the passage of infra-red radiation. The trapping of energy raises temperatures and results in climate change. Thus the basic physics of the story are well- and long-established.

7There are, however, major uncertainties in all of the five steps in the logic of human-generated climate change. Thus we cannot predict with certainty how large the effects will be. In recent times, the last two decades, the science and modelling have advanced to the point where it is now possible to place probabilities on some of the key effects, for example, the relationship between the concentrations of greenhouse gases and the likely temperature increases.

8We start in a difficult place, with concentrations of greenhouse gases (GHGs) of around 435 parts per million (ppm) of carbon dioxide equivalent (CO2e). We have added more than 150 ppm of CO2e since the mid-19th century –our usual benchmark– with the majority coming in the last 60 years of rapid high-carbon growth. We are adding at a rate of around 2.5 ppm a year and that rate is rising. Hence if we continue under BAU until the end of this century we would likely see concentration levels rise to around 750 ppm CO2e or more. The eventual (probably early in the next century) temperature increase would, with probability around 50%, be above 5oC relative to the mid-19th century. The planet has not witnessed such temperatures for more than 30 million years. Homo sapiens, who have been around for 200,000 years at most, have no experience of temperatures anything like this magnitude. Such an increase would likely result in massive movements of population, probably hundreds of millions. 3 or 4oC would also be unprecedented for humans and is likely to cause very severe and, for many areas, catastrophic effects. The story is one of risk and how much risk it is sensible to tolerate, given the options, and their cost, that are available to us.

9How far can risk be reduced? Is it possible to control temperatures to no more than a 2oC increase, the level many scientists, including the Inter-Governmental Panel on Climate Change (IPCC), have argued should be regarded as “dangerous”. Above 2oC the probability of “tipping points” starts to rise sharply. Examples of “tipping points” include the collapse of the Amazon forest, implying the loss of a major sink, or the thawing of the permafrost in Siberia and elsewhere, resulting in the emissions of massive quantities of methane, a potent greenhouse gas. Current emissions are now around 47 billion tonnes of CO2e per annum. There are a number of emissions paths, starting at current levels, that would give around a 50-50 chance of holding below 2oC (for short “2oC”). Crudely speaking, what matters is the cumulative emissions – it is concentrations that matter. Thus, paths which peak at higher levels or later will have to fall much more rapidly later than paths which peak at lower levels and sooner.

10The most plausible emissions path: emissions around 44 billion tonnes in 2020 and well below 35 in 2030, and well below 20 in 2050, means cutting totals for the world by at least 50%, 1990-2050 from the 1990 levels of around 40. The path would prevent concentrations from rising above 500 ppm. Then over a long period concentrations would have to move towards 450 or lower.

11We can see from this analysis the explanation of why, if 2oC is to be achieved, the world has to peak within the next ten years. Delay is dangerous and costly. It is dangerous because it undermines our chances of achieving 2oC and it is costly because we would have to take action later that would be very costly if we tried to “catch up”.

12The figures for 2050 carry strong lessons on where we must be headed in the medium to long-term. With around 9 billion people likely in the world in 2050, having well below 20 billion tonnes of emissions requires no more than 2 tonnes per person. Currently Europe is around 10-12 tonnes and the USA well over 20. There will not be many people below average emissions so there cannot be many above average. This explains why Europe (which must move from 10-12 tonnes per capita to around 2) must cut by at least 80%.

13This analysis explains therefore the commonly-quoted percentage levels for the cuts which are necessary for the world as a whole and for the rich countries. I prefer, however, to talk in terms of total flows, rather than percentages. With percentages it is all too attractive to fiddle with base years in order to provide “more room”. The physics of the problem works in terms of overall emissions.

14The top five emitters by country/region (China, USA, EU, Indonesia and Brazil) are responsible for more than 60% of the current emissions. This small group of key players must be centrally involved if emissions reductions are to take place on the scale required. For example, China’s emissions are already around 6 tonnes per capita and a country of that size must get down to around 2 tonnes per capita by 2050 if the overall world constraint is to be achieved. This will surely require a peaking of emissions in China within 10, or at most, 15 years.

15The arguments already described show the scale and intensity of some of the ethical challenges; issues of equity between communities and over time, and of responsibilities of different generations and countries. Let us turn briefly to some of these ethical issues.

16In much of formal economics discussion of ethics focuses on equity, within and across generations. A major mistake, committed by all-too-many economists, is trying to import observed market interest rates or rates of return directly, to the decisions affecting climate change. Such rates generally cover the near and medium-term, capital markets are very thin for more than 2 or 3 decades. Further, they are generally relevant for only small changes around a given near to medium-term path. When long-term future income levels depend in such a major way on current decisions, that is a hugely misleading analytical error; future generations may be much worse off than we are, undermining the case for strong discount rates, since additional resources have more value for poor people. I shall discuss in more detail in Lecture 2. There are, in fact, many more errors involved in the attempt to import, as I shall explain, but the one I have described is central to most of them. The first day of the symposium “Managing climate change” that will be organised with the chair (“Economic Theory and Social Organisation”) of my friend and colleague at the Collège de France, Roger Guesnerie, will be devoted to long-term discounting. The most distinguished scholars will discuss all the issues of the debate. And in the lectures I shall also explain that the ethical issues, including responsibility and sustainability, are broader and deeper than simply the distribution of income and wealth, notwithstanding the fundamental importance of those issues.

17The scale and nature of the risks and ethical issues they raise imply, in my view, that we should consider the problem as one of risk management rather than narrow cost-benefit analysis. The valuation of effects which are potentially immense, global, cover all aspects of life, and are very uncertain, strain the credibility of a formal cost-benefit analysis.

18Let me now comment briefly on the position of those who would deny the need for action. Broadly speaking, one can deny that the science tells us that there are serious risks; or one can argue that if change does come, we can adapt; or that if the problem occurs we can geo-engineer it away; or that the future is for others and matters little to us. The first, as I have argued, is absurd given the evidence. The second and third must be seen as reckless given the magnitude of the risks I have described. The fourth would be regarded by most of us as unethical.

19The science is 19th century well-tested science. The physics is not complex at its heart. The calibration of risks can be more complex and model-intensive but the recognition of the risks appeals only to the basics of the science. As risk management, the issues are surely simple: if we act as if the science is right but risks turn out to be less than anticipated, we will have discovered many useful technologies, have a cleaner, more energy-secure world and will have protected our forests. If we act as if the science is wrong, we will have put ourselves in an extremely dangerous position from which we are unlikely to be able to extricate ourselves.

20To rely on adaptation or geo-engineering is to fail to recognise the magnitude of the risk and the potential, and the rewards to emissions reductions. We will indeed have to adapt, but the potential scale of impacts is likely to be such that adaptation is limited. And we should research geo-engineering. But it would be reckless to rely on this to come up with answers that can reduce risks by acceptable magnitudes.

21Deniers have the right to speak and argue. But they do not have the right to have unsound and confused arguments, viewed as wise and reasonable.

Policy and Opportunity

22Policy must start with recognising that the emissions of GHGs constitute what we economists call an externality or market failure. Specifically, the emissions of GHGs damages others but emitters do not, unless policy intervenes, see the costs imposed on others in the market prices. They would expect to pay for labour, energy, raw materials, capital and so on used in production or consumption, but without policy on GHGs, market prices give the wrong signals. Because of its scale and involvement of all of us, I have called this the greatest market failure the world has seen. Correcting this market failure requires a price for greenhouse gases. This could be a carbon tax or a cap-and-trade scheme.

23Policy, however, must go beyond this one market failure, fundamental though that is. There are other market failures. Technology will be key to a low-carbon future. Ideas are, in general a positive externality and policy should encourage them. This area is of such importance and urgency that policy on technology should be stronger here than elsewhere, with direct support for research and feed-in tariffs for key renewables.

24A third policy area, after carbon prices and technology, concerns regulation. The emissions from buildings is an important example. Builders and property developers often argue that it is difficult to recoup investments in energy efficiency or low-carbon innovations via rent, or reasons associated with a number of market failures. Also the refurbishment of older building may be much cheaper if done neighbourhood-by-neighbourhood rather than house-by-house. Thus standards and regulation for new buildings should be important elements for policy. Similar arguments apply to private and public transport.

25Finally, we should note that policy also concerns perceptions and attitudes. We learned that mixing alcohol and driving is dangerous and most of us would not feel it right to do so. Thus we desist because we see it as wrong and irresponsible. There are, of course, sanctions, i.e., incentives not to do this, but their effect is in addition to our own views of responsibility. Economics has, I think, paid too little attention to the role of public discussion of responsibility in the making of policy. And we should note that this is not a new idea in the explicit analysis of public policy, going back at least to the middle of the 19th century and John Stuart Mill.

26The policies we have described are not simply about limiting the costs and burdens of reducing emissions. Their purpose is to create the incentives that could spark a creative and dynamic process of radical change. Economic historians have shown both how some of our most important bursts of growth have been driven by investments embodying technical advance, such as the railways, electricity and information technology, and the crucial role of finance in allowing these to move forward. The green energy revolution has already begun. The combination of the new goods and equipment on the one hand and the finance on the other are illustrated all the way from very small-scale solar lanterns in villages in India to very large railway and power infrastructure.

27The fertility of ideas in this area is quite remarkable. Regarding energy efficiency for instance, insulation technology is changing rapidly, partly using technology developed in other areas such as aerospace. The capital cost of solar power is crashing down as new materials are exploited. New varieties of crops and equipment are being developed for low-till agriculture. The examples are legion and are increasing by the day. Long-term investors are realising that low-carbon growth is the growth of the future. The potential of entrepreneurship and the markets is immense if national and international policy is strong.

28A further and vital area for policy, and this moves us towards international issues, is stopping deforestation and degradation of forests and encouraging reforestation. The growth of trees captures carbon dioxide. There is a positive externality. Standing trees have value to us all and cutting and burning them damages us all. Thus there is a responsibility of and gain to us all to act to protect forests and to discourage deforestation.

29There will be a number of elements to deforestation policy, from influencing factors that determine the demand for land and wood products, to legal and governance structures and pricing for the protection and planting of forests. More generally, policies for development are required that empower and protect the rights and livelihoods of those who depend on forests and provide alternative activities for those who may otherwise have incentives to cut them down. This is an important example showing how policies on climate change and for development are inextricably intertwined.

30Policy must cover much more than emissions reductions; adaptation to the climate change that is occurring, and that is likely to occur, will be of great importance. It makes little sense to plan our building codes, thermostatic controls and standards, flood protection, transport, irrigation schemes and agriculture as if past patterns of weather, flooding, droughts and costal erosion will be similar in the future to those in the past, when the evidence strongly suggests otherwise.

31Clearly, good information and anticipation will be vital to adaptation. We have to work to analyse and reappraise different kinds of risks. Current climate change modelling has progressed quite far in terms of possible overall and regional outcomes, but more precise local modelling and forecasting presents difficult challenges. The global structures and the local conditions are likely to interact in complex ways which put strong demands on information and modelling capabilities. And in some of the most sensitive and important areas, such as the Himalayas, a water source for billions, Africa, especially vulnerable and with a population soon to be around a billion, and the Amazon forests, key to the whole global system, observation and information are sparse.

32Policies and arguments concerning responsibilities which relate to mitigation, development and adaptation are distinct in many ways, but overlap in many others, building design and irrigation are important examples. And the actions which policies try to encourage will similarly have their distinctiveness and overlaps. The inter-connections and overlaps are, however, sufficiently strong that development policies and planning, and bilateral and multilateral institutions, should take great care to avoid structures which separate support for mitigation, for development, and for adaptation. In particular, any new funding institutions, or new windows in existing institutions, should be designed so that different sources of funding can be easily combined.

33There is no doubt that the problems of controlling emissions will be much more difficult with a population predicted to be around 9 billion in 2050. I am assuming (hopefully) that no sensible person would want to advocate increasing death rates. Studies of demography have pointed to the main influences on birth rates with some of the key determinants being family and individual incomes, opportunities for women in the labour force, education for women and girls, rights and status of women, access to reproductive healthcare, infant mortality rates. These are directly related to, or constitute, important development objectives and policies in their own right. That they will also influence climate change adds further to arguments in their support which were already very powerful.

34Looking back I think that the risks now look more worrying than I envisaged at the time we were working on the Stern Review four years ago. Emissions have been rising faster than we assumed, the absorptive capacity of the planet seems lower and some of the effects are coming through more quickly. I would now think that the stabilisation range suggested in the Review of 450-550 ppm CO2e should be changed to 450-500. That might increase a cost estimate for mitigation from 1% to 2% (approximately) of GDP p.a. for the next few decades. On the other hand, technological progress is moving so rapidly those costs may turn out to be much lower and we may see strong dynamic and other benefits from the new growth path. This reinforces the conclusion of the Stern Review: the cost of inaction is much greater than the cost of action.

Towards a Global Agreement

35This brings us to the story of Copenhagen in December 2009 and the creation of an international agreement. Let us begin by asking what an international agreement should look like on the basis of: the risks identified by the science; the technologies present and future; the likely circumstances, future, present and past, of different countries and communities; some basic criteria; and the economics.

36A global deal should be effective (on the scale required), efficient (keeping costs down), and equitable (taking into account different circumstances, as I argued earlier in this lecture). Our earlier analysis has pointed to most of the key elements of such a deal. Let me assemble them in a simple way.

37First, we must, as a world, commit to an emissions path consistent with the goal of a 50-50 chance of holding temperature increases to 2oC. This means a path of emissions which is around 44 billion tonnes CO2e p.a. by 2020, and thus world emissions peaking before then, and emissions well below 35 and 20 in 2030 and 2050. Rich countries should aim to cut actual emissions by at least 80% 1990 to 2050, and there should be strong interim targets.

38Second, developing countries should now create strong climate change action plans, including indicative targets for emissions and programmes for adaptation. These should, taken together with rich country planned paths, be consistent with the aggregate constraints for the path of world emissions from 2010-2050. This implies that emissions per capita in the developing as well as in the developed world should not exceed 2 tonnes by 2050.

39Third, the arrangements for international emissions trading should be reformed and expanded. Whilst developing countries do not have binding constraints on emissions, a “trading scheme”, such as the Clean Development Mechanism (CDM) is likely to be necessary, but its reform is urgent if trading is to move to the scale likely to be necessary. Looking further forward, the allocation of permits for global two-sided trading will raise strong equity issues: these permits are major financial assets.

40Fourth, there should be a strong programme to halt deforestation and encourage reforestation. Strong interim targets should be adopted, for example to halve deforestation within 5 or 10 years.

41Fifth, we must have a global programme on technology. Key elements should be first, co-ordination of standards and sharing technologies, and second, strong public funding for the development and deployment of new technologies. Part of investment in R&D should go to the investigation of risks associated with alternative energies. Most of them, whether they be nuclear, biofuels, wind, or solar, raise environmental and other development issues that should be examined carefully.

42Sixth, we have adaptation. UNDP calculations suggest that the extra costs to meet the Millennium Development Goals (and the successors extrapolated from 2015) are likely to approach $100 billion p.a. by 2020.

43These are the basic six elements of an effective, efficient and equitable global deal. How do outcomes in Copenhagen in December 2009 compare with this description and where do we go from here? The 15th meeting of the conference of the United Nations Framework Convention on Climate Change (COP15 of the UNFCCC) was the deadline, agreed at COP13 in Bali, December 2007, for agreeing arrangements to follow the Kyoto Protocol (agreed at COP5 in 1997), which covers the period to 2012. The proceedings at Copenhagen were somewhat chaotic, but heads of government from more than 100 countries were there in the final days. Decisions require unanimity of the 192 countries, which is extremely difficult where strong action is required. In the end a “Copenhagen Accord” was drawn up by five countries, USA, China, India, Brazil, South Africa, and it was “noted” by the Convention. It does, however, have the positive support of many countries.

44The Copenhagen Accord has just 12 paragraphs. The key elements are: (i) a 2oC target, with global and national emissions peaking as soon as possible; (ii) binding commitments by developed countries and mitigation action plans by developing countries to be submitted by 31 January 2010 (and many were); (iii) the immediate establishment of mechanisms to help finance reduced emissions from deforestation and forest degradation (“REDD+”); (iv) shorter-term finance from developed countries of $10 billion p.a. for 2010-2012, and mobilising $100 billion p.a. by 2020, with a High-Level Panel to examine sources of revenue, including new sources, with some of the resources flowing through a Copenhagen Green Climate Fund.

45All of these elements are of real value and consistent with the principles and actions I articulated. It was also valuable on the way to Copenhagen that, for the first time, key countries set out actions and targets for reductions and emissions. Also on the positive side was that the USA and China for the first time worked together to try to shape an agreement.

46There were, however, major disappointments. The participants were unable to agree or recognise the overall global reductions that would be consistent with 2oC, and which I described above. And there is nothing that would lead us to expect that when all individual country commitments are submitted that the totals for expected commitments would be consistent with levels necessary for 2oC. Further, whilst only a “political agreement” was expected, the form in which it arose (an Accord which was “noted”) involves weaker individual country commitments than might have been hoped, even from a “political agreement”.

47On balance, I would judge that whilst it is disappointing, it could have been much worse. There is a platform on which to build; perhaps we have to see Copenhagen as an “event” beginning in December 2009 and stretching to COP16 in Mexico at the end of 2010. On 2oC, on finance, on deforestation, on monitoring and reporting of emissions, there are practical avenues to follow. I will set out ways forward in my final lectures.

48Let us conclude, however, by asking about lessons for international collaboration. A sound scientific base has been essential, it has been established, and it has been key to progress. There are many uncertainties and more work to do but it is clear that the risks are very large. The sense of urgency it brings has enabled countries with difficult relationships to begin a genuinely serious dialogue on how to work practically together to manage the dangers. Analytical work on policy and a recognition of the importance of working together on technology and deforestation have also been major advances. There are, however, deep senses of injustice from the developing world, which are not only understandable but also a political reality. There is a double injustice in that rich countries are responsible for more than 60% of current concentrations in the atmosphere, yet poor countries will be hit earliest and hardest by the effects of climate change. Practical measures on strong targets for rich countries, and financial and technological support will be essential.

49The power of the example will be crucial. Some countries who embrace the argument early, such as Korea, some of the Scandinavian countries, and some parts of the developing world, such as Costa Rica, Guyana and Ethiopia are likely to demonstrate what can be done. But the developing world will expect strong progress in Europe generally, Japan and the USA if they are to find the low-carbon arguments convincing. And we have little time.

50Let us hope that the arguments of those who see low-carbon growth as exciting and dynamic will quickly come to broad recognition. This is the growth theory of the 21st century

51We must, however, do more than win intellectual arguments. We must also show as a world a new spirit of common humanity and interests. The world is more than ever facing problems which can be handled only on a global scale, and climate change, which is existential, is the most important. We require the greatest collaboration the world has ever seen.

52We will need new institutions. Indeed, I would argue that if John Maynard Keynes and Harry Dexter White were conducting a Bretton Woods Conference now instead of in 1944, they would have had three different institutions instead of World Bank, IMF, and WTO. We surely do need institutions for finance and for trade, but we now need one for the environment, a World Environmental Organisation.

53We are, however, at an intellectual gathering and must consider our own roles as academics and policy advisors. Our own responsibilities and opportunities have never been greater. We have to look ahead and anticipate. We cannot wait for bitter experience, as with two world wars and the great depression, that motivated Bretton Woods. Natural selection and experiments can reveal mistakes and ways forward when cities or regions follow paths which lead to destruction. People can migrate from a localised area of devastation or they may be able to rebuild. We have only one planet and we cannot wait for the severest impacts of climate change to show themselves before finally realising we have to act. It will be too late.

54Now is the time for reasoned argument and discussion involving all intellectual disciplines and we need to be reaching across to our colleagues across the world. This is the ultimate inter-disciplinary subject and the communication of the arguments and understanding is crucial to action. That is why it is such an honour for me to be delivering this inaugural lecture here at the Collège de France, one of the most pre-eminent and distinguished academic institutions of the world.

55Thank you.

© Collège de France, 2010

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