Revisiting The Stern Review (Part 1)
This month sees part 1 of a review of the first three parts of the six part Stern Review. The review looked at the economics of climate change. The blog post will be concluded in part 2 next month which considers parts 3 to 6.
Back in 2006 Nicholas Stern, a UK Government advisor and former chief economist to the World Bank, published an analysis of the impact of climate change on the world economy. The seminal work highlighted the implications of climate change on economics and the associated policy implications.
It is now 11 years on from the publishing of “The Economics of Climate Change. The Stern Review” and the messages are even more relevant today as they were in 2006. In summary, the 692 page book considers all aspects of climate change and its potential impacts on the economy. It considered impacts on rich and poor economies, the economics of emissions reductions, components of policy on mitigation and adaptation as well as how international sustained collective action has its own challenges.
Whilst it is hard to summarise all of the book in a limited number of words, there are a number of points and considerations that should be highlighted. Here a synthesis will recall the key messages and benefits of The Stern Review in highlighting the need for action that was urgent in 2006 but is now even more urgent.
A global policy on climate change would have many benefits as societies typically dislike bearing risks or having poor people hit the hardest. There would also be a reduction in the “discount” on future generation’s welfare purely as the live later. Science and economics should be used to inform policies to slow and stop human-induced climate change.
The contents include the following parts, the first three are considered in this blog post:
- Part 1: Climate Change: Our Approach
- Part 2: Impacts of Climate Change on Growth and Development
- Part 3: The Economics Of Stabilisation
- Part 4: Policy Responses For Stabilisation
- Part 5: Policy Responses For Adaptation
- Part 6: International Collective Action
Parts 4 to 6 will be considered in a future blog post (Revisiting The Stern Review – Part 2).
In part one the scale of the environmental challenge is highlighted including the amplification of global warming (through positive feedback events) creating potentially greater risks of even higher climate change temperatures. The water cycles would intensify with more extreme droughts and floods. It is likely to reinforce existing patterns of water scarcity and abundance. Should the Greenland or West Antarctic ice shelves begin to melt then there would be an eventual rise in the global sea levels of 5-12 metres over several centuries. The Intergovernmental Panel on Climate Change (IPCC) 2001 report noted that most of the warming observed over the 50 years to 2001 was attributable to human activities. The conclusion was based upon much significant research and much debate.
The economics of climate change are resulting from an externality (here a cost that affects a party who did not choose to incur that cost) that is associated with greenhouse gas emissions. The externality is global, long-term and persistent. There are many uncertainties and risks whilst the economic impacts are pervasive. Climate change will interact with additional market failures and other economic dynamics that will lead to complex policy issues.
Part two covers how climate change will impact people’s lives, the environment and prospects for growth and development. The three aspects are important in the understanding how climate change will affect the collective human future on Earth. Global growth is likely to be affected adversely as the temperature increases. In mathematical terms the global damage function is convex;as an example if the temperature rises above 2-3 degrees Celsius the risk of damage and costs increase more steeply than if it were to rise 1-2 degress. The costs are associated with the areas of mortality, ecosystems and income. People are likely to worst affected in sub-Saharan Africa and South Asia as temperature rises affect access to water, food, health and use of the land and the environment. A two degrees rise in temperature may have the potential to:
- reduce water availability by 20-30% in some vulnerable regions (e.g. The Mediterranean and South Africa).
- reduce crop yields in tropical regions (e.g. by 5-10% in Africa)
- expose more people to diseases like malaria (40-60 million more people in Africa)
- affect up to 10 million people with coastal flooding
- have significant impacts on species extinction
- potentially begin an irreversible melt of the Greenland Ice Sheet beginning an eventual rise in sea levels that could be up to 7 metres globally
Should temperatures rise more so then there will be bigger impacts. A five degree impact is likely to affect some major global cities (e.g. New York, London and Tokyo) with consequent challenges on populations and economies.
Welfare costs of business as usual (BAU) climate change are very high and the climate change impact is likely to reduce per-capita consumption by a minimum of 5%. Modelled scenarios show, taking into account regional costs, feedback loops and weighting for value judgements that the costs may be a reduction of 20% in per capita consumption now and forever.
Part three considers the economic challenges of stabilising greenhouse gases in the atmosphere. Stabilisation of greenhouse gas concentrations will need “deep emission” cuts of at least 25% by 2050. Ultimately it will need to be to less than one fifth of today’s levels. Greenhouse gas emissions have been driven by economic growth and future emissions are likely to come from those developing countries.
The relationship between economic growth and development and carbon dioxide growth is not immutable. Examples, often from richer countries, have seen reduced responsiveness of emissions to income growth. Often there are strong and deliberate policy choices that help with the decarbonisation process. Greenhouse gas emissions have these main sources (along with percentage of total greenhouse gas emissions):
- Power generation and heat (25%)
- Land use changes – especially deforestation (18%)
- Agriculture including livestock and fertilizer usage which account for 2/3 of the 14%
- Transport (14%) – three quarters are from road transport, 1/8 from aviation
- Industry represents another 14%
- Buildings – both commercial and residential (8%)
See this useful World Resource Institute infographic which illustrates the data from the year 2005.
The cost of mitigating climate change will not be felt in a uniform manner across the world: different countries and sectors will be affected differently. If some countries are faster to respond to implement carbon reduction policies then industries could re-locate where such policies are not in place. International sectoral agreements for greenhouse gas intensive industries could ensure that competitiveness impacts for individual countries would be kept to a minimum.
There could be wider benefits from climate policies including opportunities for services and industries. Markets for low carbon energy products are likely to do very well and financial markets can benefit from financing clean energy and energy efficiency measures. Policies on climate change may benefit energy security and enhanced environmental protection.
“On the basis of current scientific understanding, it is no longer possible to prevent all risk of dangerous climate change” Stern 2006 (page 333). Estimates of costs associated with climate change or anthropogenic climatic disruption (ACD) rise exponentially with each one degree Celsius rise in global temperature. The mean expected costs, which are based upon stochastic damage function models, rise rapidly as shown below. The costs are estimates of climate change costs. The metric estimates costs in a theoretical world without climate change against a gross world product for a given increase in global mean temperature. As an example, should global temperatures rise by 1 degree from 2 Celsius to 3 Celsius then the mean damage estimate rises from 0.6% to 1.4% of gross world production. There figures are based upon a distribution curve.
|Temperature Rise (Degrees)||Mean Expected Cost||5th Percentile||95th Percentile|