Revisiting The Stern Review (Part 2)
Last month’s blog post presented part 1 of an overview of the Stern Review which was originally published back in 2006. This month sees the conclusion of the synthesis of the review. The Stern Review is an analysis of the impact of climate change on the world economy. The contents have six parts and this post considers parts 4-6. Parts 1-3 were reviewed in Revisiting The Stern Review – Part 1
As a reminder the “The Economics of Climate Change. The Stern Review”, a 692 book, contains the following parts. The ones in bold are considered in this 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
Part four, Policy Responses for Stabilisation, considers the policy responses for mitigation including the pricing of the externalities that cause climate change – mainly carbon pricing. A price should be added by trading, regulation, taxes or regulation. This will switch trade to consider low carbon alternatives to high carbon goods. The policy response needs to be widely distributed and on a number of levels: namely global, regional and local. A core mitigation strategy is to price the greenhouse gases to reflect the damage they cause.
The lack of a creditable policy could undermine the pricing of carbon pricing. There should be well defined rules to support deep and liquid markets for emissions trading. Incentives over any given sector will be important. Characteristics of different sectors will reflect the design and choice of policy tools.
In conjunction with policies there should be a rapid acceleration in technological innovation with more research and development (R&D) and technological diffusion. Power generation, transport and energy use sectors could benefit greatly from the improvements in technology. There is an argument to support R&D and early stages of commercial product development perhaps. Some sectors will need more support – transport and energy as examples. Low-emission technology options should be brought to commercial viability. There is a strong possibility that some technological ideas will fail and there may be gains to be made from the learning.
Market imperfections will still exist, particularly for energy efficiency. Regulation, information and financing will each have a role to play. Also important is education about the nature and consequences of climate change and its solutions. Thinking about the context of housing, transport and food consumption can shape behaviour and preferences. Governments can demonstrate leadership in these areas.
Part five is entitled “The Policy Responses for Adaptation”. This part of the report highlights the understanding of the economics of adaptation. It notes that adaptation will be crucial to deal with the unavoidable impacts of climate change to which the world has already committed from previous emissions of greenhouse gases. Adaptation can mute the impacts of climate change but will not solve the problem and there are limits to what adaptation can achieve. There are limits to what adaptation can achieve. Without mitigating climate change the costs of adaptation will rapidly increase. Adaptation provides local benefits realised without long-term lags that mitigation will need. Adaptation is complex and there are constraints to be overcome. Governments have a role to play to make adaptation happen. There are gross benefits of adaptation.
Adaptation will be required in the developed world to reduce the cost of disruption caused by extremes of weather associated with climate change. The cost of making infrastructure more resilient to climate change will rise as the temperature increases. Markets and governments that respond to climate information will simulate adaptation. As an example schemes such as risk based insurance that considers climate risk will encourage better risk management. Governments have a role in provision of high-quality climate information and land use planning and performance standards. The government can apply policies for climate sensitive public goods such as natural resource and coastal protection for example. A financial safety net may be required for the poorest members of society.
In the developing world adaptation will be essential as the poorest countries will be especially hard hit by climate change. Development is a key to adaptation and will enable an investment in health care, promote economic growth, enhance resilience to disasters and improve disaster management. Focused development policies can reduce the poverty and development constraints. Adaptation should be integrated into development policy and planning at all levels. It is difficult to predict the costs but they are likely to be in the tens of billions of dollars range. Without mitigation action, the adaptation and impacts will be much larger: over the next few decades adaptation will be needed along with the ongoing mitigation measures. Globally the richer countries may have to support the developing countries.
The final section, Part 6 – International Collective Action, considers building and sustaining international collective action on climate change and the challenges of the action. It considers mitigation and adaptation which are not independent from each other. It notes that the scale of international co-operation on mitigation will determine the scale of action for adaptation.
Climate change mitigation should be considered as a provision of a global public good. Multi-lateral frameworks such as the Kyoto Protocol and the United Nations Framework Convention on Climate Change (UNFCCC) provide a foundation for further co-operation. Other partnerships such as the International Energy Agency (IEA) facilitate international action. Understanding of domestic policy goals supports further action and supports further beneficial initiatives such as those in California, China and the EU. Stronger and more coordinated action is needed to stabilise greenhouse gas concentrations in the atmosphere. Insights from game theory help to inform the design of frameworks for international collaborative action. International commitments tend to work best when there is a notion of responsible behaviour. Public awareness and support is crucial for encouraging and sustaining co-operation at the international level.
Creating a global price for carbon – a shared understanding of long-term goals to support large reductions of greenhouse gas emissions are important. It is argued that a broadly similar price of carbon would be necessary to keep down overall costs of making the reductions. It is argued that there is an urgent challenge to create a transparent and comparable cost of carbon. It needs to be an equitable distribution of effort across developed and developing countries. Historically it would make sense for developed countries to take responsibility for emissions reductions of at least 60% from 1990 levels by 2050. The Kyoto Protocol created valuable institutions to underpin emissions trading and there are possibilities to learn and improve on the approach. The private sector trading schemes are at the heart of flows of carbon finance: these can be expanded through international co-operation and new institutional arrangements. Carbon pricing should extend to international aviation and shipping.
Opportunities exist in the developing countries in particular to fulfil demand for energy and transport with low carbon solutions. There is a substantial opportunity to support the transition to a low-carbon global economy. Technology transfer to developing countries can be supported through private sector companies. Energy price and taxation reform play a role in enabling a shift to allow investments in low carbon technologies. It is argued that carbon pricing is essential to influencing low-carbon investment decisions. An incremental cost of low carbon investment in developing countries is likely to be at least $20-30 billion a year. There is a need to ensure that carbon finance continues after 2012. The reduction of tariff and non-tariff barriers for low carbon goods and services are going to assist the diffusion of low-carbon technologies.
The private sector should be a driver for innovation and diffusion of technologies. Technology co-operation enables risk and reward sharing and enables co-ordinated priorities in this area. There are many forms of research and development including knowledge sharing and co-ordination of priorities. The scale of new market growth can benefit cost reductions for new technologies. An example of this is the growth and cost reduction of solar panel production for example. Supporting development would be consistency in regulations and product standards. This can benefit energy efficiency for example. Typically international trade will benefit as well.
Reversing emissions from land-use change can be a highly cost effective way of reducing greenhouse gas emissions. This may include the creation of new forests, and enhancing the potential to store carbon in soils etc. Policies on deforestation should be shaped locally at the national level but supported through strong international community input. Rights of locals to forestry land is key for effective forest management. Preserving national forests is very important.
International support for developing countries’ adaptation efforts needs to be accelerated. Poorer developing countries are most likely to be hardest hit by climate change despite not having contributed significantly to the cause of the issue. The international community should support them in adapting to climate change. The international community can support adaptation through investing in global public goods including improved monitoring and prediction of climate change, development of new (perhaps drought resistant) crops, methods to combat land degradation and better modelling of impacts. Developed country commitments need to be honoured to support the developing countries. Strong and early mitigation has a role to play.
Overall the Stern Review concludes that the next few years will be critical in preventing the possibility of very high temperature increases. It notes that action is required now (in 2006) in order to stabilise the atmosphere in the range of 450-550 parts per million (ppm) carbon dioxide equivalent. Success will be dependent on continuity of the process of building carbon markets, international co-operation and the reduction of deforestation.
The strong and early mitigation discussed did not really taken place; it took a further nine years until the 2015 Paris agreement that means 176 countries working towards the common goal. There is a steady growth in mitigation through renewable energy investment across the world. The commitment needed to combat climate change is, however, now much more urgent than that eleven years ago. There have been some progress in this direction with economic growth beginning to become decoupled from carbon emissions.