The Stern review on the economics of climate change irrevocably altered the climate debate when it came out in October 2006. For the first time, environmentalists who had shouted loudly about the dangers of climate change were joined by an apparently hard-headed economist, commissioned by a government and with a team of 15 economic analysts and modellers at his command.
Nicholas Stern, a former World Bank chief economist, was working at the treasury when he was asked to look at the economics of climate change. The conclusion of his 700-page report—that the world must act quickly or face devastating consequences—was not new, but the language it used was. Stern presented an economic argument that rapid and affordable action now would prevent huge losses later. That in turn made it easier for politicians and business leaders to back action on climate change.
While environmentalists welcomed the review, more than a few economists did not. Richard Tol, professor at the Economic and Social Research Institute in Dublin, claimed that it cherry-picked the most pessimistic studies. He presented the familiar economist's reaction: "Stern assumes that society will never get used to higher but stable temperatures, changed rainfall patterns or higher sea levels. This is a rather dim view of human ingenuity."
William Nordhaus, a Yale professor of economics, rejected Stern's view that urgent action was needed. He focused on one part of the review—its cost-benefit analysis—and the value Stern selected for the "discount rate," the rate at which future consumption ought to be discounted to make it equivalent in value to consumption today when people are not as rich. Nordhaus's attacks are repeated in his new book, A Question of Balance (Yale). An adulatory review of the book by physicist Freeman Dyson in the New York Review of Books claims that if the world answered the Stern call for "draconian" cuts in emissions, "several generations of Chinese citizens would be impoverished to make their descendants only slightly richer." Dyson quotes Nordhaus's view of Stern as taking "the lofty vantage point of the world social planner… stoking the dying embers of the British empire."
Then there are the critics who believe the threat from climate change has been exaggerated. Nigel Lawson has written (Prospect online, November 2005) that the intergovernmental panel on climate change (IPCC) is determined to "suppress or ignore dissenting views." In a new book, An Appeal to Reason (Duckworth), Lawson scorns the "lamentable," "alarmist," "politically inspired" Stern review.
Stern has moved on since his review. He became Lord Stern of Brentford last year. No longer in government, he is a professor at the LSE and recently became chairman of the new Grantham Research Institute on Climate Change and the Environment, a result of a grant from philanthropist Jeremy Grantham, the biggest the LSE has ever received.
The climate change world has moved on too. Discussions at Bali in December 2007 produced a consensus to try for a major agreement at a summit in Copenhagen in December 2009. By then, a new US president will have been in office for less than a year. The clock is ticking, but Stern believes a deal is possible. For the last couple of months he has been talking to the Danish, Indian and Australian prime ministers, as well as serving on committees around Europe and advising the British government. He is going out to the Democratic convention in Denver in August, and expects to testify before the US congress for the second time. He recently published "Key Elements of a Global Deal on Climate Change," perhaps the first paper to try to map out the overall structure of a possible world deal. Stern has the ear of many powerful people, but, as he explains, he now represents no one.
Despite the fame and the peerage, he introduces himself just as "Nick Stern" and is singularly modest for someone with the most immodest plans for the world. Sitting listening to him, you can believe in a less cynical world in which decent Fabian LSE professors really are able to solve our problems.
Stern is a 62-year-old Londoner; lively, intelligent, fast-talking, amiable. His father Adalbert fled Nazi Germany in the late 1930s, but was interned in Australia as an "enemy alien" for the duration of the war, along with many other German Jews. Settling back in Britain, he became a Labour councillor in Brentford. His background gave his son a sense of the fragility of civilisation and the meaning of social justice, both on the big and the small scale: as well as working at the World Bank, Nicholas has spent many years studying development in a small Indian village
I called on him at the Bank of England, where he has an office and is working on a book called Blueprint for a Safer Planet, due next January.
NICHOLAS STERN: Politically, the change is quite remarkable. Somebody who went to sleep at the end of 2006 and woke up now would be astonished at how the discussion has changed. In January 2007, George W Bush acknowledged for the first time that there was a link between human activity and climate change. Since then, the Americans have been debating the issue intensely and investing in technology. A bill that sought to reduce US greenhouse gas emissions by 70 per cent by 2050 came before the Senate recently. Although it did not pass, it is likely to return in 2009. John McCain and Barack Obama both have clear positions on the scale of the cuts, the cap-and-trade schemes and the technology needed.
The G8 summit last June committed to 50 per cent reductions by 2050. Last year the Australians threw out John Howard, partly because of his position on climate change, and elected Kevin Rudd prime minister in his place. Rudd immediately signed the Kyoto protocol. The Chinese published their first climate change action plan last year. India is about to publish its own plan. The challenge now is to go from commitments to action.
The claim that the Stern review was alarmist is nonsense. The dangers of climate change were, if anything, underestimated: since the review, there has been further evidence that if we continue "business as usual" then late this century, levels of greenhouse gases in the atmosphere will reach 750-800 parts per million (ppm), compared to 430ppm now and the pre-industrial figure of 280ppm. That would give us sometime in the next century a 50-50 probability of temperatures being more than 5 degrees Celsius above pre-industrial times. The last time temperatures were that high, 30-50m years ago, the world was covered in swampy forests and alligators lived near the North Pole. A rise of that magnitude would involve vast movements of populations. Whole areas would dry out; others would be submerged. We cannot adapt to that without great human cost.
Economists originally got this wrong. They underestimated the rate of growth of emissions on the back of IPCC work from nearly ten years ago. They overestimated the ability of oceans to absorb carbon dioxide. And it now turns out that there is more risk than we had thought of very high temperature rises—six, seven or eight degrees.
AA: Do you have time for sceptics like Nigel Lawson?
NS: I don't have a particular issue with Lawson himself, but I do with the sceptics who deny the science. It is not controversial any more. Of course, there will always be people who point out that temperatures are not changing as fast this decade as the last [see Lab report, Prospect June 2008], but that is irrelevant; climate change is about the long-term trend, not the fluctuations. But put this aside and ask yourself what the commonsense approach to risk is. Suppose we invest in new technologies and find that the climate scientists were wrong. We will at least have clean, efficient ways of doing things of value. Suppose, on the other hand, we do nothing and find that the scientists were right after all; now we will have left action too late and it will be very hard to get greenhouse gas levels back down. It is not enough to say that the science might be wrong; to argue for no action, you have to able to argue that the risks are really very small.
AA: How are we to go from commitments to action?
NS: The crunch will be in Copenhagen. I'm trying to help the discussion with a paper that sets out what I see as the key elements of a global deal. Each of the elements is well understood. But I think this is the first time anybody has put them together and explained how to make a deal satisfy three fundamental principles: efficiency, effectiveness and equity.
My proposed deal has six basic elements. First, we need to cut total world carbon emissions by 50 per cent by 2050, compared to 1990 levels, with rich countries committing at Copenhagen to cut by 80 per cent by 2050. That would reduce the probability of temperatures rising more than 5 degrees in the next century from 50 per cent to 3 per cent. And there has been progress: France made a 75 per cent commitment in 2004, Obama's proposed target is 80 per cent, McCain's 60 per cent, and Gordon Brown is considering whether to raise the target in the climate change bill from 60 per cent to 80 per cent.
The figure of 80 per cent is not arbitrary. The world needs a 50 per cent overall cut by 2050 to stabilise greenhouse gas levels; that would take us down to two tonnes of annual emissions per capita as a world. The whole world needs to converge on that figure by 2050. Europe and Japan are currently at 10-12 tonnes of annual emissions per capita, so an 80 per cent cut would get you in the region of two tonnes. The US would have to do a bit better, but my own view is that we should get everyone in the rich world on 80 per cent and sort out the rest later.
Second, poor countries need to recognise that they will be 8bn people out of the 9bn world population in 2050; there is no way to succeed without them. They should plan for two tonnes per capita, but they won't need to make their commitments until 2020. They make their commitments after looking at the experiences of the rich countries in going low-carbon, after seeing that the financial flows to them through carbon trading are real and that technology is transferred. It is, if you like, a reversal of the usual conditionality of aid. Poor countries will deliver on condition that rich countries meet their targets. That is an interesting difference. But they all have to start planning and acting now.
Third, carbon trading has to be developed. We ought to be thinking of private sector carbon trading flows of the order of $100bn a year 15 years from now in order to help bring the developing world into the story. This is a key part of the glue of the global deal. The EU already has a large emissions trading scheme and Australia is developing one, as are several US states. Linking these together may be the best way to start building a global scheme.
Fourth, we have to act globally to prevent deforestation because you don't simply want to be moving the problem around. Deforestation is the source of 20 per cent of global emissions. Cutting deforestation in half will take around $15bn a year of public money, but as trading in deforestation comes into the picture, that figure would go down.
Fifth, strong development and sharing of technology. We probably need some major financial support for carbon capture and storage for coal, for example.
Finally, we must deliver on our commitments on development aid. The Gleneagles G8 summit in 2005 promised to double aid between 2005 and 2010, and the European commitments are to devote 0.7 per cent of GDP to aid by 2015. That is essential to help poor countries adapt to the further 2 degrees of warming we can expect to see even if we cut emissions drastically. The developed countries have put the majority of the greenhouse gases responsible for that warming into the atmosphere, and should take the main responsibility for the consequences.
So that's the package. I hope it's the basis for a global deal in Copenhagen next year.
AA: It is a staggeringly ambitious plan. How has it been received? And can it really bring in nations like India and China? It is all very well to look for a massive global carbon trading scheme, but the European scheme has not had an easy beginning and there are constant complaints of abuse of the Kyoto clean development mechanism (CDM), which is meant to fund only "additional" emissions-reduction projects in the developing world that would not have been carried out in its absence.
NS: The plan is not ambitious in relation to the problem. It is ambitious in relation to world politics. It has been out for only a few weeks, but has already been picked up by people in ministries around the world. I've discussed it with the Danish authorities, and I'm hoping it will feed into the discussions at Copenhagen. Any agreement reached next year will be a treaty with a lot of words, not a communiqué cobbled together in the middle of the night.
Developing countries will have to accept tough targets too. How do you ask them to accept those targets without harming their economies? "Trust me, we'll help you" doesn't seem good enough. Developing countries are looking for their current period of expansion to continue, and they are right to do so. In the meantime rich countries have to show that low-carbon growth is possible, that we can finance it and that we have the technologies.
The CDM has shown that if you give incentives, you see a lot of initiative in response. It is one-sided in that you are rewarded for achieving cuts but not penalised for not achieving them. My view is that you need these one-sided mechanisms for a little while to build up trust in the markets in order for developing countries to accept caps by 2020 on the right scale. I don't think that there is anything wildly optimistic about scaling up the CDM. I can imagine a big wholesale fund into which companies in countries that have strong emissions caps will buy. That fund could buy carbon credits by providing carbon capture and storage for power stations across one province in China. Or it could provide targets right across an industrial sector so that, for example, credits would be given for each tonne of cement produced using less than an agreed amount of carbon. Such deals would be more easily monitored than the CDM approach, for which the rather hypothetical question "What would you have done without the CDM?" must be answered in every single project.
AA: Won't we need a whole new UN agency to look after all this?
NS: It is a market on a scale that would require a proper regulator. But I don't think we should say that we can't do anything before we have created new institutions. I spent ten years of my life in international institutions, and they take a long time to get going. We have to make an agreement with the institutions we have got now.
AA: Although there may now be greater political awareness of climate change, no sooner did oil prices begin to rise than plans for expanding the use of coal were made all around the world.
NS: You might wish for a world without coal. But coal is going to be used for 80 per cent or so of electricity generation in India and China. So we have to make carbon capture work. If it doesn't, the adjustment will be much more difficult and costly. We are going to need carbon capture for the next 20, 30 or 40 years. It is possible that by 2050, we will have got so good at solar energy that we don't need coal any more. But in the meantime we are going to need coal, and probably nuclear power too. That's the reality.
There is a good chance carbon capture and storage will work. We will only know when we get it on a commercial scale in a 300-400 megawatt power station, and that's going to take seven years. My own view is that Britain is not doing enough. We are funding one demonstration project, but we should be doing two if we want a leadership role.
AA: If technology is the key, should we organise a "Manhattan project" to find technologies to deal with warming and postpone action on emissions until we have more efficient answers? Bjørn Lomborg says we should do nothing now but "invent solutions," and agree at Copenhagen to boost world R&D tenfold.
NS: Technology is not the key; it is one of the keys. World public sector R&D in technology fell by half between, roughly, the early 1980s and the early 2000s. Only in the last few years has it begun rising again. Private and public research activity are highly correlated, and much more of both is needed.
As for Lomborg, he is not an economist. People who are not economists usually miss the fact that you need incentives as well as technology. There must be a price on carbon. They have to go together. The other thing is that we are in a hurry because of the "flow-stock problem"—we already have 430ppm in the atmosphere, and the number is rising by 2.5ppm a year. If we do nothing but technological work for 30 years, then we will get close to 550ppm, and even if we stabilise at that point, there would be a 70 per cent chance of a temperature rise above 3 degrees. So the period from now to 2050 is crucial.
AA: Is the rise in the oil price helping tackle global warming by forcing us to give up our addiction to oil because we can no longer afford it?
NS: Yes and no. It makes change easier because it gives people stronger incentives to be energy-efficient. If oil stays up, as looks quite likely, it will drag gas and coal up with it. The price differential between wind, solar and geothermal, which are on the way down, and hydrocarbons, which are on the way up, will lessen. It will bring closer the day on which you can substitute one for the other.
But it also makes change more difficult, because people focus on short-term problems. Policies to deal with climate change need to start now and keep going for 30 to 50 years. In that period, we are likely to see three or four recessions and the odd economic crisis, but we must hold steady with our policies. We must deal with the short term within the long term.
AA: Do you think the European and American reactions to rising fuel prices, and politicians' consequent promises to cut fuel taxes, suggest that voters' commitments to green issues are superficial?
NS: There are going to be adjustment costs. It will take leadership from politicians and others, and it will also take public discussion. People have to believe that if taxes go up on some things, they will go down on others. They have to believe that new expenditure will be wise and associated with the problem. So it is a matter of good policy and good leadership, combined with serious public discussion.
AA: Is that enough? Surveys suggest people aren't prepared to make big sacrifices for the environment.
NS: Answers to surveys depend on how the question is asked. If you ask someone if they would pay more for their holiday abroad to stop environmental damage 50 years down the road, they will say no. But ask them if they would support funding for different ways to generate electricity and run cars so that their grandchildren won't inherit a damaged world—and they will say yes. The Congo Basin Forest Partnership—a project intended to conserve the rainforest in ten African countries—is about to be launched, with £50m of British funding. That's the kind of thing people will back: the logic is clear.
AA: The Conservative party claims that the public will support green taxes, and has suggested a range of ways to use taxes to boost energy efficiency.
NS: I try to be outside party politics. But I think some kind of carbon tax alongside carbon trading is fine, so long as they don't fall over each other. But we need trading to get the global flows working. With carbon trading, you start by determining the total quantities of greenhouse gases that can be emitted, and then the market works out the prices. The advantage is that you have more certainties about the quantities—and we need as much certainty as we can get. With taxes, you don't know what level to apply and by the time you find out, you need to change it. You can't have both price certainty and quantity certainty in this business.
AA: Yale economist William Nordhaus remains a persistent critic of yours. He has just restated his view that we have time to solve the problem, and that your more "draconian" approach comes from someone with an imperial view of planning the world.
NS: Well the British empire remark is a cheap shot, that's not typical of Bill Nordhaus. He was one of the early scholars in this field, but he has badly underestimated emissions and has not thought through what a world five degrees warmer looks like. We haven't got the time for his leisurely approach.
Then there is his view of intertemporal ethics—the relative rights and responsibilities of different generations. Within the economics profession, there has been a great reticence to look at this issue. Many economists simply look at the trade-offs, but that is a mistake; you can't discuss this subject without the ethics. But discussing is not prescribing. In a lot of the early literature, people ended up making assumptions which many people, certainly myself, would regard as unacceptable. For example, Bill Nordhaus routinely includes a 2 per cent pure time discount rate in his calculations.
AA: By the "pure time discount," do you mean discounting the wellbeing of people simply because they live in the future? That is different from the standard money discount rate that we might apply because in the future people will be richer—that £1 of consumption is worth more to us now than to people in 30 years time because they will be, say, 25 per cent wealthier.
NS: That's right. Discounting because people are wealthier in the future is a big part of the Stern review, as it should be of all such analysis, and you can argue over the appropriate discount rate. Applying a 2 per cent pure time discount, however, means that you assign half the value to somebody born today to someone who is 35 years old. I would not discriminate against future generations like that.
The greater part of the Stern review looked at the risks and the costs of adjustment rather than applying a cost-benefit analysis. Many economists have not looked so explicitly at risk and their cost-benefit analyses have not recognised that relative prices change. If you invest in something else with a high rate of return because you think you can sort the environment out later, you will discover that the cost of the latter has gone up dramatically. There was one mistake after another in the standard conceptual framework on discounting. Happily, work from the economists Martin Weitzman [Harvard] and Partha Dasgupta [Cambridge], and, I hope, myself, is getting the discussion back on track.
AA: I worry that greenhouse gas emissions are really only a symptom of a much wider issue: our failure to live sustainably on this planet. Shouldn't there be a wider Stern review to match? Germany's environment minister is trying to find a "true economic value of the benefits we receive from nature."
NS: Yes, we should be looking at these issues. But climate change is especially urgent because of this flow-stock problem—the later you leave it, the more the flows build up in the stocks. There is also a political aspect to this. If we get international collaboration going on climate change, if we can improve our understanding of how to work together, there could be enormous benefits beyond simply climate change.
AA: How do you rate the chances of success in Copenhagen next year?
NS: I think that there is a good chance we will get some sort of deal. Will it be ambitious enough? I don't know. If not, then we will have to face up to the very big risks that we are continuing to create.
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