How We Can Save the World and Create Prosperity

Climate change will shrink US economy and kill thousands, government report warns.
Climate change will shrink US economy and kill thousands, government report warns.

Excerpt from A Blueprint for a Safer Planet: How We Can Save the World and Create Prosperity, by Lord Nicholas Stern (Vintage, 2010). Reprinted with permission from the author.

Chapter 1: Why there is a problem and how we can deal with it

We start in a difficult place and we are following a dangerous path. At its most basic level, the science is simple and clear. Since the Industrial Revolution we have been emitting greenhouse gases at a faster rate each year than the planet can absorb, especially during the rapid and energy-intensive growth of the last sixty years. The gases trap the sun’s heat as it is radiated back from the earth and cause global warming. This in turn causes climate change, with direct impacts on our livelihoods. Continuing with current practices will, by the end of this century, take us to a point where global warming in the subsequent decades of 5°C above pre-industrial times is more likely than not. Temperature increases of this magnitude will disrupt the climate and environment so severely that there will be massive movements of population, global conflict and severe dislocation and hardship.

The two greatest problems of our times – overcoming poverty in the developing world and combating climate change – are inextricably linked. Failure to tackle one will undermine efforts to deal with the other: ignoring climate change would result in an increasingly hostile environment for development and poverty reduction, but to try to deal with climate change by shackling growth and development would damage, probably fatally, the cooperation between developed and developing countries that is vital to success. Developing countries cannot ‘put development on hold’ while they reduce emissions and change technologies. Rich and poor countries have to work together to achieve low-carbon growth; but we can create this growth and it can be strong and sustained. And high-carbon growth will eventually destroy itself. We confuse the issues if we try to create an artificial ‘horse race’ between development and climate responsibility.

Scientists have been outstanding in marshalling the evidence on the risks. It is now the task of policy analysts and policymakers to construct strategies to reduce those risks and create a viable and attractive alternative to the high-carbon growth path we have been following. We can see the basic outlines of a way forward. But these policies and strategies are about incentives and opportunities for investments and technologies, and the relevant actions will mostly be from private investors, big and small. They must play a major role shaping policy.

The danger and the response

The danger from climate change lies not only, or even primarily, in heat. Most of the damage is from water, or the lack of it: storms, droughts, floods, rising sea levels. The levels of warming that we risk would be profoundly damaging for all countries of the world, rich and poor. A transformation of the physical geography of the world also changes the human geography: where we live, and how we live our lives.

We do not know for sure by how much global temperatures will rise if we follow ‘business as usual’. I choose 5°C here to illustrate the risks because there seems to be around a fifty–fifty chance of eventual temperature increases around this magnitude if we continue along likely current growth paths, or follow business as usual for much of this century. Increases of 5°C would be devastating, but there are deeply worrying probabilities of being above 6°C or more next century. And even in a very optimistic assessment of the consequences of business as usual, we can still expect a rise of around 4°C, the effects of which would also be profoundly damaging, triggering unstable dynamics we do not yet fully understand. Indeed, such risks occur at lower temperatures and concentrations of greenhouse gases.

The seriousness of a 5°C increase is clear when we realise that in the last ice age, around 10,000 years ago, the planet was 5°C cooler than now. Most of Northern Europe, North America and corresponding latitudes were under hundreds of metres of ice, with human life concentrated much closer to the equator. We have to go back 30–50 million years, to the Eocene period, to find temperatures as high as 5°C above pre-industrial times. The world’s land then consisted mainly of swampy forest. Temperature increases on this scale, and the consequent climate change, lead to massive dislocation, generate huge new vulnerabilities and redraw patterns of habitation. They cannot be understood in terms of the difference between Stockholm and Madrid, or Maine and Florida, or the idea that we might just need a little more air conditioning and flood defence.

The central message of this book is not, however, one of despair. These huge risks can be reduced drastically at reasonable cost, but only if we act together and follow clear and well-structured policies starting now. The cost of action is much lower than the cost of inaction – in other words, delay would become the anti-growth strategy.

The low-carbon world we must and can create will be much more attractive than business as usual. Not only will growth be sustained, it will be cleaner, safer, quieter and more biodiverse. We understand many of the necessary technologies and will create more; and we can design the economic, political and social structures that can take us there. We require clarity of analysis, commitment to action and collaboration.

It is neither economically necessary nor ethically responsible to stop or drastically slow growth to manage climate change. Without strong growth it will be extremely difficult for the poor people of the developing world to lift themselves out of poverty, and we should not respond to climate change by damaging their prospects. Moreover, politically it would be very hard to gain support for action by telling people that they have to choose between growth and climate responsibility. Not only would it be analytically unsound, it would also pose severe ethical difficulties and be so politically destructive as to fail as policy.

This is not to claim that the world can continue to grow indefinitely. It is not even clear what such a claim would involve; societies, living standards, ways of producing and consuming all develop and change. A picture of indefinite expansion is an implausible story of the future, but two things are key: first, to find a way of increasing living standards (including health, education and freedoms) so that world poverty can be overcome; and second, to discover ways of living that can be sustained over time, particularly in relation to the environment. Strong growth, of the right kind, will be both necessary and feasible for many decades.

The nature of the market failure

At the heart of economic policy must be the recognition that the emission of greenhouse gases is a market failure. When we emit greenhouse gases we damage the prospects for others and, unless appropriate policy is in place, we do not bear the costs of the damage. Markets then fail in the sense that their main coordinating mechanism – prices – give the wrong signals. That is, prices – of petrol or of aluminium produced with dirty energy, for example – do not reflect the true cost to society of producing and using those goods. In the language of economists, the social cost of production and consumption exceeds the private cost, so that markets without policy intervention will lead to too much of such goods being produced and consumed. By producing and consuming less of these products and more of others, we create economic gains that can make everyone better off. Markets with uncorrected failures lead to inefficiency and waste.

Market failures take many forms and much of economic policy is about correcting them. The most prominent are lack of information, abuse of market power and ‘externalities’. An externality arises when the action of one person directly affects the prospects of another – discharging toxic waste into a river, building an eyesore and smoking in a restaurant, for example.

The appropriate response to a substantial market failure is not to abandon markets but to act directly to fix it, through taxes, other forms of price correction, or regulation. Acting in this way on climate change, with complementary policies on technology and deforestation, will allow continued and substantial growth and poverty reduction. Allowing the market failure to continue will damage the environment, curtail growth and lead to dislocation and conflict. To understand both the dangers and the appropriate policy requires an examination of how the market failure occurs and its effect on future generations.

Emissions are clearly an externality and are thus a market failure, but their impact is unlike that of, say, congestion or local pollution in four fundamental respects: the externality is long-term; it is global; it involves major uncertainties; and it is potentially of a huge scale. Greenhouse gas emissions constitute the greatest market failure the world has seen. Thus at the heart of economic analysis must be: the ethics of values both within and between generations; international collaboration; an appreciation of risk; and changes way beyond minor adjustments, or ‘marginal increments’ in the jargon so beloved of economists. Much of the analysis of climate change over the last two decades has been profoundly misleading because it paid no, or, at best, superficial, attention to some or all of these issues.

Our actions in the next thirty years, through investments, the generation and use of energy and electric power, the way we organise transport, and our treatment of forests, will determine whether or not we can keep climate change risks manageable. Less waste and more new technologies will be central to an effective response. The actions necessary to move onto a more sustainable pathway involve long-term planning: many of the relevant investments, such as power plants and buildings, have lifetimes of many decades.

In thinking through policy on climate change, and particularly its timing, we must also understand that there is a ‘ratchet effect’ of crucial importance. The flows of emissions build up into stocks or concentrations of greenhouse gases in the atmosphere that are very difficult to remove. Thus any delay means higher stocks and a more difficult and dangerous starting point for action. This ratchet effect together with long investment lifetimes, imply that the decisions, plans and incentive structures we make and create in the coming months and years will have a profound effect on the future of the planet.

In thinking about the long term how to reduce risks for future generations, ethical questions must be directly examined. All too often economists shy away from these issues, arguing that they are outside our subject, or say that ethics are ‘revealed’ by market behaviour and outcomes. Both arguments are mistaken. Economists provide analyses that inform political processes and policy and moral judgements, and that can help to shape questions. Economic analysis can show the implications of different sets of values for decisions and show inconsistencies. Moreover, while markets can provide some limited information relevant to values, there is no way that they can settle debates over which values should be used to guide decisions of this magnitude, collective responsibility and timescale.

The second special feature of the externality is its global nature. Greenhouse gases have the same effect on global warming whether emitted from London, New York, Sydney, Beijing, Delhi or Johannesburg; hurricanes and storms hit New Orleans and Mumbai; flooding occurs in England and Mozambique; droughts in Australia and Darfur; sea-level rise will affect Florida and Bangladesh. There is a double inequity here: the poor countries are least responsible for the existing stock of greenhouse gases, yet they are hit earliest and hardest by climate change. At the same time, the rapid growth of China, India and others is already making them important emitters – China has overtaken the USA to become the world’s largest producer of greenhouse gases. Indonesia and Brazil are the third and fourth largest emitters, mainly as a result of deforestation and peat fires.

The rich countries have major historical and other responsibilities, and must show leadership. Without it, global action will fail. But the future of the climate will largely be shaped by the developing countries: in population terms, it is their planet. Already, the rich countries constitute less than one in six of total global population; by 2050, they will be only one in nine. The large developing countries will be central to the design and execution of international action to protect their future. It is profoundly inequitable that the difficult starting point is largely as a result of actions by the developed nations, but the numbers on population and future emissions are such that a credible response cannot come from the rich countries alone.

The third and fourth special features of the externality, the centrality of risk and the scale of possible damage, shape both the structure of the argument and the method of analysis. This is not an investment project like a new road or a bridge. The costs and benefits of such projects can reasonably be understood in terms of a marginal change, set in the context of a given growth path for the entire economy. What we are discussing with climate change are strategies concerning patterns of growth, or possible decline, for the world economy as a whole in the context of uncertain outcomes. The analytical tools and policy constructs must be capable of taking on these issues directly. All too many discussions – and it is astonishing that they have done so – see policy on climate change as a single investment decision, analogous to a new bridge. Standard, marginal cost-benefit analysis is appropriate for the latter kind of decision. For climate change, however, the relevant economics are much more difficult and profound.

Shaping policy

The central economic criteria in forming policy must be: effectiveness in reducing emissions on the scale required; efficiency, to keep costs down; and equity, in recognising differences in incomes, technologies and historical responsibility. The earlier we start to put the policies in place, the longer we have for a calm and measured response. Delay now and haste later not only build up damage but also risk expensive mistakes in investment decisions. The greater the coordinated involvement of all emitters, the more successful, cheaper and equitable are the actions and outcomes.

Good policy can avoid many of the more devastating scenarios that could arise in the second half of this century and into the next. Throughout the world we are seeing record events, whether they be floods, droughts or hurricanes. We cannot directly attribute any one of them to climate change, but we can say that the frequency of similarly severe events will rise. We are already seeing the effects of a 0.8°C temperature increase; we have around 1.5°C or 2°C more to come, even if we act strongly and sensibly immediately. The costs of adapting to these changes will be very large; planning for adaptation to climate change should start now in all countries of the world.

The challenges for developing countries will be particularly severe. To ignore a changing climate and what it implies would simply make for bad investments. Adaptation must be part of development. At the same time, development itself will be very important in adapting, as it encourages economic diversification and a more flexible workforce, both of which reduce vulnerability. It also generates the income necessary for robust investment and it fosters greater technical knowledge. In all these fundamental ways, development is the most important form of adaptation.

All countries will have to reorientate their economies, both to strengthen resilience to the inevitable effects of climate change and to lessen the use of carbon in order to reduce substantially those risks in the future. This is a story about the economic management of investment and growth from the perspective of both adaptation and mitigation.

Leadership at the most senior level is vital, as that is the only place at which the kind of mutual understandings and trade-offs that are necessary for a global deal can be made. Collaboration may involve, and be helped by, understanding on other issues such as trade, health and financial stability. Furthermore, the process of reaching a global deal may lay the foundations for future international cooperation on broader issues. This wider context means that the global deal cannot be left only to environment ministries, important though they are, and however strong and able they might be – all ministries must be involved and committed, and the deal must be in the hands of heads of government. Only if world leaders give this issue the attention and priority it deserves can a deal be made which reflects the magnitude of the risks and the scale of action required.

The logic of the problem structures the argument of this book. The first half sets out the challenges in terms of the risks of climate change and the scale and nature of action, from a global perspective, necessary to manage those risks. The second half analyses the policies required to promote action, proposes the basics of a global deal and examines the challenges of how to build and sustain that deal.

Excerpted from A Blueprint for a Safer Planet by Lord Nicholas Stern. Copyright © Nicholas Stern, 2010. All rights reserved.

Nicholas Stern is the first IG Patel Chair in Economics and Government, Chair of the Grantham Research Institute on Climate Change at the London School of Economics, and is a member of the British House of Lords. He was advisor to the UK government on the economics of climate change and development from 2005-2007 and head of the The Stern Review on the Economics of Climate Change. He was also head of the Government Economic Service, 2003-2007; second permanent secretary to Her Majesty’s Treasury, 2003-2005; and director of policy and research for the prime minister’s Commission for Africa, 2004-2005. He was chief economist and senior vice president at the World Bank from 2000-2003 and chief economist of the European Bank of Reconstruction and Development from 1994-1999. His career from 1970 to 1994 was as an academic economist, including chairs at the LSE and Warwick, and teaching and research positions in MIT, Ecole Polytechnique, the Indian Statistical Institute, and the People’s University of China. His research and publications have focused on the economics of climate change, economic development and growth, economic theory, tax reform, public policy, and the role of the state and economies in transition.

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