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In October 2006, Nicholas Stern, one of the greatest economists and public intellectuals of our day, made headlines around the world with his report, which reviewed the costs and benefits of dealing with global warming. The world’s community has learned that it must act to mitigate global climate change, but until the Stern Review, no one knew how much it would cost, and how to do it.

Now, Stern has transformed his report into a powerful narrative book for general readers. The Global Deal evaluates the economic future, and the essential steps we must take to protect growth and reduce poverty while managing climate change.

The future Stern outlines is optimistic and pragmatic; he believes we have the capacity and creativity to change. But we need the will to inspire our political leaders to drive a new global strategy.

To Sue

Introduction

How did an economist who had worked on public policy, growth, and development for most of his career come to work on policy on climate change? The logic of the problem, the relationship between economic development and climate change, and a little history can explain. My first fieldwork at the end of the 1960s had been on tea smallholdings in Africa, which profoundly influenced my thinking on public policy, as it showed what could happen if the entrepreneurship of the farmer was combined with the skills of the private tea factory in an environment shaped by sound policy, good infrastructure and effective agricultural extension. Of particular importance to me has been my work over more than three decades with splendid collaborators, in the village of Palanpur in India. I have been following Palanpur and its economic and social change since I first went there in 1974-5 to study the effects of the Green Revolution, witnessing both the vulnerability and creativity of those in poor rural areas at first hand. Good policy unleashes entrepreneurship and achievement. I had been an academic for twenty-five years, from 1969 until the end of 1993. After ten years lecturing at Oxford, I had become a professor at Warwick and then at the London School of Economics, and also led a very international life teaching and researching in India, China and Africa as well as the École Polytechnique in Paris and the Massachusetts Institute of Technology in the USA.

Since 1993, I had been more directly involved in the making of public policy as chief economist of the European Bank for Reconstruction and Development, chief economist and senior vice president of the World Bank, and then head of the Government Economic Service in the UK and second permanent secretary at the Treasury—positions I occupied whilst writing the Report of the Commission for Africa. I am now an academic economist again, as I. G. Patel Professor of Economics and Government at the London School of Economics, Chairman of the Grantham Institute on Climate Change and the Environment and Director of the India Observatory. I am an economist, a researcher and a writer.

In 2005 I was asked by Gordon Brown, then the UK Finance Minister, and Tony Blair, then its Prime Minister, to undertake an economic analysis of climate change. I hoped to determine the magnitudes, in economic terms, of the risks which the science had identified, and the policies and strategies that could help us manage those risks. These were the basic questions at the heart of what became known as The Stern Review. They required both a strongly international perspective, and the rigorous toolbox of the modern economics of public policy. I had no special knowledge, beyond that of a concerned citizen anywhere, of the science of climate change.

The first thing that struck me as an economist when I began looking at climate change was the magnitude of the risks and the potentially devastating effects on the lives of people across the world. We were gambling the planet. I was also keenly aware of the importance of direct experience in mobilising action: unless people have seen or felt a problem, it is difficult to persuade them that a response is necessary. With the effects of climate change becoming apparent only over a long period of time, this is particularly challenging. The magnitude of risks involved in climate change is vastly greater than, for instance, the disruption that would be caused to people were the Western financial system to collapse. But, unlike the banking crisis that emerged with sudden and tangible force during 2008, climate change is gradual, incremental and, despite occasional moments of captivating drama, rather sly. It is also very much harder to reverse.

My own experience of poor communities in Ethiopia, Kenya and India in the late 1960s and early 1970s had convinced me as a young man to spend my life working on policy which could help create the circumstances in which people can change their lives. That is why I am so worried about climate change. Just as progress is starting to accelerate and we become more optimistic about battling poverty, we risk derailing that process through our inaction on climate change. And unless our action on climate change is consistent with rapid development, we will not get the global agreement that is fundamental for success. We will succeed or fail on these challenges together.

What is more, climate change is a problem which arises from a build-up of greenhouse gases over time and the effects come through with long lags of several decades. If the world waits before taking the problem seriously, until Bangladesh, the Netherlands and Florida are under water, it will be too late to back ourselves out of a huge hole. So the special challenge is to change behaviour and make new policy before the crisis erupts with full fury, and not responsively and retrospectively. We cannot wait for the climate crash to happen before we start to try to deal with it. We have to anticipate the catastrophe to avoid it. We are fast approaching a crisis which requires decision and action now, before we fully experience the dangers we are causing. And let us be clear, these dangers are of a magnitude that could cause not only disruption and hardship but mass migration and thus conflict on a global scale. They concern us all, rich and poor.

I was also troubled by some of the previous work on the economics of climate change precisely because it had not taken adequate account of the magnitude of the risks, and had not thought through sufficiently carefully the logic and ethics of policies which have long-term effects over several generations. By playing down the discussion of risks and of the ethics, it had missed or distorted central issues. It had, in large measure, failed to apply precisely those techniques which were crucial to serious analyses: the economics of risk and the theory of public policy for the long term, where many existing markets, including capital markets, are distorted and hence of limited help in guiding policy. I saw an opportunity and a responsibility to change the economics of the discussion.

Another much more positive thing to strike me, however, was that there is so much we can do to manage the risks and, if we act sensibly, to make a much better world. We can create a new era of progress and prosperity. But we have to act together, to create a global deal—this is a problem that is global in both its origins and its impacts.

That global deal must be effective, in that it cuts back emissions on the scale required; it must be efficient, in keeping costs down; and it must be equitable in relation to abilities and responsibilities, taking into account both the origins and impact of climate change. Climate change is a deeply inequitable phenomenon: rich countries are responsible for most of past emissions but developing countries are hit earliest and hardest. Climate change is likely to significantly disrupt their development. Looking forward, however, it will be the currently developing countries that will be responsible for most of the growth of emissions. Unless a deal is truly global it cannot work.

Difficult though it will be, I think such a deal can be constructed before the end of 2009. The pace of movement since the publication of the Stern Review in October 2006 has been remarkable. There have been so many important contributions to awareness including the splendid examples of Al Gore and the International Panel on Climate Change, who have worked for two decades to create an understanding of the science and the dangers, and who were very worthy winners of the Nobel Peace Prize in 2007.

At the beginning of 2007, President Bush, in his State of the Union message, acknowledged for the first time that climate change was a serious challenge and closely linked to economic dependence on hydrocarbons. In the European Council of heads of EU governments in spring 2007, the EU committed itself to a 20% reduction in greenhouse gases by 2020, and a 30% reduction in the context of a global deal. Just prior to the 2007 G8 Heiligendamm summit in Germany, China published its first climate change action plan. In the autumn of the same year, the Australian prime minister, John Howard, was ejected from office, partly on the grounds of his hostility to action on climate change, following devastating droughts. His successor, Kevin Rudd, immediately signed the Kyoto Protocol—thus depriving the United States of its one key ally in the ‘coalition of the unwilling’.

The momentum for commitment to action has been sustained into 2008. The Indian government published its climate change action plan in June. At the Hokkaido G8 summit, hosted by Japan in July, there was agreement to a 2050 target of a 50% cut in world emissions. The European Commission set out detailed proposals for achieving the 20% cuts by 2020. In November 2008, US president-elect Barack Obama sent a message to a climate change conference convened by Governor Arnold Schwarzenegger in which he promised that his administration would establish annual targets to reduce emissions to their 1990 levels by 2020 and reduce them another 80 percent by 2050. In case anyone doubted him, or felt that the recession would provide grounds for him to reduce the commitment, he said ‘Now is the time to confront this challenge once and for all. Delay is no longer an option. Denial is no longer an acceptable response.’ No American president has ever been more forthright on the subject.

The United Nations Framework Convention on Climate Change (UNFCCC) launched negotiations in Bali in December 2007. It will meet again in Copenhagen in December 2009, when the task is to agree a global deal to follow the 1997 Kyoto Protocol, whose period comes to an end in 2012. The Copenhagen deal must be more ambitious, more international and much stronger. We must agree not only on our ambitions but on the details of action; the timetable is very tight. So much rests on the success of that journey from Bali to Copenhagen.

If we succeed, we will have created the potential not only to provide a serious response to the problem of climate change, but also to unleash an era of internationalism which could make the world much better at dealing with some of the other important international issues of our time. If we fail, the confidence and trust necessary to create and sustain an international agreement may be destroyed and the confidence of investors and markets—crucial for the real decisions that will make the necessary changes—will be undermined. Furthermore, addressing many of the obstacles to development, such as water availability, agricultural production, malaria and AIDS, will become much harder and costlier. We have to see the issues of economic development and of climate change as parts of a whole.

We do, of course, have much to learn. Whilst the science of climate change has been with us for nearly 200 years, the study of policy in dealing with it is relatively young. There is a pressing urgency to put policy in place now, and we must act according to what we already know. Postponing a global deal will put both policy and markets in a limbo that could be very destructive. Those making the crucial investments in energy-related and other industries will not have the clear signals necessary to make considered and responsible decisions. The relentless logic of the flow of emissions adding to the concentrations of greenhouse gases in the atmosphere will place us in an ever more difficult position. We cannot afford to wait until we know everything with certainty.

Some may argue that the turbulence in financial markets of 2007 and 2008 and the likely slow down of the world economy should lead to the postponement of action on climate change. That would be a serious mistake. A key lesson of the current financial disarray should surely be that it is dangerous to ignore or fail to recognise the build up of risk: this current economic crisis was 15 or 20 years in the making. If we postpone action on climate change for 15 or 20 years our starting point will be much more difficult and risky. Further, in straightened times, energy efficiency will appear even more important. And we shall need a growth engine to take us out of the slow down. Low-carbon energy could be a powerful driver: it is lasting and substantial, it is dynamic in its learning and global opportunities, and it is of real economic and social value.

It is true that some people, including politicians, have limited ability to concentrate and can only focus on one big issue at a time. But that is not true of all. And there may be enhanced sensitivity to cost increases, although these may be more easily managed as oil and gas prices fall in the slow down. Leadership will be important and in some countries, including the UK and the USA, we do see both a continuing or growing concentration on climate change and greater recognition of the growth potential of investments which can manage it.

A global deal will inevitably involve much detail and the economics of policy requires careful argument. I am not a campaigner; my purpose is to give careful arguments explaining why we must act, that we know how to act effectively and that the results will give us a better world for our children and grandchildren. I have tried to keep these arguments and analyses as simple as the subject allows. In my experience, if an economic or policy argument is sound it can usually be expressed in a way that is straightforward. But understanding policy analysis does require a bit of application by the reader and it is important that the logic of arguments as well as the conclusion are understood. The reader will have to judge. There are some sections in the middle of the book which the non-economist might occasionally find a little difficult. I hope, however, that the basic thrust of the arguments, even in those sections, are apparent to all and that the non-economist reader who persists will find the details clear, too. Those who have an insatiable desire for the economics are provided with references which they can pursue.

The argument that the dangers are great and that the world should act strongly and urgently is, or should be, over. We should now be working on the policy and strategic response. The main purpose of this book is to argue that what we now understand is sufficient to point us unequivocally to measured and structured policies that involve deep cuts in emissions, in cost-effective and equitable ways, and that promote considered and careful adaptation to the effects of the climate change which will occur. I offer a blueprint of how to build a safer planet, or how to manage climate change whilst creating a new era of growth and prosperity. This is emphatically not a blueprint in the sense of a master plan of the kind that used to emerge from planning commissions in centrally planned economics. It examines what we now need: strategies, international understandings and policies that will guide action, correct the biggest market failure the world has seen and provide a framework for the entrepreneurship and discovery across the whole of business and society, which can show us how to achieve a cleaner, safer, more sustainable pattern of growth and development.

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.

Genre:

Kirkus, 3/15
“Erudite and effective”
Bill McKibben, New York Review of Books
“2009 may well turn out to be the decisive year in the human relationship with our home planet. By December, when the world’s leaders plan to gather in Copenhagen to sign a new global accord on global warming, we’ll know whether or not our political systems are up to the unprecedented challenge that climate change represents….Nicholas Stern’s new book provides the best scorecard we have for keeping track of this drama as it unfolds.”

On Sale: Apr 28, 2009
Page Count: 256 pages
Publisher: PublicAffairs
ISBN-13: 9780786741441