The Stern Review: The economics of climate change

Release the Hounds

We face all sorts of risks in our lives. As individuals, there’s risks to our health and safety, our businesses and our homes. We take sensible actions to deal with those risks. We weigh up the risks, their likelihood and potential impacts and look at what measures we can take to minimise or deal with the risks and what those measures cost. If we own a house, we’ll put decent locks on the windows and doors and take out insurance covering the risk of break-ins and theft. If we have a particularly valuable house or live in a particularly crime-prone area, we’ll consider more expensive protection – alarms, fences, maybe even some hounds.

One of the things that I think many people miss in the climate change debate is that it’s largely a debate about weighing risks and costs: the likelihood and possible impact of a changing climate and the measures we could take to deal with the problem - the likely costs of taking action compared to the likely costs of not taking action. It sounds obvious but it’s routinely ignored.

It follows that we need good scientific advice to tell us what the likely risks are, and good economic or financial advice to tell us what they will cost, what measures we can take to mitigate or adapt to climate change and what they will cost.

What are the risks? What will it cost?

It annoys me when I hear people say that we must do whatever it takes to avoid climate change. It also annoys me when I hear people say that we should do nothing about climate change until we really know for sure that it’s a big problem. Does the first group have security guards at their homes and surround them with barbed wire fences? Would the second group leave their house open when they go away for a weekend unless I can prove to them that someone will steal their stuff while they’re away?

What probably annoys me most is the disingenuous conservatives who claim that the market economy is so marvellous at adapting to shocks that we don’t need to worry about a changing climate – we’ll just adapt and it will all be very efficient and painless – but God forbid we should sign the Kyoto Protocol or aim to reduce emissions or do anything to increase the cost of energy, because that’s a shock we just can’t cope with.

Some guidance is on the way

An important document relating to the economics of climate change will be released tonight (Australian time). It will help inform the debate about the risks and costs of climate change and the risks and costs of taking action to reduce climate change impacts - by putting some numbers on these costs.

In July last year, the UK government commissioned a review, headed by development economist and former World Bank chief economist Sir Nicholas Stern, to review the economic, social and environmental consequences of climate change, as well as possible actions to adapt to the changing climate and the costs associated with them, and the costs and benefits of actions to reduce the net global balance of greenhouse gas emissions. The Stern Review on the Economics of Climate Change will be published tonight.

Stabilising emissions costs money…

From what’s been released so far about the Review, it has estimated that effective measures to stabilise greenhouse gas concentrations will knock about 1% per year off global economic output. That apparently means it will take an extra two years for global wealth to double. Although it sounds small in the scheme of things, that’s not a trivial cost. It is, for example, in the same ballpark as estimates of what a global pandemic would likely cost the world.

…Not stabilising emissions costs much more

But the flipside is big. Very big. The Review estimates that “business as usual” would leave to a reduction in global economic output of at least 5% - ignoring health impacts, assigning zero value to the non-economic benefits of the environment and assuming no feedback effects that result in the atmosphere warming faster and faster as greenhouse gas concentrations rise. Factoring these in, the level of climate change in the next century based on continuing current trends would reduce output by as much as 20% per year. That’s an impact, according to reports on the Review, “on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century”.

The bottom line is that spending money on strong, early measures to reduce emissions is a very good investment. It’s insurance against what is looking like a very serious risk to the world that seems expensive now but, according to the Review, will seem in hindsight to be an absolute bargain.

No doubt there will be plenty of analysis of the Stern Report in the coming days and weeks. Hopefully this will help inform the debate about how we should respond to the climate change threat.

Other reports:

Reuters

BBC

Observer

Guardian

New Economist blog