Reflections on the Stern Review

Monday’s release by the UK government of the Stern Review on The Economics of Climate Change could come to be seen as one of those pivotal events in shaping public policy. I hope so, anyway. This report takes the accumulation of scientific knowledge about the present and potential future impacts of global warming and translates them into the language of economics. It puts forward hard numbers for us to chew on. Everyone should, minimally, read the executive summary.

Up until now, at least in North America, there has been an underlying assumption that the costs of addressing climate change would be too high, and so an alternative path would be to just adjust and adapt to it (while disputing that there is an “it” in the first place). The Stern Review tells us that the costs of doing nothing are much larger than the costs of acting to address the crisis, even though there is some warming, and therefore costs, already locked in.

The core proposal out of the Review is to stabilize emissions between 500-550 parts per million of CO2 equivalent, at a cost of 1% of global GDP per year. Doing so would avert costs of up to 20% of GDP per year in the future. The net present value of Stern’s plan is US$2.5 trillion.

The current level is about 430 ppm. Stern argues that stabilizing at 450 ppm is essentially out of reach as we are on a trajectory to be there within a decade. Pre-industrial levels were around 280 ppm. So Stern’s plan is modest to the extent that it requires accepting another 25% increase in CO2 in the atmosphere, to a level that is almost double that of pre-industrial times. If Stern’s plan happens, there will still be massive costs and risks due to climate change, but hopefully we avoid utter catastrophe.

I’ve argued before that we should not see this as something that we go into kicking and screaming, but that we embrace the challenge and build an industrial strategy around it. Stern says:

Climate change is the greatest market failure the world has ever seen, and it interacts with other market imperfections. Three elements of policy are required for an effective global response. The first is the pricing of carbon, implemented through tax, trading or regulation. The second is policy to support innovation and the deployment of low-carbon technologies. And the third is action to remove barriers to energy efficiency, and to inform, educate and persuade individuals about what they can do to respond to climate change.

Imagine a suite of policy responses from Ottawa: carbon taxes, emissions trading, fee-bates, and strong regulation, all in the context of a clear emissions path; huge public investments in alternative power sources, energy efficiency, green technologies and production processes, mass transit, and carbon sequestration technologies; and, a major just transition program to ensure that displaced workers get training and education, income support and relocation allowances. This would be a sea-change unlike anything since World War II.

To put the 1% into the Canadian context, this would translate into $10.4 billion per year, or about the size of the current federal surplus (last year’s was $13.2 billion and it has been even higher in other years). And beyond measures aimed at mitigation, some adaptation to the impacts of climate change will be inevitable.

This kind of package will make big business freak out. But change is needed, and as long as governments can make credible long-term commitments, this just becomes part of the infrastructure upon which commerce takes place. The analogue is the introduction of past regulations for health and safety, food, or the environment.

The clock is ticking. North America has been lagging other countries. Let’s get on with it.

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