Stern Review on the Economics of Climate Change

1
The Economics of Climate ChangeNicholas
SternAustralian Davos Connection28th March
2007
2
Key messages

• The costs of strong and urgent action to avoid
  serious impacts from climate change are
  substantially less than the the damages thereby
  avoided
• Even with strong action to reduce greenhouse gas
  emissions adaptation must be a crucial part of
  development strategy
• Policy requires urgent and international action,
  pricing for damages from greenhouse gases,
  supporting technology development and combating
  deforestation

3
Projected impacts of climate change
Global temperature change (relative to
pre-industrial)








1C
2C
5C
4C
3C
0C
Food
Falling crop yields in many areas, particularly
developing regions
Falling yields in many developed regions
Possible rising yields in some high latitude
regions
Water
Significant decreases in water availability in
many areas, including Mediterranean and Southern
Africa
Small mountain glaciers disappear water
supplies threatened in several areas
Sea level rise threatens major cities
Ecosystems
Extensive Damage to Coral Reefs
Rising number of species face extinction
Extreme Weather Events
Rising intensity of storms, forest fires,
droughts, flooding and heat waves
Risk of Abrupt and Major Irreversible Changes
Increasing risk of dangerous feedbacks and
abrupt, large-scale shifts in the climate system
4
Stabilisation and commitment to warming








400 ppm CO2e
5
95
450 ppm CO2e
550 ppm CO2e
650ppm CO2e
750ppm CO2e
Eventual temperature change (relative to
pre-industrial)
1C
2C
5C
4C
3C
0C
4
5
Delaying mitigation is dangerous and costly

• Stabilising below 450ppm CO2e would require
  emissions to peak by 2010 with 6-10 p.a. decline
  thereafter.
• If emissions peak in 2020, stabilisation below
  550ppm CO2e requires annual declines of 1 2.5
  afterwards. A 10 year delay almost doubles the
  annual rate of decline required.

6
Given the costs of impacts, the cost of
mitigation is a good deal

• Expected cost of cutting emissions consistent
  with a 550ppm CO2e stabilisation trajectory
  averages 1 of GDP per year.
• Impacts on competitiveness limited but some
  sectoral arrangements valuable
• Opportunities for growth via new technologies
• Strong mitigation is therefore fully consistent
  with the aspirations for growth and development
  in poor and rich countries.

6
7
Key principles of policy

• Climate change policy
• Carbon pricing
• R,DD
• Related market failures and behavioural change
• Consistency with other policy goals growth and
  energy security

8
Carbon pricing

• Price signals can be established in different
  ways greenhouse gas taxes capping emissions and
  setting up a market in permits or implicitly
  through regulation.
• The economics of risk points to long-term goals
  for stabilisation of concentrations.
• The economics of cost points to short-run
  flexibility over time, sector and country. Policy
  makers and markets should be able to respond to
  new information on impacts and costs.
• Credibility, flexibility and predictability are
  key if policy is to influence investment.

9
Technology needs more than a carbon price
IEA (2000)

• One element of technology policy is public
  funding to support innovation in new
  technologies.
• The Review suggests that
• Global public energy RD funding should double,
  to around 20 bn
• Deployment incentives should increase 2 to 5
  times, from current level of 34 bn
• Promising developments Pholtovoltaics (new
  material) cellulosic biofuels nanostorage.

10
International action

• Key foundations
• A common understanding of the scale of the
  problem
• Transparency and mutual understanding of actions
  and policies
• Structures that sustain cooperation
• Equity
• Effective action includes
• Trading
• Technology
• Deforestation
• Adaptation

10
11
Building international carbon markets

• Scarcity in rich countries demand side
• Benchmarks for supply side
• Institutional structure

12
Strategies for emission reduction

• Four ways to cut emissions
• patterns of demand
• improving efficiency
• using lower-carbon technologies
• tackling non-energy emissions.

13
Adaptation

• Adaptation and development support each other
• Adaptation will put strong pressure on developing
  country budgets and ODA essential to meet
  commitments made to double aid flows by 2010
• International action also has a key role in
  supporting global public goods for adaptation
• Disaster response
• Crop varieties and technology
• Forecasting climate and weather

14
Role of Business

• Carbon finance expansion of EU ETS new schemes
  in US, Australia, Japan transformation of CDM
  combining carbon finance with domestic
  investment, FDI and concessional finance World
  Bank Clean Energy Investment Framework
• International sectoral arrangements
• Technology co-operation RD, deployment,
  procurement, standards
• Firms should work with various national and
  international stakeholders to develop long-term
  regulatory frameworks which in turn would create
  a stable long-term investment climate

15
Conclusion from the analysis

• Unless emissions are curbed, climate change
  will bring high costs for human development,
  economies and the environment
• Concentrations of 550ppm CO2e and above are
  associated with very high risks of serious
  economic impacts
• Concentrations of 450ppm CO2e and below will be
  extremely difficult to achieve given where we are
  now and given current and foreseeable technology
• Limiting concentrations within this range is
  possible. The costs are modest relative to the
  costs of inaction.
• Decisive and strong international action is
  urgent delay means greater risks and higher
  costs

15
16
Key messages

• The costs of strong and urgent action to avoid
  serious impacts from climate change are
  substantially less than the the damages thereby
  avoided
• Even with strong action to reduce greenhouse gas
  emissions adaptation must be a crucial part of
  development strategy
• Policy requires urgent and international action,
  pricing for damages from greenhouse gases,
  supporting technology development and combating
  deforestation

17
Projected impacts of climate change
Global temperature change (relative to
pre-industrial)








1C
2C
5C
4C
3C
0C
Food
Falling crop yields in many areas, particularly
developing regions
Falling yields in many developed regions
Possible rising yields in some high latitude
regions
Water
Significant decreases in water availability in
many areas, including Mediterranean and Southern
Africa
Small mountain glaciers disappear water
supplies threatened in several areas
Sea level rise threatens major cities
Ecosystems
Extensive Damage to Coral Reefs
Rising number of species face extinction
Extreme Weather Events
Rising intensity of storms, forest fires,
droughts, flooding and heat waves
Risk of Abrupt and Major Irreversible Changes
Increasing risk of dangerous feedbacks and
abrupt, large-scale shifts in the climate system
18
Stabilisation and commitment to warming








400 ppm CO2e
5
95
450 ppm CO2e
550 ppm CO2e
650ppm CO2e
750ppm CO2e
Eventual temperature change (relative to
pre-industrial)
1C
2C
5C
4C
3C
0C
18
19
Delaying mitigation is dangerous and costly

• Stabilising below 450ppm CO2e would require
  emissions to peak by 2010 with 6-10 p.a. decline
  thereafter.
• If emissions peak in 2020, stabilisation below
  550ppm CO2e requires annual declines of 1 2.5
  afterwards. A 10 year delay almost doubles the
  annual rate of decline required.

20
Given the costs of impacts, the cost of
mitigation is a good deal

• Expected cost of cutting emissions consistent
  with a 550ppm CO2e stabilisation trajectory
  averages 1 of GDP per year.
• Impacts on competitiveness limited but some
  sectoral arrangements valuable
• Opportunities for growth via new technologies
• Strong mitigation is therefore fully consistent
  with the aspirations for growth and development
  in poor and rich countries.

21
Key principles of policy

• Climate change policy
• Carbon pricing
• R,DD
• Related market failures and behavioural change
• Consistency with other policy goals growth and
  energy security

22
Carbon pricing

• Price signals can be established in different
  ways greenhouse gas taxes capping emissions and
  setting up a market in permits or implicitly
  through regulation.
• The economics of risk points to long-term goals
  for stabilisation of concentrations.
• The economics of cost points to short-run
  flexibility over time, sector and country. Policy
  makers and markets should be able to respond to
  new information on impacts and costs.
• Credibility, flexibility and predictability are
  key if policy is to influence investment.

23
Technology needs more than a carbon price
IEA (2000)

• One element of technology policy is public
  funding to support innovation in new
  technologies.
• The Review suggests that
• Global public energy RD funding should double,
  to around 20 bn
• Deployment incentives should increase 2 to 5
  times, from current level of 34 bn
• Promising developments Pholtovoltaics (new
  material) cellulosic biofuels nanostorage.

24
International action

• Key foundations
• A common understanding of the scale of the
  problem
• Transparency and mutual understanding of actions
  and policies
• Structures that sustain cooperation
• Equity
• Effective action includes
• Trading
• Technology
• Deforestation
• Adaptation

24
25
Building international carbon markets

• Scarcity in rich countries demand side
• Benchmarks for supply side
• Institutional structure

26
Strategies for emission reduction

• Four ways to cut emissions
• patterns of demand
• improving efficiency
• using lower-carbon technologies
• tackling non-energy emissions.

27
Adaptation

• Adaptation and development support each other
• Adaptation will put strong pressure on developing
  country budgets and ODA essential to meet
  commitments made to double aid flows by 2010
• International action also has a key role in
  supporting global public goods for adaptation
• Disaster response
• Crop varieties and technology
• Forecasting climate and weather

28
Role of Business

• Carbon finance expansion of EU ETS new schemes
  in US, Australia, Japan transformation of CDM
  combining carbon finance with domestic
  investment, FDI and concessional finance World
  Bank Clean Energy Investment Framework
• International sectoral arrangements
• Technology co-operation RD, deployment,
  procurement, standards
• Firms should work with various national and
  international stakeholders to develop long-term
  regulatory frameworks which in turn would create
  a stable long-term investment climate

29
Conclusion from the analysis

• Unless emissions are curbed, climate change
  will bring high costs for human development,
  economies and the environment
• Concentrations of 550ppm CO2e and above are
  associated with very high risks of serious
  economic impacts
• Concentrations of 450ppm CO2e and below will be
  extremely difficult to achieve given where we are
  now and given current and foreseeable technology
• Limiting concentrations within this range is
  possible. The costs are modest relative to the
  costs of inaction.
• Decisive and strong international action is
  urgent delay means greater risks and higher
  costs

29
30
www.sternreview.org.uk
30