Climate Change Ethics and the Economics of the Global Deal

The Society’s 2007 Annual Public Lecture was given by Nicholas Stern in Manchester on 29th November and in London on the 30th. We reproduce here a dramatically shortened summary of Lord Stern’s talk.

What I want to do today is to say something about the Stern Review but I want to look forward to Bali for which people will be departing next week. What we’re looking for at that gathering, is a commitment to find a deal between now and 2009 and at least some understanding as to what that deal might look like.

I do realise that there are people here who are not economists and I’ll try to make what I have to say accessible. You have to use lots more economics than you would normally use in an applied policy problem. Of course, those of you who are not economists, it is partly your fault, Actually, it’s largely your fault. You could have made different choices at different times but I will be tolerant — or try to be. Most of what I’ll have to say is about how to reduce greenhouse gas emissions so that we bring the risks of climate change into an acceptable range.

Other articles on this theme published in the Newsletter include:
The treatment of economic issues by the Intergovernmental Panel on Climate Change (Jan 2005)
More on the Intergovernmental panel on climate change (April 2005)
Nicholas Stern’s Immaculate Conception (July 2006)
Letter from America - on transatlantic vices (October 2007)
Climate change, the Stern Review and Discounting the Future (April 2008)
Climate change and its mitigation (April 2013)

Now, what is the problem? Economic activity, economic activity results in the release of greenhouse gases. That flow of greenhouse gases builds up into a stock. So there’s a stock in the atmosphere at any given time. It’s the stock that causes the warming. Now it’s not particularly the warming itself that’s the problem, although there are issues, major issues of heat stress and so on. It’s climate change that’s the problem and the global warming causes the climate change. And that manifests itself mostly in some way or other, through water — storms, floods, droughts, sea level rise. There are long lags in this system. So nothing we do now is going to affect the climate in ten or 15 years time but what we do now can, from about 30-35 years onward, have a very significant effect on the way in which climate change occurs. So we have to take a long-term view. Further, it doesn’t matter where a unit of a greenhouse gas comes from, Manchester or London or Sydney or Adelaide or Beijing or Los Angeles. It has the same effect. So this is global and it’s long-term. There’s lots of uncertainty at every step along the way. We don’t know precisely the quantity or type of emissions associated with the economic activity. The way in which the flow builds into the stock also has uncertainty in it as does the way in which the stock influences climate. The way the climate influences people’s lives has uncertainty. Every step along the way, there’s lots of risk and uncertainty involved. So, because of this flow-stock problem and the long build-up and the fact that CO2 stays around for a very long time, we know that some consequences of our actions will, over a reasonable period of time, 100-200 years, be essentially irreversible. Once a species is extinct, it doesn’t generally reappear.

So let’s look very quickly now at the science. Climate change hits us on all sorts of dimensions and it hits us harder as the temperatures go up. If we look at the chart on the next page, we can see that we are quite a way over to the left of that picture. We have seen an increase of only 0.8oC. ‘Only’, you say; but of course some of the effects of that are already quite strong. Record droughts in Australia, record floods in Bihar at the moment, big floods in major parts of Africa, particularly East Africa this year. Even record floods in Gloucester, and Worcester. Those of you who like your cricket will remember the Worcestershire cricket pitch being underwater. Now that’s probably the least of our problems. But what I’m emphasising here is that you’re seeing record events: not simply one in 100 events becoming one in 30 events. You’re seeing record events. Events that never occurred before, just on an 0.8oC rise. But we’re going to have to contemplate an increase a good deal bigger than that. And we won’t be able to keep it much below two, even if we’re very sensible. So what we’re talking about is trying to deal with a world where this increase might be kept down to two, or two-and-a-half degrees, centigrade.

What are the probabilities that these kinds of things will happen? Well, it depends on the stock as I’ve already argued. At the time of the Industrial Revolution, say roughly the middle of the 19th century, we were at 280 parts per million of ‘CO2 equivalent’ in the atmosphere. We’re now at 430. So we’ve already added 150 ppm. We’re now adding at a rate of about about two-and- a-half a year and that rate itself is increasing. Over the next century, if we do nothing, that two and a half would easily average four. So if we did nothing for a century, the stock would be up to way over 800.

What are the implications for temperature? In the chart on the right, the solid lines represent, in effect, confidence intervals: there’s a five per cent chance of being off the top, or bottom, ends. So, if we managed to stabilise the world at 550 parts per million, we’d have a bit over a five per cent change of the temperature rise being above 5oC. If we stabilised at 450, then we can be reasonably confident that we’d hold the temperature increase below four. And the average temperature increase is roughly in the middle of these red bars. What we took in this red bar is a fairly standard central model which comes form the Hadley Centre. So we are very close to the 450. We’ll be at 450 in eight years or so. And that will give us roughly a 50:50 chance of being either side of two degrees centigrade. If we stabilise below 550, we’d have a roughly 50:50 chance of being below, if we stabilised at 550, we’d have a roughly 50:50 chance of being above or below three degrees Centigrade eventually. If we go forward on the basis of ‘business as usual’ and we go up to 750 or so, then there would be something like a 50:50 chance of being either side of five degrees centigrade warmer. And that would be, in most people’s judgment, absolutely devastating.

What kind of consequences do you get from a rise of five degrees? The science is quite quiet on the subject because it doesn’t really know. Three million years ago, we were a bit warmer than we are now but that was only by two or three degrees. So five degrees is way outside human experience. It would be absolutely transformational. In all probability, we’d see the collapse of the ice sheets, definitely in Greenland, probably also West Antarctica. That would lead to well over 10 metres of seal level rise. Most of the world’s coastal cities would be flooded in that environment. The snows and glaciers on the Himalayas are essentially the water tower or the sponge that gives a steady discharge through the year, down the major rivers of the world. Billions of people are dependent on those rivers. If we just count the countries for which these are the major rivers, they involve roughly a half of the humankind. All this would result in major movements of population and conceivably in massive conflict.

Suppose we accept that argument that we should stabilise below 550. That gives us targets, it anchors economic and scientific and environmental policy. It will tell us for example, that we ought to be cutting flows by about 50 per cent by 2050 if we want to be comfortably below 550. And that was what was agreed in Heiligendamm at the G8 Summit in June of this year. I think many people exaggerate the cost of doing this but it is going to be costly. A number of models estimate the cost of CO2 as about $30 per tonne. This is what is called the ‘marginal abatement cost’, what it costs to take the last tonne out of the atmosphere.

When it comes policy recommendations, cost is not the only issue. There are ethical issues involved as well. How do you treat this generation relative to future generations in thinking about your equity and your understanding of responsibilities? Do you discriminate by date of birth? Do the young get less weight than the old? Do the people about to be born get much less weight than the people who are already here? The way I’ve put it should make you shout ‘no!’ but amazingly, there is a large number of people who think you should give much lower weight to people who are 30 or 40 years younger than those who are 30 or 40 years older. It’s an argument that’s always puzzled me. You do have to think about distribution. Future generations may be richer or poorer than us. That will matter and that’s very important. Within a generation there will be very difficult equity issues. And you also have to ask yourself, how do you value environment and lives?

The discounting issue has attracted a lot of attention. I shall say only one or two things here. The first is that discounting, how much you value an extra unit that comes later relative to an extra unit now, that idea of discounting is something which is quite difficult to deal with in this context, for the very basic and simple reason that you're comparing paths corresponding to different choices we make about how much we cut our emissions, you’re dealing with very very different paths. Normally in economics we deal with investment projects which you know, build a bit of railway now and get the returns in terms of railway services a little bit later. This isn’t one of those. So it’s a big, non-marginal, problem and the kind of tools that are conventionally used in very simple-minded approach to cost benefit analysis, can’t be applied directly here. There are several ways to think about this problem. We tried to raise them in the ‘Review’ but a lot of the discussion on discounting that you’ll find in the literature, and watch out for it, makes the basic mistake of not recognising this as a problem involving very big changes. I haven’t got the time to go into any detail here but it’s an important and interesting issue which I think economists now are starting to handle much better than they did a couple of years ago in the economics of climate change.

What policy instruments do we have to use? People have to face up directly to the costs of the actions, the damages they’re doing to others. We can do that through taxes, you can do it through carbon trading. Carbon trading is where you’re not allowed to emit carbon or not allowed to emit carbon above a certain level without a permit and you have to buy that permit. And those permits can be traded. So allocations say, ‘...if I’m allowed to emit carbon up to a given level, and I go under it, I can sell how much I’ve gone under it. If I go over it, I have to buy the right to go over it’. In the EU, we already have the Emissions Trading Scheme which got off the ground in the last couple of years. It’s moving into its second phase next year and the cost of carbon in the second phase is about 20-22 euros a tonne, getting into the kind of range that I think is sensible. I think it will have to be a fair bit higher than that eventually but at least that’s starting to work. It covers half of our emissions in Europe. If you ask people, do they pay carbon taxes at the moment, they’d probably say, ‘no’. They’d be wrong. Half of our emissions are actually covered by the EU Emissions Trading Scheme.

We have to design these trading schemes well. It’s very important, in my view, to move to auctioning of permits and not just giving them away. Auctioning of permits, of course, gets your public revenue. It will focus people's attention a bit more strongly and get them to move more quickly and, of course, giving say, all the airline permits to the big airlines would actually give you more problems of oligopoly and market power. So there are all sorts of reasons for auctioning permits. I think it’s sensible to go to that gradually because firms made their plans before carbon pricing was there and they have to adjust. And you have to think about how price volatility might work as well. If you stick to quantity constraints, there will be volatility of prices. If you fix prices, there’ll be volatility of quantities. My own view is that quantity is so important. Let us deal separately with the volatility in prices and try to think through how we can make prices less volatile. There are ways of doing that.

We are also going to have to bring forward technology very quickly. I don’t believe that just by having a price for carbon, we’ll see fast enough technical progress because we’re in a real hurry. And of course, there are all kinds of market imperfections, particularly associated with energy efficiency. There are all sorts of reasons why people don’t go for really energy efficient projects, for example, in their own home. We have to understand that better. Partly it’s information, partly it’s transaction cost. These are just the kind of market imperfections that economists struggle to analyse. Economists tend to think that people do things because of sticks or carrots, ‘incentives’. Actually people sometimes think about responsible behaviour. So I think public discussion and debate about responsible behaviour will actually make a difference. I think it’s starting to make a difference. I’m an economist. I start with the sticks and carrots and I’ll go on starting with the sticks and carrots. Forget those at your peril but it isn’t the only part of the story. And I’ve already emphasised the importance of deforestation.

Let's think a little bit now about the equity of all this. As I said, we've gone from 280 pre-industrial times to 430 now and 550 should be the actual maximum. Currently, United States is at 20 tonnes per person, Europe over 10 tonnes per person, China at least five, probably six, India one tonne per capita and most of Africa a good deal less than one tonne per capita. If you just look at the flows, it is extraordinarily inequitable. But as I’ve said right from the beginning, this isn’t just a flow story. It’s also a stock story. If we're taking a route between the 280 that we were, before pre-industrial times, and the 550 which is the maximum we should end up, that's adding another 270 from the 280. And that’s a maximum we should be adding and we’ve already added 150 of it. There’s only 120 left. Who took the lion’s share of that 150 already added?

That’s pretty obvious; around 75 per cent were the rich countries. So if you think of this as a well, a well of additions which was 270 big, we’ve already drunk 150 of it and one lot drank the most. Less than 20 per cent of the population drank the lion’s share. And that’s more than half of the well. So we shouldn’t wonder why developing countries are so incensed at the inequity of all this. It’s the rich countries that have been largely responsible for the problem, particularly if you think of it in the stock sense and it’s the poor countries going to be hit earliest and hardest. So the first reaction is, ‘...you caused the problem, you rich countries, you less than 20 per cent of the world’s population, you sort it out’.

We’ve all got to cut back. We understand that even if the rich countries went to zero by 2050, there’d still be a problem. Because the way to get from 40-45 gigatonnes in terms of the annual emissions flows, down to 20-25 gigatonnes, we’ve all got to be involved. 20-25 means getting the world average per capita of around seven tonnes with six billion people now down to two or three with a world population of nine billion. The only country in the world, of the big players, that’s actually below the two or three tonnes we need to get to, is India.

In Heiligendamm in June of this year, the G8 committed to 50 per cent reductions by 2050. Exactly in the kind of range I was talking about. In California, 80 per cent reductions by 2050. Gordon Brown, recently said the UK should be thinking very seriously of moving its 60 per cent reduction target by 2050 to 80 per cent. Talking and committing are very different from doing. But rich countries with strong targets will help. It’s the right way to start and all this has happened in this calendar year.

Deforestation emits more, is responsible for more emissions currently than all of air, sea, road, rail transport put together. You can’t go charging around telling other countries how to run their deforestation policies, but you can support them in serious attempts to hold back on deforestation. We could make a very big difference quite quickly. I think with a fund of 10 or 15 billion dollars a year, to could cut deforestation by up to half. We have to commit and share technologies. We’re going to need nuclear, we’re going to need renewables but we're also going to need carbon capture and storage for coal because many countries in the world are going to use coal for their electricity generation. And we have to decarbonise electricity generation because that will give us zero carbon road transport and rail transport as well.

Within the last year we have seen reluctant politicians, John Howard, George Bush, being pushed by their public to recognise the urgency of climate change. That’s what makes me more optimistic. But I’m only more optimistic than I was a year and a half ago. It’s tough and it’s difficult to put these deals together but the next two or three weeks in Bali are going to be crucial steps along the way.

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