"The benefits of strong, early action on climate change outweigh the costs."
The sentence appears as a paragraph by itself, in bold, in the Executive Summary of the now-released, much-anticipated Stern Review on the Economics of Climate Change.
The numbers underscore the point: addressing the problem now will cost about 1% of GDP per year. Doing nothing, say the economic models, will cost the world the loss of 5% GDP per year -- "now and forever" says the report, evoking an almost religious tone. That 5% figure is actually the best case scenario for doing nothing: if all the risk factors are taken into account, and they all hit home (an appropriate phrase in this case, since our homes are what they will hit), then the figure could be as high as 20%.
This conclusion, and these figures, are what will be most remembered about this report -- that, and the media/policy splash it's making. We'll get into the details (there are 700 pages of them, so we certainly won't get into too many) later in this article. Let's first consider the frame and context.
Essentially, Stern's team took the output from climate models, and fed them into economic models. The models are intended to number-crunch a great many factors including rates of innovation, capital investment, discounting and the like, and to produce a result. Often that result is radically simplified (at least for political consumption) in the form of changes in GDP over time. The Stern Review takes broader economic-and-social approach, but it's the GDP numbers that, as usual, make the news.
As always, the results of such a study are only as good as the models and the data fed into them. But the climate models are getting darned good (we have enough historical data now on observed recent climate change to do continuous model validation and improvement), and economic modelers also have a pretty good track record at summing up a nation's development plusses and minuses. The Stern Review is based on the best of both kinds of models -- by best, I mean ethically best as well as methodologically best -- so our capacity for environmental and economic mathematical prophesy doesn't get any "better" than this.
But I cannot go farther before I air a critique about the use of that tricky word, "cost". In the Stern Review's "address it now" scenario, many of those "costs" are probably better framed as investments. They involve changes in energy consumption and technology, new fuels, new materials, reductions in traffic, etc. A great deal of that economic action will save money and/or earn it. The Stern Review itself points to a likely half-trillion dollar market in low-energy products by 2050, and Gordon Brown, the Chancellor of the Exchequer (equivalent of Treasury Secretary), also noted in a speech today that 100,000 new British jobs could be expected from many of the "costs" mentioned by the Stern review. It's unclear, at least in the summaries of this report and from scanning as many pages as I had time for, whether the net effect of this costs-cum-investments will be a real reduction in GDP ... or an increase. GDP is notorious, in fact, for registering lots of socially and environmentally negative "costs" as positive economic activity, and for not registering positives when they are not part of the monetized economy. But in any case, "cost" is not the right word here, in my view.
On the other hand, the "costs" of the "business-as-usual" (BAU) scenario are mostly real costs -- such as the cost of providing food to people whose land can no longer grow food, or the cost of dealing with climate refugees. Scrambling to meet these costs, at the expense of other economically productive activity, is what lead's Stern's review to warn that BAU, also known as "doing nothing", will result in a great depression, the likes of which has not been seen since the Great Depression.
Which leads us to lead-author Stern himself. Nicholas Stern is not just any economist; he was Chief Economist of the World Bank from 2000-2003. That by-line, and the gravitas and credibility that it evokes in nearly every corner of the globe, is a huge piece of the reason this report is getting such attention. Stern is now a UK civil servant and government advisor holding the rank of "second permanent secretary at the Treasury," but this title does not play as well in Peoria, or Pretoria, or Porto Alegre.
The other reason the report is news is because the UK wants it to be news. In case you had not noticed, the United Kingdom is very busy "profiling itself" as we say here in Sweden (and as was said today on our own national radio with a slight undertone of envy) as the world leader in the area of climate change policy. This report is another salvo in a massive national public relations campaign, which appears driven by a combination of save-the-world missionary zeal and political scuffling for center stage, all supported on a deep bedrock of UK-based science and activism on climate going back over two decades. Gordon Brown's announcement that he had engaged Al Gore to advise him on climate policy is substance plus symbolism in the same vein. David Cameron, the Tory leader, is competing on climate not with traditional conservative skepticism, but with charges of weak Labor leadership on the issue and attempts to set the policy bar even higher. In the UK, climate is cool.
Now into some of the details of the Stern Review. The ones that will get the most attention have to do with predicted economic impacts of predicted physical -- that is, environmental, ecological, climatic -- events. These impacts are of course based on science, and there is a lot of science summarized in this report. In fact, the Swedish economic commentators (I listened to Swedish radio while doing errands in my ethanol car) were at least a little surprised and even alarmed about how much climate science was in this presumably economic study. That anyone is surprised that an economic look at climate change would include a review of the science is what I find surprising; but economics is notorious for banishing references to the real world from its considerations. "Economists try to prove that what works in practice is also possible in theory," goes the old joke.
So the extensive and thoughtful scientific review is quite a credibility booster -- and that makes it all the more sobering to hear a former World Bank Chief Economist noting that:
- "[S]tabilisation [of greenhouse gases] -- at whatever level -- requires that annual emissions be brought down to more than 80% below current levels."
- "The power sector around the world would need to be at least 60% decarbonised by 2050"
- "Climate change threatens the basic elements of life for people around the world ..."
- "Ecosystems will be particularly vulnerable to climate change, with around 15 - 40% of species potentially facing extinction after only 2°C of warming."
... and so on.
The Stern Review will especially be noted for its characterization and quantification of the economic costs and benefits of climate change, in both the developed and the developing world. Chapters with titles like "Understanding the Costs of Mitigation" and "Opportunities and Wider Benefits from Climate Policies" will probably be the most read.
But I believe the most important contribution of the Stern Review is not in the conclusions that it draws, and in its methods ... but its ethics.
It may seem odd to insert that word "ethics" in an article about an economic report on climate change. But any careful reading of the Stern Review reveals that ethics is central to the project. A long review of climate change's ethical dimensions -- ranging from impacts on rights and freedoms to inter-generational equity -- appears as Chapter 2, together with a highly technical (and fascinating) annex immediately following. Why is this ethical dimension so important? Because assessing the economics of climate change requires, absolutely, making departures from traditional ethical assumptions embedded within economics.
For example, "traditional" neo-classical economics uses something called "pure time discounting," which basically says that the future and everything in it, from people to resources to species, is worth less than the present, simply because it's in the future and therefore inaccessible to us. What builds my confidence most in the Stern Review is that it builds inter-generational ethics -- which acknowledges (duh!) that the future has value to the people who will actually live in the future -- explicitly and transparently into its models. You have to speak economic math fluently to follow all this in detail, and I speak only a pigeon variety. But I sometimes lead people on expeditions to that difficult country (see Introducing Inclusive Wealth: A New Economic Measure of Sustainability); and I like what understand in the Stern Review.
Actually, it's important to underscore that the ethics in this report are mostly not arcane -- even though those arcane aspects reflect, I think, a tectonic shift in economics that the Stern Review is helping to solidify. Climate change is forcing economists to think differently. In fact, I think climate change will one day be credited with having knocked some sense into the discipline of economics.
The Stern Review itself says that it takes a "multi-dimensional view of economic and social goals, rather than a narrowly monetary one," and assesses climate change impacts against the United Nation's Millennium Development Goals. This is already a hugely important ethical decision, and quite different from, for example, the by-comparison-ridiculous "Copenhagen Consensus" process run by Danish statistician Bjorn Lomborg. That process also involved a cost/benefit analysis of climate change ... but it considered the issue in purely monetary terms, and in isolation from the other problems (like AIDS or water) it was supposedly "competing" with for artificially "scarce" global investment dollars. Lomborg's framing of issue revealed a profound lack of understanding about how the world actually works -- that problems are systemically connected, for one thing, and that money isn't the only thing available to invest. The Stern Review crushes the flimsy intellectual scaffolding of such over-exposed work with 700-page, equation-and-data-braced, systems-thinking-fueled "ka-thunk".
In short ... it does not do justice to this report to report on it in short. I predict the Stern Review will inevitably be used largely as a political prop and target, for better or worse but mostly for better, and that it will be read in its surprisingly lucid entirety by relatively few. But I also predict the Stern Review will go down as a landmark of how clear, thorough thinking can emerge into policy -- a landmark not just in climate change, or the economics of climate change, but in economics in general.
