This independent Review was commissioned by the Chancellor of the Exchequer, reporting to both the Chancellor and to the Prime Minister, as a contribution to assessing the evidence and building understanding of the economics of climate change.
The Review first examines the evidence on the economic impacts of climate change itself, and explores the economics of stabilising greenhouse gases in the atmosphere. The second half of the Review considers the complex policy challenges involved in managing the transition to a low-carbon economy and in ensuring that societies can adapt to the consequences of climate change that can no longer be avoided.
The scientific evidence is now overwhelming:
Climate change presents very serious global risks, and it demands an urgent global response.
Climate change is global in its causes and consequences, and international collective action will be critical in driving
an effective, efficient and equitable response on the scale required. This response will require deeper international co-operation in many areas - most notably in creating price signals and markets for carbon, spurring technology research, development and deployment, and promoting adaptation, particularly for developing countries.
The effects of our actions now on future changes in the climate have long lead times. What we do now can have only a limited effect on the climate over the next 40 or 50 years. On the other hand what we do in the next 10 or 20 years can have a profound effect on the climate in the second half of this century and in the next.
Mitigation - taking strong action to reduce emissions - must be viewed as an investment, a cost incurred now and in the
coming few decades to avoid the risks of very severe consequences in the future. If these investments are made wisely, the costs will be manageable, and there will be a
wide range of opportunities for growth and development along the way. For this to work well, policy must promote sound market signals, overcome market failures and have equity and risk mitigation at its core.
The evidence gathered by the Review leads to a simple conclusion:
the benefits of strong, early action considerably outweigh the costs.
The evidence shows that ignoring climate change will eventually damage economic growth. It will be difficult or impossible to reverse these changes. Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries. The earlier effective action is taken, the less costly it will be.
The scientific evidence points to increasing risks of serious, irreversible impacts from climate change associated with business-as-usual (BAU) paths for emissions.
The stocks of greenhouse gases in the atmosphere (including carbon dioxide, methane, nitrous oxides and a number of gases that arise from industrial processes) are rising, as a result of human activity.
The current level or stock of greenhouse gases in the atmosphere is equivalent to around 430 parts per million (ppm) CO2, compared with only 280ppm before the Industrial Revolution. These concentrations have already caused the world to warm by more than half a degree Celsius and will lead to at least a further half degree warming over the next few decades, because of the inertia in the climate system.
Even if the annual flow of emissions did not increase beyond today's rate, the stock of greenhouse gases in the atmosphere would reach double pre-industrial levels by
2050 - that is 550ppm CO2e - and would continue growing thereafter. But the annual flow of emissions is accelerating, as fast-growing economies invest in highcarbon
infrastructure and as demand for energy and transport increases around the world. The level of 550ppm CO2e could be reached as early as 2035. At this level there is at least a 77% chance - and perhaps up to a 99% chance, depending on the climate model used - of a global average temperature rise exceeding 2°C.
Under a BAU scenario, the stock of greenhouse gases could more than treble by the end of the century, giving at least a 50% risk of exceeding 5°C global average temperature change during the following decades. This would take humans into unknown territory. An illustration of the scale of such an increase is that we are now only around 5°C warmer than in the last ice age.
Under a BAU scenario, the stock of greenhouse gases could more than treble by the end of the century, giving at least a 50% risk of exceeding 5°C global average temperature change during the following decades. This would take humans into unknown territory. An illustration of the scale of such an increase is that we are now only around 5°C warmer than in the last ice age.
On current trends, average global temperatures will rise by 2 - 3°C within the next fifty years in Africa, could leave hundreds of millions without the ability to produce or purchase sufficient food. At 4°C and above, global food production is likely to be seriously affected.
Rising sea levels will result in tens to hundreds of illions more people flooded each year with warming of 3 or 4°C.
According to one estimate, by the middle of the century, 200 million people may become permanently displaced due to rising sea levels, heavier floods, and more intense droughts.
The damages from climate change will accelerate as the world gets warmer.
A number of studies suggest that the Amazon rainforest could be vulnerable to climate change, with models projecting significant drying in this region. One model, for example, finds that the Amazon rainforest could be significantly,
and possibly irrevocably, damaged by a warming of 2 - 3°C (A warming of 2°C is expected in less than 50 years).
The melting or collapse of ice sheets would eventually threaten land which today is home to 1 in every 20 people(=5% of the worlwide population).
The impacts of climate change are not evenly distributed - the poorest countries and people will suffer earliest and most. And if and when the damages appear it will be too late to reverse the process. Thus we are forced to look a long way ahead.
Climate change is likely to reduce further already low incomes and increase illness and death rates in developing countries. Falling farm incomes will increase poverty and reduce the ability of households to invest in a better future, forcing them to use up meagre savings just to survive.
Rising sea levels and other climate-driven changes could drive millions of people to migrate: more than a fifth of Bangladesh could be under water with a 1m rise in sea levels, which is a possibility by the end of the century.
A 5 or 10% increase in hurricane wind speed, linked to rising sea temperatures, is predicted approximately to double annual damage costs, in the USA.
Heat waves like that experienced in 2003 in Europe, when 35,000 people died and agricultural losses reached $15 billion, will be commonplace by the middle of the century.
The rising costs of extreme weather events could affect global financial markets through higher and more volatile costs of insurance.
The monetary impacts of climate change are now expected to be more serious than many earlier studies suggested, not least because those studies tended to exclude some of the
most uncertain but potentially most damaging impacts.
The risks of outcomes much worse than expected are very real and they could be catastrophic.
The consequences of climate change for health and for the environment are likely to be severe.
Some recent scientific evidence indicates that the climate system may be more responsive to greenhouse-gas emissions than previously thought, for example because of the existence of amplifying feedbacks such as the release of methane and weakening of carbon sinks.
Putting these additional factors together would increase the total cost of BAU climate change to the equivalent of around a 20% reduction in consumption per head, now and into the future.
Emissions have been, and continue to be, driven by economic growth; yet stabilisation of greenhouse-gas concentrations in the atmosphere is feasible and consistent with continued growth.
Since 1850, North America and Europe have produced around 70% of all the CO2 emissions due to energy production, while developing countries have accounted for less than one quarter. Most future emissions growth will come from today’s
developing countries, because of their more rapid population and GDP growth and their increasing share of energy-intensive industries.
In the long term, annual global emissions will need to be
reduced to below 5 GtCO2e, the level that the earth can absorb without adding to the concentration of GHGs in the atmosphere. This is more than 80% below the absolute level of current annual emissions.
To stabilise at 450ppm CO2e, without overshooting, global emissions would need to peak in the next 10 years and then fall at more than 5% per year, reaching 70% below current levels by 2050. Achieving these deep cuts in emissions will have a cost. The Review estimates the annual costs of stabilisation at 500-550ppm CO2e to be around 1% of GDP
by 2050 - a level that is significant but manageable.
Greenhouse-gas emissions can be cut in four ways. Costs will differ considerably depending on which combination of these methods is used, and in which sector:
• Reducing demand for emissions-intensive goods and services
• Increased efficiency, which can save both money and emissions
• Action on non-energy emissions, such as avoiding deforestation
• Switching to lower-carbon technologies for power, heat and transport
Studies by the International Energy Agency show that, by 2050, energy efficiency has the potential to be the biggest single source of emissions savings in the energy sector. This would have both environmental and economic benefits:
energy-efficiency measures cut waste and often save money.
A substantial body of evidence suggests that action to prevent further deforestation would be relatively cheap compared with other types of mitigation, if the right policies and institutional structures are put in place.
Large-scale uptake of a range of clean power, heat, and transport technologies is required for radical emission cuts in the medium to long term. The power sector around the world will have to be least 60%, and perhaps as much as 75%,
decarbonised by 2050 to stabilise at or below 550ppm CO2e. Deep cuts in the transport sector are likely to be more difficult in the shorter term, but will ultimately be
needed. While many of the technologies to achieve this already exist, the priority is to bring down their costs so that they are competitive with fossil-fuel alternatives under a carbon-pricing policy regime.
A portfolio of technologies will be required to stabilise emissions. It is highly unlikely that any single technology will deliver all the necessary emission savings, because all
technologies are subject to constraints of some kind, and because of the wide range of activities and sectors that generate greenhouse-gas emissions.
The stocks of hydrocarbons that are profitable to extract (under current policies) are more than enough to take the world to levels of greenhouse-gas concentrations well beyond 750ppm CO2e, with very dangerous consequences.
Costs rise significantly as mitigation efforts become more ambitious or sudden.
An important corollary is that there is a high price to delay. Delay in taking action on climate change would make it necessary to accept both more climate change and,
eventually, higher mitigation costs. Weak action in the next 10-20 years would put stabilisation even at 550ppm CO2e beyond reach – and this level is already associated with significant risks.
The transition to a low-carbon economy will bring challenges for competitiveness but also opportunities for growth.
Costs of mitigation of around 1% of GDP are small relative to the costs and risks of climate change that will be avoided. All economies undergo continuous structural change; the most successful economies are those that have the flexibility and dynamism to embrace the change.
There are also significant new opportunities across a wide range of industries and services. Markets for low-carbon energy products are likely to be worth at least $500bn per year by 2050, and perhaps much more. Individual companies and countries should position themselves to take advantage of these opportunities.
Climate-change policy can help to root out existing inefficiencies. At the company level, implementing climate policies may draw attention to money-saving opportunities. At the economy-wide level, climate-change policy may be a lever for reforming inefficient energy systems and removing distorting energy subsidies, on which governments around the world currently spend around $250bn a year.
Policies on climate change can also help to achieve other objectives. These cobenefits can significantly reduce the overall cost to the economy of reducing greenhouse-gas emissions. If climate policy is designed well, it can, for example, contribute to reducing ill-health and mortality from air pollution, and to preserving forests that contain a significant proportion of the world’s biodiversity.
Preliminary calculations adopting the approach to valuation taken in this Review suggest that the social cost of carbon today, if we remain on a BAU trajectory, is of the order of $85 per tonne of CO2. Comparing the social costs of carbon on a BAU trajectory and on a path towards stabilisation at 550ppm CO2e, we estimate the excess of benefits over costs, in net present value terms, from implementing strong mitigation policies this year, shifting the world onto the better path: the net benefits would be of the order of $2.5 trillion. Even if we have sensible policies in place, the social cost of carbon will also rise steadily over time, making more and more technological options for mitigation costeffective.
The current evidence suggests aiming for stabilisation somewhere within the range 450 - 550ppm CO2e. Anything higher would substantially increase the risks of very
harmful impacts while reducing the expected costs of mitigation by comparatively little. Uncertainty is an argument for a more, not less, demanding goal, because of the size of the adverse climate-change impacts in the worst-case scenarios.
Policy to reduce emissions should be based on three essential elements: carbon pricing, technology policy, and removal of barriers to behavioural change.
Establishing a carbon price, through tax, trading or regulation, is an essential foundation for climate-change policy. Greenhouse gases are, in economic terms, an externality: those who produce greenhouse-gas emissions are bringing about climate change, thereby imposing costs on the world and on future generations, but they do not face the full consequences of their actions themselves.
Putting an appropriate price on carbon – explicitly through tax or trading, or implicitly through regulation – means that people are faced with the full social cost of their
actions. This will lead individuals and businesses to switch away from high-carbon goods and services, and to invest in low-carbon alternatives. Trading schemes can be an effective way to equalise carbon prices across countries and sectors, and the EU Emissions Trading Scheme is now the centrepiece of European efforts to cut emissions. In order to influence behaviour and investment decisions, investors and consumers
must believe that the carbon price will be maintained into the future. This is particularly important for investments in long-lived capital stock. Investments such as power stations, buildings, industrial plants and aircraft last for many decades. If there is a lack of confidence that climate change policies will persist, then businesses may not factor a carbon price into their decision-making. The result may be
overinvestment in long-lived, high-carbon infrastructure – which will make emissions cuts later on much more expensive and difficult.
Policies are required to support the development of a range of low-carbon and high-efficiency technologies on an urgent timescale.
The second element of climate-change policy is technology policy, covering the full spectrum from research and development, to demonstration and early stage deployment. The development and deployment of a wide range of low-carbon
technologies is essential in achieving the deep cuts in emissions that are needed. The private sector plays the major role in R&D and technology diffusion, but closer
collaboration between government and industry will further stimulate the development of a broad portfolio of low carbon technologies and reduce costs.
In some sectors - particularly electricity generation, where new technologies can struggle to gain a foothold - policies to support the market for early-stage technologies will be critical.
The third element is the removal of barriers to behavioural change. Even where measures to reduce emissions are cost-effective, there may be barriers preventing action. These include a lack of reliable information, transaction costs, and behavioural and organisational inertia. The impact of these barriers can be most clearly seen in the frequent failure to realise the potential for cost-effective energy efficiency measures.
Regulatory measures can play a powerful role in cutting through these complexities, and providing clarity and certainty. Minimum standards for buildings and appliances
have proved a cost-effective way to improve performance, where price signals alone may be too muted to have a significant impact.
Adaptation policy is crucial for dealing with the unavoidable impacts of climate change, but it has been under-emphasised in many countries.
Quantitative information on the costs and benefits of economy-wide adaptation is currently limited. Studies in climate-sensitive sectors point to many adaptation
options that will provide benefits in excess of cost. But at higher temperatures, the costs of adaptation will rise sharply and the residual damages remain large. The
additional costs of making new infrastructure and buildings resilient to climate change in OECD countries could be $15 – 150 billion each year (0.05 – 0.5% of GDP).
Markets that respond to climate information will stimulate adaptation among individuals and firms. Risk-based insurance schemes, for example, provide strong signals about the size of climate risks and therefore encourage good risk
management.
Indeed, many countries, states and companies are already beginning to act. However, the emissions of most individual countries are small relative to the global total, and very large reductions are required to stabilise greenhouse gas
concentrations in the atmosphere. Climate change mitigation raises the classic problem of the provision of a global public good. It shares key characteristics with other environmental challenges that require the international management of common resources to avoid free riding.
The UN Framework Convention on Climate Change (UNFCCC), Kyoto Protocol and a range of other informal partnerships and dialogues provide a framework that supports co-operation, and a foundation from which to build further collective action.
The need for action is urgent: demand for energy and transportation is growing rapidly in many developing countries, and many developed countries are also due to
renew a significant proportion of capital stock. The investments made in the next 10-20 years could lock in very high emissions for the next half-century, or present an
opportunity to move the world onto a more sustainable path.
Creating a broadly similar carbon price signal around the world, and using carbon finance to accelerate action in developing countries, are urgent priorities for international co-operation.
A broadly similar price of carbon is necessary to keep down the overall costs of making these reductions, and can be created through tax, trading or regulation. The transfer of technologies to developing countries by the private sector can be accelerated through national action and international co-operation.
Scaling up flows of carbon finance to developing countries to support effective policies and programmes for reducing emissions would accelerate the transition to a low-carbon economy.
Developing countries are already taking significant action to decouple their economic growth from the growth in greenhouse gas emissions. For example, China has adopted very ambitious domestic goals to reduce energy used for each unit of GDP by 20% from 2006-2010 and to promote the use of renewable energy. India has created an Integrated Energy Policy for the same period that includes measures to
expand access to cleaner energy for poor people and to increase energy efficiency.
Greater international co-operation to accelerate technological innovation and diffusion will reduce the costs of mitigation.
The private sector is the major driver of innovation and the diffusion of technologies around the world. But governments can help to promote international collaboration to
overcome barriers in this area, including through formal arrangements and through arrangements that promote public-private co-operation such as the Asia Pacific
Partnership. Technology co-operation enables the sharing of risks, rewards and progress of technology development and enables co-ordination of priorities.
International co-ordination of regulations and product standards can be a powerful way to encourage greater energy efficiency. It can raise their cost effectiveness,
strengthen the incentives to innovate, improve transparency, and promote international trade.
Curbing deforestation is a highly cost-effective way of reducing greenhouse gas emissions.
Emissions from deforestation are very significant – they are estimated to represent more than 18% of global emissions, a share greater than is produced by the global transport sector.
Action to preserve the remaining areas of natural forest is needed urgently. Largescale pilot schemes are required to explore effective approaches to combining national action and international support. Policies on deforestation should be shaped and led by the nation where the particular
forest stands. But those countries should receive strong help from the international community, which benefits from their actions to reduce deforestation.
Research carried out for this report indicates that the opportunity cost of forest protection in 8 countries responsible for 70 per cent of emissions from land use could
be around $5 billion per annum initially, although over time marginal costs would rise. Compensation from the international community should take account of the
opportunity costs of alternative uses of the land, the costs of administering and enforcing protection, and the challenges of managing the political transition as
established interests are displaced.
Adaptation efforts in developing countries must be accelerated and supported, including through international development assistance.
The poorest developing countries will be hit earliest and hardest by climate change, even though they have contributed little to causing the problem. Their low incomes make it difficult to finance adaptation. The international community has an obligation to support them in adapting to climate change. Without such support there is a serious risk that development progress will be undermined. The additional costs to developing countries of adapting to climate change could run into tens of billions of dollars.
Without a clear perspective on the long-term goals for stabilisation of greenhouse gas concentrations in the atmosphere, it is unlikely that action will be sufficient to
meet the objective. Action must include mitigation, innovation and adaptation. There are many opportunities to start now, including where there are immediate benefits and where large-scale pilot programmes will generate valuable experience. And we have already begun to create the institutions to underpin co-operation.
There is still time to avoid the worst impacts of climate change if strong collective action starts now.
There are ways to reduce the risks of climate change. With the right incentives, the private sector will respond and can deliver solutions. The stabilisation of greenhouse
gas concentrations in the atmosphere is feasible, at significant but manageable costs. The policy tools exist to create the incentives required to change investment patterns
and move the global economy onto a low-carbon path. This must go hand-in-hand with increased action to adapt to the impacts of the climate change that can no longer be avoided.
Above all, reducing the risks of climate change requires collective action. It requires co-operation between countries, through international frameworks that support the
achievement of shared goals. It requires a partnership between the public and private sector, working with civil society and with individuals. It is still possible to avoid the worst impacts of climate change; but it requires strong and urgent collective action.
Delay would be costly and dangerous. |
Stern review 30_10_06_exec_sum.pdf