A new energy-industrial revolution and global agreement on climate change

Nicholas Stern

Chair of the Grantham Research Institute on Climate Change and the Environment,

IG Patel Professor of Economics & Government,

London School of Economics and Political Science

Low Carbon Prosperity Summit

Brussels, 9 February 2011

A new energy-industrial revolution• We are at a crossroads: much to gain from action, much to lose from

inaction. Evidence on planet, risks and emissions points to ever greater urgency.

• A transition to low-carbon growth would likely be one of the most dynamic periods in economic history.

• A new era of progress and prosperity; could bring decades of innovative and creative growth across the economy, especially for businesses, and large and growing investment and markets for the pioneers.

• Will require good public policy, strong investment and some dislocation. Will not happen on its own, it is not for free and will involve changing prices, taxes, infrastructure, and regulations.

• Important to overcome market failures around R&D and finance, e.g., support for research institutions, RD&D tax/price incentives, risk sharing to encourage private investment. Funding from green taxes/permit auctions.

2

Waves of innovation

3

1ST WAVE

Industrial(1770-1830)

2ND WAVE

Steam & Railways(1830-1870) 3RD WAVE

Steel, Electricity& Heavy(1875-1920) 4TH WAVE

Oil, Automobiles& Mass Production(1910-1975)

5TH WAVE

Information& Telecom(1971-)

INN

OV

AT

ION

1785 1845 1900 1950 1990 2020

Cleantech& Biotech (2009-)

6TH WAVE

Source: Merrill Lynch (2008) & Perez (2002)

Place: Syria and Israel

Source: Google images

Drip irrigation and low- or no-till agriculture

Place: UK

Source: Google images

Cavity wall and loft insulation

Place: USA and Germany

Source: Google images

Biofuels from algae

Place: Germany

Source: Google images

Electric vehicles

Place: USA and Japan

Source: Google images

Solar thin film and nanotechnology

Source: IEA World Energy Outlook (2010); IEA, OPEC, and The World Bank (2010), Analysis of the Scope of Energy Subsidies and Suggestions for the G-20 Initiative. Available at: http://www.g20.org/exp_04.aspx

Promoting technological innovation (I)

*IEA estimates are based on the price-gap method with a sample size of 37 counties, which the IEA state represent 95% of global subsidised fossil-fuel consumption. All but 2 of the 37 countries are non-OECD.

Coal 6

Natural gas85

Electricity95

Oil products126

0

20

40

60

80

100

120

140

US

$ b

illio

n

IEA estimates of fossil-fuel consumption subsidies in 2009, by type of fuel*

Total US$ 312 billion

• Total production subsidies could be in the order of US$ 100 billion p.a., although there are no current analyses of production subsidies that systemically examine a wide range of countries.

Source: World Bank, World Development Report 2010, Ch 7.

Promoting technological innovation (II)

• COP16 in Cancun was more constructive than Copenhagen, both in atmosphere and outcome.

• Modest but significant advances:

– Broad acceptance of the principles outlined in the Copenhagen Accord;

– Embodiment of Accord submissions on emissions; takes us, for 2020, 60-70% of the way between BAU and a 2°C path;

– Recognition there must be progress on the key building blocks of finance, forests, technology and measurement; mechanisms were set out.

• China, India and Brazil are recognising their leadership role.

• Any agreement should be based on an inclusive understanding and mutual confidence:

– Will involve careful study and appreciation of the plans of others, including China's 12th 5-year plan.

– These key foundations can be constructed via various commitment

arrangements.

Cancun to Durban

Cancun to Durban

Top down (regional/international)

Bottom up (firms/households/cities/nations)

Top down and bottom up support each other

Mutual confidence is fundamental to accelerating progress

There is no artificial horse race between the two

Source: Google images