The Economics of Climate ChangeNicholas Stern

Australian Davos Connection28th March 2007

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

Projected impacts of climate change

1°C 2°C 5°C4°C3°C

Sea level rise threatens major cities

Falling crop yields in many areas, particularly developing regions

FoodFood

WaterWater

EcosystemsEcosystems

Risk of Abrupt and Risk of Abrupt and Major Irreversible Major Irreversible ChangesChanges

Global temperature change (relative to pre-industrial)0°C

Falling yields in many developed regions

Rising number of species face extinction

Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system

Significant decreases in water availability in many areas, including Mediterranean and Southern Africa

Small mountain glaciers disappear – water supplies threatened in several areas

Extensive Damage to Coral Reefs

Extreme Extreme Weather Weather EventsEvents

Rising intensity of storms, forest fires, droughts, flooding and heat waves

Possible rising yields in some high latitude regions

Stabilisation and commitment to warming

1°C 2°C 5°C4°C3°C

400 ppm CO2e

450 ppm CO2e

550 ppm CO2e

650ppm CO2e

750ppm CO2e

5% 95%

Eventual temperature change (relative to pre-industrial)

0°C

4

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.

0

10

20

30

40

50

60

70

80

90

100

2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Glo

bal E

mis

sion

s (G

tCO

2e)

450ppm CO2e

500ppm CO2e (falling to450ppm CO2e in 2150)

550ppm CO2e

Business as Usual

50GtCO2e

70GtCO2e

65GtCO2e

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

Key principles of policy

• Climate change policy:• Carbon pricing• R,D&D• Related market failures and behavioural change

• Consistency with other policy goals – growth and energy security

• 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.

Carbon pricing

Technology needs more than a carbon price

• One element of technology policy is public funding to support innovation in new technologies.

• The Review suggests that: – Global public energy R&D 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’….

IEA (2000)

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

Building international carbon markets

• Scarcity in rich countries: demand side

• Benchmarks for supply side

• Institutional structure 0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

European Union(25)

United States ofAmerica

China, India,Mexico, Brazil,South Africa

(+5)

G7 EU25, Jap, Aus,Can, USA

OECD Top 20 Globalemitters

Milli

on to

nnes

CO

2 em

issi

ons,

200

2

Total emissions from fossil fuels

Emissions from power and industrial sectors (estimated)

Strategies for emission reduction

Four ways to cut emissions:

• patterns of demand;

• improving efficiency;

• using lower-carbon technologies;

• tackling non-energy emissions.

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

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: R&D, 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

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

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

Projected impacts of climate change

1°C 2°C 5°C4°C3°C

Sea level rise threatens major cities

Falling crop yields in many areas, particularly developing regions

FoodFood

WaterWater

EcosystemsEcosystems

Risk of Abrupt and Risk of Abrupt and Major Irreversible Major Irreversible ChangesChanges

Global temperature change (relative to pre-industrial)0°C

Falling yields in many developed regions

Rising number of species face extinction

Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system

Significant decreases in water availability in many areas, including Mediterranean and Southern Africa

Small mountain glaciers disappear – water supplies threatened in several areas

Extensive Damage to Coral Reefs

Extreme Extreme Weather Weather EventsEvents

Rising intensity of storms, forest fires, droughts, flooding and heat waves

Possible rising yields in some high latitude regions

Stabilisation and commitment to warming

1°C 2°C 5°C4°C3°C

400 ppm CO2e

450 ppm CO2e

550 ppm CO2e

650ppm CO2e

750ppm CO2e

5% 95%

Eventual temperature change (relative to pre-industrial)

0°C

18

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.

0

10

20

30

40

50

60

70

80

90

100

2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Glo

bal E

mis

sion

s (G

tCO

2e)

450ppm CO2e

500ppm CO2e (falling to450ppm CO2e in 2150)

550ppm CO2e

Business as Usual

50GtCO2e

70GtCO2e

65GtCO2e

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.

Key principles of policy

• Climate change policy:• Carbon pricing• R,D&D• Related market failures and behavioural change

• Consistency with other policy goals – growth and energy security

• 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.

Carbon pricing

Technology needs more than a carbon price

• One element of technology policy is public funding to support innovation in new technologies.

• The Review suggests that: – Global public energy R&D 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’….

IEA (2000)

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

Building international carbon markets

• Scarcity in rich countries: demand side

• Benchmarks for supply side

• Institutional structure 0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

European Union(25)

United States ofAmerica

China, India,Mexico, Brazil,South Africa

(+5)

G7 EU25, Jap, Aus,Can, USA

OECD Top 20 Globalemitters

Milli

on to

nnes

CO

2 em

issi

ons,

200

2

Total emissions from fossil fuels

Emissions from power and industrial sectors (estimated)

Strategies for emission reduction

Four ways to cut emissions:

• patterns of demand;

• improving efficiency;

• using lower-carbon technologies;

• tackling non-energy emissions.

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

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: R&D, 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

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