In 2005, HM Treasury appointed Sir Nicholas Stern, an economist, to report on climate change. Stern calls climate change ‘the worst market failure the world has ever seen’ and states three main goals to overcome it; (i) the pricing of carbon through tax, trading and regulation (ii) a policy which supports and encourages low carbon technology and (iii) the removal of barriers which lead to energy efficiency along with informing, persuading and educating individuals with regard to climate change.
A relationship between the environment and economics is inevitable as economics is the study of scarce resources, resources that we source from the environment around us. The Stern report, which was published in October 2006, was not the first study to discuss this relationship, however, Stern emphasised the cost of environmental degradation to us in terms of global gross domestic product (GDP, something economists could easily relate to) with shocking results.
According to Stern’s model a realistic projected world temperature increase in the next century of 5-6ºC would result in a 5–10% loss of global GDP with poor countries being be affected with a 10% loss of GDP. So what is global GDP? Again, according to Stern, 0.5% of global GDP is equal to $200billion so a loss of 5-10% equates to $2-$4 trillion, an unimaginable quantity.
However, Stern does not wallow in disaster or create colourful stories of probable Armageddon but focuses on what can be done, sprinkling a little hope on what is already a heavily discussed and gloomy topic. To counteract the effect of climate change a reduction of emissions by 80% is required, this cost are ‘low in comparison to inaction’. Keeping the CO2 emissions at reasonable levels will require an annual cost of 1% of global GDP according to central estimates. The problem with the estimation is that it depends on technology; if the development of low carbon emission technology is slow the costs will be higher, whereas if the technology is quickly developed the costs will be smaller.
Decreasing carbon emissions will not be an easy task, in terms of practicalities; adopting cleaner power, energy efficiency and transport technologies, present enough problems within themselves. But then the international aspect is added into the mix, some countries produce more then others, some can afford more then others, and some care more then others, so who takes charge? Stern does not believe individual action is sufficient. The Kyoto Protocol and the UN Climate framework are certainly a good basis for international co-operation but by no means are they enough, rather an ‘international vision of long-term goals’ is required within an international framework. This takes us deep into the bureaucratic nature of international organisations and their inefficiency, a complicated and avoidable topic.
So, according to Stern, there is hope. It is in our best interest to act sooner rather then later, not purely for monetary gains but also because of the effects of our actions on generations to come. So what if no action is taken? The report predicts an ever-increasing concentration of greenhouse gases leading to global temperature rising, in the long term, the probability of the temperature rising by 5ºC is 50%. We may not complain about having a warmer summer here in Britain but, for comparative reasons, a 5ºC increase is the same change in temperature that occurred between the last ice age and now. A remarkable change in the way lives are led will occur, fundamentally, the way we are living now is not sustainable and we must act to prevent any more irreversible damage.
Steps towards a better environment are gently being formed. More supermarkets are implementing a small fee for their plastic bags or incentives for reusing them. Car taxes depending on the amount of CO2 emissions have been introduced. The question is whether this will make enough of a difference. The goal is to reduce carbon emission by 80% yet Stern predicts that in 2050 half of our energy will still come from fossil fuels, the other half from renewable energy and nuclear (a disputed topic in itself).
What it all appears to boil down to is sustainability. We are not living in a sustainable way and future generations will suffer the consequences, Stern states that we are too late to alter what may happen in the next few decades but we can change what will happen in the next few centuries. A continuation of extreme weather patterns is likely to occur in the next few decades, the 2003 drought in Western Europe for example, or Hurricane Katrina.
So how do we overcome the market failure? By allocating the resources efficiently or by investing in research and technology? We have, so far, failed as an international system to efficiently allocate resources, but research and technology take time, a factor we don’t have the luxury of. Since publication the Stern review has experienced both positive and negative critical response with the report being deemed political.
For further reading on the subject
The Stern Report