Monday, October 30, 2006

Stern medicine

The Stern Report (“The Economics of Climate Change), alluded to in an earlier post, was officially published last week. Commissioned by the British Government, the report is a comprehensive overview of the economics of climate change, and manages to be both optimistic (there’s still time) and cautionary (but if we wait too long…).

This report is a thorough, painstaking and ultimately courageous step forward. The authors recognized they would have to go way out on limb after limb with their assumptions and projections, but rather than take the safe course, they went out onto every limb, taking care to clearly document their assumptions and their methods of projection. Creating economic projections for a single country a year into the future can be a pretty daunting task – this group tackled the entire global economy and went out a hundred years.

But they did it right. Here are the highlights:

Cost-benefit analysis
The report starts with a cost-benefit analysis. On the cost side, looking at a relatively narrow range of the possible economic impacts (based on the 2001 IPCC report), the price tag for global warming is estimated at 5% of global GDP. Per year. If you add in more recent evidence and take a broader view, the costs could rise to 20% of global GDP per year.

On the other hand, the costs to reduce greenhouse gasses are estimated in the 1% of global GDP range. “People would pay a little more for carbon-intensive goods

Is this a no-brainer, or what?

Looking at it another way, each metric ton of CO2 emitted today is causing about $85 worth of damage. Data from the carbon-trading markets indicate that the cost to eliminate that metric ton of CO2 is about $25. “In other words,” says Her Majesty’s Treasury, “we’d be better off…in the order of $2.5 trillion a year.” Throw in the creation of new markets for carbon reduction technologies, and you could add another $500 billion a year of benefits.

Pretty much a no-brainer. Or as we say in Minnesota: Ufda!

What to do?
Well, act now rather than later, to be sure. But the report goes on to list four key elements to acting now successfully:

  1. International carbon pricing: The report calls the current global warming problem one of the biggest market failures of all time, and the reason is simple – the true costs of carbon usage are not accounted for by the market. To have the market work for us instead of against us, we need to starting adding in this cost – through taxation, carbon emissions trading and/or regulation.

  2. Technology policy: In the long term, developing the technologies we need to drastically reduce our carbon usage is properly the role of private industry. Trouble is, we may not have a “long term” to work with, so in the short term, governments can and should provide the necessary incentives to accelerate the process.

  3. Removing barriers to change: All systems resist change, and large companies and institutions can be the worst offenders. Government can help overcome this inertia through a combination of providing good information about the problems and “best practice” solution, by setting standards for new infrastructure so that our current carbon-usages doesn’t become ingrained, by tax and other policies designed to stimulate movement toward a lower carbon, more efficient economy.

  4. Adaptation: No matter what, the report says, we will be facing significant consequences from the global warming we’ve already created. The CO2 we put in the air today lasts for a hundred years. And the consequences will fall most heavily on the countries least able to handle them. Governments can assist these countries through provision of good information, and planning and financial assistance.

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