November 6, 2006

Inaction on climate change will cost 5% per year in global GDP, says major British analysis

The economic impact of failing to take prompt, concerted action to reduce greenhouse gas (GHG) emissions contributing to climate change will be equivalent to losing at least 5% of global Gross Domestic Product (GDP) each year-permanently. By contrast, says a major analysis by Sir Nicholas Stern, a former chief economist for the World Bank, the cost of reducing GHG emissions to avoid the worst impacts of climate change can be limited to around 1% of global GDP per year.

The review by Stern, head of the British government's Economic Service, is said to be the most comprehensive review ever carried out on the economics of climate change. He said the report's conclusion "is essentially optimistic. There is still time to avoid the worst impacts of climate change, if we act now and act internationally. Governments, businesses and individuals all need to work together to respond to the challenge. Strong, deliberate policy choices by governments are essential to motivate change.

"But the task is urgent," he continued. "Delaying action, even by a decade or two, will take us into dangerous territory. We must not let this window of opportunity close."

The first half of the Stern Review focuses on the impacts and risks arising from uncontrolled climate change, and on the costs and opportunities associated with action to tackle it. Conclusions and estimates are based on evidence from many different economic models, including one that allowed new scientific evidence and a wider range of impacts to be taken into account. The report emphasizes that while economic models over timescales of centuries do not offer precise forecasts, but they are an important way to illustrate the scale of effects that might occur.

All countries will be affected by climate change, but the poorest countries will suffer earliest and most, even though they have contributed least to climate change. The estimated 5% loss in global GDP due to unabated climate change represents the costs associated with a narrow range of climate change impacts and is based on the 2001 assessment of climate change science by the Intergovernmental Panel on Climate Change (IPCC). If more recent scientific evidence is factored in, along with a modelling approach that ensures appropriate weighting of the impacts on poor people, the dangers of climate change could be equivalent to 20% of GDP or more.

In contrast, the costs of action to reduce greenhouse gas emissions to avoid the worst impacts of climate change can be limited to around 1% of global GDP each year. People would pay a little more for low-carbon goods, but the world's economies could continue to grow strongly. The shift to a low-carbon economy will also bring huge opportunities. Markets for low-carbon technologies will be worth at least $500 billion, and perhaps much more by 2050 if the world acts on the scale required.

Without action to control emissions, each tonne of carbon dioxide (CO2) being emitted now is causing damage worth at least $85, but these costs are not included when investors and consumers make decisions about how to spend their money. Emerging emissions trading systems allowing people to trade reductions in CO2 have demonstrated that there are many opportunities to cut emissions for less than $25 a tonne. By some calculations, says the report, value of the benefits of actions to shift the world onto a low-carbon path could, over time, be in the order of $2.5 trillion annually.

In short, tackling climate change is a pro-growth strategy for the longer term that can be implemented in a way that does not cap the aspirations for growth of rich or poor countries. Ignoring climate change, however, will ultimately undermine economic growth.

Considering the level of action needed worldwide, the Review concludes that GHG levels in the atmosphere should be stabilized at a range between 450 and 550 parts per million (ppm) CO2e (CO2 equivalent). This is only slightly higher than current concentrations of 430 ppm CO2e and at the upper limit is almost double the pre-industrial GHG levels of 280 ppm CO2e.

Any higher limit, says the report, would substantially increase risks of very harmful impacts but would reduce the expected costs of mitigation by comparatively little. A limit below this range would impose very high adjustment costs in the near term and might not even be feasible, not least because of past delays in taking strong action.

An examination of the national and international policy challenges associated with the transition to a low-carbon global economy makes up the second half of the Review. Calling climate change "the greatest market failure the world has seen," Stern says three elements of policy are required for an effective response.

The first is carbon pricing, through taxation, emissions trading or regulation, so that people are faced with the full social costs of their actions. The aim should be to build a common global carbon price across countries and sectors.

The second is technology policy, to drive the development and deployment at scale of a range of low-carbon and high-efficiency products.

And the third is action to remove barriers to energy efficiency, and to inform and educate individuals about what they can do to respond to climate change, and persuade them to do so. Fostering a shared understanding of the nature of climate change, and its consequences, is critical in shaping behaviour, as well as in underpinning both national and international action.

Effective action requires a global policy response, guided by a common international understanding of the long-term goals for climate policy and strong frameworks for co-operation. Key elements of future international frameworks should include the following.

Emissions trading

*Expanding and linking the growing number of emissions trading schemes around the world is a powerful way to promote cost-effective reductions in emissions and to bring forward action in developing countries.

*Strong targets in rich countries could drive flows amounting to tens of billions of dollars each year to support the transition to low-carbon development paths.

Technology co-operation:

*Informal co-ordination as well as formal agreements can boost the effectiveness of investments in innovation around the world.

*Globally, support for energy research and development should at least double, and support for the deployment of low-carbon technologies should increase up to five-fold.

*International co-operation on product standards is a powerful way to boost energy efficiency.

Action to reduce deforestation

*The loss of natural forests around the world contributes more to global emissions each year than the transport sector. Curbing deforestation is a highly cost-effective way to reduce emissions; large-scale international pilot programs to explore the best ways to do this should get underway very quickly.


*The poorest countries are most vulnerable to climate change. It is essential that climate change be fully integrated into development policy, and that rich countries honour their pledges to increase support through overseas development assistance.

*International funding should also support improved regional information on climate change impacts, and research into new crop varieties that will be more resilient to drought and flood.

The full Stern Review, with accompanying background information, may be viewed on-line at

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