The Stern Review

By now its been all over the news and some discussion at other sites. Still for my own and other’s references here I will briefly discuss some things about what it says about AGW. Firstly the full report can be seen here. As well as the full document there are long and short summaries. I hope to get around to discussing some of the meat about emissions markets and so forth later.

The main conclusion can be seen in this extract taken from the short summary.

Climate change will affect the basic elements of life for people around the world – access to water, food production, health, and the environment. Hundreds of millions of people could suffer hunger, water shortages and coastal flooding as the world warms.

Using the results from formal economic models, the Review estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more.

In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1% of global GDP each year.

The policy outlined in the full executive summary advocates three main policy directions as necessary to properly tackle the problem. Carbon pricing, investment in technology and measures to assist in behavioural change including labelling for energy efficiency. I’ve discussed most of these before although I have been less positive about the role of government in the technology investment.

  • Carbon Pricing
  • The first element of policy is carbon pricing. Greenhouse gases are, in economic terms, an externality: those who produce greenhouse-gas emissions are bringing about climate change, thereby imposing costs on the world and on future generations, but they do not face the full consequences of their actions themselves.

    Putting an appropriate price on carbon – explicitly through tax or trading, or implicitly through regulation – means that people are faced with the full social cost of their actions. This will lead individuals and businesses to switch away from high-carbon goods and services, and to invest in low-carbon alternatives. Economic efficiency points to the advantages of a common global carbon price: emissions reductions will then take place wherever they are cheapest.

  • Technology investment
  • The second element of climate-change policy is technology policy, covering the full spectrum from research and development, to demonstration and early stage deployment. The development and deployment of a wide range of low-carbon technologies is essential in achieving the deep cuts in emissions that are needed. The private sector plays the major role in R&D and technology diffusion, but closer collaboration between government and industry will further stimulate the development of a broad portfolio of low carbon technologies and reduce costs.

    Many low-carbon technologies are currently more expensive than the fossil-fuel alternatives. But experience shows that the costs of technologies fall with scale and experience, as shown in Figure 5 below.

    Carbon pricing gives an incentive to invest in new technologies to reduce carbon; indeed, without it, there is little reason to make such investments. But investing in new lower-carbon technologies carries risks. Companies may worry that they will not have a market for their new product if carbon-pricing policy is not maintained into the future. And the knowledge gained from research and development is a public good; companies may under-invest in projects with a big social payoff if they fear they will be unable to capture the full benefits. Thus there are good economic reasons to promote new technology directly.

  • Behavioural Change
  • The third element is the removal of barriers to behavioural change. Even where measures to reduce emissions are cost-effective, there may be barriers preventing action. These include a lack of reliable information, transaction costs, and behavioural and organisational inertia. The impact of these barriers can be most clearly seen in the frequent failure to realise the potential for cost-effective energy efficiency measures.

    Regulatory measures can play a powerful role in cutting through these complexities, and providing clarity and certainty. Minimum standards for buildings and appliances have proved a cost-effective way to improve performance, where price signals alone may be too muted to have a significant impact.

    Information policies, including labelling and the sharing of best practice, can help consumers and businesses make sound decisions, and stimulate competitive markets for low-carbon and high-efficiency goods and services. Financing measures can also help, through overcoming possible constraints to paying the upfront cost of efficiency improvements.


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