Climate Change: The Economics of and Prospects for a Global Deal

author: Sir Nicholas Stern, London School of Economics and Political Science, University of London
published: Aug. 7, 2012,   recorded: November 2007,   views: 2917

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From Nicholas Stern’s market perspective, climate change constitutes an “externality” that, like traffic grid lock in a city center, arises when some people’s actions affect the welfare of others, at no cost to the perpetrators. Simple price mechanisms can fix congestion, says Stern, but climate change, which he views as “the greatest market failure the world has ever seen,” requires unprecedented measures to contend with its potentially cataclysmic, long-term global impacts.

Stern is the author of an influential and provocative review prepared for the British government describing the economics of climate change and development. Here he outlines, in non-technical jargon, the key issues, choices and potential responses of a world facing warming.

Scientific modeling suggests that if nations continue on their present course, the Earth will move from CO2 levels of around 450 parts per million (ppm) today to over 800 ppm a century from now. That could bring a 5o C change, says Stern, accompanied by storms, droughts, and sea level rise, which would trigger massive human migration and “severe conflict.” While totting up the costs of such a scenario is nearly unimaginable, Stern has more of a handle on the “scale of damage” -- disruptions to economic and social activity -- a 3o C increase might inflict. This is the kind of increase that many climate models suggest will come if we manage to stabilize CO2levels at 550 ppm.

Stern argues that if we don’t act to rein in greenhouse gases to such a target, the costs to the global GDP will exceed 5% each year, forever. (If the impacts of a 3o C increase have been underestimated, the costs might rise to 20% GDP, or more.) If nations think of this as “an insurance problem,” says Stern, they ought to be willing to invest 1%-2% of their current GDP in reducing emissions and achieving stabilization in the next 10-20 years. This is the timeframe societies have to put into play appropriate policies for carbon pricing, new technologies for conservation and non-carbon based energies. What’s needed, says Stern, is a global deal, a framework of understanding that guides all nations of the world. His six-point plan relies on rich nations acknowledging their obligation to reduce carbon emissions by greater amounts than developing nations; funding efforts to develop and share technologies, and to tackle deforestation; and monies to help needier nations adapt to change. Stern sees some evidence that the international community -- perhaps even the U.S. – is positively inclined toward cutting a global deal.

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