Extract: STERN REVIEW: The Economics of Climate Change 2006

Emissions have been, and continue to be, driven by economic growth; yet stabilisation of greenhouse-gas concentrations in the atmosphere is feasible and consistent with continued growth.

CO2 emissions per head have been strongly correlated with GDP per head. As a result, since 1850, North America and Europe have produced around 70% of all the CO2 emissions due to energy production, while developing countries have accounted for less than one quarter. Most future emissions growth will come from today’s developing countries, because of their more rapid population and GDP growth and their increasing share of energy-intensive industries.

Yet despite the historical pattern the world does not need to choose between averting climate change and promoting growth and development.

Changes in energy technologies and the structure of economies have reduced the responsiveness of emissions to income growth, particularly in some of the richest countries. With strong, deliberate policy choices, it is possible to ‘decarbonise’ both developed and developing economies on the scale required for climate stabilisation, while maintaining economic growth in both.

Stabilisation – at whatever level – requires that annual emissions be brought down to the level that balances the Earth’s natural capacity to remove greenhouse gases from the atmosphere. The longer emissions remain above this level, the higher the final stabilisation level. In the long term, annual global emissions will need to be reduced to below 5 GtCO2e, the level that the earth can absorb without adding to the concentration of Green House Gasses (GHGs) in the atmosphere. This is more than 80% below the absolute level of current annual emissions.

This Review has focused on the feasibility and costs of stabilisation of greenhouse gas concentrations in the atmosphere in the range of 450-550ppm CO2e. Stabilising at or below 550ppm CO2e would require global emissions to peak in thenext 10 – 20 years, and then fall at a rate of at least 1 – 3% per year.

By 2050, global emissions would need to be around 25% below current levels. These cuts will have to be made in the context of a world economy in 2050 that may be 3 – 4 times larger than today – so emissions per unit of GDP would need to be just one quarter of current levels by 2050.

To stabilise at 450ppm CO2e, without overshooting, global emissions would need to peak in the next 10 years and then fall at more than 5% per year, reaching 70% below current levels by 2050.

Theoretically it might be possible to “overshoot” by allowing the atmospheric GHG concentration to peak above the stabilisation level and then fall, but this would be both practically very difficult and very unwise. Overshooting paths involve greater risks, as temperatures will also rise rapidly and peak at a higher level for many decades before falling back down. Also, overshooting requires that emissions subsequently be reduced to extremely low levels, below the level of natural carbon absorption, which may not be feasible. Furthermore, if the high temperatures were to weaken the capacity of the Earth to absorb carbon – as becomes more likely with overshooting – future emissions would need to be cut even more rapidly to hit any given stabilisation target for atmospheric concentration. Delaying emissions cuts means that emissions must bereduced more rapidly to achieve the same stabilisation goal.

Achieving these deep cuts in emissions will have a cost. The Review estimates the annual costs of stabilisation at 500-550ppm CO2e to be around 1% of GDP by 2050 – a level that is significant but manageable.

Reversing the historical trend in emissions growth, and achieving cuts of 25% or more against today’s levels is a major challenge. Costs will be incurred as the world shifts from a high-carbon to a low-carbon trajectory. But there will also be business opportunities as the markets for low-carbon, high-efficiency goods and services expand.

Greenhouse-gas emissions can be cut in four ways. Costs will differ considerably depending on which combination of these methods is used, and in which sector:

• Reducing demand for emissions-intensive goods and services
• Increased efficiency, which can save both money and emissions
• Action on non-energy emissions, such as avoiding deforestation
• Switching to lower-carbon technologies for power, heat and transport

Policy to reduce emissions should be based on three essential elements: carbon pricing, technology policy, and removal of barriers to behavioural change.

A shared understanding of the long-term goals for stabilisation is a crucial guide to policy-making on climate change: it narrows down strongly the range of acceptable emissions paths. But from year to year, flexibility in what, where and when reductions are made will reduce the costs of meeting these stabilisation goals.

Policies should adapt to changing circumstances as the costs and benefits of responding to climate change become clearer over time. They should also build on diverse national conditions and approaches to policy-making. But the strong links between current actions and the long-term goal should be at the forefront of policy.

Three elements of policy for mitigation are essential: a carbon price, technology policy, and the removal of barriers to behavioural change. Leaving out any one of these elements will significantly increase the costs of action.

Establishing a carbon price, through tax, trading or regulation, is an essential foundation for climate-change policy.

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.

For media response http://www.theguardian.com/politics/2006/oct/30/economy.uk