The Economics of Climate Change Nicholas Stern Australian Davos Connection 28th March 2007

Key messages The costs of strong and urgent action to avoid serious impacts from climate change are substantially less than the the damages thereby avoided Even with strong action to reduce greenhouse gas emissions adaptation must be a crucial part of development strategy Policy requires urgent and international action, pricing for damages from greenhouse gases, supporting technology development and combating deforestation

Projected impacts of climate change 1°C2°C5°C4°C3°C Sea level rise threatens major cities Falling crop yields in many areas, particularly developing regions Food Water Ecosystems Risk of Abrupt and Major Irreversible Changes Global temperature change (relative to pre-industrial) 0°C Falling yields in many developed regions Rising number of species face extinction Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system Significant decreases in water availability in many areas, including Mediterranean and Southern Africa Small mountain glaciers disappear – water supplies threatened in several areas Extensive Damage to Coral Reefs Extreme Weather Events Rising intensity of storms, forest fires, droughts, flooding and heat waves Possible rising yields in some high latitude regions

Stabilisation and commitment to warming 1°C2°C5°C4°C3°C 400 ppm CO 2 e 450 ppm CO 2 e 550 ppm CO 2 e 650ppm CO 2 e 750ppm CO 2 e 5%95% Eventual temperature change (relative to pre-industrial) 0°C 4

Delaying mitigation is dangerous and costly Stabilising below 450ppm CO2e would require emissions to peak by 2010 with 6-10% p.a. decline thereafter. If emissions peak in 2020, stabilisation below 550ppm CO2e requires annual declines of 1 – 2.5% afterwards. A 10 year delay almost doubles the annual rate of decline required.

Given the costs of impacts, the cost of mitigation is a good deal Expected cost of cutting emissions consistent with a 550ppm CO2e stabilisation trajectory averages 1% of GDP per year. Impacts on competitiveness limited but some sectoral arrangements valuable Opportunities for growth via new technologies Strong mitigation is therefore fully consistent with the aspirations for growth and development in poor and rich countries. 6

Key principles of policy Climate change policy: Carbon pricing R,D&D Related market failures and behavioural change Consistency with other policy goals – growth and energy security

Price signals can be established in different ways: greenhouse gas taxes; capping emissions and setting up a market in permits; or implicitly through regulation. The economics of risk points to long-term goals for stabilisation of concentrations. The economics of cost points to short-run flexibility over time, sector and country. Policy makers and markets should be able to respond to new information on impacts and costs. Credibility, flexibility and predictability are key if policy is to influence investment. Carbon pricing

Technology needs more than a carbon price One element of technology policy is public funding to support innovation in new technologies. The Review suggests that: – Global public energy R&D funding should double, to around $20 bn – Deployment incentives should increase 2 to 5 times, from current level of $34 bn Promising developments: Pholtovoltaics (new material); cellulosic biofuels; ‘nanostorage’…. IEA (2000)

International action Key foundations: A common understanding of the scale of the problem Transparency and mutual understanding of actions and policies Structures that sustain cooperation Equity Effective action includes: Trading Technology Deforestation Adaptation 10

Building international carbon markets Scarcity in rich countries: demand side Benchmarks for supply side Institutional structure

Strategies for emission reduction Four ways to cut emissions: patterns of demand; improving efficiency; using lower-carbon technologies; tackling non-energy emissions.

Adaptation Adaptation and development support each other Adaptation will put strong pressure on developing country budgets and ODA: essential to meet commitments made to double aid flows by 2010 International action also has a key role in supporting global public goods for adaptation –Disaster response –Crop varieties and technology –Forecasting climate and weather

Role of Business Carbon finance: expansion of EU ETS; new schemes in US, Australia, Japan; transformation of CDM; combining carbon finance with domestic investment, FDI and concessional finance; World Bank Clean Energy Investment Framework International sectoral arrangements Technology co-operation: R&D, deployment, procurement, standards Firms should work with various national and international stakeholders to develop long-term regulatory frameworks which in turn would create a stable long-term investment climate

Conclusion from the analysis Unless emissions are curbed, climate change will bring high costs for human development, economies and the environment –Concentrations of 550ppm CO 2 e and above are associated with very high risks of serious economic impacts –Concentrations of 450ppm CO 2 e and below will be extremely difficult to achieve given where we are now and given current and foreseeable technology Limiting concentrations within this range is possible. The costs are modest relative to the costs of inaction. Decisive and strong international action is urgent: delay means greater risks and higher costs 15

Key messages The costs of strong and urgent action to avoid serious impacts from climate change are substantially less than the the damages thereby avoided Even with strong action to reduce greenhouse gas emissions adaptation must be a crucial part of development strategy Policy requires urgent and international action, pricing for damages from greenhouse gases, supporting technology development and combating deforestation

Projected impacts of climate change 1°C2°C5°C4°C3°C Sea level rise threatens major cities Falling crop yields in many areas, particularly developing regions Food Water Ecosystems Risk of Abrupt and Major Irreversible Changes Global temperature change (relative to pre-industrial) 0°C Falling yields in many developed regions Rising number of species face extinction Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system Significant decreases in water availability in many areas, including Mediterranean and Southern Africa Small mountain glaciers disappear – water supplies threatened in several areas Extensive Damage to Coral Reefs Extreme Weather Events Rising intensity of storms, forest fires, droughts, flooding and heat waves Possible rising yields in some high latitude regions

Stabilisation and commitment to warming 1°C2°C5°C4°C3°C 400 ppm CO 2 e 450 ppm CO 2 e 550 ppm CO 2 e 650ppm CO 2 e 750ppm CO 2 e 5%95% Eventual temperature change (relative to pre-industrial) 0°C 18

Delaying mitigation is dangerous and costly Stabilising below 450ppm CO2e would require emissions to peak by 2010 with 6-10% p.a. decline thereafter. If emissions peak in 2020, stabilisation below 550ppm CO2e requires annual declines of 1 – 2.5% afterwards. A 10 year delay almost doubles the annual rate of decline required.

Given the costs of impacts, the cost of mitigation is a good deal Expected cost of cutting emissions consistent with a 550ppm CO2e stabilisation trajectory averages 1% of GDP per year. Impacts on competitiveness limited but some sectoral arrangements valuable Opportunities for growth via new technologies Strong mitigation is therefore fully consistent with the aspirations for growth and development in poor and rich countries.

Key principles of policy Climate change policy: Carbon pricing R,D&D Related market failures and behavioural change Consistency with other policy goals – growth and energy security

Price signals can be established in different ways: greenhouse gas taxes; capping emissions and setting up a market in permits; or implicitly through regulation. The economics of risk points to long-term goals for stabilisation of concentrations. The economics of cost points to short-run flexibility over time, sector and country. Policy makers and markets should be able to respond to new information on impacts and costs. Credibility, flexibility and predictability are key if policy is to influence investment. Carbon pricing

Technology needs more than a carbon price One element of technology policy is public funding to support innovation in new technologies. The Review suggests that: – Global public energy R&D funding should double, to around $20 bn – Deployment incentives should increase 2 to 5 times, from current level of $34 bn Promising developments: Pholtovoltaics (new material); cellulosic biofuels; ‘nanostorage’…. IEA (2000)

International action Key foundations: A common understanding of the scale of the problem Transparency and mutual understanding of actions and policies Structures that sustain cooperation Equity Effective action includes: Trading Technology Deforestation Adaptation 24

Building international carbon markets Scarcity in rich countries: demand side Benchmarks for supply side Institutional structure

Strategies for emission reduction Four ways to cut emissions: patterns of demand; improving efficiency; using lower-carbon technologies; tackling non-energy emissions.

Adaptation Adaptation and development support each other Adaptation will put strong pressure on developing country budgets and ODA: essential to meet commitments made to double aid flows by 2010 International action also has a key role in supporting global public goods for adaptation –Disaster response –Crop varieties and technology –Forecasting climate and weather

Role of Business Carbon finance: expansion of EU ETS; new schemes in US, Australia, Japan; transformation of CDM; combining carbon finance with domestic investment, FDI and concessional finance; World Bank Clean Energy Investment Framework International sectoral arrangements Technology co-operation: R&D, deployment, procurement, standards Firms should work with various national and international stakeholders to develop long-term regulatory frameworks which in turn would create a stable long-term investment climate

Conclusion from the analysis Unless emissions are curbed, climate change will bring high costs for human development, economies and the environment –Concentrations of 550ppm CO 2 e and above are associated with very high risks of serious economic impacts –Concentrations of 450ppm CO 2 e and below will be extremely difficult to achieve given where we are now and given current and foreseeable technology Limiting concentrations within this range is possible. The costs are modest relative to the costs of inaction. Decisive and strong international action is urgent: delay means greater risks and higher costs 29

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