Michael McCarthy Analysis: Inaction spells a world of floods, drought and economic disaster

Our environment expert examines the report's 700 pages and summarises the key findings

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1. THE ECONOMIC IMPACTS OF CLIMATE CHANGE

Climate change, if nothing is done about it, could cost the world up to a fifth of its entire wealth, with major implications for human welfare, the Stern report says. Global gross domestic product (GDP), or consumption per head, could be reduced by up to 20 per cent by the damage caused by rising temperatures, droughts, floods, water shortages and extreme weather events, the report says, if economies continue on a path of business as usual. At the very least, global GDP is likely to go down by 5 per cent.

The report first looks closely at the different physical impacts of climate change on economic activity, human life and the environment which are likely, as "on current trends, average global temperatures will rise by between 2C to 3C within the next 50 years or so".

All changes in temperature are expressed relative to levels prevailing 200 years ago before the Industrial Revolution, the so-called "pre-industrial" level.

Many of the effects in this litany of change are potentially devastating.

"Warming will have many severe impacts, often mediated through water," the report says. "Melting glaciers will initially increase flood risk and then strongly reduce water supplies, eventually threatening one-sixth of the world's population, predominantly in the Indian sub-continent, parts of China, and the Andes in South America.

"Declining crop yields, especially in Africa, could leave hundreds of millions without the ability to produce or purchase sufficient food ... at 4C and above, global food production is likely to be seriously affected. Climate change will increase worldwide deaths from malnutrition and heat stress. Vector-borne diseases such as malaria and dengue fever could become more widespread if effective control measures are not in place. Rising sea levels will result in tens to hundreds of millions more people flooded each years with warming of 3C or 4C.

"There will be serious risks and increasing pressures for coastal protection in south-east Asia (Bangladesh and Vietnam), small islands in the Caribbean and the Pacific, and large coastal cities, such as Tokyo, New York, Cairo and London. According to one estimate, by the middle of the century, 200 million people may become permanently displaced due to rising sea levels, heavier floods, and more intense droughts."

The report does not leave out the natural world. It notes: "Ecosystems will be particularly vulnerable to climate change, with around 15 to 40 per cent of species potentially facing extinction after only 2C of warming. And ocean acidification, a direct result of rising carbon dioxide levels, will have major effects on marine ecosystems, with possible adverse consequences on fish stocks."

As the world gets warmer, the report points out, the damage from climate change will accelerate. "Higher temperatures will increase the chance of triggering abrupt and large-scale changes. Warming may induce sudden shifts in regional weather patterns such as the monsoon rains in south Asia or the El Niño phenomenon - changes that would have severe consequences for water availability and flooding in tropical regions and threaten the livelihoods of millions of people ... The melting or collapse of ice sheets would eventually threaten land which today is home to one in every 20 people.

"While there is much to learn about these risks, the temperatures that may result from unabated climate change will take the world outside the range of human experience. This points to the possibility of very damaging consequences.

"The costs of damage from extreme weather (storms, hurricanes, typhoons, floods, droughts, and heatwaves) will increase rapidly at higher temperatures. Based on simple extrapolations, costs of extreme weather alone could reach 0.5 to 1 per cent of world GDP per annum by the middle of the century, and will keep rising if the world continues to warm.

"A 5 or 10 per cent increase in hurricane wind speed, linked to rising sea temperatures, is predicted approximately to double annual damage costs, in the US. In the UK, annual flood losses along could increase from 0.1 per cent of GDP today to 0.2 to 0.4 per cent of GDP once the increase in global temperatures reaches 3C or 4C.

"Heatwaves like that experienced in 2003 in Europe when 35,000 people died and agricultural losses reached $15bn, will be commonplace by the middle of the century."

The Stern review team used economic models to provide aggregate monetary estimates of the total costs of all this, in particular a model named PAGE2002, used with the scientific data in the last report of the UN's Intergovernmental Panel on Climate Change, published in 2001.

"Using this model ... we estimate the total cost over the next two centuries of climate change, associated under business- as-usual emissions, involves impacts and risks that are equivalent to an average reduction in global per-capita consumption of at least 5 per cent, now and forever. The cost of business- as-usual would increase still further, were the model systematically to take account of three important factors.

"First, including direct impacts on the environment and human health (sometimes called 'non-market' impacts), increases our estimate of the total cost of climate change on this path from 5 per cent to 11 per cent of global per-capita consumption.

"Second, some recent scientific evidence indicates that the climate system may be more responsive to greenhouse-gas emissions than previously thought, for example because of the existence of amplifying feedbacks, such as the release of methane and weakening of carbon sinks.

"Our estimates ... indicate that the potential scale of the climate response could increase the cost of climate change on the business-as-usual path from 5 to 7 per cent of global consumption, or from 11 to 14 per cent, if the non-market impacts described above are included.

"Third, a disproportionate share of the climate change burden falls on poor regions of the world. If we weigh this unequal burden appropriately, the estimated global cost of climate change at 5C to 6C warming could be more than one quarter higher than without such weights. "Putting these additional factors together would increase the total cost of business-as-usual climate change to the equivalent of around a 20 per cent reduction in consumption per head, now and into the future.

"In summary, analyses that take into account the full ranges of both impacts and possible outcomes - that is, that employ the basic economics of risk - suggest that business-as-usual climate change will reduce welfare by an amount equivalent to a reduction in consumption per head of between 5 and 20 per cent.

"Taking account of the increasing scientific evidence of greater risks, of aversion to the possibility of catastrophe, and of a broader approach to the consequences than implied by narrow output measures, the appropriate estimate is likely to be in the upper part of this range."

2. THE ECONOMICS OF STABILISING GREENHOUSE GASES IN THE ATMOSPHERE

Making the cuts in emissions of greenhouse gases necessary to halt the progress of global warming can be achieved at a cost far lower than that of the impacts, the Stern Review asserts in its second major economic conclusion. Furthermore, it can be achieved without derailing economic growth.

Compared to the possible 20 per cent of global consumption that doing nothing will cost the world, taking the appropriate action will only cost about 1 per cent of global GDP, the report says. It adds: "This is significant, but fully consistent with continued growth and development, in contrast with unabated climate change, which will eventually pose significant threats to growth."

The review comes up with a major climate change target for the world community to aim for. It suggests a level that greenhouse gases in the atmosphere should not be allowed to exceed: 550 parts per million carbon dioxide equivalent (550ppm CO2e), that is, all the C02 in the atmosphere, plus the other major greenhouse gases such as methane and nitrous oxide, expressed in CO2 equivalent terms.

At the moment, CO2 in the atmosphere stands at about 382 parts per million (compared with 280ppm before the Industrial Revolution, and 315 ppm 50 years ago) while the full C02 equivalent figure is about 430ppm.

"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," the report says.

"Anything higher would substantially increase the risks of very harmful impacts, while reducing the expected cost of mitigation by comparatively little.

"Aiming for the lower end of this range would mean that the costs of mitigation would be likely to rise rapidly. Anything lower would certainly impose very high adjustment costs in the near term for small gains, and might not even be feasible, not least because of past delays in taking strong action.

"Uncertainty is an argument for a more, not less, demanding goal, because of the size of the adverse climate-change impacts in the worst-case scenarios.

"Stabilising at or below 550ppm CO2e would require global emissions to peak in the next 10 to 20 years, and then fall at a rate of at least 1 to 3 per cent a year. By 2050, global emissions would need to be around 25 per cent below current levels.

"These cuts will have to be made in the context of a world economy in 2050 that may be three to four 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 cent per year, reaching 70 per cent below current levels by 2050."

However, the report suggests that this lower level is not actually feasible. "Stabilisation at 450ppm CO2e is already almost out of reach, given that we are likely to reach this level within 10 years, and that there are real difficulties in making sharp reductions required with current and foreseeable technologies.

"Costs rise significantly as mitigation efforts become more ambitious or sudden, Efforts to reduce emissions rapidly are likely to be very costly."

Instead, it focuses on a higher level. "The review estimates the annual costs of stabilisation at 500-550ppm CO2e to be around 1 per cent of GDP by 2050 - a level that is significant but manageable. Reversing the historical trend in emissions growth and achieving cuts of 25 per cent 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.

"Estimating the costs of these changes can be done in two ways.

"One is to look at the resource costs of measures, including the introduction of low-carbon technologies and changes in land use, compared with the costs of the business-as-usual alternative. This provides an upper bound on costs, as it does not take account of opportunities to respond involving reductions in demand for high-carbon goods and services. The second is to use macroeconomic models to explore the system-wide effects of the transition to a low-carbon energy economy.

"On the basis of these two methods, [our] central estimate is that stabilisation of greenhouse gases at levels of 500-550ppm CO2e will cost, on average, around 1 per cent of annual global GDP by 2050.

"Costs of mitigation of around 1 per cent of GDP are small relative to the costs and risks of climate change that will be avoided. However, for some countries and some sectors the costs will be higher. There may be some impacts on the competitiveness of a small number of internationally traded products and processes. These should not be overestimated, and can be reduced or eliminated if countries or sectors act together; nevertheless, there will be a transition to be managed.

"For the economy as a whole, there will be benefits from innovation that will offset some of these costs. There are also significant new opportunities across a wide range of industries and services. Markets for low-carbon energy products are likely to be worth at least £500bn per year by 2050, and perhaps much more. Individual companies and countries should position themselves to take advantage of these opportunities.

"Reducing the expected adverse impacts of climate change is therefore both highly desirable and feasible."

3. HOW TO GET A LOW-CARBON ECONOMY

There are three key elements in the policies needed to cut greenhouse gas emissions and stabilise global warming, the Stern review says: putting a price on carbon, urgently boosting low-carbon technologies, and encouraging people to change their behaviour.

The first of these, it says, is an essential foundation for climate- change policy. At present, there is simply no price put on the damage that carbon emissions are doing across the world.

The report says: "Climate change presents a unique challenge for economics: it is the greatest and widest-ranging market failure ever seen."

It explains: "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 advantage of a common global carbon price: emissions reductions will then take place wherever they are cheapest. In order to influence behaviour and investment decisions, investors and consumers must believe that the carbon price will be maintained into the future. This is particularly important for investments in long-lived capital stock. Investments such as power stations, buildings, industrial plants and aircraft last for many decades. If there is a lack of confidence that climate-change policies will persist, then businesses may not factor a carbon price into their decision-making.

"The result may be overinvestment in long-lived, high-carbon infrastructure - which will make emissions cuts later on much more expensive and difficult. The next 10 to 20 years will be a period of transition, from a world where carbon-pricing schemes are in their infancy, to one where carbon pricing is universal and is automatically factored into decision-making."

The second necessity for the transition to a low-carbon economy, says the report, is an accelerated technology policy, "covering the full spectrum from research and development to demonstration and early-stage deployment."

It asserts: "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 reduced costs.

"Most low-carbon technologies are currently more expensive than fossil-fuel alternatives, But ... the costs of technologies fall with scale and experience.

"Public spending on research, development and demonstration has fallen significantly in the past two decades and is now low relative to other industries. There are likely to be high returns to a doubling of investments in this area to around $20bn per annum globally. In some sectors - particularly electricity generation, where new technologies can struggle to gain a foothold - policies to support the market for early-stage technologies will be critical. The review argues that the scale of existing deployment incentives worldwide should increase by two to five times, from the current level of around $34bn per annum."

The third policy element is what the report calls "the removal of the barriers to behavioural change".

It says: "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. 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 business make sound decisions and stimulate competitive markets for low carbon and high-efficiency goods and services.

"Fostering a shared understanding of the nature of climate change, and its consequences, is critical in shaping behaviour, as well as in underpinning national and international action. Governments can be a catalyst for dialogue through evidence, education, persuasion and discussion. Educating those currently at school about climate change will help to shape and sustain future policy-making, and a broad public and international debate will support today's policy makers in taking strong action now."

The report makes several more key points.

It says that there should be more stress on the policy of adaptation - that is, dealing concretely with the climate change that is actually going to happen.

"Adaptation policy is crucial for dealing with the unavoidable impacts of climate change, but it has been under-emphasised in many counties," it says.

It stresses that an effective response to climate change will depend on creating the conditions for international collective action. Creating a broadly similar carbon price signal around the world, and using carbon finance to accelerate action in developing countries, are urgent priorities for such international co-operation, it says, adding that the European Union's emissions trading scheme could become the nucleus of future global carbon market.

And finally, it points out a highly cost-effective way of reducing greenhouse gas emissions - curbing deforestation.

"Emissions from deforestation are very significant- they are estimated to represent more than 18 per cent of global emissions, a share greater than is produced by the global transport sector," the report says.

"Action to preserve the remaining areas of natural forest is needed urgently."

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