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A Stern Look at Climate Risks and Opportunities

November 1, 2006

You have a house into which you have poured your life savings. Do you buy hazard insurance that costs about 1 percent of your net earnings? Or, do you skip the insurance, save the 1 percent, and play the odds that you won’t suffer a total financial wipeout if the house catches fire?

You have a business in a bad location. Customer traffic is falling, sales are slipping, and costs are rising. A better location is available in a spiffy new mall across town, but it will cost you some money up front to relocate the business. Do you invest some capital in a better opportunity, or do you stick with what you know, knowing that the odds of failure loom large?

Tough questions, but in both vignettes, the wiser course of action is patently obvious.

So it goes with a sweeping report about climate change that was published this week by the British government, with the full endorsement of Prime Minister Tony Blair.

The report was the culmination of serious number crunching that examined climate trends and applied sophisticated economic modeling to answer two critical what-if questions. What are the costs if human civilization tries to stabilize greenhouse gas concentrations? What are the costs if we don’t?

Here’s the bottom line in the report, which was overseen by Sir Nicholas Stern, former World Bank chief economist: We can invest about 1 percent of world GDP by 2050 to stabilize greenhouse gas concentrations at about 550 ppm (today’s level is 430 ppm, expressing all greenhouse gases as carbon dioxide equivalent).

By making the investments, we can shift the world to a less wasteful, cleaner, more robust economy, with net present value benefits estimated in the long run at $2.5 trillion. The market for low-carbon products could total $500 billion or more by 2050, if those markets are encouraged to develop through carefully drawn climate policies.

Or, we can do nothing and take a chance that global warming will gather force, wiping an average of 5 to 10 percent off global GDP, and possibly as much as 20 percent, as a result of storm damage, disease, and other spin-off impacts of climate destabilized by greenhouse gas emissions.

Average GDP loss statistics, however, do not do justice to the real impacts of destabilizing the global climate, especially for the world’s poorest people. The Stern report lists some possibilities:

• Rising sea levels flooding out millions of Asians and Pacific Islanders living in low lying areas
• Disappearing glaciers eliminating free storage reservoirs of clean, fresh water
• Greater risk of illness and death from heat stress and spread of disease vectors, especially for people in hot-weather countries.
• Hunger stalking the world’s poorest in Africa as crop yields diminish from drought

If we keep adding more greenhouse gases to the atmosphere and raise average temperatures further, we risk pushing the climate into what the Stern report calls “unknown territory.” The global climate system in past epochs has demonstrated twitchy behavior, shifting from cold to hot to cold in the geological blink of an eye. Adding more greenhouse gases to the atmospheric heat engine could trigger abrupt climate shifts beyond human experience or ability to cope.

Climate change is the largest case of market failure the world has ever known, the Stern report writes. To correct that failure, markets must see the price of disposing of carbon in the atmosphere. The report calls for an integrated range of technology deployment and poverty reduction measures, as well as efforts to remove barriers to greater energy efficiency, in order to move markets in the desired direction.

The Stern report says, however, that there isn't much time to get moving. The longer we wait to get a handle on greenhouse gases, the harder and costlier the job will be, and the more chances we’ll be taking.

The report notes: “The task is urgent. Delaying action, even by a decade or two, will take us into dangerous territory. We must not let this window of opportunity close.”