The best way to get
a government’s attention is to speak the language that politicians understand: money. That is the hope behind a new report that attempts to put a price tag on the fallout from unmitigated global warming, and estimates the possible cost of action.

The report — entitled The Economics of Climate Change, which was commissioned by the British government and authored by Sir Nicholas Stern, former chief economist at the World Bank — focuses on the economics of global warming. It calls climate change “the biggest market failure the world has seen” and calls for markets to be a big part of the solution through methods such as carbon pricing, emissions trading and policy incentives to develop more carbon-efficient products.

“Our actions now and over the coming decades could create risks of major disruption to economic and social activity, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century,” the report says. “And it will be difficult or impossible to reverse these changes.”

Essentially, it recommends that greenhouse gas concentrations in the atmosphere not be allowed to grow much from current levels of about 430 parts per million. It argues that levels must be limited to a range of 450 ppm to 550 ppm, up from 280 ppm in the pre-industrialized world. But keeping carbon concentrations in that range will require significant emission reductions from current levels.

“Anything higher would substantially increase risks of very harmful impacts but would reduce the expected costs of mitigation by comparatively little,” the report says. “Anything lower would impose very high adjustment costs in the near term and might not even be feasible, not least because of past delays in taking strong action.”

The report sets out a stark economic bargain for policy-makers to consider. It estimates that, based on data from the Intergovernmental Panel on Climate Change in 2001, the effects of climate change will cost about 5% of world GDP each year. Factoring in more recent data, the report warns that the cost could rise as high as 20% of annual GDP.

The report also estimates that the cost of acting to avoid the worst effects of global warming would only be about 1% of global GDP a year. Moreover, the report predicts that markets for low-carbon technologies would be worth at least $500 billion by 2050 if the world acts to combat global warming on the scale Stern advocates.

Such estimates are clearly meant to convey that there’s a simple economic rationale for combating climate change. Economic research firm Global Insight Inc. states: “By trying to put a price on failing to tackle climate change, and by arguing that prompt action is cost-effective, Stern hopes to appeal to the many skeptical governments that have failed to act to date. The U.S. is clearly the biggest target, given its huge share of global emissions.”

The idea that there’s more money to be made reducing emissions than there is in generating them without limit is not a new one. A recent report from the World Bank on deforestation suggests that dense tropical forests in areas of Latin America, Asia and Africa may be worth five times more if they are left standing to serve as a carbon-storage mechanism than if they are cleared to make way for agricultural uses.

The World Bank report calls for the use of carbon markets to make the transactions viable. “Global carbon finance can be a power-ful incentive to stop deforestation,” notes François Bourguignon, World Bank chief economist and senior vice president of development economics. “Compensation for avoiding deforestation could help developing countries improve forest governance and boost rural incomes, while helping the world at large mitigate climate change more vigorously.”

The development of market mechanisms is seen as essential to value more accurately the consumption of natural resources and to generate sustainable economic growth. “The world does not need to choose between averting climate change and promoting growth and development,” the Stern report argues. “Changes in energy technologies and in the structure of economies have created opportunities to decouple growth from GHG emissions. Indeed, ignoring climate change will eventually damage economic growth.

“Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries,” the report insists.

@page_break@The idea that the cost of environmental degradation must be factored into economic growth is gaining currency.

“There is growing recognition that GDP produced at the expense of the global environment — and at the expense of scarce and finite physical resources — overstates the net contribution of that economic growth to our prosperity,” notes a recent report from the Conference Board of Canada. “Indeed, measures of national wealth should ideally include some estimation of the net impact on the natural resources used to produce that wealth — the costs imposed on the physical environment — in addition to the current estimation of the economic benefits from growth.”

Whether the concept will catch on with the governments of other major polluters, and whether the Stern report is enough to motivate them to action, remains to be seen. Global Insight is skeptical, saying: “Without a change of administration in the U.S., it seems highly unlikely that it will take a global lead.” And, it adds, “For fast-growing Asia, the longer-term threats posed by climate change are low down the list of immediate priorities.”

None of which bodes very well for the Stern report being translated into action, even though its very existence suggests the British government is going to champion the cause.

Upon the release of the report, British Prime Minister Tony Blair suggested that the report will be seen as “a landmark in the struggle against climate change. Without radical international measures to reduce carbon emissions within the next 10 to 15 years, there is compelling evidence to suggest we might lose the chance to control temperature rises.”

Blair stresses the need to get working on an international agreement to reduce emissions when the Kyoto protocol expires in 2012, by which time emissions are supposed to be 5% less than 1990 levels in countries, such as Canada, that signed the agreement. He calls for action among the G-8 countries and within the European Union.

Markets are central to Blair’s vision for cutting back emissions. He proposes that the EU Emissions Trading Scheme should be extended beyond 2012 and it should cover aviation emissions, as well. He also suggests that it should be linked with other trading schemes, such as one being launched by California, to create a global emissions trading market.

Despite the fact that Blair is expected to step down in the coming year, Britain may remain a leading advocate of action on global warming. Global Insight notes that both Blair’s presumed successor, Chancellor of the Exchequer Gordon Brown, and his party’s primary opponent, Conservative leader David Cameron, have made the fight against climate change policy a priority. So, however the politics may play out, Britain will probably be pushing for global action on emissions. And politics is key at this point.

Global Insight says that “bringing about the kind of measures Stern advocates looks a very tall order, politically,” noting that Stern calls for more radical action than Kyoto — and negotiating Kyoto was a protracted effort. Even then, the countries that signed on aren’t necessarily meeting their commitments.

Canada, for example, is a signatory to the Kyoto treaty. But the government that signed it did little to push the country to meet its obligations. The current federal government has long criticized Kyoto and recently released its own plan to curb emissions — proposing to slash them by 50% by 2050. But it doesn’t contemplate mandatory reductions on emissions until 2020 at the earliest, nor does it propose the sort of emissions cap that might make a trading scheme viable.

It is anybody’s guess what will happen in Canada. The government’s position may yet be toughened. As the Conservatives are in a minority, they require Opposition support to get things passed, and there has been little support from the Opposition parties, who have pledged to push the government to meet its obligations under Kyoto.

The Montreal Climate Exchange, a joint venture of the Montreal Exchange and the Chicago Climate Exchange, has pledged to participate actively in consultations in an effort to sell the idea of emissions trading. The sooner companies have emissions reduction targets, the better, the MCX maintains, pointing out that reduction requirements can stimulate energy efficiency throughout the economy and promote investment in cleaner technologies.

Although there are certain to be disagreements on tactics and methods, it appears that fighting climate change is no longer a simple partisan issue — with those on the Right opposing any restraint on industry and those on the Left demanding economically crippling reductions.

As the Conference Board report suggests, ensuring that economic growth is sustainable has become a challenge that all politicians understand they must address: “Despite the absence of a meaningful global consensus on Kyoto, climate change is now accepted in mainstream political discourse — politicians of all stripes have to position themselves as doing something.

“It should be recognized that Kyoto is but a first step in a long voyage to stabilize and then reduce global GHG emissions,” the report adds. “Therefore, the future debate on climate change will not be on whether action is necessary to curtail emissions of GHG. Instead, the debate will centre on how to develop a full global consensus on the pace of adjustment, the impact on various sectors and fair burden sharing among nations.”

The Stern report aims to frame the debate around economic risk and opportunity. And putting a price-tag on the possible long-term effects of environmental degradation may turn out to be an important step in convincing politicians that grime doesn’t pay. IE