Nicholas Stern,
The Global Deal: Climate Change and the Creation of a New Era of Progress and Prosperity.
London: The Bodley Head; New York: PublicAffairs, 2009. 248 pages, includes references and index.

Lord Nicholas Stern has enjoyed an illustrious career as an economics professor, as Chief Economist of the World Bank and as an adviser to Gordon Brown, now British Prime Minister. He headed the British government team that in 2006 produced the 700-page “Stern Review” on the economics of climate change, and a very “stern” review it is. The report concludes that the costs of inaction are dire. Somewhat in the imperial tradition of William Gladstone, the moralizing 19th-century British Prime Minister, Stern has now supplemented the review with a book telling the world what is to be done.

“I am not a campaigner,” writes Nicholas Stern, but his passionate arguments and seemingly angry response to his critics speak otherwise. This is not follow-up analysis, nor simply logical argument. It is a call and guide for global action, and a curt dismissal of those who would argue against his position.

On the basis of his background in development economics and more recent work on climate change, Stern sees poverty in developing countries and climate change as the two greatest – and inextricably linked – challenges of our time. These are not alternative issues that must compete for global attention and resources: a central theme of Stern’s book is that they can and must be addressed together. Development assistance will not succeed if climate change is not mitigated. It is the developing countries that are most vulnerable to the effects of climate change and least able to cope with them. And efforts to curtail greenhouse emissions will be fruitless without the cooperation and participation of the developing world. These countries will be more willing and able to make significant contributions if their limited historic responsibilities are recognized and their future development aspirations are not undermined.

There is, in Stern’s view, no justification for failing to act. The scientific and moral imperatives are very clear. “Business as usual” will lead to concentrations of greenhouse gases in the atmosphere that significantly risk an increase in average world temperatures of more than 5 degrees Celsius – a level that would radically change the physical and human geography of the world. Failure to act, Stern warns, will result in severe dislocation; the consequent migration of billions of people “would plunge the world into massive and extended conflict.”

Carefully planned and concerted action, on the other hand, can reduce those risks at what Stern describes as relatively modest cost. His recommended target is to limit concentrations of greenhouse gases to 500 parts per million.That would still result in significant global warming, but would greatly reduce the probability of the more catastrophic temperature increases. To achieve this target, annual greenhouse gas emissions must be reduced by about 30 billion tonnes of carbon dioxide equivalent (more than 50 per cent of current levels) by 2050. Based on an estimated supply curve of greenhouse gas abatement opportunities, Stern calculates that the cost of achieving those reductions would be less than €30 (about C$48 at the time of writing) per tonne, in total less than 1 per cent of world GDP. Even if reductions costing up to €50 (C$79) per tonne were required, the total cost would still be less than 2 per cent of world GDP, a price “well worth paying” for the avoided risks.

Stern has no patience for those who do not accept what in his view is the overwhelmingly compelling logic of such greenhouse gas reductions. He calls those who argue for investment in adaptation as opposed to emission reduction “ignorant and reckless.” He dismisses as mistaken and confused those fellow economists who argue that he has overstated climate change costs by not applying a reasonable discount rate in summing distant future, uncertain events; in his view they are “making one logical mistake after another.”

This aspect of Stern’s book is greatly disappointing, the style as much as the substance. Few quarrel with the need for greenhouse gas reductions and an ultimate shift to a low-carbon economy. Fewer still oppose the aggressive pursuit of low-cost opportunities to abate emissions and reduce whatever risks there may be from increasing concentrations of greenhouse gases in the atmosphere. However, there are questions about the rate and extent of reductions Stern calls for, and legitimate concerns that they may not be achievable at anywhere close to the costs Stern suggests. It isn’t measured, efficient reduction in greenhouse gas emissions that is so worrying. It is the evangelical fervour that some advocates bring to this issue, demanding emission reductions at virtually any cost.

Stern’s estimated cost of 2 per cent of world GDP to meet his recommended target (which assumes unit costs remain below €50 per tonne) is not an insignificant amount. By 2050 that would equal some $2 trillion annually, an amount that exceeds Canada’s entire 2008 gross domestic product. The opportunity costs of that magnitude of investment should not be ignored. There are alternative investments in education, public health, infrastructure, governance and security – other moral imperatives – that also need to be addressed to improve social, environmental and economic conditions throughout the world and may yield greater social returns. And not all of those investments necessarily depend on greenhouse gas reductions to succeed.

Resources are scarce and need to be efficiently allocated. There is a risk that the absolute supremacy Stern and others assign to the greenhouse gas issue, and the disdain they exhibit toward those who might question their position, will preclude the dispassionate assessments needed for efficient allocations to take place.

Stern’s discussion of discounting, the economic practice of giving less weight to a benefit or cost the farther in the future it is expected to occur, is particularly sharp and unhelpful. There are good reasons for discounting. People generally do give more weight to more immediate than to more distant consequences, especially highly uncertain ones. Like Arthur Pigou and other classical British economists, Stern uses a near-zero discount rate in summing future costs and benefits. He considers discounting of the future at higher rates to be immoral, but in democracies people’s views matter and should not be summarily dismissed.

Furthermore, if the world economy continues to grow, as by most accounts it is expected to, especially in developing countries, a dollar of benefit or cost in the future will be less significant than a dollar today. Diverting resources from the present to the future may be tantamount to a diversion from the relatively poor to the relatively rich. Discounting, as Stern himself seems to grudgingly recognize, is needed to reflect that. Most importantly, discounting is needed to ensure that investments are not made without taking the social return into account. It is a way of recognizing the opportunity cost of displacing other possible investments.

Stern is right, and his critics would agree, when he states that an immediate program to reduce greenhouse gas emissions will have the benefit of enhancing our flexibility to respond effectively and efficiently to emerging information on the pace and consequences of global warming. The discounted present value of what we currently expect future climate damages to be is not the central issue; we need insurance against the more catastrophic outcomes that may arise. But the questions still remain: how much insurance do we need, and what is the best way of achieving it? It may well be that the slow-ramp approach of William Nordhaus and other critics, combined with aggressive, targeted research into abatement technologies, would be more cost-effective and achievable than the aggressive reductions Stern proposes.

The second half of Stern’s book addresses how his targets are to be met. The key criteria, he writes, are that the measures taken must be effective in meeting the emission targets he calls for, efficient in doing so at lowest cost, and equitable in the allocation of responsibilities and costs.

He argues that the full suite of policy measures – carbon taxes, cap-and-trade quota systems and regulations – will likely all be required, along with research and development support for renewable energy and other new technologies. Carbon taxes are a way to “internalize” the greenhouse gas externality – that is, to make those responsible for greenhouse gas emissions bear the cost – but are limited by the uncertainty over exactly what the magnitude of that externality is (what the marginal damage costs are), and by the uncertainty over the amount of emission reductions they will induce. Quota systems provide greater certainty over emission reductions, and are needed to create the global carbon markets that are central to Stern’s proposed global deal. However, quota systems can create uncertainty over the quota price, thus inhibiting long-term investment, and are more costly to implement. Regulations are generally not as desirable as market mechanisms, but can play an important and cost-effective role in setting industry-wide emission and energy-related standards. The mix of measures will vary from country to country.

Of course, exactly what is done and to what extent will depend on the global allocation of emission reduction responsibilities. Like the leaders of many developing countries, Stern insists that the developed countries must assume financial responsibility for realizing most of the needed reductions. He says this not as a practical matter – that the rich countries have the resources to take this on – but rather as a moral issue. It is the developed world that is historically responsible for the problem we face, and is currently contributing most to the increased concentration of greenhouse gases in the atmosphere. Therefore it is the developed world that must take the lead in addressing the problem.

Stern calculates that with a world population of some 9 billion in 2050, emissions will have to fall to about 2 tonnes per person, as compared to an average 8 tonnes today, and more than 20 in some developed countries like Canada and the United States. The question of how to allocate these emissions is central to Stern’s global deal. Limiting emissions to 2 tonnes per person in all countries would in itself require reductions in the developed world many times greater than in the developing world. However, Stern goes further: he says there are moral arguments that the per capita allocation of emissions to developed countries should be less than the world average, possibly even negative given their responsibility for the problems we now face.

The greater the required reductions in the developed world, the greater will be the transfer of resources to the developing world through investment in offset projects or purchase of quotas. And that serves well Stern’s interest in economic development as well as emission reductions. However, all this is very much Stern’s global plan as opposed to a viable global deal.

There is little reason to believe that the developed world will agree to emission caps that are proportional to population – let alone less than proportional. Stern’s arguments may play well in Delhi and Jakarta, but leaders in Washington, Paris and Ottawa will not be receptive to the suggestion that their citizens must bear a markedly disproportionate share of the costs to mitigate future problems. Will the citizens of the developed world agree to Stern’s plan because a British economist and developing world leaders say they must – regardless of how rich or poor they may be and regardless of how recently they may have migrated to the developed world? Not likely.

A global deal won’t be done by dividing the world into good guys and bad guys. It won’t be done if inequities perceived by the developing world are replaced by attempts to impose inequities on the developed world. A much different, more practical approach is required – one that recognizes the global interest in action and global ability to respond.

Stern likes to conduct thought experiments. He would have done well to consider how one would fashion a global deal if we were all one global country. The best way would be to seek out the globally least costly ways to reduce emissions wherever they may occur, and to impose global industry and energy pricing standards. The cost of emission reductions would fall most on wealthier residents, not by region but on individuals wherever they lived. And as for development, the efforts to eliminate poverty would have to be continued, in rich as well as poor regions of the globe, and be reinforced not because of climate change, but rather despite it.