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How Climate Change is Revolutionizing Economics
Alan AtKisson, WorldChanging
"The benefits of strong, early action on climate change outweigh the costs."
The sentence appears as a paragraph by itself, in bold, in the Executive Summary of the now-released, much-anticipated Stern Review on the Economics of Climate Change.
The numbers underscore the point: addressing the problem now will cost about 1% of GDP per year. Doing nothing, say the economic models, will cost the world the loss of 5% GDP per year -- "now and forever" says the report, evoking an almost religious tone. That 5% figure is actually the best case scenario for doing nothing: if all the risk factors are taken into account, and they all hit home (an appropriate phrase in this case, since our homes are what they will hit), then the figure could be as high as 20%.
This conclusion, and these figures, are what will be most remembered about this report -- that, and the media/policy splash it's making. We'll get into the details (there are 700 pages of them, so we certainly won't get into too many) later in this article. Let's first consider the frame and context.
Essentially, Stern's team took the output from climate models, and fed them into economic models. The models are intended to number-crunch a great many factors including rates of innovation, capital investment, discounting and the like, and to produce a result. Often that result is radically simplified (at least for political consumption) in the form of changes in GDP over time. The Stern Review takes broader economic-and-social approach, but it's the GDP numbers that, as usual, make the news.
As always, the results of such a study are only as good as the models and the data fed into them. But the climate models are getting darned good (we have enough historical data now on observed recent climate change to do continuous model validation and improvement), and economic modelers also have a pretty good track record at summing up a nation's development plusses and minuses. The Stern Review is based on the best of both kinds of models -- by best, I mean ethically best as well as methodologically best -- so our capacity for environmental and economic mathematical prophesy doesn't get any "better" than this.
But I cannot go farther before I air a critique about the use of that tricky word, "cost". In the Stern Review's "address it now" scenario, many of those "costs" are probably better framed as investments.
...Which leads us to lead-author Stern himself. Nicholas Stern is not just any economist; he was Chief Economist of the World Bank from 2000-2003. That by-line, and the gravitas and credibility that it evokes in nearly every corner of the globe, is a huge piece of the reason this report is getting such attention. Stern is now a UK civil servant and government advisor holding the rank of "second permanent secretary at the Treasury," but this title does not play as well in Peoria, or Pretoria, or Porto Alegre.
The other reason the report is news is because the UK wants it to be news.
...I predict the Stern Review will inevitably be used largely as a political prop and target, for better or worse but mostly for better, and that it will be read in its surprisingly lucid entirety by relatively few. But I also predict the Stern Review will go down as a landmark of how clear, thorough thinking can emerge into policy -- a landmark not just in climate change, or the economics of climate change, but in economics in general.
(31 Oct 2006)
One of the best commentaries I've seen so far. More at the original. -BA
The approaching storm
William Keegan, Guardian
The climate report may have politicians clamouring to alter policy but economists have seen it coming for years.
...Where microeconomics meets macroeconomics in all this is simple: from the great Cambridge economist A C Pigou onwards, generations of economics students have been taught about "externalities" - the way, for instance, that smoke from factories pollutes the atmosphere, but the damage (or cost) is not part of the costs of the firm, which, unless the government introduces legislation, has no incentive to behave better.
In due course such externalities became known in the economics trade as "market failure" - in other words the microeconomics have become a macroeconomic issue. Since economists in the classical and free market tradition just love markets (they often pronounce the very word in a quasi religious tone) market failure is a terrible blow to them, because it usually means that hated governments have to intervene to make up for the deficiencies of the market.
What Sir Nicholas Stern is essentially saying is that global warming, and all those carbon emissions, represent the biggest market failure imaginable, with dire consequences if serious action is not taken soon.
On the more dire scenarios, the economies of the world will be (in some cases literally) up the creek in decades to come, presented with huge macroeconomic problems. So far scientists have struggled hard to convince a largely sceptical economics profession of their case.
Sir Nicholas has brought important sections of the economics profession on board, including some recent Nobel prize winners. Ironically, though, for a problem or crisis centred on market failure, the proferred solutions are presented as "market solutions" - trading in a limited amount of permits for carbon emissions, and tax incentives aimed at encouraging businesses and consumers to abandon their energy-profligate ways.
(31 Oct 2006)
Fossil fools: OPEC, Australia and USA say global warming doesn't exist
Jerome a Paris, European Tribune
...The governments of Australia and the USA obviously think that they can go on living as they do, letting various countries around the world pay the price of our inaction; after all, it's only invisible thirdworlders (or the occasional Louisiana black) who are dying or being uprooted from their lives.
But the fact remains: our lifestyle is in many ways unsustainable, and it will thus STOP, whether we want it or not. That can be done in an orderly fashion, because we acknowledge the issue and organize our societies to cope, and to help those in the least favorable situation, or it will be imposed in a chaotic way by reality.
So, to those [in the Daily Kos forums] that tell me that it is not possible to live in rural Nebraska without a big car and, if you're poor, cheap gas is vital, I say this: I agree. It is not possible, and it will not last. The only question is whether the people that now live there will be helped to move to a more sustainable lifestyle, or if they will be forced brutally to change their lives.
Understand me: I have nothing against rural Nebraska, and I am not saying that you should not live there; but I am saying that living there is steadily going to become more and more expensive, and it will be quite simply unaffordable for those that are not rich. I am not blaming those that live there now: I am sure it is a wonderful place, and cheap energy has made it possible. But the bill is coming due. A serious energy policy will organise the transition. A lack of policy will condemn those of you that do live in such places to be subject to unpredictable lifechanging circumstances dictated by the realities of the international energy markets.
(31 Oct 2006)
Also at Daily Kos.
OPEC says British climate change report "unfounded"
Tanya Mosolova, Reuters
A hard-hitting report on climate change published by the British government on Monday has no basis in science or economics, OPEC's Secretary-General Mohammed Barkindo said on Tuesday.
...The study recommended taking action now to offset the far greater cost of dealing with climate change later.
But Barkindo told an energy conference in Moscow that the Organization of the Petroleum Exporting Countries (OPEC) -- which holds around two thirds of the world's oil reserves -- opposed such research efforts.
"We find some of the so-called initiatives of the rich industrialized countries who are supposed to take the lead in combating climate change rather alarming," he said.
(31 Oct 2006)
UK Insurance Journal on the Stern Report
Insurance Journal (UK)
...The insurance industry should be particularly interested in the conclusions contained in Stern's report. They point to increasingly violent storms and shifts in weather patterns, recurring droughts and floods, the inundation of low-lying coastal areas and islands, accompanied by a general disruption of economic activity. Melting glaciers will increase flood risk, while paradoxically reducing sources of fresh water. Crop yields will decline, particularly in Africa. Rising sea levels could leave 200 million people permanently displaced. Up to 40 percent of animal species could face extinction.
All of those risks are to a greater or lesser extent covered by insurance, but the projected losses would greatly exceed the cover available from private companies. Even government insurers would be strained.
The report urges immediate action. "The investment that takes place in the next 10-20 years will have a profound effect on the climate in the second half of this century and in the next," the summary continued. "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. And it will be difficult or impossible to reverse these changes. So prompt and strong action is clearly warranted."
The review focuses squarely on global warming and the role played by greenhouse gas emissions in accelerating the process, and calls for greater efforts to control them. It does hold out some hope that the message is beginning to sink in. "Many countries and regions are taking action already," the summary notes. "The EU, California and China are among those with the most ambitious policies that will reduce greenhouse gas emissions. The UN Framework Convention on Climate Change and the Kyoto Protocol provide a basis for international co-operation, along with a range of partnerships and other approaches. But more ambitious action is now required around the world."
The insurance industry is one of the few major economic sectors that has fully realized the perils of inaction in combating climate change. Reinsurers, especially Swiss Re and Munich Re, employ staffs of scientists full time to analyze the problems and find solutions. However, the industry can't do it alone. If Stern's report is dismissed as a Cassandra like prophecy of doom, and no action is taken, not only will the industry be hard pressed to survive, but also the entire planet.
(31 Oct 2006)