The government argues that climate change is the greatest threat to humanity and that a precautionary approach is the best way of dealing with it. But as Daniel Ben-Ami reports, this does not necessarily make economic sense.
This was the year when, in Britain at least, the consensus that climate change was the greatest threat facing humanity became almost universal. Former sceptics, from The Economist to The Sun, shifted to the government’s position on the need for urgent action.
David Cameron, the Conservative leader, repositioned his party as “green” and said he would put a wind turbine on 10 Downing Street if he became prime minister. Tony Blair stated in an official letter to European Union leaders that the world was facing climate catastrophe.1 And the Treasury’s Stern review on the economics of climate change was widely seen as the last word on the subject.2
If the consensus is right – and that should not be taken as given – then it has enormous consequences. The response to climate change could reshape the economy and financial markets. It is not simply a question of fund managers finding new niche areas in which to invest. But what if the government is wrong in its approach to climate change? It could then lead the economy in an enormously damaging direction. Whoever is right the stakes in the debate are high.
Before going into detail on the subject it is necessary to dispel some of the key myths in the climate change discussion. Although the government likes to take the moral high ground on the question, it is itself guilty of spreading misconceptions.
Myth one: There is a scientific consensus that the world is facing “catastrophic tipping points” within 10-15 years.
This phrase was used in a letter by Tony Blair and Jan Peter Balkenende, his Dutch counterpart, to fellow European Union leaders on October 20. Such a statement wilfully confuses two different – although related – debates.
There is certainly a consensus among scientists that the earth is warming and that humans have played a role in the process – although it should be noted that the consensus is not always right. But the idea that the world is on the verge of a catastrophe is much more controversial – which does not mean it is necessarily wrong.
Even the government’s own Stern review avoids the term “tipping point” and is cautious about stating definitively that the world is facing catastrophe. Also, perhaps in response to the government’s line, Mike Hulme, professor of environmental sciences at the University of East Anglia and director of the Tyndall Centre for Climate Change Research, has recently written attacking the language of “chaos and catastrophe” in relation to climate change.3
It should also be noted in this context that the idea of a “tipping point” has its origins in social science rather than natural science. The term was popularised by Malcolm Gladwell, a staff writer on New Yorker magazine, in his book of that name.4
Natural scientists, in contrast, tend to talk about negative and positive feedback effects. For example, a feedback in relation to global warming could be the release of methane from the melting of the permafrost in Siberia. Some scientists fear that global warming could lead to such a melting, which would in turn exacerbate the trend to climate change still further. The point here is not that such scientists are necessarily wrong but that, contrary to the impression given by the government, it remains a minority view that a catastrophe is imminent. Change and catastrophe should not be lumped together.
Myth two: The Stern review represented a breakthrough in the science of climate change.
Somehow there seems to be a widespread view that Stern represented a scientific breakthrough – even though the report itself makes no such claim. The Stern review is explicitly on the economics of climate change rather than the science. To the extent it discusses science, it is primarily based on the Intergovernmental Panel on Climate Change’s Third Assessment Report of 2001, while also considering more recent studies.5
However, for some reason Stern seems to prefer the IPCC’s most pessimistic A2 scenario for its modelling rather than the more mainstream A1 scenario. The A2 scenario assumes, among other things, slower technological change, less international cooperation, uneven economic growth and continuing global inequality.6 The next global update of the science of climate change should be the IPCC’s Fourth Assessment Report, which is due to be published next year.
Myth three: The Stern review ends the debate on how to respond to climate change.
This is perhaps the most pernicious myth of all and one encouraged by a government that is unwilling to debate the question. For example, Margaret Beckett, the foreign secretary, recently gave a speech to the Royal United Services Institute where she compared scepticism on climate change to support for Islamic terrorism.7
In fact the Stern report contains many questions that are open to debate including: Is it right to see climate change as a result of market failure? Is a precautionary approach the best way to deal with climate change? Are its estimates of the respective costs and benefits of dealing with climate change likely to be right? What is the appropriate way of dealing with discount rates? What is likely to be the best economic response to the challenge of climate change? The Stern review is best viewed as a starting point for discussing some of these topics rather than the end point of a debate.
Before going into more detail on the economics of climate change it is important to emphasise a key point. The discussion of the details of the science of climate change is best left to the scientists. Indeed, one reason why the topic is often so confused is that politicians and pundits – both on the government side and among sceptics – often focus on science. Yet climate science is an immensely complicated discipline that should be left to the specialists.
The emphasis here is on how we, as a society, can best respond to environmental challenges. The relationship between the natural science and the best policy response is not clear-cut. For any given scenario there is more than one possible response and considerable room for debate about which is the best.
Looking at the question in its baldest, most logical, terms thereare two possible responses to climate change. The first involves promoting rapid economic growth, since a richer society should be better able to handle climate change. All sides agree that poorer societies are more vulnerable to the effects of climate change so, in this first view, the solution is to make them richer. From such a perspective the battle to control the climate is merely part of a broader struggle to transform and enrich society.
The strategy of rapid growth is consistent with bolstering energy supply. Since economic growth and energy demand are closely correlated, a strategy of bolstering affluence means more energy will be needed. So increasing growth means looking for new sources of energy or bolstering existing ones. These could include more nuclear fission power stations (based on splitting heavy atoms), developing nuclear fusion (based on fusing together isotopes of hydrogen), hydroelectric power and using sequestration with fossil fuels to capture and store greenhouse gas emissions. As new supplies of energy are harnessed, the overall volume of greenhouse gas emissions could stabilise or even fall.
The second possible logical strategy – the opposite of the first – is to curb economic growth. This strategy also recognises that greater affluence and increased energy use are closely correlated. Only the conclusion it draws is that austerity is needed to grapple with the problem of climate change. Several hard core environmentalists, such as George Monbiot, explicitly take this view.8
In relation to energy, the second strategy promotes the need to manage energy demand. The emphasis is either on using less energy, in absolute terms, or perhaps switching to sources such as renewables. It sees overconsumption – both of energy and resources in general – as a key problem in the world.
No doubt many mainstream politicians are sympathetic to this approach but they are reluctant to say so explicitly. For selling austerity and rationing to the world – particularly when so many people are living in dire poverty – is never likely to prove popular.
Unfortunately, the categories used in the mainstream debate muddle rather than clarify the issues involved. Typically they emphasise mitigation (curbing greenhouse gas emissions) while seeing some role for adaptation (adapting to the effects of climate change). But mitigation encompasses four different possible strategies, rather than just one approach:
Behaviour modification sponsored by the state. This is the area most favoured by government. It includes endless exhortations on such things as not leaving electronic appliances on standby, recycling waste and not leaving the water running when brushing your teeth. Such an approach is most in line with curbing energy demand rather than bolstering supply.
Product innovation. The development of more energy-efficient products. Over time, no doubt, products will become more energy efficient. The long-term trend is for aircraft, cars, fridges and other appliances to be more efficient in their use of energy.
But there is a widespread myth that more energy efficiency means less energy use. On the contrary, the long-term trend shows that the opposite is true. As products become more energy efficient, consumers tends to use more of them. They fly more, drive more and buy bigger consumer appliances.9
Process efficiency in energy production. Developing more efficient ways of producing energy. It is notable that this form of mitigation is one of the least discussed by government. It is far easier for politicians to exhort individuals not to put their TV on standby than to invest to develop new sources of energy.
Indeed, in many ways the problem of climate change can be seen as a result of the lack of innovation and investment in the energy sector. As Anatole Kaletsky, an associate editor of The Times, noted in a recent article: “The fact is that, despite all the public ballyhoo about global warming, both governments and private businesses have been drastically reducing their investment in energy research over the past 20 years.”10 (original emphasis).
Higher efficiency in other areas of production. Making production more efficient overall means using less energy for each unit of output. Although more energy will be used overall, there will not be as much used relative to the size of the economy. This is another area in which, in Britain at least, the government has found it difficult to live up to its promises. Although New Labour has insisted from the start that bolstering productivity is a priority, it has found it hard to narrow the gap with Britain’s main competitors.
Although much of the debate on climate changes focuses on mitigation – reducing greenhouse gas emissions – the informed discussion also sees a role for adaptation. This is certainly the case with Stern, which sees adaptation as necessary since some climate change is inevitable in any event.
Part V of the Stern review, on “policy responses for adaptation”, includes three chapters on the topic. The introduction argues: “Adaptation will reduce the costs and disruption caused by climate change. Governments can promote adaptation by providing information and clear policy frameworks to encourage individuals and firms to respond to market signals.”
The problem with the mainstream discussion is that it tends to see adaptation in minimal terms. For the government it is often discussed as coping with the worst effects of climate change, rather than harnessing human ingenuity to overcome the problem. Measures such as building modern flood defences and developing new strains of crops are generally given the highest priority.
There is nothing inherently wrong with either measure but talk on such a level downplays the possibility of human ingenuity finding solutions to the problem of climate change. All sorts of measures – from developing nuclear fusion to building a modern economic infrastructure for Africa – could help the world adapt to the effects of climate change.
In the longer term, the possibility of geo-engineering – including seeding the oceans with iron filings, installing giant mirrors in space and injecting clouds with salt crystals – could enable humanity to take control of the climate. While climate control might not come off, the present intellectual climate tends to discourage scientists from exploring the possibilities.
As the year draws to a close there are two clear choices in responding to the climate change debate. For the government, the only sane choice is to emphasise curbing energy consumption as a way of saving the planet. If it is right it could save the Earth from catastrophe, but if it is wrong it could do huge damage to global growth while leaving billions stuck in poverty.
The alternative is an ambitious programme of economic growth accompanied by a corresponding increase in energy supply. Such an approach could make the world immensely more prosperous while enhancing human control over the environment. The stakes in the debate could not be much higher.
The arithmetic of climate change
From the perspective of the Stern report, the arithmetic of climate change is straightforward. Either we continue with “business as usual” and lose 5-20% of global GDP each year, “now and forever”, or we take action and limit the impact to 1% a year. If such a perspective is taken at face value then only a fool would opt for the “business as usual” approach.
However, there are several reasons to question this approach. Bjorn Lomborg, a Danish statistician and scourge of environmentalists, has argued that Stern includes several dubious assumptions.11 There are good reasons to believe the 1% figure is an understatement, while the 5-20% figures are gross overstatements. For example, he says that Stern wrongly assumes that if we do act on mitigation we will not have to pay the costs of adaptation. But even if action is taken on mitigation it will be necessary to adapt to the effects of climate change. More generally, as already noted, Stern’s assumptions are based on a worst-case scenario.
A key technical question in this respect is the level of discount rates assumed in Stern. Discounting involves finding the present value of future amounts of cash. For example, £1 today could be worth £2 in 10 years’ time. Such a calculation involves making an assumption about the rate at which the cash is likely to grow over the intervening period.
Discounting is a complex topic but over the long term the appropriate rate would be expected to be broadly in line with GDP growth. So assuming that economic growth is likely to be relatively low – as Stern seems to do – means assuming that the world is not likely to be that much wealthier in the future. As a result the costs of dealing with the effects of climate change could be higher.
Assuming rapid economic growth, in contrast, makes a dramatic difference to the figures. Any given amount will be far lower as a proportion of GDP if total output is at a higher level.
More broadly, there is also reason to question the whole cost-benefit analysis framework embodied in Stern. A lot of what he classifies as “costs” are likely to be investments that would be borne anyway. For example, investing in new forms of technology could be classified as a cost under the Stern framework. Such a categorisation means that investment is seen as problematic, when in reality it is likely to be a positive development.
Dangers of precaution
The discussion on the economics of climate change is typically steeped in the culture of precaution. Even when the language of catastrophe is eschewed – as it is in the Stern report – similar conclusions can be drawn from a precautionary approach. Essentially the idea is that because the future is so uncertain, it is necessary to be particularly cautious about the appropriate action to take. The idea that climate change could be irreversible and harmful to the whole of humanity adds weight to the precautionary approach.
Precaution was certainly built into the Stern review. In a section on “risk and uncertainty” it states: “The analytical approach [in the report] incorporates aspects of insurance, caution and precaution directly, and does not therefore require a separate ‘precautionary principle’ to be imposed as an ethical criterion.”
To Stern, and other advocates of a precautionary approach, this outlook is based on common sense. It is akin to buying insurance for a house except, in relation to climate change, there is only one Earth. If Earth is destroyed or seriously damaged, there is no chance of moving to another planet.
But the idea of precaution is not as straightforward or positive as is generally assumed. An alternative would be to argue that a timid approach towards humanity’s relationship with the environment itself entails risks. The bolder and more ambitious the development plans, the better able humans will be to control their environment. In contrast, a limited approach to development leaves humans prey to environmental changes.
Despite seemingly ambitious rhetoric elsewhere, the low horizons of Stern are apparent in its definition of sustainable development: “Future generations should have a right to a standard of living no lower than the current one.” Such a miserable definition runs directly counter the experience of the past two centuries.12 Since about 1800 the level of output per person has risen enormously. As a result, humans have come to live longer, healthier and more fulfilling lives.
Arguably, a precautionary approach is the worst possible response to climate change. It deters humanity from developing the means to control its environment. Greater development, and more widespread prosperity, enhance the ability of humans to create a better life for themselves.
1The text of the letter is available at http://www.number10.gov.uk/files/pdf/Vanhanen.pdf
2The full text of the Stern review, along with accompanying documentation, is available at: http://www.sternreview.org.uk
3Mike Hulme “Chaotic world of climate truth” BBC online 4 November 2006. http://news.bbc.co.uk/1/low/sci/tech/6115644.stm
4Malcolm Gladwell “The Tipping Point: How Little Things Can Make a Big Difference”, Little, Brown 2000.
5The report is available online at: http://www.ipcc.ch
6For an overview of A2 see http://www.grida.no/climate/ipcc/emission/094.htm and for A1 see: http://www.grida.no/climate/ipcc/emission/093.htm#1
7“Transnational terrorism: defeating the threat”. Available at: http://www.rusi.org/events Ref: E4524DBAC4D301 info:public/infoID:E455325E609BB3/
8For a critical review of Monbiot’s book see Daniel Ben-Ami “Misanthropy will not save the planet” Fund Strategy November 13, 2006.
9Klaus S Lackner and Jeffrey Sachs “A robust strategy for sustainable energy” Brookings Papers on Economic Activity (2) 2005. Available at: http://www.earthinstitute.columbia.edu/news/2006/old_images/LacknerSachs.pdf
10Anatole Kaletsky “Give us non-polluting energy – starting now” Times November 23, 2006. Available at: http://www.timesonline.co.uk/article/0,,6-2466603.html
11Bjorn Lomborg “Stern Review: the dodgy numbers behind the latest warming scare” Wall Street Journal November 2, 2006. http://opinionjournal.com/extra/ ?id=110009182
12See Gregory Clark “The conquest of nature: a brief economic history of the world, 10,000 BC – 2000 AD” http://www.econ.ucdavis.edu/faculty/gclark/GlobalHistory/Conquesthome.html