Monday, 8 February 2010

Nicholas Stern - "'A Blueprint for a Safer Planet"

This book could have equally have been called “A Blueprint for Copenhagen 2010”. Now, it might seem a bit unfair to comment on a book written before December 2010 in relation to what happened in that month. In Nicholas Stern’s case it is fully justified. As a former Chief Economist of the European Bank for Reconstruction and Development and of the World Bank and as the author of the UK government’s, globally influential, review of the Economics of Climate Change the author has been deeply involved in shaping policy.

The book is well written and the author has the ability to clarify complex issues. One of these is the relative merits and disadvantages of controlling CO2 emissions by a Carbon Tax or by Carbon Trading. With a Carbon Tax you know what it will cost but not how much it will reduce emissions; with Carbon Trading (Cap-and-Trade in the US) you know by how much it will reduce emissions but not what the financial implications are.

He also deals with one of the main criticisms of the Stern Review. Some economists argued that his conclusions were, in part, an outcome of his choice of discount rate. This is an important issue and it is worth looking briefly at what the “discount rate” is. The discount rate is used by economists for comparing alternative investments. For example when building a bridge how do you decide whether to build a 4-lane or a 6-lane bridge? If you build the 6-lane bridge part of the capacity will be unused for many years; if you build the 4-lane bridge you will have to face the cost and complication of widening it at some date in the future. The answer is to work out how much money you would have to invest now to pay for the bridge to be widened in the future. The rate of interest used for this calculation is called the discount rate and is typically around 6%. If the amount you have to invest now more than than the cost difference between a 6-lane and a 4-lane bridge you build a 4-lane bridge; if it is the other way around you build a 6-lane bridge now.

In his review Nicholas Stern used a much lower discount rate than the 6% mentioned above. He justifies his choice on two grounds. The first is that conventional economics assumes that whatever is being considered will not alter the ground rules; the type of bridge you build will not alter the economic assumptions underlying the comparison. With climate change, which could have major impacts globally, the assumptions of conventional economic are no longer valid. The second justification is that the real rate of return on safe long-term investments, such as government bonds, is also much lower, around 1.5%.

The crux of his argument is that mitigation, reducing the emission of greenhouse gases, makes more economic sense than adaptation, waiting for it happen and adjusting our life styles as a consequence.

No one can question Stern’s economic credentials and, wisely, he simply accepts the science. In a paragraph on adaption he shows a lack of understanding of why people quote the fact that the Romans made wine in Northern England. He suggests this is used as an example of adaptation. It is not. It used to demonstrate that at the time when Roman civilisations was spreading over Europe and North Africa temperatures were higher than they are today.

I started by saying the title of this book could have included “Copenhagen”. There is actually a chapter in the book called “The structure of a global deal.” The key elements identified are: a 50% cut in world emissions by 2050, developing countries to start reductions from 2020, carbon trading to be introduced world-wide, funding to reduce deforestation, investment in current and new low carbon energy and financial help to reduce the impact of climate change in developing countries. None of this was agreed.

The impasse at Copenhagen could be considered as a failure of the world’s governments to accept the arguments of this book. Despite that it is well worth reading as whatever the outcome economics will play a large part in decision that have to be taken.

Publisher: The Bodley Head, 2009
ISBN 9781847920386

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