Nicholas Stern

 Nicholas Stern speaking on a symposium of climate change in Galapagos

 

Lord Nicholas Stern (1946- ) is a British economist and President of the British Academy, who was elected a Fellow of the British Academy in 1993. In 2005, he was commissioned to study economics of climate change and the Stern Review on the Economics of Climate Change was published in 2006. His has published Blueprint for a Safer Planet and The Global Deal: Climate Change and the Creation of a New Era of Progress and Prosperity.

 

 

Climate change is caused by market failure because the price of GHG goods and services is failed to re­flect those losses brought about by climate change. After years of dedi­cation to the economics of climate change, Lord Stern shared his view on this topic with CSST.

 

CSST: You noted in the Stern Review that climate change is the result of the greatest market failure the world has ever seen. Could you explain more about this?

 

Stern: Market failure is a term in economics that describes the circumstance where I affect other people directly when I consume something; this is what we call an externality. An externality means that market does not give a good signal. Market is supposed to be, through its prices, telling you how much it costs to consume that good. If you are consuming that good and inflict damages on other people but the market is not giving a right signal, you will consume too much of that good because you are not aware of the costs that fall on other people.

 

Climate change comes from the emission of greenhouse gases, carbon dioxide particularly. When I emit greenhouse gases as a con­sumer or a producer, I am causing the concentrations of greenhouse gases in the atmosphere to rise, and that causes warming and cli­mate change. Other people bear the consequences of that climate change. So it is clearly an external­ity: we are damaging future gen­erations. It is the greatest market failure the world has ever seen. It comes from the idea that we are all responsible; everybody is involved in emitting the greenhouse gases and a very large number of people in the future generations will suffer the damage. The market failure is very big in terms of the big number of people who cause it and who will feel it. So that is why I call it the greatest market failure the world has ever seen.

 

CSST: When releasing the report Climate and Carbon: Aligning Prices and Policies last October, OECD Secretary-General Angel Gurría said that “our policy has to lead to the complete elimi­nation of emissions to the atmo­sphere from fossil fuels in the second half of the century”. Do you think it is possible to achieve this goal?

 

Stern: We will need to rapidly embrace zero-emissions energy technologies, including carbon capture and storage, which would allow the continued consumption of some fossil fuels. And it is pos­sible to achieve this goal; the con­sequences of failure to do so would be deeply damaging. But it is nec­essary to act strongly now. Policy-making across the board should focus on accelerating the transition to low-carbon growth and devel­opment, including not just putting a strong price on carbon through taxes and cap and trade schemes, but also the use of regulations and standards to, for instance, dramati­cally improve energy efficiency.

 

CSST: Speaking of cap and trade schemes, are they sufficient to re­duce carbon emissions?

 

Stern: One way to make the mar­ket work better is that we pay for the damage we do to others. The cap and trade scheme is one way of doing so. China is experimenting with that in some parts. The first part of the answer to your ques­tion is that this is a good part of re­sponse, but the second part of the answer is that it is not all response.

 

One of the areas of market fail­ure in addition to the emission of greenhouse gases is research and development and discovery. A lot of the techniques that we need in terms of inventing better ways of doing renewables, insulating build­ings better, as well as different kinds of public transport and pri­vate transport, all of these things are part of the response and they all involve new ideas. We therefore have to also think about how to create those new ideas as efficient­ly and as fast as we possibly can. It is important that we invest strong­ly in new ways of doing things. That can be new technologies, new ways of collaboration, new ways of becoming more efficient. We have to invest in the discovery and learning processes. Thirdly, we have to think about capital market because some of the new forms of technology and new ways of doing things will be risky, and some of them will be long term. One thing we know about capital market is that it is not necessarily very good at handling very risky long-term investment. So there are at least two more things that we need to do: one is research and develop­ment and discovery, and the other is capital market.

 

CSST: What is the most impor­tant and effective measure to ad­dress climate change?

 

Stern: Climate change is primar­ily a problem of risk management. The potential consequences of unmanaged climate change could be huge, so the risks are immense. In order to avoid the worst conse­quences, the world should reduce its annual emissions of greenhouse gases sharply, across every sector, particularly energy. Climate change is the result of a very serious market failure which means that the prices of goods and services which involve greenhouse gas emissions do not reflect the costs those emissions create through climate change. A carbon price corrects that market failure and helps to create a level playing field for low-carbon technologies to compete. But there are other mar­ket failures also holding back the development of new low-carbon technologies, including access to networks and in the financing of innovative investment. If policy-makers are able to tackle these failures, markets can be a power­ful tool through which to achieve emissions reductions at least cost. So market instruments are neces­sary, but not sufficient alone, in or­der to promote a transition to low-carbon growth and development. High-quality research and devel­opment and clear and consistent public policy-making are also crucial in creating the technologies and sending the signals for invest­ment which are needed to manage the risks of climate change.

 

CSST: Energy policy is also very important to tackle climate change. How do we make concerted effort in designing effective energy policy in the globe?

 

Stern: I think it is going to need the leadership of a few countries. The United States is very interest­ed in energy efficiency, getting rid of coal and research and develop­ment. So are China and Germany. Those three countries are very cre­ative as global leaders. If we could get leaders in the US, China and Germany together to discuss those three topics and how the investors, scientists, economists and engi­neers could get together to work on them, that will be real global leadership. If those three countries move quickly, including Europe as a whole, then we can make a very big difference. We do not have to have very formal agreement to do that; we can share ideas and col­laborate.

 

CSST: We have many channels for negotiating, for example, the Doha Rounds. How do you view their effect?

 

Stern: Later this year, the Global Commission on the Economy and Climate, will publish its first report, identifying the numerous economic benefits to be gained from the transition to low-carbon growth and development, not just through the avoided risks of climate change, but also through, for instance, improvements in lo­cal air pollution. It will show that there are many powerful advan­tages from creating a cleaner and more sustainable economy. These should inform not just the negotia­tions towards a new international agreement at the United Nations climate change summit in Paris in 2015, but also complementary international processes to promote sustainable growth, including the Doha Development Agenda. Rapid­ly growing trade of low-carbon and other environmental goods and services are an important source of growth for those pioneers that are investing in the creation and expansion of new markets. Low-carbon goods and services will be a powerful potential source of sustainable economic growth and development over the coming dec­ades.

 

The Chinese version appeared in Chinese Social Sciences Today, No. 617, July 7, 2014

                                                    Translated by Jiang Hong

The Chinese link:

http://sscp.cssn.cn/xkpd/dh/201407/t20140707_1242447.html