Virtual Learning Resource Centre

The Stern Review on the economics of climate change

presented by Sir Nicholas Stern to the UK Government


The Review presented by Sir Nicholas Stern, former Chief Economist of the World Bank, is perhaps the most important report ever produced, both for the world as a whole and for the future direction of business and industry. The increase in carbon emissions in the atmosphere threatens the way of life in the developed countries and is even more harmful to the developing world, mired in deepest poverty. Scientific and economic evidence is provided to demonstrate that the danger is real. If the world does not cooperate now to mitigate climate change, the situation could be catastrophic from the mid century. The Review shows how, given determination and international cooperation, the threat posed by greenhouse gases can be managed without disaster. Business has the opportunity to enhance profitability by early innovation to adapt to the unfolding situation and to help mitigate the impact in the longer term future. Action has to start now.

(Reviewed by Edgar Wille in November 2006)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)


This publication is over 600 pages long. This review of it is, therefore inevitably selective and will consider it especially from the point of view of business and industry. Sir Nicholas Stern, former Chief Economist of the World Bank, and his colleagues, have written in such a way that the non specialist can understand the main arguments, though the detailed economic and scientific support is set out in more specialist sections.

The Stern Review gives clear and thorough evidence that there is significant worldwide danger if nothing is done to meet the threats from climate change. I aim to distil the essence of the Stern Review, which is the most comprehensive report ever written on the subject. If heeded, it could mark a turning point in world history and in business and personal life throughout the world.

Early in the Review we meet the acronym BAU, which stands for “Business as usual”. BAU is a policy we cannot afford to follow, whether the outcome of climate change is in line with the worst case scenario or follows a less serious, but still serious, path.

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Long-term predictions

The Review is not a panicky document. It demonstrates that climate change is a problem for all the inhabitants of the earth, but Stern is certain that if we begin to act decisively now we can bring the situation under control in time to avoid utter disaster. Failure to act urgently could mean that by mid century greenhouse gas emissions (GHG) would be on an unstoppable path, bringing temperature rises which would change the geography of every part of the world.

The northern areas of Russia, Scandinavia and Canada would become warmer and be able to grow crops that are impossible now, but on the other hand, the melting of the permafrost which prevails in these areas would add to the emissions, which would affect the rest of the world adversely. The present temperate areas, such as the UK, the Low Countries and North Germany, would move toward a Mediterranean climate, and the tropical areas, already suffering from severe weather unbalance, would experience the worst outcomes, some of them becoming deserts and many impossible for living. And even on the least serious scenarios, things would be moving in this direction.

These predictions are based on well tried statistical models, which lie at the base of all scientific and sociological research. They are given in detail in the technical chapters, which demonstrate to even the non expert reader that they have considerable force. It is emphasised that while there is definitely a problem, there is a large degree of uncertainty about the precise figures. The fact that this is admitted gives one confidence in the general direction of the expectations. Scaremongers don’t make such concessions.

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Immediate action

Another factor is that we can have only a limited effect on the climate over the next 30 plus years, because it is determined by what has already happened. But what we do now and in the next 10 to 20 years will determine the extent of the longer term damage; it can have a very deep effect on what happens to the climate in the last half of the century. The fact that we cannot alter what has already happened should not make us belittle the need to deal with what will happen from mid century onward. We have twenty years in which to have a reasonable chance to ensure a manageable situation after 2050.

At the very least the evidence adduced is sufficiently strong that we would be fools to ignore it. And our children and grandchildren, who faced the consequences of our neglect would feel we had let them down in bequeathing such problems to them. The issue of The Economist immediately after the Stern Review was published gave a guarded welcome to it, but considered that Sir Nicholas might be erring on the gloomy side. It went on to say that governments should act on the risk of something catastrophic happening and made this point forcefully:

Just as people spend a small slice of their incomes on buying insurance on the off-chance that their house might burn down, and nations use a slice of taxpayers, money to pay for standing armies just in case a rival power might try to invade them, so the world should invest a small portion of its resources in trying to avert the risk of boiling the planet. The costs are not huge. The dangers are.

One of the scientific doubts cast on the Stern Review by a minority of readers is that natural causes might have been responsible for present and future global warming. But even if that be so, there can be no doubt that human activities are crucial contributors.

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International action required

Early chapters examine the evidence for the economic consequences of various degrees of climate warming, together with means of stabilising what is beyond avoiding, because the greenhouse gases are already there in the atmosphere. Then there is consideration of what the transition to a low carbon economy means to everyone’s life and livelihood, and how society can learn to adapt to inevitable changes, if they can be kept at a relatively low level.

The perspective adopted is international, although there is discussion of the effect of different degrees of global warming on different geographical regions. But the approach has to be global as the emission of GHG is increased by activity all over the world. It therefore requires adaptive and mitigating activity by all nations. It is no good the British saying that, as they are responsible for only 2% of the whole, therefore their contribution is negligible. At that rate for all nations we would be well over the100%.mark. Successful dealing with the problem is only possible when all the two percent countries and those contributing more and even those responsible for less, work together. The populist press in Britain made much of this 2% figure, ignoring the fact that it is only by adding together everybody’s contribution to carbon emissions can the threat to all be averted.

There will need to be agreement across all countries on pricing mechanisms for carbon, on priority of research which should also be freely shared, on policies for adaptation, and on the particular problems for the least developed countries (LDCs), many of whom will be greatly at risk.

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Conceptual framework

One of the difficulties is that the issue of climate change and its economic consequences has to be considered along long time horizons and there is always a tendency in human thinking to think “Ah, well that’s a long way off”. But this will not do in these unparalleled circumstances. I cannot do better than quote from the executive summary of the Stern Review on how to accommodate our thinking to the long term nature of the matter:

"No one can predict the consequences of climate change with complete certainty, but we now know enough to understand the risks. Mitigation – taking strong action to reduce emissions – must be viewed as an investment, a cost incurred now and in the coming few decades to avoid the risks of very severe consequences in the future. If these investments are made wisely, the costs will be manageable, and there will be a wide range of opportunities for growth and development along the way. For this to work well, policy must promote sound market signals, overcome market failures and have equity and risk mitigation at its core. That essentially is the conceptual framework of this Review."

The Review sets out three ways of looking at the economic costs of the impacts of climate change and the benefits which will arise from action to reduce emission of GHGs:

  • Looking at the physical effects of climate change on the economy – on human life and the environment – and the resource cost of different technologies and strategies to address the problem
  • Using economic models to estimate the economic impacts of climate change and to represent the cost of transition to low carbon energy systems for the whole economy
  • Comparing the current level and future direction of the cost of the impact of an additional unit of GHG emission with the cost of doing something about reducing these emissions.

If we do nothing, the impact will ultimately be irreversible. Seriously tackling the issue can actually permit growth for the longer term and will not veto the aspirations for growth of both rich and poor countries. "The earlier action is taken, the less costly it will be."

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Adaptation and mitigation

Two activities are required:

  1. One is helping people to adapt in the here and now to the climate change which IS happening
  2. The other is to mitigate the longer term future effects.

These two simultaneous approaches will help people everywhere to cope, and at the same time reduce the amount of coping they will have to do in the longer term.

Adaptation is the only possible response in the next two or three decades. It will tend to provide relatively local benefits. Some adaptation will just happen, as people respond to market or environmental changes. Some will require planning and greater foresight, eg major infrastructure issues. Information, often from governmental sources, will help individual response and action, eg new techniques, more climate-resilient crops. The problems of adaptation will be particularly intense in the less developed world, where greater poverty and vulnerability limits action.

Mitigation influences the more distant future which has not already been compromised. It has longer lead times and involves the international community. It is the really direct activity which makes the changes related to a period which we can influence now. Its long term nature is no reason for regarding it as non-urgent. If we don’t start acting now, the mitigation activity will not be in place when the time for it to make a difference arrives. We shall run out of the time in which we can alter things.

Stabilisation is another concept employed – to arrive at a point where the situation is ultimately under control and where emissions do not continue to grow. The Review is not saying that there will be no pain and no changes to life styles, but it is convinced that if as a world we take action early, the problem is likely to be manageable. There is a nice balance between, on the one hand, making clear the extent of the dangers of climate warming and, on the other, avoiding panic and expressing hope, if the world takes action.

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The size of the problem

The Review uses a wide range of scientific research to express the probable temperature outcomes for various scenarios, depending on the level of stabilisation of greenhouse gases (GHGs) in the atmosphere. GHGs include methane, nitrous oxide and a number of gases arising from industrial processes as well as the major one – carbon dioxide. They are all usually expressed in terms of carbon dioxide equivalent. The current level is about 430 parts per million (ppm) of carbon dioxide in the atmosphere. This compares with 280ppm before the Industrial Revolution – over, say, the last two hundred years. This growth in volume has meant a rise is earth’s average temperatures of half a degree Celsius and what is already in the atmospheric system will unavoidably lead to the rise of another half degree over the next few decades.

That is without any increase in emissions. If we increase emissions at the present rate, the stock of GHGs in the atmosphere would reach twice the level at the start of the Industrial revolution ie 550ppm by 2050, and it would continue growing thereafter. The current rate of emissions is accelerating due to fast growing economies and increased demands for transport and energy. If this is not halted we could reach the 550ppm level by as early as 2035. This could mean a rise in average global temperature in excess of 2 degrees Celsius. And then adaptation would be very much more difficult and the world would be on a path of ever increasing difficulty. Mitigation must therefore be attempted forthwith; starting now it must be making clear progress by 2010. And this is the path of good sense even if the figures turn out to be somewhat lower. We cannot delay in the hope that something will turn up.

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The sources and impacts of the problem

The emissions stem from both energy and non energy sources. The current energy sources are Power (24%), Industry (14%), Transport (14%), Buildings (8%), other (5%). The non energy sources are Waste (3%), Agriculture (14%), Land usage (!8%).

Included in the consequences of a Business as Usual (BAU) approach from now on, are temperature rises of 5% in the second half of the current century. Effects would begin to develop before that, and would, then and thereafter, lead to consequences such as falling crop yields in most less developed regions – up to one third in Africa – and in many developed regions. Furthermore, sea levels would rise and threaten many coastal areas and cities including London, New York, Shanghai, Tokyo and Hong Kong; storms, heat-waves, forest fires, droughts and floods would become endemic. The beneficial ocean currents like the Gulf Stream could be weakened and polar melting would add to the catalogue of disasters.

There are variations in detail between the various models used because of the assumptions employed, but all agree on the general direction of likely events. The temperature rise which would cause such disasters is based on a feasible assumption of between 650ppm and 750ppp of carbon dioxide equivalent in the atmosphere if BAU prevails from now on.

Food production would be drastically affected, even if the more northerly areas were able to grow more for a while. Worldwide deaths from heat stress and malnutrition would increase. Diseases such as malaria would increase. 200 million people could be permanently displaced by rising sea levels, heavier floods and intense droughts. Many animal species would disappear and fishing stocks would be reduced (though apart from global warming there is a crisis in fishing stocks anyway, it being recently indicated in a scientific report, that fish supplies may dry up by the middle of this century). The above effects of global warming are dire, but the Stern Review brings them into the open, not in order to panic people, but to motivate everyone, governments and peoples, to take action to avoid these consequences.

The point is made at different stages in the Review that the impacts of climate change are not, and will not, be evenly spread throughout the earth. The poorest people and countries will suffer earliest and most, being very dependent on agriculture and thus especially vulnerable. They are already living in the warmest parts of the world and have the highest rainfall variability. Ongoing climate change will exacerbate this situation, in some cases to the point of making some regions uninhabitable, giving rise to the stresses of mass migration. Even if the inhabitants remain, low incomes will become lower and illness and death rates will rise. And, goodness knows, life is well nigh intolerable for those living at the very bottom of the pyramid (BOP) now.

And arising from all this, what would happen to the world’s money markets and financial arrangements? It beggars description.

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Modelling costs of climate change

Apart from agreement that, at best, coping with the situation will be costly, the exact levels of cost forecast vary, depending on the model used. The Review is quite open about this. There is no attempt to pull the wool over anyone’s eyes and the divergences are of degree, not of the seriousness of the costs, however calculated. The model mainly followed looks at the different categories of threat and particularly weights the evaluation of the effect on the poorest people.

Averaging the results of various well attested models would mean that the cost of the 5% temperature rise of the worst scenario would mean the loss of between 5% and 10% of GDP worldwide. The implications for business and employment are vast and wise companies will be putting their innovative thinking hats on without delay, ready to think unthinkable thoughts in order to turn potential disaster in to profitable advantage if they are early in the field of meeting new kinds of demand.

If the BAU course is followed, climate change could lead to a fall of 20% in consumption per head, worldwide, and in the most favourable scenario it would not be less than a 5% reduction. Once again business, as well as every individual, has to prepare for a new environment in which to operate. And the best preparation would be activity in mitigation of the circumstances that would lead to such consequences. Life styles would change, but not to the point where life was hardly worth living, if action is taken now and hereon. This point is continually emphasised in the Review. You could say that its main purpose is to make us aware of what is possible in order to avoid global disaster.

In fact one section is devoted to making the point:

Emissions have been, and continue to be, driven by economic growth; yet stabilisation of greenhouse gas concentrations in the atmosphere is feasible and consistent with continued growth.

Corporations and companies, large and small, have the opportunity to be involved both in the stabilisation process and in the development of new goods and services to meet a new market situation. Meeting the problems head on could lead to a time of unparalleled innovation. The Review refers to this theme of opportunity at various points in the development of its argument.

In the case for starting action right now, the Review suggests that to stabilise at the level, mentioned above, of 550ppm, would require global emissions to peak in the next 10-20 years and then fall at the rate of 1-3% per annum. This means that by 2050 global emissions would need to be 25% less than current emissions. It is also pointed out that really high temperatures could weaken the ability of the earth to absorb carbon and therefore exacerbate the situation. Assuming a world economy three to four times that of today in 2050, emissions per unit of GDP would need to be one quarter of what they are today. (Elsewhere on VLRC we will be reviewing a book on the perspective that such growth is not necessary for a fruitful life; this might have a bearing on the issues we are discussing here.)

To stabilise at a rate of 450ppm (20ppm more than the present situation) it would be necessary to peak in the next ten years and then fall at more than 5% per annum, reaching 70% below current levels by 2050. This is an enormous challenge and, while he says it is possible, Sir Nicholas doesn’t sound as if he expects so radical an approach so soon. In fact the Review says that it is already almost out of reach, given that this level will be reached within ten years and the technology will not be ready to cope with such sharp reductions in such a short time.

Another warning is that weak action in the next 10 to 20 years would put stabilisation at even 550ppm beyond reach. And 550ppm has risks enough.

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Opportunities for business to innovate

Taking the idea of cuts of 25% in emissions against present levels, as referred to above, the Stern Review recognises that there will be costs to be met in moving from a high carbon to a low carbon trajectory. However he adds: "But there will also be business opportunities as the markets for low carbon, high efficiency goods and services expand."

Greenhouse gases can be reduced in four ways:

  • Reducing demand for emissions-intensive goods and services
  • Increased efficiency, which can save money as well as emissions
  • Moving to low carbon technologies for power, heat and transport
  • Doing something about non energy emissions, eg avoiding deforestation.

Any manager or other employee could begin right now to make a list of items to look into, which could meet the first three of the above reduction approaches. The businesses which are quick off the mark will be the most likely to make profits out of the challenges – a case of "doing well while doing good" - of turning problems into opportunities.

Costs would have to be estimated. One could look at the costs of introducing these changes when compared with the costs of doing nothing (BAU). Costs would also be reduced by a general reduction in demand for high carbon goods and services as the general public increasingly understands the needs of the situation. Special attention would be required by firms whose principal offerings are in the field of high carbon goods and services; a change of strategy and a realignment of core competencies would be needed to stay in business. (One challenge that many companies will face is if there is a reduction in the demand for high carbon non essentials and luxuries, to offer the market equally pleasing alternatives with a much lower carbon cost.)

Macroeconomic models can also be used to track the system-wide implications of the transition to a low carbon energy economy and see how they apply to specific businesses, including changes in prices.

Using these two approaches in an economy-wide sense leads the Review to estimate that stabilisation of GHGs at levels of 500-550ppm of carbon equivalent would cost on average 1% of global GDP by 2050. This is substantial, but the Review considers that it would allow continued growth where the worst case scenarios would not.

The Review acknowledges the difficulties implicit in the above estimates. Although confident of the general trend of the costs, Sir Nicholas and his team recognise the uncertain aspects of the calculations. It is not easy to estimate the cost of new technologies several decades into the future, or to determine how fossil fuel prices may evolve, or what people’s responses will be to price changes. But by using a portfolio of options a central projection of costs is possible, sufficient to act as a signpost on the basis of which to prepare scenarios for specific actions, in firms for example.

The Review summarises the issues surrounding the large uptake needed of a range of clean power, heat and transport technologies to get really significant emission cuts in the medium to long term: “The power sector around the world will have to be at least 60%, and perhaps as much as 75% decarbonised by 2050 to stabilise at or below 550ppm.“ In spite of difficulties in the transport sector the need for deep cuts of emissions cannot be avoided and therefore technology needs to develop apace. In many of these fields the technologies exist which could help achieve the objectives, but the priority is to bring down their costs, to where they are competitive with fossil fuel alternatives. There is no one magic innovation and a whole portfolio of options has to be considered.

It is expected that in spite of the development of renewable energy use by the second half of the century, over half of energy needs will still be met by hydrocarbons. The dangers in this can be partly offset by extensive carbon capture and storage. Also dramatic falls in the price of fossil fuels could threaten the whole process of reducing carbon emissions, if companies maintain a short term perspective which concentrates on making a better return for shareholders in the here and now.

(I have not noticed any addressing in the Review of the issue of shareholder attitudes and how these could slow up the needed reforms, unless at some stage panic about greenhouse gas emissions leads to a significant fall in share values anyway. Books such as Built to Last and Good to great, reviewed on the VLRC, praise companies which take a long term view. Such companies should be at ease with issues which have long term consequences. Companies who have assessed everything on a quarterly basis will find it more difficult to adapt to long term horizons.)

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Opportunities for growth

Sir Nicholas and his team have a section specifically concerned with business opportunities in the transition to a low carbon economy. It is recognised that some internationally traded products and processes could find their competitiveness eroded by the move in the direction of a low carbon basis. For the economy as a whole, however, benefits from innovation will offset some of the extra costs. Companies which have been alert to what is involved in change as a general principle will already have the dynamism and flexibility to enable them to grasp the nettle.

A wide range of manufacturing and service industries will exploit opportunities in the low carbon energy and energy products which are considered to be likely to amount to $500 billion or much more a year by 2050. The Review invites individual companies and countries to position themselves to take advantage of the potential of this market. Innovation is much spoken of in management literature and education; it will come into its own in finding new products and methods to meet the carbon emission situation. One innovation area mentioned is the development of crops that are resilient to whatever climate change throws at it, such as drought. Better information for users is also seen as vital in the task of defeating the results of climate change.

As well as market opportunities there is also scope for internal rooting out of current inefficiencies; there may be money saving to be gained.

Government policies on climate change may also provide a lever for reforming energy inefficient systems and abolishing energy subsidies which distort the situation. These cost governments around the world some $250 billion per annum. There are also indirect costs of GHGs which can be addressed, eg ill health and death from air pollution and deforestation. Climate change policy can fit in with national plans for energy security and structures in which investors in power generation can operate. For many economies, carbon capture and storage is essential to maintain the role of coal in providing reliable energy supplies. The scope for research, financed privately or by governments, is endless and the role of academic research will be significant.

Private companies, in the context of government policies and global cooperation, have a vital role to play in helping customers to adapt to new situations and in taking steps to mitigate the effects of global warming, both in terms of what they produce and how they produce it. The private business sector, with its PR and advertising machinery and marketing approach, has an immense influence on the life styles of the population and in pursuing its self interest will have a vital role in diverting customers to a low carbon society.

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Carbon pricing

The Review is clear that an essential foundation for climate change policy, led by governments, is the fixing of a carbon price through tax, trading or regulation. Greenhouse gases are what economists call an externality in relation to an organisation’s activities, whereby costs are created by their activity, but they do not have to pay for these costs. Those who produce GHGs impose "costs on the world and future generations, but they do not face the full consequences of their actions themselves". (Sir Nicholas and his colleagues have an aptitude for making basic principles of economics seem quite simple, without giving a direct economics lesson.)

The Review says:

Putting an appropriate price on carbon – explicitly through tax or trading, or implicitly through regulation – means that people are faced with the full social cost of their actions. This will lead individuals and businesses to switch away from high-carbon goods and services and to invest in low carbon alternatives. Economic efficiency points to the advantages of a common carbon price; emissions reductions will then take place wherever they are cheapest.

The Review recognises that the precise policy tool will be a matter of choice. In some cases tax is the way ahead, providing a steady stream of revenue (which the British Liberal Democrats suggest could be used to reduce other taxes). For some, trading and the use of an auction approach will be the way ahead. Here, low emission companies or countries can sell their unused permitted carbon allocation to enable others to exceed it. But buying the right to exceed the agreed allocation for carbon emissions will incur heavy costs. The objective of introducing this carbon trading is to bring home the size of these costs to the creators of high emission and to impel them to look from more efficient ways of handling energy in their products and services and related processes, so as to reduce costs.

The structure of the carbon price must be one which is credible and long lasting, as otherwise companies with long lead times in their production will not feel the risk is worthwhile. Investments in aircraft manufacture, power stations, industrial plants, for example, last for many decades and there must be confidence in the carbon price, so that it will not be in a continual state of flux. It will take time to build up that kind of credibility.

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Technology development

The Review emphasises that policies are required to support the development of a range of low-carbon and high-efficiency technologies on an urgent timescale. This work needs to cover everything from research and development to demonstration and early stage deployment. Close collaboration between government and industry is seen as essential. Low-carbon technologies are often more expensive than fossil fuel alternatives. But the costs of technology tend anyway to fall with scale and experience.

Companies may worry that there will not be a market for their new products and they may under-invest if they are uncertain of the full pay-off. So in some circumstances public funding may be necessary. The Stern Review suggests that there could be high returns if the investments in this area for research, development and demonstration were doubled to $20 billion per annum globally, to support a diverse portfolio of technologies.

The early stages of launching a technology need support, during the period when it is gaining acceptance, and achieving little profit. The Review argues that existing deployment incentives worldwide should go up two to five times from the existing level of $34 billion per annum. Such grants could powerfully motivate the private sector to move ahead with their innovations.

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Behavioural change

The removal of barriers to changes in business behaviour is important for the encouragement of the take-up of opportunities for energy efficiency. These barriers include lack of information, transaction costs and organisational inertia.

Regulatory measures can cut through many complexities in the above areas and make the situation clearer. We already have minimum standards for buildings and appliances in many countries and they have helped to improve performance, where price signals might not have sufficed. Information includes clear labelling of products; sharing best practice can help both consumers and businesses in the choices they make.

Education and public discussion also have a role to play. Today’s school children are tomorrow’s policy makers and voters. Public discussion can give people a sense of involvement in the decisions which will affect them so much.

Government guidelines will be needed to help individuals and firms to adapt in the medium and longer term. Governments should provide high quality climate information as the situation unfolds, together with tools for risk management. These will help to drive efficient markets. There should be guidance on land use, building and other infrastructure construction to ensure that climate change is taken into account. Long term policies will be needed for natural resource protection, coastal protection and readiness for handling emergencies. A financial safety net needs to be provided for the poorest people who cannot afford self protection, such as insurance, and who are the most vulnerable. So Governments can and must do much, but this requires the understanding and support of the general public. (Cynical point scoring by the media, politicians and captains of industry will need to retreat before the flow of well defined information and supporting activity.)

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International collective action

To be really effective the response to climate change has to be internationally handled. The actions of individual countries to reduce emissions are usually only a small part of the whole. We have already seen how the UK contributes only 2% of the global emissions. This has been used by the popular press to suggest that as UK contributes such a small proportion of the problem, why should British people be bothered?

But the answer is in the Stern Review: “Many countries, states and companies are already beginning to act. However the emissions of most individual countries are small relative to the global total, and very large reductions are required are required to stabilise greenhouse gas concentrations in the atmosphere.” The issue is one of global public good. Everyone’s 2% or more or less is required. Without them all we shall not hit our global mitigation target. There can be no free-riding. Multilateral frameworks and coordinated action is required. If a nation stays outside, it cannot say "I’m alright Jack"; it will suffer with all other nations.

This is going to be one of the biggest challenges to be addressed and new levels of diplomatic effectiveness will need to be attained by the leaders. On past form the prospects are not good for such worldwide cooperation. The problem of China’s development and high contribution to GHGs is a matter of concern. But China can’t say that they are not going to reduce their level of GHGs on grounds of fairness – because the fully developed countries have created the situation by their past actions. Why should a country like China, involved in its own great development period, have to run the risk of losing what they have gained, because of what others have done in the past?

They are not asked to lose it. If everyone plays their part, the Review is certain that the worst consequences could be avoided. And fair or not, if China opted out, it would still suffer from the disastrous situation caused if all nations do not cooperate. There are signs that China is, in fact, willing to enter the discussion with other nations. It has already adopted ambitious domestic goals to reduce energy used for each unit of GDP by 20% from 2006-2010 and to promote the use of renewable energy.

The biggest obstacle would be if America would not cooperate fully and preferred a less rigorous approach. Currently the Bush Administration prefers to follow the technological route toward emission reduction and is not interested in the path of emission control and certainly not a carbon tax. This contrasts with the mix of three approaches urged by Sir Nicholas Stern – taxes, trading and technology.

The Review emphasises the urgency of international action by reference to the demand for energy and transportation which is growing rapidly in developing countries and to the fact that many developed countries are at stage where they will need to renew a considerable amount of their capital stock. It is pointed out that investments in the next 10-20 years could create a point of no-return for emissions over the next half century, or, much preferably, they could be used as an "opportunity to move the world onto a more sustainable path".

Less developed and very poor countries (LDCs) will be less able to cope with the situation. Those who invest in them will have a moral and self interested responsibility to bear some of the load and international bodies and other nations will need to facilitate action which the LDCs are unable to take on their own. The least altruistic nations will themselves suffer if they stand by and do nothing as the bottom of the economic pyramid sinks lower and lower. The incremental costs of low carbon investments in LDCs are likely to be $20-30bn per annum.

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Broad international coverage

International cooperation needs to cover every aspect of emission reduction – pricing, technology, regulation, land use, forest protection. Energy efficiency can be enhanced by cooperation and brings commercial advantage, as also would a reduction of gas flaring associated with oil and gas extraction. There is no single formula to achieve these results, but the review suggests that "calculations based on income, historic responsibility and per capita emissions, all point to rich countries taking responsibility for emissions reductions of 60-80% from 1990 levels by 2050."

Obviously the carbon trading approach depends on close international cooperation, both between individual countries and by institutions. The EU emissions trading system (ETS) is advanced as providing a model which other regions and countries could well learn from. The third phase is under discussion to come into effect in 2012 and it could lead to a way ahead capable of general adoption in principle. It needs to be fixed at such a level that the price of the trading would hurt the purchasers of credits sufficiently to make them anxious to seek alternatives. Clear information to ensure transparency is recommended, and banking help to smooth prices over time, so that traders would know where they stood. It is suggested that other trading schemes being developed could link up with the EU trading scheme.

All this international activity requires the growth of trust as nations and companies interact. It is also suggested that the international financial institutions have an important role to play. A Clean Energy Investment Framework established by the W orld Bank and other multilateral development banks is mentioned as having potential for catalysing and scaling up investment flows. This could help the developing countries.

It is apparent that global and regional cooperation, both formal and informal, and taking many forms, can be crucial to the development of emission reducing and of cost saving technologies and schemes. Curbing deforestation is picked out as a very cost effective way of reducing global emissions to which it contributes 18% - which is more than that contributed by all forms of transport, including road and air.

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A clear perspective needed

The Review concludes by emphasising the need to gain everywhere a clear perspective on the long term goals for stabilisation of greenhouse gas concentrations in the atmosphere. Otherwise action is unlikely to be able to meet the objectives. The three keywords, mitigation, adaptation and innovation are reaffirmed. Towards the end of the Review, Sir Nicholas re- asserts:

The challenge is to broaden and deepen participation across all the relevant dimensions of action – including cooperation to create carbon prices and markets, to accelerate innovation and deployment of low carbon technologies, to reverse emissions from land use change and to help poor countries adapt to the worst impacts of climate change.

The final paragraph of the Review reads:

Above all, reducing the risks of climate change requires collective action. It requires cooperation between countries, through international networks that support the achievement of shared goals. It requires a partnership between the public and private sector, working with civil society and individuals. It is still possible to avoid the worst impacts of climate change; through strong collective action starting from now.

The full executive summary adds: "Delay would be costly and dangerous".

The Review highlights the need for much more work by scientists and economists to tackle the analytical challenges and resolve some of the uncertainties across a broad front. It expresses the belief that with the right incentives the private sector will respond and deliver solutions. This VLRC review has been undertaken as a matter of urgency, because we believe that the role of business will be central to the success of the endeavour to avoid disaster and perpetuate a reasonably high degree of what the King of Bhutan called "gross domestic happiness". If this is attained, and shared more equally throughout the world, then our descendants may be able to echo the words of Shakespeare’s Hotspur that "out of this nettle, danger, we pluck this flower, safety".

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