The new climate economics
By Felipe Calderón, Nicholas Stern
Calderón is former President of Mexico and currently a visiting scholar at Harvard University, Chair of the Global Commission on the Economy and Climate
Stern is President of the British Academy, is Professor of Economics at the London School of Economics and Co-Chair of the Commission
This Friday, in its latest comprehensive assessment of the
evidence on global warming, the United Nations Intergovernmental
Panel on Climate Change will show that the world's climate
scientists are more certain than ever that human activity - largely
combustion of fossil fuels - is causing temperatures and sea levels
to rise.
In recent years, a series of extreme weather events - including
Hurricane Sandy in New York and New Jersey, floods in China, and
droughts in the American Midwest, Russia, and many developing
countries - have caused immense damage. Last week, Mexico
experienced simultaneous hurricanes in the Pacific and in the Gulf
of Mexico that devastated towns and cities in their path. Climate
change will be a major driver of such events, and we risk much
worse.
This puts a new debate center stage: how to reconcile increased
action to reduce greenhouse gas emissions with strong economic
growth.
It is a debate that is already mired in controversy. As most
countries have started making serious investments in renewable
energy, and many are implementing carbon prices and regulations,
critics complain that such policies may undermine growth. With the
global economy still recovering from the 2008 financial crash,
higher energy costs - not yet fully offset by greater energy
efficiency - are worrying business and political leaders.
The advent of shale gas has confused the energy debate even more.
If gas is substituted for coal, it can be a useful bridge to a
low-carbon future. But astonishingly, it is coal, the dirtiest
fuel, that is experiencing the sharpest increase in use. Companies
and investors are hedging their bets by taking a few
resource-efficiency measures and investing in some low-carbon
assets, but leaving their high-carbon portfolios and activities
largely intact. Policy vacillation in some countries has not
helped.
Advocates of stronger action respond that low-carbon investments
can generate much stronger, cleaner growth. They point to the
savings available from energy efficiency, and to the market
opportunities generated by clean-energy technologies as the
processes of learning and discovery take hold. They seek to
demonstrate the benefits that a more sustainable pattern of
development can bring to the world's cities, to people's health
(from the reduction in air pollution), to energy security, and to
the ability of the world's poor to access energy. And they propose
green bonds and public investment banks to finance new
infrastructure and jobs at a time when world interest rates are low
and demand is depressed in many countries.
These are serious economic debates, but too often they have become
entangled in ideological disputes about the appropriate response to
the economic crisis and the value of government intervention in
markets. That is regrettable. Climate change is not a partisan
issue, and climate policy is essentially market-based. It is about
correcting market failures so that markets and entrepreneurship can
play their proper role of ensuring innovation and efficient
resource allocation.
In order to escape this impasse, we have helped to launch the
Global Commission on the Economy and Climate. The Commission's New
Climate Economy project brings together seven leading policy
research institutes from six continents, overseen by a panel of
former heads of government and finance ministers and prominent
business leaders, and advised by a panel of leading economists from
across the world. Its purpose is to provide authoritative new
evidence concerning how governments and businesses can achieve
stronger economic growth while simultaneously addressing climate
risks.
Few governments or investors start from the standpoint of climate
change. They want to promote investment and economic growth, create
jobs, stabilize public finances, expand markets, turn profits,
ensure reliable energy and food supplies, produce goods and
services, reduce poverty, and build cities. So the primary question
that we need to ask is not whether we can reduce emissions, but how
public policy can help to achieve these core goals while reducing
emissions and building a more climate-resilient economy.
There is now a lot of experience around the world in this area.
When the Stern Review on the economics of climate change was
published seven years ago, the subject was largely theoretical. Now
countries at all stages of development are pursuing new patterns of
economic growth that take climate into account.
Germany, for example, is planning the world's most ambitious
low-carbon energy transition, based on energy conservation and
renewables. South Korea has made "green growth" a central economic
goal. Mexico's 2012 General Law on Climate Change has put it on
course for a major increase in clean power. China has placed the
industrial development of green technologies at the top of its
agenda. Ethiopia is seeking to move to lower-carbon farming. Brazil
has significantly reduced the rate of deforestation in the
Amazon.
Some major businesses are providing powerful examples of what is
possible. Unilever has committed to the sustainable sourcing of
agricultural and forest products. Coca-Cola is phasing out all use
of climate-polluting hydrofluorocarbons. The retail giant Wal-Mart
is driving emissions reduction throughout its supply chain.
Meanwhile, the World Bank and the European Investment Bank have
stopped lending to high-emission coal plants.
Yet genuine questions remain about how fast economies should move
on to a low-carbon path, and the most effective way to do so. Some
low-carbon policies have clearly been expensive, while other,
apparently cost-effective options, have not been pursued at all.
Any structural transformation involves costs, trade-offs, and
uncertainties, and it is vital that we understand these
properly.
Powerful interests will, of course, oppose any low-carbon
transition, dismissing and often drowning out those who stand to
benefit. That makes it even more important to clarify the choices.
As science makes clear how imperative the climate question is, it
is time for economists and policymakers to explain how it can be
answered.
Copyright: Project Syndicate
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