Monday, October 30, 2006

How Bad Could It Be?

One of the key factors hampering a more effective response to climate change has been the enormous uncertainty surrounding its future costs. If emissions reductions and other forms of mitigation are equivalent to an insurance premium, as I've suggested for many years, just what is the magnitude of the adverse outcomes against which we're insuring? The release today of a new UK government report addresses just this question. Commissioned by Chancellor Gordon Brown, led by economist Sir Nicholas Stern, and capped off with a presentation to Britain's Royal Society, the study describes a range of consequences that would be catastrophic for global economic output and highly disruptive to the lives of nations and individuals. Although I intend to convey my reactions to the full report in a later posting, once I've had a chance to digest it, I think it's worth noting the publication of these findings as a milestone in the climate controversy.

Although some may argue otherwise, it seems intuitively obvious that altering our industrial and lifestyle patterns to reduce global greenhouse gas emissions will impose the equivalent of a tax on the global economy. If we view this tax as an investment in averting higher costs later, then it's impossible to assess the return--and thus the priority--of these investments without having a good sense of the magnitude of the avoided future costs. The Stern Report indicates that these figures are in the trillions of US dollars, either in terms of the cost of the potential damage or the value of measures undertaken now to mitigate these results. It also puts a cost on the externality associated with unregulated emissions: $85/ton of CO2 equivalent.

One of the surprising aspects of the report is the optimistic tone of the summary. The focus is not just on the downside, as we'd expect, but also very much on the scope for action and the benefits, economic and otherwise, of responding aggressively. Because of the breadth of the issues covered in this study, we should expect that opponents will soon be at work picking it apart, even as advocates of more drastic action cherry-pick its worst-case outcomes. The key contribution here is something we've lacked for some time: a serious cost estimate grounded in the science of climate change but focused on the economy and the consequences of the status quo and various levels of response. This is precisely what policy makers need in order to make appropriate judgments about how to weigh future uncertainties against the certain current costs of emissions reductions. Stay tuned.

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