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The Stern Review: observations from a forest economist

Sir Nicholas Stern, the government chief economist, produced his Review on the Economics of Climate Change on Monday 30th October 2006. What differentiates the Stern Review from other climate change (CC) studies is its comprehensive nature. It examines the scientific evidence, the economics and ethics of CC, the impact on growth and development and the impact on developing countries. In addition it also covers opportunities for stabilisation, mitigation policy, adaptation measures and collective international action. No wonder it's almost 700 pages!

The Review is written by economists for economists and parts of it are technical in nature. However the economics discussed are robust and well thought out.

The Review takes an international approach to this international problem, providing a comprehensive discourse on the underlying science. It highlights that the problem is increasing and that the longer the delay in acting the greater (and more costly) the necessary actions will become. Recognising the degree of uncertainty inherent in the science relating to precisely when consequences will occur, it quantifies the risk wherever possible.

The cost of CC to global gross domestic product (GDP) is estimated at between 5% and 20% per year, however the solution will cost the annual equivalent of 1% of (global) GDP. Stern also illustrates how this cost will increase if everyone does not take action now.

The Review has been criticised as being sensationalist by some reviewers, highlighting the worst case scenarios. However there are comments on the confidence with which some assertions are made and their likelihood is considered, for example recognising that the evidence for an accelerating feedback loop is "less well understood".

Whichever way you look at climate change, the consequences are serious especially for the developing world. The review addresses issues of equality and the rights of future generations as well.

 

The Economics of Climate Change

It is human economic activity that has caused (and continues to cause) CC, predominately energy production, industrial activity, transport and land use.

The main economic conditions are that:

  • The climate is a public good in that it belongs to no individual and everyone benefits or suffers from changes in its quality, without paying.
  • This makes Climate Change an economic externality, whereby the level of use by one consumer has a direct effect on the welfare of another. For example, living near a forest one may experience disturbance from timber lorries or the noise of harvesting without having any economic benefit from the proximity.
  • The previous two conditions make CC a classic example of market failure. Because no one pays or receives a financial benefit for the climate, there is no (monetary) incentive to do anything about it and no market.

These three conditions underlie all the economics of CC addressed in the Review. It is also clear that those that suffer most from CC will not necessarily be those that contribute most to the problem, indeed it is likely that the developing world will suffer most as a consequence of the economic activity of the industrialised nations.

The Review places great store on ensuring the economics used reflect the dynamics of the scientific evidence. It also addresses the issue of inequality using economic tools and espousing the polluter pays principle (PPP).

 

Implications for Forestry

The coverage of forestry in the report is mainly in terms of deforestation. However there are a number of other issues that affect forestry.

The report looks at adopting energy ratings for buildings, products and vehicles. While this facilitates informed choice it (by showing whole of life energy costs) also highlights the benefits of timber as a building material over the likes of concrete and steel.

In terms of mitigation, fossil fuel use can be limited by substitution. If prices are set to reflect the full cost of production, including the GHG externality, then consumers will switch to a lower carbon substitute. This augurs well for woodfuel and many countries are recognising the benefits of this.

Curbing deforestation is a cost-effective means of combating CC by reducing GHG emissions. It also offers quick reductions. In addition, it preserves biodiversity and water quality. The review recognises that national forests are a national resource but suggests that the international community can (and should) be supportive, as they too will benefit from positive actions.

Establishing, clarifying and enforcing clear property rights to forestland, as well as determining the rights and responsibilities to landowners, communities and loggers is the key to effective forest management.

The Review recommends that the international community should provide compensation, taking account of the opportunity costs (missed economic activity) of alternative land use and the cost of managing and enforcing protection. An estimate of the level of this for the 8 countries responsible for 70% of emissions from land use could be $5billion a year.

Aforestation also offers significant opportunities to enhance the capacity of soils to store carbon and reverse emissions of carbon change. Markets can be created that will favour forest creation as part of a wider approach to deforestation.

Whilst carbon markets have an important role to play the Review urges caution. In linking deforestation in with carbon trading, there is a potential risk of destabilising the growing carbon market if no agreements are in place to increase requirements for emissions reductions.

The report suggests that large-scale pilot studies are required to take action to preserve the remaining areas of natural forest. This is seen as an essential first step.

 

Wider implications

A 1°C increase could put at least 10% of land species at risk of extinction. The speed of CC means that there is no opportunity for species to adapt (evolve). The potential consequences of this are still being thought through. Upsetting the balance of species could have unforeseen consequences. Even changes in breeding seasons can have significant consequences. If earlier springs cause insects to peak before birds breed there could be an imbalance in the food chain resulting in crop failure either through predation or lack of pollination. Combined with crop failure through drought, this could result in the starvation of thousands of people world-wide.

The main risks of CC discussed are to water, food, health, land, environment and abrupt and large scale impacts. The effects will vary by location and time of year. Water stress; crop yield (dependant on degree of adaptation); hunger; health (malnutrition/heat stress); economic growth & development; loss of essential species; increased incidence of flooding; forest and crop fires; climate induced outbreaks of pests and diseases, and rising surface ozone are all consequences of climate change. CC may benefit some countries/regions (at least initially) through increased crop yield for example. This may make it difficult to generate public support in these countries.

The Review illustrates the need for international agreement on targets; flexibility through tax or trading (at a regulated price) and shows the revenue earning potential of taxes and tradable quotas.

There exists considerable uncertainty around the costs and effectiveness of abatement and this has been a contributing factor to the mixed success of the European Emissions Trading Scheme. Lessons have been learnt and the scheme will be reviewed in 2007.

 

Conclusions

The main conclusion of the Review is that there is still enough time to avoid the worst impacts of Climate Change if we take strong action now!

Other key messages are:

  • CC will have serious impacts on growth and development. These effects will be felt unevenly.
  • The costs of stabilising the climate are significant but manageable; delay would be dangerous and much more costly.
  • Action on CC is required across all countries and it need not cap the aspirations for growth of rich or poor countries.
  • A range of options exists to cut emissions however strong, deliberate international policy action is required to motivate their take-up.
  • CC demands an international response, based on a shared understanding of long term goals and agreement on frameworks for action.
  • Key elements for future international frameworks should include emissions trading; technology co-operation; action to reduce deforestation and adaptation.

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