Britain, climate change leaders

Nicholas Stern

Times Online - February 22, 2008

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Hesitation today in putting reductions into effect will have serious consequences tomorrow

Climate change is the greatest market failure the world has seen. It requires large-scale and international action. By providing a strong policy framework to overcome this failure, governments can harness the tremendous power of markets to find effective, efficient, equitable and international responses to the challenge. For markets and entrepreneurship to work, that framework must be credible and predictable, but allow flexibility too.

The Climate Change Bill, currently in debate in the House of Lords, provides a huge opportunity to demonstrate the UK's commitment. Targets must be consistent with the scale of the problem - that means at least 80 per cent reductions by 2050 for the UK (relative to 1990); and they must promote efficiency and internationalism - that means openness to buying emissions reductions from poor countries.

Reversing the trend to higher global temperatures, more extreme and variable local weather patterns, increasing costs of natural disasters and potentially enormous population movements requires an urgent worldwide shift towards a low-carbon economy. Sound policy and international collaboration can deliver strong and clean growth for all at reasonable cost. Weak or delayed action will eventually choke off growth and is a far more costly option.

A global policy must satisfy three principles if it is to find international support: it must lead to cuts in CO2 emissions on the scale required; it must be implemented in the most cost-effective way; and it must be equitable, to take account of the double inequity - it is poor countries that are hit earliest and hardest and rich countries that have greater responsibility for past emissions. At the same time, with the welcome rapid growth of some parts of the developing world it is crucial that they participate if the “deep cuts” in emissions agreed in Bali last December are to be achieved.

The Bill will make the UK the first country in the world to have a legally binding long-term framework to cut CO2 emissions and adapt to climate change. The Bill proposes a 2050 target of at least 60 per cent reduction in CO2 emissions compared with 1990 levels, and a 2020 target of between 26 per cent and 32 per cent reduction in CO2 emissions against the same baseline. Five-yearly carbon emissions budgets will become the milestones on the way to the targets, and the first budget period begins this year.

Lord Turner of Ecchinswell has been appointed to chair the Committee on Climate Change, which will advise the Government on the 2050 target and the carbon budgets. He has a deep understanding both of the challenge and of how the private sector is central to any response.

The establishment of the committee is a radical institutional innovation. It will help us all to meet the UK's emissions targets by holding the Government to account. Significantly, one of the first jobs of the committee will be to report, as requested by the Prime Minister, on whether the 2050 target should be tightened up to 80 per cent. At Heiligendamm, the G8 agreed that the world must reduce global emissions by 50 per cent by 2050 in order to control the risks of severe climate change to acceptable levels.

But we should go farther. The UK, and other rich countries, should commit themselves to a target of at least 80 per cent. With a world reduction of 50 per cent that would bring us down to the world average only in 2050: we will remain above that between now and then. Given the historical responsibility of big countries for a large majority of the current stock of gases, that is surely the minimum cut that equity demands. Clarity and predictability require that the decision be taken quickly.

In addition to being effective and equitable, we must also be efficient through pressing down on costs. By putting an appropriate price on carbon, people will be faced with the full social cost of their actions. A common global price would be most efficient because emissions reductions will then take place wherever they are cheapest. It is possible to put a price on carbon, explicitly through tax or trading, or implicitly through regulation. A system of carbon trading, however, has three important advantages. First, quotas control the level of emissions directly; secondly, trading for countries who want to exceed those quotes encourages better sharing of costs across the world; and thirdly, they provide incentives for developing countries to participate.

Price volatility is sometimes argued as a problem with quotas and trading. However, price volatility can be reduced by clarity of policy, firm decisions on quotas and broader and deeper markets.

Thus there is a powerful case for a large element of carbon trading in the policy package in rich countries. Alongside rich countries setting their own strict targets on emissions, carbon prices at appropriate levels can be maintained that will give incentives both for reduction at home and purchase abroad.

The Climate Change Bill embodies elements of the three principles of effectiveness, efficiency and equity. If the 80 per cent target is adopted by the Government, as I believe it must, the UK will have made a legally binding commitment to emissions reductions that show an effective global policy response to climate change.

If, further, there is a clear understanding that some of this can be met by trade, we would not only help to keep down costs but also foster real incentives for developing countries to participate in the search for low-carbon growth while continuing their fight against poverty.

Lord Stern of Brentford is IG Patel Professor of Economics & Government at the London School of Economics and led the review on the economics of climate change published last year

© Copyright 2008 Times Newspapers Ltd

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