House of Commons - Environmental Audit

Select Committee on Environmental Audit Fourth Report

The Stern Review

6. Commissioned jointly by the Prime Minister and Chancellor of the Exchequer, the Stern Review was tasked with assessing the economics of moving to a low-carbon global economy, the potential of different approaches to adaptation to global warming, and specific lessons for the UK.[8] The key messages of the Review are set out in Figure 1.

Figure 1 Key messages from the Stern Review

The over-riding message:

"The scientific evidence is now overwhelming: climate change is a serious global threat, and it demands an urgent global response."
"the benefits of strong and early action far outweigh the economic costs of not acting."
"There is still time to avoid the worst impacts of climate change, if we take strong action now."

On the size of emissions cuts required:

"The risks of the worst impacts of climate change can be substantially reduced if greenhouse gas levels in the atmosphere can be stabilised between 450 and 550ppm [parts per million] CO₂ equivalent (CO₂e)."

On the urgency of the problem:

"The current level is 430ppm CO₂e today, and it is rising at more than 2ppm each year. […] It would already be very difficult and costly to aim to stabilise at 450ppm CO₂e. If we delay, the opportunity to stabilise at 500-550ppm CO₂e may slip away."

On the costs and effects of climate change if we do not limit emissions:

"Hundreds of millions of people could suffer hunger, water shortages and coastal flooding"
"overall costs and risks [… are] equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more."

On the economic costs and benefits of taking action to limit greenhouse gases:

"Central estimates of the annual costs of achieving stabilisation between 500 and 550ppm CO₂e are around 1% of global GDP, if we start to take strong action now."

On the international nature of the problem:

"The most vulnerable—the poorest countries and populations - will suffer earliest and most, even though they have contributed least to the causes of climate change."
"Even if the rich world takes on responsibility for absolute cuts in emissions of 60-80% by 2050, developing countries must take significant action too. But developing countries should not be required to bear the full costs of this action alone"

On the policy responses required to reduce emissions:

"Three elements of policy are required for an effective global response. The first is the pricing of carbon, implemented through tax, trading or regulation. The second is policy to support innovation and the deployment of low-carbon technologies. And the third is action to remove barriers to energy efficiency, and to inform, educate and persuade individuals about what they can do to respond to climate change."

On the need to adapt to the effects of global warming:

"Adaptation efforts, particularly in developing countries, should be accelerated."

Source: "Summary of Conclusions", Stern Review: The Economics of Climate Change, pp vi-ix

7. The Review was published on 30 October 2006 to a broadly very favourable reaction from a wide audience. For example, Stern received very positive endorsements from many leading economists, including Nobel Laureates Amartya Sen ("The world would be foolish to neglect this strong but strictly time-bound practical message"), Joseph Stiglitz (Stern "shows convincingly that the benefits of early global action to mitigate climate change will be far lower than the costs"), and Robert Solow ("If the world is waiting for a calm, reasonable, carefully argued approach to climate change, Nick Stern and his team have produced one").[9] Stern also received a generally very warm reception from leading environmentalists. Sir Jonathan Porritt, chairman of the Sustainable Development Commission, for example, said of it:

Similarly, Tony Juniper, Executive Director of Friends of the Earth, said: "This report turns the conventional attitude to the economics of climate change on its head. For too many years industry lobbyists have claimed that action on climate change was not affordable, but this proves this is not the case."[11] Many leading business figures also welcomed the report. Richard Lambert, for instance, Director General of the CBI, said: "The Stern Review adds up to a powerful argument for collective action by the nations of the world. Provided we act with sufficient speed, we will not have to make a choice between averting climate change and promoting growth and investment."[12]

8. At the same time, there has been some prominent negative criticism of the Review. Some environmentalists, for instance, have criticised it for what they have seen as a lack of ambition in terms of its main target limits on emissions. Some economists, meanwhile, have criticised it for its estimates of the relative costs of mitigation versus the future costs of unchecked climate change under a "Business As Usual" (BAU) scenario in which emissions are allowed to grow; they have argued that these relative cost estimates present aggressive mitigation in too advantageous a light.

9. We took evidence from Sir Nick Stern himself, to discuss these issues, and also to bring out implications of his work for policymakers, paying particular interest to lessons to draw for the domestic policies of HM Treasury. In reviewing the conclusions of the Stern Review, we also took into account the hopes and concerns for the Review we had previously set out in our report on PBR 2005 last year.

The target level of emissions used in the Stern Review

10. The Stern Review focuses on stabilising atmospheric concentrations of greenhouse gases (GHGs) at between 450 and 550 parts per million carbon dioxide equivalent, or CO₂e (see Figure 2 for explanation of the way in which total GHGs are expressed in terms of carbon dioxide equivalent). The reason Stern gives for focusing on this range is that "stabilisation at levels below 450 ppm CO₂e would require immediate, substantial and rapid cuts in emissions that are likely to be extremely costly, whereas stabilisation above 550 ppm CO₂e would imply climatic risks that are very large and likely to be generally viewed as unacceptable."[13] The Review expands on its lower band choice of 450ppm by arguing that anything lower would not just be very costly but practically extremely difficult to achieve:

The lower limit to the stabilisation range is determined by the level at which further tightening of the goal becomes prohibitively expensive. On the basis of current evidence, stabilisation at 450ppm CO₂e or below is likely to be very difficult and costly.

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Meanwhile, in arguing that 550ppm should be the upper limit, it highlights that even this level of emissions risks very serious and potentially irreversible consequences, thereby suggesting that this truly ought to be a maximum limit:

Expected climate-change impacts rise with the atmospheric concentration of greenhouse gases […] The evidence strongly suggests that 550ppm CO2e would be a dangerous place to be, with substantial risks of very unpleasant outcomes.

At the same time, it suggests that the target range of concentrations ought (at least under current scientific understanding) still to go to up as far as 550ppm on cost-benefit grounds —i.e., as a result of weighing up lower (shorter term) costs against increased (longer term) risks of stabilising at closer to 550ppm rather than 450ppm—especially "if climate-change impacts turn out to be towards the low end [of projections …] and mitigation costs towards the high end".[16]

Figure 2 CO₂ and CO₂ equivalent

Carbon dioxideequivalent (CO₂e) is the universal unit of measurement used to indicate the global warming potential (GWP) of different greenhouse gases. GWP is defined as the warming influence of a gas over a set time period relative to that of carbon dioxide. For illustration, the GWP values used for methane and nitrous oxide are 23 and 296 respectively. This means that emissions of 1million tonnes of methane are taken to be equivalent in global warming impact to 23 million tonnes of carbon dioxide, with 1 million tonnes of nitrous oxide being equivalent to 296 million tonnes of CO₂.
Greenhouse Gas

GWP

Carbon Dioxide (CO₂)

1

Methane (CH₄)

23

Nitrous Oxide (N₂O)

296

Hydrofluorocarbons (HFCs)

12-12,000

Sulphur Hexafluoride (SF₆)

22,200

Perfluorocarbons (PFCs) - eg, CF₄

5700

The lifetime of greenhouse gases in the atmosphere varies, but for carbon dioxide it is estimated at 5-200 years, while for CF₄ it is estimated at 50,000 years and for CH₄ around 12 years.
While other gases have a higher GWP, CO₂ still has the largest impact in terms of direct anthropogenic emissions, given the volume of emissions and length of time they remain in the atmosphere. For illustration, as the Government has put it: "the current concentration of carbon dioxide is 380ppm, while the level of all greenhouse gases is equivalent to around 430ppm, i.e. other gases, mainly methane and nitrous oxide, have a warming effect equivalent to 50ppm of carbon dioxide."
The Government has stated: "A [global] stabilisation goal defined in terms of CO2e has the advantage of representing the full effect of anthropogenic greenhouse gases on the atmosphere. It is a quantity that can be linked directly to a probable temperature outcome and allows flexibility to achieve least cost allocation of emissions reductions between different gases."
The CO₂e measure usually only includes the six Kyoto gases: carbon dioxide, methane, nitrous oxide, SF₆, HFCs and PFCs; some definitions include other anthropogenic effects, such as aerosols and CFCs.

Source: IPCC Third Assessment Report 6.12.2, European Environment Agency; Climate Change - the UK Programme 2006, Defra, March 2006; Supplementary evidence to this inquiry, HM Treasury; US Environment Protection Agency.

11. In our report on PBR 2005 last year, one concern we registered about the Stern Review —and, more pointedly, the Government's use of it—was that:

the Government should ensure that, in examining the economics of different options for tackling climate change, it starts by deciding the level of carbon emissions it wants to achieve, and then looks for the most cost-effective means of getting there.

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With regard more specifically to the Stern Review itself, the tenor of our recommendation was essentially that the Review should start with absolute limits on GHG emissions suggested by the science, rather than with a "reasonable" figure of financial costs which were assumed to be the maximum that the international community would be prepared to spend on mitigation efforts. In this respect, while Stern has used economic calculations (i.e., as to the costs and benefits of pursuing different abatement trajectories) to inform his choice of targets, we are reassured by the way in which he has very firmly suggested an upper limit to concentrations of greenhouse gases above which we should not go, paying close attention to the scientific evidence of the increasing risks of more serious and irreversible impacts at higher concentrations.

12. At the same time, many environmentalists have expressed significant concerns that the Stern Review focuses mainly, at least in terms of its headline costings of mitigation, at the upper limit of its target range, towards 550ppm. Typically, the Review states:

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The 1% GDP figure has been widely reported as Stern's estimate of the costs of mitigating climate change; meaning in practice that such reports have also implicitly interpreted the Review as endorsing a mitigation target of around 550ppm CO₂e. To take a prominent example, HM Treasury's press release accompanying publication of the Review stated: "the costs of action to reduce greenhouse gas emissions to avoid the worst impacts of climate change can be limited to around 1% of global GDP each year."[19] To be clear about this, then, in publicising the headline cost figure of 1% of global GDP, the Treasury has implicitly chosen to set its sights at the maximum limit of greenhouse gases suggested by the Review - the level which Stern characterises as "a dangerous place to be, with substantial risks of very unpleasant outcomes"—as the target to aim for.

13. It is this focus on the upper limit of the target range which has been subject to forthright criticism from some environmentalists. An editorial article in The Ecologist, for instance, argued:

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14. One comment we could make on this is that there would appear to be a degree of confusion here, in that while Stern does refer to stabilisation at 550ppm, he clearly states that this refers to total greenhouse gases expressed as carbon dioxide equivalent, not to carbon dioxide alone. This means that in terms purely of CO₂ his target level is significantly less than 550 ppm. As the Review states:

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15. Notwithstanding this, the broader point made by The Ecologist still largely stands: even a limit of 550ppm CO₂e, equating to a concentration in CO₂ of around 490-500ppm, would ultimately carry very significant risks. The Review itself is clear about this, noting that "for a stock of greenhouse gases stabilised at 550 ppm CO₂e, recent studies suggest a 63-99 % chance of exceeding a warming of 2^oC relative to the pre-industrial",[22] at the same time drawing attention to the conclusion from current science that a rise of "around 2-3^oC" might set in chain a number of more serious impacts from climate change, some irreversible and very long lasting:

For illustration, Figure 3, taken from the Review, depicts the range of suggested impacts at different temperature rises, and their correlation with different target ranges of greenhouse gas concentrations.

Figure 3 Stabilisation levels and probability ranges for temperature increases

16. We put the criticism that the Review was focusing on too high a target to Sir Nick Stern himself, who argued firmly:

17. One reason, it would seem, why the Review was not more prescriptive about stabilising closer to 450ppm is that stabilisation even at this level cannot eliminate quite appreciable risks of ultimately very dangerous warming. As it notes: "Recent research on the uncertainties surrounding temperature projections suggests that at 450ppm CO₂e there would already be a more-than-evens chance of exceeding 2^oC".[25] Indeed, it notes: "Even if the world were able to stabilise at current concentrations [430ppm], it is already possible that the ultimate global average temperature increase will exceed 2^oC."[26] It would thus appear, given the cost-benefit approach it adopts, that the Review does not more firmly—or even exclusively—recommend a stabilisation goal towards the lower end of its 450-550ppm range, because, while this would certainly reduce the risks of major irreversible impacts, we could not be sure that it would in fact do so, and meanwhile the efforts to reach it would certainly cost more money in the short term. Another reason why the Stern Review may have focused on the 500-550ppm range at least in costing different mitigation efforts was pointed out to us by RSPB, who very simply observed that there were extremely few studies which had costed a mitigation target of below 500ppm for the Review to draw on.[27]

18. To sum up, while the Stern Review offers a target range of between 450 and 550ppm greenhouse gas concentrations, and while its costings of the efforts required to meet these targets focus on the upper limit of this range, governments should not treat the upper figure of 550ppm as the target endorsed by the Review and the one which they should in practice aim for. Sir Nick Stern himself has made it very clear that the Review did not suggest 550ppm as the main target to work towards. Rather, he has emphasised strongly that 550ppm is the maximum stabilisation limit for 2050 we should possibly consider, and that the further beneath this level at which we can stabilise greenhouse gases by 2050, the lower the risk of catastrophic climatic events in the future. We therefore urge the Government, in promoting the findings of the Stern Review, to ensure that this is the message that is widely understood.

19. Our own view is that 550ppm CO₂e would be an excessively dangerous target, and that a prudent approach would be to aim for 500ppm or below if this could be achieved. Especially considering the dangers of slipping from and exceeding initial targets, we urge the Government to work with international partners towards selecting a global stabilisation goal at a level very considerably below 550ppm CO₂e.

The costs and opportunities of mitigation

20. The Stern Review is clear that even limiting total costs to 1% of GDP will entail widespread price rises and economic upheavals:

Any costs to the economy of cutting GHG emissions, like other costs, will ultimately be borne by households.

Emissions-intensive products will either become more expensive or impossible to buy. The costs of adjusting industrial structures will be reflected in pay and profits—with opportunities for new activities and challenges for old. More resources will be used, at least for a while, in making currently emissions-intensive products in new ways, so fewer will be available for creating other goods and services.[

21. Rapidly decarbonising the global economy will indeed not be easy. What the Stern Review is saying is that we will all notice it, in the price we pay for emissions-intensive goods and services, and thus in the range of economic opportunities open to us. The central argument of the Stern Review is that these would still be minor inconveniences compared to the potential risks of unchecked climate change. But the Review also strongly underlines that, while mitigation would slightly slow it overall, it would still be perfectly compatible with continued economic growth. As Sir Nick put it to us:

Indeed, the Review gives a cash estimate of the costs of mitigation to its trajectory towards stabilisation at 550ppm by mid-century, equating to the 1% GDP figure, of around $1 trillion. While this is indeed a very large figure, Stern is at pains to stress that this is still "relatively modest in relation to the level and expansion of economic output over the next 50 years, which in any scenario of economic success is likely to be over one hundred times this amount."[30] Furthermore, as the Review also sets out, the process of aggressive mitigation should accelerate the development of new technologies which could in various ways improve economic productivity and quality of life. As a major example, an eventual replacement of oil-based vehicles with electric or hydrogen-based models might lead to significant improvements to urban air quality.[31]

22. The Government is right to emphasise Stern's arguments as to the benefits of an aggressive programme to cut emissions. Aside from decreasing the risk of the most damaging impacts of global warming in the future, rapid mitigation can be expected to deliver a number of benefits in its own right, speeding the deployment of new technology, and thereby increasing economic efficiency as well as reducing pollution.

23. At the same time, the Government should not minimise the challenges of rapid mitigation. Rather, it should be honest with businesses and consumers about the price impacts on emissions-intensive processes and activities which accelerated emission-reduction policies imply. This may help to develop the social consensus needed to make rapid progress.

Putting a value on the effects of global warming

24. While receiving criticism from some environmentalists that his recommendations were too weak, Stern has also received trenchant criticism from some economists that his recommendations were too strong. The main argument from such economists (for instance, William Nordhaus, of Yale University) has been that the Review's estimates of the costs of climate change resulting from a Business As Usual growth in emissions were too high, thereby skewing its cost-benefit analysis in favour of steeper and more costly cuts in emissions in the short term.

25. The essential argument made by Nordhaus and others would seem to revolve around perceptions as to the approach taken by Stern to discounting the costs and benefits experienced by future generations relative to those experienced by us today. Without delving too deeply into the economic theory, the broad outline of this issue is the following:

actions taken today and in the next few decades to reduce GHG emissions could cost the present generation considerable amounts of money;

there is a lag between rising atmospheric concentrations of GHGs and rising global temperatures, meaning that some of the most serious effects resulting from increases in GHG levels will only be experienced by future generations, as well as meaning that we today cannot be sure of the precise extent of effects that will only be apparent in the future;

assuming ongoing economic growth, future generations will be considerably wealthier than us today.

26. In seeking to calculate the optimum rate at which society should invest in mitigation efforts, economists take account of these different variables by applying a discount rate to projections of the future economic damages resulting from climate change. In brief, having projected the future effects of given scenarios of climate change on society, and having produced resulting estimates of monetary costs, economists then apply a discount to these costs to arrive at figures which can be used in present day cost-benefit calculations. Essentially, these figures represent the current generation's reckoning of the size of economic benefits which would be gained by investing in given levels of mitigation, understanding that these benefits would largely accrue to other people—future generations —who are expected (at least under mainstream economics) to be wealthier than us today, and hence inheriting a higher base level of economic welfare with which to cope with the adverse effects of climate change. To put it another way, these discounted projections of future costs are used to compare the loss of economic welfare that would be caused by taking large sums of money out of today's relatively smaller and poorer global economy to invest now in mitigation efforts, against the loss of economic welfare which would experienced by tomorrow's larger and richer global economy as a result of more dangerous climate change, in the event that we today choose to spend more on ourselves rather than on cutting back on emissions.

27. The criticism from some economists has been that the discount rate applied by Stern was too small; and thus the estimates given for the economic costs of unchecked climate change too high, and with them Stern's recommendations on the size and urgency of mitigation efforts required today and in the next few decades. Indeed, William Nordhaus, has argued that the Stern Review's choice of a low discount rate is essentially the only reason why its estimates of damages arising from Business As Usual emissions are higher than most other studies.[32] To sum up, according to the critics, Stern's choice of discount rate has led him to the conclusion that we today should spend more on mitigation than is good for us; us today, that is.

28. We discussed these criticisms with Sir Nick Stern. One point he made in reply was to clarify that "for a number of aspects of climate the discount rate is not a legitimate concept for doing the basic appraisal of policy",[33] and that, rather, there were two main elements to discounting in such a large, complex, and inter-generational equation. One element is what is known as the "pure time discount rate", reflecting the extent to which, as he put it, you "disregard the future simply because it is in the future". As he expressed his view on this: "I would stick very strongly to the argument that the pure time discount rate for issues which involve the future of the planet should be very low."[34] The Cambridge economist Sir Partha Dasgupta has described Stern's approach, approvingly, as follows: "The Review, rightly in my view, takes it that the tradeoff among the well-being between the present US and the future THEMs should be, roughly speaking, one-to-one, or in other words, that we should not discount future generations' well-beings simply because those generations will appear only in the future".[35] To put this into alternative language, it appears that Stern's approach to future generations embodies the golden rule of morality, of treating others as one would want to be treated oneself.

29. In addition, Stern describes the other main element of discounting used in the Review as that concerning "valuations of richer people in the future versus richer people now [… and] richer people here at this moment in time versus poorer people in other parts of the world." It appears that this has been rather more controversial among some economists.[36] However, judging by the comments made by Stern and his team in response to such criticisms, it may also be that this aspect of Stern's discounting has been somewhat misunderstood. In any case, subsequent to the initial publication of the Stern Review and the criticisms which responded to it, the Review team have published on the Treasury website a Postscript to the Review and several papers in a series entitled "After the Stern Review: reflections and responses", passages of which deal explicitly and robustly with these criticisms.[37] The Postscript, for instance, explains in brief:

Our estimates of damage from business-as-usual are higher than some previously published for the following sound reasons:

We treat aversion to risk explicitly—this issue is all about risk and we invoke the economics of risk directly.

We use the more recent literature, from the science, on the probabilities. This points to significant risks of temperature increases above 5°C under business-for-usual by the early part of the next century. Previous studies have focused on temperature increases of 2 or 3°C. The damages from 5°C would be very much higher—damages rise much faster than temperature.

We adopt lower pure time discount rates than some earlier literature and thus […] the analysis gives future generations appropriate ethical weight. […]

We take account of the disproportionate impacts on poor regions, reflecting the fact that those in poverty will feel losses in consumption more keenly.[38]

As this underlines, the Stern Review team are very clear that in addition to using different approaches to discounting than other studies, they are drawing on more recent science, pointing to the greater potential for more serious global warming than costed by other economic studies.

30. We are not in a position to engage in the full detail of the economic arguments over the size of the projected costs of unchecked climate change—estimated by the Stern Review to be between 5% and 20% of global GDP. However, we would make a number of important arguments and observations. Firstly, we most certainly endorse the Review's use of a very low value for its "pure time discount rate", meaning in effect that Stern treats future generations as being of equal importance to those alive today. To think otherwise would be morally reprehensible, condemning future generations to an uncertain and, in many parts of the world, possibly calamitous future, out of sheer indifference.

31. Secondly, we would point out that there are many ways in which Stern's projected figures for the costs of global warming are likely still to be underestimates - and that other reviews of the costs of climate change are likely to be even further from capturing its full potential costs. While the Stern Review offers calculations for the "non-market impacts" of global warming on human health and the environment, it does not, as it makes clear, offer cost estimates for such "socially contingent responses" to climate change as "conflict, migration and the flight of capital investment". And these could be very significant; as the Review underlines: "If the world's physical geography is changed, so too will be its human geography."[39] Indeed, Sir Nick told us:

I do think it is an important way in which some of what we have done may have been underestimating, rather than overestimating.

Meanwhile, the Stern Review refers to research which argues that none of the previous studies of the economics of climate change contained any monetary assessment of "socially contingent responses", while there was only very little assessment of "non-market impacts".[41]

32. Thirdly, we would argue strongly that, while economic analysis may have its place within climate change policy—for instance, in helping to decide between the use and terms of emissions trading, carbon taxes, and direct regulation of GHG emissions in different cases—it should be strictly subordinated to a scientific understanding of the levels of mitigation required to give us best-estimated probabilities of avoiding important thresholds in the climate system, which might trigger very serious and irreversible impacts. In short, global warming should not be treated like any other economic issue. The effects of global warming do not easily lend themselves to being quantified and expressed in terms of economic utility, given that they may radically alter, not simply purchasing power or productivity, but entire ways of life. Indeed, in several parts of the world they threaten to make what are currently densely populated areas literally uninhabitable.

33. In our report on PBR 2005 last year, we expressed in advance our concerns that the Stern Review might be undermined by such faults, drawing attention in particular to the difficulties of calculating a single "social cost of carbon" (SCC), given the risks of widely divergent outcomes depending on whether crucial climatic limits were breached, and given the differing values that might be placed on mitigation by different generations, depending on whether or not they had already begun personally to experience profoundly negative effects.[42] On all these questions, we are pleased to note that the Stern Review itself acknowledges the limitations of economic analysis. As the Review states:

These models should be seen as one contribution […] They should be treated with great circumspection. There is a danger that, because they are quantitative, they will be taken too literally. They should not be. They are only one part of an argument. […] Nevertheless, we think that they illustrate a very important point: the risks involved in a 'business as usual' approach to climate change are very large.

34. The Stern Review is, indeed, explicit about being "based on a multi-dimensional view of economic and social goals, rather than a narrowly monetary one".[43] While it does, as it says for illustrative purposes, express a wide range of the potential effects of climate change in monetary terms, it also sets out powerful evidence, drawing on recent science, of these potential effects in themselves. That is to say, it sets out scientific estimates of the probable range of impacts of rising concentrations of greenhouse gases on global temperatures, the probable range of impacts of rising temperatures on the environment, and the probable range of impacts of environmental changes on macroeconomics, on human health, and on social conflict. Thus in addition to estimating costed impacts, it spells out the types of "extremely damaging phenomena" which might accompany dangerous levels of warming uncosted and in themselves, including, as it puts it:

Irreversible losses of ecosystems and extinction of a significant fraction of species.

Deaths of hundreds of millions of people (due to food and water shortages, disease or extreme weather events).

Social upheaval, large-scale conflict and population movements, possibly triggered by severe declines in food production and water supplies (globally or over large vulnerable areas), massive coastal inundation (due to collapse of ice sheets) and extreme weather events.

Taken altogether, the range of evidence on the natural and human impacts of climate change presented in the Review supplements and intensifies its headline conclusions on the quantifiable economic costs and benefits of taking action. Whatever the detail of the economic analysis, and whatever one's views of the estimated costs, the dangers of reaching important thresholds in the climate system are surely so great that the need for urgent and aggressive mitigation is overwhelming.

The scale and urgency of the challenge

35. The Stern Review is very clear as to the enormous scale and urgency of the challenge of avoiding dangerous climate change. To focus on the size of the challenge more than the speed with which it must be tackled, Stern offers some striking projections of the "mitigation gap" between emissions in 2050 under Business As Usual and under its projected mitigation paths to stabilise greenhouse gases between 450 and 550ppm CO₂e. Accepting that the exact size of the mitigation gap depends on the assumptions chosen to project BAU trajectories, Stern estimates that we would need to reduce annual emissions by 60-65% from BAU levels in 2050 to stabilise at 550ppm CO₂e, and by more than 85% to stabilise (without overshooting) at 450ppm CO₂e (Figure 4). To further illustrate this central need to shift the trend in emissions markedly down from their present BAU path, and to illustrate the tremendous challenge this will pose not just the industrialised economies but the developing world as well, Stern comments on this:

Even if emissions from developed regions […] could be reduced to zero in 2050, the rest of the world would still need to cut emissions by 40% from BAU to stabilise at 550 ppm CO₂e. For 450 ppm CO₂e, this rises to almost 80%.[

Figure 4 BAU emissions and stabilisation trajectories for 450-550ppm CO₂e

36. The Stern Review also clearly explains the extent to which annual GHG emissions will have to be reduced even further than this beyond 2050. As it underlines, in order to stabilise greenhouse concentrations at any level, annual GHG emissions must be brought into equilibrium with the rate at which the planet's carbon sinks remove carbon from the atmosphere (for instance, through the growth of plant life on land and plankton in the ocean). As this rate of natural carbon absorption is projected to decrease, so must manmade carbon emissions decrease in step, if stabilisation at a steady concentration of GHGs in the atmosphere is to be maintained:

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The scale of the challenge that achieving this " 'sustainable' rate of emissions" is going to represent is emphasised by the Review, where it spells out:

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And, while acknowledging that it is indeed a very long term issue, the Review makes clear that ultimately the challenge to reduce annual emissions will grow even tougher:

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37. These are stark conclusions. The Government should do more to publicise the size of the challenge as summarised in the Stern Review. As Stern makes clear, the stabilisation of greenhouse gases—whether at 450 or 550ppm CO₂e—will require ongoing reductions in emissions beyond 2050, ultimately necessitating possibly the complete decarbonisation of every other human activity beyond agriculture; and that further into the future, net emissions must be cut even more deeply, possibly to just a fifth of the present day emissions from agriculture alone. The Review is clear that quantifying these limits is very difficult and still uncertain. It is also clear that the first of these limits would probably only need to be met in the second half of the next century, while the second will probably not need to be met for several centuries. Nevertheless it might still be valuable to raise awareness of these long term limits; or at least to the conclusion that emissions must continue to decline, even if we meet Stern's targets for 2050. If nothing else, this might help to increase popular consciousness of the ultimate inevitability of radical changes to familiar technologies and habits of living if climate change is to be tackled, which might help to stimulate innovatory thinking and support for more radical measures in the short term.

38. In addition to depicting the size of the challenge, the Stern Review also clearly sets out the reasons for urgency. The main reason follows from the limits to the natural absorption rate of the planet's carbon sinks: given that it will be hard in practice simply to reduce annual emissions to this rate and thus stabilise greenhouse concentrations, it will be even harder to reduce annual emissions to below this level, and thus reduce the amount of GHGs in the atmosphere. And even if the latter aim were achieved it would be practically difficult to reduce emissions much below the absorption rate, thus it would only lead to very gradual reductions in global concentrations. Indeed, these would be progressively diminishing reductions, given the expected diminution in the natural absorption rate. What this means in brief, as the Review sums it up, is that: "The longer emissions remain above the level of natural absorption, the higher the final stabilisation level will be. [… I]f action is slow and emissions stay high for a long time, the ultimate level of stabilisation will be higher than if early and ambitious action is taken."[49] Another way of thinking about this is to see that even once global annual emissions reach a peak and begin to decline year on year, the atmospheric stock of greenhouse gases is going to continue rising year on year, until annual emission finally decline to a level that is no higher than the annual amount which is absorbed by the Earth's carbon sinks.

39. Here again, the Government should do more to highlight another key conclusion from the Stern Review: stabilising greenhouse gas concentrations at a chosen level does not simply depend on how much we cut annual emissions by, but how quickly we do so. Stern repeatedly emphasises the dangers of overshooting a target stock level of greenhouse gases in the atmosphere: once we go above a certain level, it will be very difficult and could take a prolonged time to reduce it again. As Stern puts it:

40. Stern makes a number of important points in relation to this. First, he points out that it makes a big difference how soon global annual emissions reach a peak before declining. The longer that global emissions continue to rise year on year, the harder it will be, once annual emissions begin to decline, to make annual cuts large enough and fast enough to get down to equilibrium with the carbon absorption rate in time to stabilise the final atmospheric total at a desired target level. Second, even if such steep reductions in annual emissions are achievable, they will be much more costly than a scenario in which annual emissions peak early, and thus allow us the time to follow a shallower and less demanding reduction trajectory. As the Review expands on this, also commenting on how difficult an early peak will be to achieve:

₂

Stabilising at 450 ppm CO₂e or below, without overshooting, is likely to be very costly because it would require around 7% per year emission reductions.

Finally, the later the peak in emissions, the steeper the rise in atmospheric concentrations of GHGs, and the steeper the rise in annual temperatures; even if atmospheric totals, and global temperatures, are ultimately stabilised at the same level as in an early peak trajectory, the more rapid the change in temperature and resulting impacts on nature and society, the more difficult it may be for wildlife and human communities to adapt.[52] Overall, taking all these points into account, one of Stern's main conclusions on the timing of mitigation efforts is thus:

Pathways involving a late peak in emissions may effectively rule out lower stabilisation trajectories and give less margin for error, making the world more vulnerable to unforeseen changes in the Earth's system.

Implications for Government policy

41. Having presented its evidence and outlined its conclusions on the projected impacts of different scenarios of climate change, and the overall cost-benefits of early and rapid mitigation, the Stern Review then describes in detail three main recommended policy responses for mitigation: imposing an extra monetary charge on emissions; accelerating the development and deployment of new technologies; and implementing various actions to overcome structural and behavioural barriers to reducing emissions. As it introduces these recommendations in summary:

The first essential element of climate change policy is carbon pricing. Greenhouse gases are, in economic terms, an externality: those who produce greenhouse gas do not face the full consequences of the costs of their actions themselves. Putting an appropriate price on carbon, through taxes, trading or regulation, means that people pay 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.

But the presence of a range of other market failures and barriers mean that carbon pricing alone is not sufficient. Technology policy, the second element of a climate change strategy, is vital to bring forward the range of low-carbon and high-efficiency technologies that will be needed to make deep emissions cuts. Research and development, demonstration, and market support policies can all help to drive innovation, and motivate a response by the private sector.

Policies to remove the barriers to behavioural change are a third critical element. Opportunities for cost-effective mitigation options are not always taken up, because of a lack of information, the complexity of the choices available, or the upfront cost. Policies on regulation, information and financing are therefore important. And a shared understanding of the nature of climate change and its consequences should be fostered through evidence, education, persuasion and discussion.[

In addition the Review contains a cautionary note to the effect that it may take some time for such policies to become widely established and acted upon, and that in the meantime it will be important to address the potential for public and private investment decisions to take us further in the wrong direction for years to come. As it puts it: "In the transitional period, it is important for governments to consider how to avoid the risks that long-lived investments may be made in high-carbon infrastructure."[55]

42. We will use these main policy recommendations of the Stern Review to help us assess the coherence and effectiveness of the individual measures in Pre-Budget 2006 as we come to examine PBR 2006 in the rest of this report; and will continue to refer to Stern's recommendations in examining future PBRs and other major announcements of Government policy. In this section, however, we focus briefly on three particular implications of the Stern Review which stood out for us in this inquiry.

43. The first of these is the profound scale and, even more, urgency of the need to act as argued by Stern; and the implication of this, that we would expect to see a very noticeable increase in Government policies designed markedly to accelerate the reduction in UK emissions. Pre-Budget 2006 assumes particular importance here because it was one of the first major opportunities for the Government to introduce or increase such policies following publication of the Stern Review. In this it disappointed many observers. For example, the Environment Agency observed to us:

For their part, Friends of the Earth, told us:

The verdict of Green Alliance, meanwhile, was that: "on the domestic front, there was some encouraging shifts in the Pre-Budget Report but in overall terms we found it rather disappointing as a follow-up to Stern."[58] Discussing what was required in terms of a domestic response to the Review, Green Alliance expanded:

44. More widely, we heard the criticism that the Government's approach to the Stern Review has been to focus far more on using it to influence international opinion, rather than implementing its conclusions in actual policies, especially domestic policies. This, again, was certainly the view of Friends of the Earth, who argued:

Green Alliance were somewhat less critical, but echoed this essential point about the Government's international focus:

Elsewhere, Green Alliance have described the Review as "a challenge not just to the international community, but also to the UK government that commissioned it".[62]

45. We asked the Financial Secretary whether and how the Treasury, in particular, was going to change its policies as a result of the Stern Review. In reply, he suggested that there would not necessarily be any radical changes in Treasury policy as a result of the Review in itself:

Joan Walley:

John Healey:

We then asked him to point to the "specific proposals in the Pre-Budget Report which are there directly because of the work of Stern", to which he responded:

John Healey:

46. To a certain extent we agree with the Financial Secretary: the Treasury can indeed point to already having developed a number of policies which fall under Stern's three main recommendations for government action. Indeed, in commissioning and promoting the findings of the Stern Review around the world, the Government is clearly playing a very important role in helping to influence international opinion and rally support for concerted and urgent action. But it must respond to Stern's conclusions in its own domestic policies; the profound issue which remains is the scale and urgency of its programme. The true test of its policies is very simple: how fast the reduction in UK emissions accelerates.

47. In this respect, we are very disappointed by this Pre-Budget Report. This was the Treasury's first opportunity to incorporate the findings of the Stern Review in a major policy statement. It did not take it; we did not see any escalation of the Treasury's climate change policies in this PBR.

48. A second individual point to focus on is Stern's work on calculating a Social Cost of Carbon (SCC). As already referred to, we and our predecessor Committee have previously expressed our reservations regarding the use of an SCC in policy appraisal decisions—i.e., to calculate the costs of the extra carbon emissions which would result from a certain policy if it were to be implemented, and thus help to inform decision-makers as to whether it should go ahead or not—not least arguing that such a figure cannot hope accurately to reflect the range of possible impacts arising from certain rises in GHG concentrations. Stern's discussion of SCCs is more complex than this, revolving mainly around establishing an effective carbon price, through taxation or emissions trading schemes, for a given emissions trajectory.[65] However, what particularly interested us was that Stern recommends a much higher SCC than that currently used by the Government.

49. The Government currently uses a figure of £70 per tonne of carbon as its Social Cost of Carbon.[66] The Stern Review suggests that the current SCC might be around $85 per tonne of CO₂ (in year 2000 prices). Elsewhere the Review states the conversion rates it uses between: i) an SCC in year 2000 US dollars and measured per tonne of CO₂, and ii) an SCC in year 2000 pounds sterling and measured per tonne of carbon.[67] Friends of the Earth brought this to our attention, using it to calculate Stern's suggested SCC in the same terms as the figure currently used by the Government: this produces the figure of £238 per tonne of carbon, or over three times the Government's SCC value. Simon Bullock of Friends of the Earth expanded on the implications of this to us:

Mr Bullock

In policy terms, I think where it would have the biggest effect is if it was reflected in the Government's policy appraisal mechanisms. They currently use the £70 tonne of carbon across Government and it affects lots and lots of different things. In the last six months we have seen it heavily affect the levels of recycling the Government is prepared to countenance in its new waste strategy. If you triple the rate of the Social Cost of Carbon that would mean, in the options you put across and what recycling you go for, it would come out much higher than incineration or other options. That is a practical example of where it would be very different.

50. In discussing this point with us, the Financial Secretary told us that the Government does not accept that Stern's figure is applicable for Government decisions within the UK:

David Howarth:

John Healey:

51. We find this argument hard to follow. After all, the Government frequently makes the point that the global warming impacts of a tonne of carbon do not differ depending on where those emissions are made. The corollary of this should surely be that the Social Cost of Carbon should be the same for any emissions, no matter where they are made. We made this point directly to the Financial Secretary:

David Howarth:

John Healey:

We accept that Defra are currently reviewing the UK's SCC, but we can see no convincing reason why the UK should not adopt Stern's suggested SCC value for the current global emissions trajectory. If the Government accepts the findings of the Stern Review, it should surely accept its conclusions on the Social Cost of Carbon.

52. Finally, but most importantly, the third implication of the Stern Review which we focused on was the difference between Stern's greenhouse gas targets for 2050 and the target used by the Government. To be clear, Stern recommends a target range in atmospheric concentrations of GHGs in 2050 of between 450 and 550ppm CO₂ equivalent; which, in terms of CO₂ alone equates in the main scenarios he uses to between around 400 and 490ppm CO₂. (He also suggests the possibility of a wider range of carbon dioxide concentrations, compatible with his target range of 450-550ppm CO₂e, of around 360-500ppm CO₂.)[70] The Government, meanwhile, has a target to reduce annual UK CO₂ emissions by 60% from 1990 levels by 2050, with real progress by 2020. This target was adapted from a recommendation made in 2000 by the Royal Commission on Environmental Pollution (RCEP),[71] which was itself based on a target of stabilising global atmospheric concentrations of carbon dioxide at 550ppm CO₂ by 2050. Clearly, then, the Government's 2050 target for reducing UK CO₂ emissions is out of step with the global targets recommended by the Stern Review. Indeed, the global target limit for atmospheric concentrations of CO₂ which underlies the UK's domestic target for 2050 is some 50-60ppm CO₂, or 10-12%, higher (that is, more lax) than Stern's upper limit, the level of emissions which Stern makes clear would itself be dangerous.

53. We put this point to the Financial Secretary, who sent us a very interesting written answer:

Stabilisation goals—greenhouse gases compared to carbon dioxide—information as provided by Defra

₂

54. One point of interest in this response is the information that: "Officials are currently exploring the linkages between this objective and a prospective long-term stabilisation goal defined in terms of CO₂e." This suggests that, whether agreed at an EU level or formulated by the UK alone, the Government might at some point in the perhaps near future adopt and promote a global stabilisation target for GHG concentrations. This will presumably—not least because, as the response says, the EU Council of Ministers has already indicated that this stabilisation level should be "well below 550ppm carbon dioxide equivalent" —be lower than the underlying target behind the Government's domestic target for 2050. Indeed, the Financial Secretary intimated that the Government was already aware that its 2050 carbon target might have to be made tougher:

John Healey:

55. This is of particular interest at this moment because of the Government's plans to enshrine its current 2050 target in law, via the Climate Change Bill. The Government has explained that even if its current domestic carbon reduction target, included in the Climate Change Bill, becomes law, it may still be altered and made tougher, should the science develop and suggest the need for a lower limit to emissions. This is indeed welcome. However, the science has already moved on since the UK's domestic target for 2050 was first framed. The Government ought to adopt a domestic target in line with Stern's target for global greenhouse gases.

56. It is useful to go back to the original RCEP report from which the Government's 2050 target was drawn. While the report centrally suggested a global stabilisation target by 2050 of 550ppm CO₂ and its associated target reduction in annual UK CO₂ emissions, it also offered other targets for UK CO₂ cuts, associated with other global stabilisation targets, should policymakers decide a different global target were needed. For a global 2050 target of 450ppm CO₂ (roughly in the middle of Stern's 400-490ppm CO₂ target range), RCEP recommended that UK annual emissions ought to be cut by 79% from 1997 levels by 2050.[74] Putting this in the form in which the Government adopted RCEP's 550ppm target, this equates to around an 80% cut in UK annual CO₂ emissions from 1990 levels: a reduction from annual emissions of 592.13MtCO₂ in 1990 down to around 118.43MtCO₂ in 2050.[75] To illustrate what a difference this would make to the Government's current domestic target, a 60% cut from 1990 levels would result in annual emissions in 2050 of around 236.85MtCO₂. In other words, a new target for the UK, based on roughly the mid-range of Stern's global targets, would mean that UK CO₂ emissions in 2050 would have to be just half what they would be under the Government's current target, the one that is currently included in the Climate Change Bill (Figure 5). We need hardly point out that the choice between such target values must have the profoundest implications for the entire array of public policy decisions, starting today.

57. This highlights the need for greater public debate on what the UK's longer term emissions targets should be. Even more, it highlights the need for much greater international focus on a global target and a trajectory for getting there. The Stern Review makes a powerful argument for an urgent new international agreement on climate change, and for it to be framed in terms of a target for the global stock of greenhouse gases in the atmosphere in 2050; it is in these terms that Stern has suggested his target range of 450-550ppm CO2e. A more specific target within this range could be chosen by first deciding on a level of temperature increase at which to seek to limit global warming; then linking this, via the best scientific evidence on the probability of certain temperature rises from different levels of GHGs, to a definite target level of greenhouse gas concentrations. Once such a global target were selected, it could be used to determine the size of the national targets into which it was broken down. The Government should work urgently to influence international negotiations in this direction.

Figure 5 Implications of the Stern Review for the UK's CO₂ target for 2050