Examination of Witnesses (Questions 1-19)
SIR NICHOLAS
STERN AND
MS LORRAINE
HAMID
16 JANUARY 2007
Q1 Chairman: Good morning, and a very
warm welcome to the Committee. We are delighted to see you here
and very grateful to you for making the time to come and talk
to us. As you know, there is intense interest from members of
this Committee in your Report and and the reaction to it. I came
to the actual original launch in November and I know that at least
one of my colleagues was at your launch yesterday as well. We
did ask, I think through the staff, if you wanted to make a brief
opening statement. Are you happy to do so before starting with
the questions?
Sir Nicholas Stern:
Yes, thank you very much. Thank you for inviting me. I would like
to introduce my colleague Lorraine Hamid. Lorraine was part of
the Stern Review team and came to us from the DTI. As you know
it was very collaborative and we drew on several ministries' departments,
and Lorraine worked particularly on EU trading schemes in the
DTI, and specialised with us on that area. Arcane questions about
the operations of the EU and the ETS I may refer to Lorraine.
I thought I would focus my introductory remarks on the comments
that we received in relation to the backbone of the argument and
then say a little bit about the interactions on the road and the
perspective that that gives us for the prospects for international
action, which is of course at the heart of the story, because
we have been travelling quite a lot since the Report was published.
The backbone of the argument is in two parts, corresponding to
the two parts of the Report: why you should act to that urgently,
and then how you act. Why you act, essentially our arguments were
founded on the economics of risk. We now know from science much
better than we did four or five years ago the relationship between
the concentrations of greenhouse gases in the atmosphere and the
temperature increases, and the relationship between the likely
temperature increases and the physical climatic effects. Those
come with probabilities attached. We say, for example, that if
we did stabilise at 550 parts per million (ppm) there would be
roughly a 50:50 chance of being above or below 3°C eventually.
The key thing is that we now have probabilities from the science.
As you know, the science is very old science, it is 19th century
science, in its basics about the greenhouse gases trapping the
energy coming out of the earth, and thus warming it up; but the
newer science is built on that but it gives us the probabilities.
That is absolutely crucial because it allows us to look at the
economics of risk and that together with the international collective
action are the two strong and newish themes of the Report. Then
we applied that in a way that looked at the costs of action and
the costs of inaction. The costs of inaction are in relation to
the damages. If you act strongly you can reduce the risks of those
damages; you cannot take all the risks away, but you can reduce
them quite sharply. You are comparing essentially the costs of
action with the damages which are saved by action. You have to
examine both those parts and that is exactly what we did. We argued
that the costs of stabilising for the world somewhere below 550
ppm would be around 1% of world GDP. As with all these things,
this is a fairly big plus or minus; we said plus or minus 2% of
national income. That strong action to stabilise around 550 ppm
is essentially like a one-off 1% increase in the price index.
That is an extremely strong conclusion because it tells you that
you can be green and grow. It says doing things a bit differently,
sometimes very differently in some cases, on the energy side will
cost you, and it will be like a 1% one-off permanent increase
in costs. These are the kinds of things we have to cope with all
the time with changes in exchange rates and technical progress
of various kinds; and these changes are changes in the economy
that happen; you have to cope with them; but it is not a story
of stopping growth in order to mitigate and reduce the greenhouse
gases. That is the key conclusion. In our discussions in Europe
it actually was quite a big part of the story because it says
that the Lisbon Agenda, the growth agenda if you like, and the
climate change or environment agenda, and I would add to that
the energy security agenda, are actually quite coherent and they
are not in conflict. It is not a horserace between those three
things. In our discussions in Europe that was a particular theme.
I think you can see in the Strategic Energy Review that has just
been published, a modest 2,000 pages compared with our 600 and
something, it does actually pick up that idea quite strongly.
In our discussions with Mr Barroso, with Dimas, with Piebalgs
and so on that weighed quite heavily. That part of the cost story
was a strong element in the discussions that we have had so far.
I am very happy to discuss the underpinnings of the cost story.
Some people have said it is too high. The International Energy
Agency published a report just after that suggesting that in some
aspects it could be lower than we estimated; but that is the ball
park and I think it has stood up quite well to scrutiny. On the
damages side we do get damages which are higher than some previous
studies, but that is for very clear reasons: one is the economics
of risk. Previously the economics of climate change, in my view,
had not embodied anywhere near strongly enough the economics of
risk. We would be mitigating, we would be reducing our emissions
in order to reduce risk and, therefore, we have to analyse the
probabilities of the bad events and the probabilities of the good
events and link your estimate of damages to that. That is exactly
what we did in a standard kind of way in economics which means,
for those of you who like the nerdy part of the analysis, you
work through expected utilities, which is the standard approach
to risk that you find in portfolio analysis in the City, most
serious forms of cost benefit and so on. We adopted the standard
procedure in economics but it had not been there in anything like
the appropriate degree in advance of our work. That is one of
the reasons we get results a bit higher. The second is that we
incorporated the modern science. The modern science is telling
us that the risks, in a number of areas, really are very worrying.
For example, if we follow Business As Usual we are likely to end
up around the end of this century with something more than 800
ppm CO2 equivalent. We are currently at 450 and we were at 280.
The consequence of that is above a 50% probability of a temperature
increase of 5°C—above 50%. All these temperatures are
measured relative to the middle of the 19th century and we are
currently 0.7°C above that. That is very dangerous. Most
of the calculations of costs and benefits in the past have focussed
on 2°C and 3°C increases; and people have been quite
understandably worried abut some of the consequences of those.
We now know that the risks of Business As Usual are really very
great and world transforming. 5°C is the distance between
us and the last Ice Age, and that was a transformed world. The
physical geography there was of a kind that the human geography
would have to be extremely different, of course, with all the
movements of people, and all the hardship that that would involve.
We used the modern science with these probabilities that there
are rather unpleasant high outcomes. We used an approach to the
cost benefit of this whole story which puts a different perspective
on pure time discounting than you would have for a project which
was, say, a railway. I can explain that, if you like, at probably
boring length if you want to go into the questioning; but there
is a difference between discounting and pure time discounting.
There is an appropriate context for using the shortcut approach
which is discounting; and in other contexts you have to go back
to the underlying basic applied wealth of economics which drive
policy, and for which discounting is a shortcut. Basically we
have strong discounting in our model for growth because the future
will be richer; it could be even stronger and we have experimented
with some things there; but we argue that pure time discounting,
if you are talking about the future prospects and existence of
the planet, is something that should be small—certainly
small relative to, say, a railway project where there is some
probability that the whole context in which that railway project
takes place could be undermined by future changes in policy, actions
and so on. Those are the three reasons why we get damages a little
higher than others. There are a number of reasons why we may have
underestimated damages. We were quite cautious on the science.
We were quite cautious on weighting of developing countries relative
to rich countries. We were quite cautious on end points. We assumed
that eventually the damages would stop rising. There are a number
of ways in which I think we may be said to have underestimated.
Some argue that we have overestimated. We did do some sensitivity
analysis which we published on the web about three or four weeks
after publication of the Review and called it a "postscript";
and it is in the book which was published by Cambridge University
Press yesterday and is now in the bookshops in paperback at a
modest price. That is the story of costs and damages. In the Review
and in the postscript we show that the basic statement which should
drive policy is very robust. That basic statement is that the
cost of action to bring down emissions, to stabilise below 550
ppm, is small relative to the damages thereby saved. The particular
numbers there are difficult to be precise about; but the broad
statement, that the costs are small in relation to the damages
saved, I think is robust and is standing up to scrutiny and standing
up to the cost benefit analysis we carried out. What do you do
about all of this if you think that this argument is a strong
one? You go for pricing of the damage that is caused; pricing
of greenhouse gases; it can be trading schemes; it can be taxation;
it must be clear; and it must be forward-looking. We argue that
it must be open to trade in order to keep the costs down and to
promote the involvement of developing countries in the story,
so there is some flow of carbon finance from rich countries to
poor countries which can pull in action in poor countries; the
private sector; carbon finance arising from strong targets. I
think the reaction to our arguments on the pricing front has been
actually quite strong. We are not the only players in the business;
we are not the only people who speak on this; you cannot identify
anything that follows from what we have done, because it follows
from what everybody is saying, not just from what we are saying;
but over the last few months, if you look at Europe and the attitudes
to the Emissions Trading Scheme, the Chancellor announced on the
day of publication of the Review, at the event where you were
which you mentioned in your first question, that we ought to have
a 30% reduction target on the EU ETS Third Phase by 2020, that
means 30%. In the Strategic Energy Review it said at the EU, published
in the last few days, we would go for 20% and 30% if we see movement
from others. That traction there, in terms of ambition, I think
is coming, and coming quite strongly; and it would put us well
on the way to the 60-80% reduction for rich countries by 2050
that we argued for. That is important in terms of the scale of
the problem, and it is important in terms of the equity. It is
the rich countries that put the stuff up there, and the poor countries
feel, understandably, very resentful that they are being asked
to cut back quickly on their emissions when it is the rich countries
that cause the problem. By having a very strong 60-80% reduction
in rich countries you make the effort on a scale which tackles
the problem, but also tackles the equity aspects of the problem.
Q2 Chairman: Can I just stop you
on that point, if I may. I think the message which you summarise
as being one that the cost of action is lower than the cost of
inaction, that is obviously a very important message. The other
message is that the cost of action is lower if taken sooner rather
than later. In any case this is in the context of a problem which
is quite urgent?
Sir Nicholas Stern: Yes.
Q3 Chairman: You happen to come to
us in the middle of our inquiry into the Pre-Budget Report, did
you share the disappointment I felt at the Pre-Budget Report,
the first major policy opportunity for the Chancellor after having
received a Report which he had commissioned from you, that it
looked pretty timid in its recommendation in terms of the kind
of conclusions which you have drawn and urgency of the whole problem?
Sir Nicholas Stern: Obviously
I am a civil servant—
Q4 Chairman: Not for much longer!
Sir Nicholas Stern: —and
it is not for me to pronounce disappointment or enthusiasm with
Government policy. What I would like to do is look at what we
said and look at the way the discussion is going. We argued very
strongly in favour of strong carbon pricing. We did underline
(and thank you for emphasising it) a) the urgency, because we
are building up very quickly these stocks in the atmosphere through
emissions; and b) the costs are lower if they are measured, carefully
and take place over time. That was a big thing in what we had.
The key elements in the storyline are: the pricing; the technology;
and the removing of barriers to action in imperfections in capital
markets; the way property markets work; people's perceptions and
so on. Those are our three broad dimensions for action. If you
look at the first of these, the price of carbon is most strongly
influenced in the UK by the EU Emissions Trading Scheme. It covers
about half of the European carbon emissions. That is the big one
at the moment. That is where attention was focussed, and rightly
so. That is where it was focussed on the day of the announcement.
I have already emphasised that the 30% reduction by 2020, the
third phase of the EU ETS, does seem to be moving quite strongly
in a good direction. I think it is fair to say that the UK is
the strongest mover in all that; the only one not to get its second
phase national allocation plan sent back; almost the only one
that is meeting Kyoto targets and pushing very strongly for this
way of pricing. That is the big one. Those got a strong reaction
on the day of launch of the Report, and strong emphasis in the
Pre-Budget Report. There are other areas which are not covered
by the EU Emissions Trading Scheme: air travel of course is one,
and there was an increase in the air passenger duty there; and
there has been a strong discussion of bringing in aviation into
the EU ETS. Aviation, and its growth, is important, but it is
2% of world emission. The EU ETS covers roughly half our emissions.
That is the big one, and I think it is right to focus attention
there and consistent with what we had. A second part of the policy
story emphasises the whole technology one—and there the
Energy Technology Institute and the emphasis on carbon capture
and storage for coal, do seem to me to be very much in harmony
with lines of argument of the Report. Things like going for carbon
neutrality on new housing within a few years again is the kind
of thing consistent with the third part of the story that we had.
If you look across the board at the kinds of policy discussions
that have taken place, and look at these policies as developing
in interaction with our key international partners, I think you
will see that there is actually quite a strong harmony there.
I am going to India to meet up with the Chancellor, and we will
be talking in India about doing further work on the economics
of climate change for India as part of the story of bringing in
other big players. We had similar discussions when we were in
China. I think with your steering in the right direction on urgency
that probably completes what I wanted to say by way of introduction.
I am more than happy to talk about discussions that we had in
China, India and Japan, a lot of discussions within Europe; and
in a couple of weeks' time I am off to the United States, and
between now and then I am visiting India, and I have been asked
to address the Heads of State of the African Union in Addis at
the end of the month. After the United States I will be going
to Indonesia, which of course is a big player in deforestation,
and where the next meeting of the United Nations Framework Convention
on Climate Change will be in November; then Australia, California
and then I will stop, and go back to LSE I should think!
Q5 Chairman: You have raised quite
a lot of issues which my colleagues will want to come back on.
Can I just take you to one general point at the start. The compatibility
of continued growth with action to address climate change is obviously
a very positive message from your Report, but there has been criticism
that the target of stabilisation at 550 ppm is rather unambitious,
but actually that by itself is quite a risky level and you acknowledge
there is only a 50% chance we will keep under a 3°C increase,
so it is bordering on a dangerous level. Would it be a fair criticism
to say that actually you needed that rather unambitious target
in order to achieve the compatibility between action to address
the problem and a fairly comfortable economic message?
Sir Nicholas Stern: We did not
offer 550 as a target. What we said is, given the risks at 550,
any reasonable target should be below that. We argued that the
target should be below 450 and 550. We are already at 430 ppm,
and will be at 450 probably within 10 years given that we are
adding at least 2½ ppm a year. Getting below 450 would be
very tough, given that it is so difficult or, at the moment, not
possible, to extract greenhouses gases from the atmosphere. Once
it is there it is there and takes a very long time, at least in
the case of carbon, to go away. That is why we said that 450 is
about as ambitious as you could be. 550 is an upper limit saying
that is 50:50, as you mentioned, being above or below 3°
and there is quite a lot of risk in that. At the same time, it
does involve quite strong action. To get to 550 would involve
stabilising world emissions within 15 or 20 years and that is
a tough call. We argue that if we start now and pursue it sensibly,
we could handle it at 1% of GDP; but as you emphasise, it does
depend on starting now. That is what we essentially said about
targets that should be in that range; to get it down to the lower
end of the range will cost you more and save you more risk.
Q6 Tim Farron: Could you describe
the reaction to your Review you have encountered so far, especially
looking at the US, India and China?
Sir Nicholas Stern: I have not
been to the US yet. We have done articles and interviews on national
public radio.
Q7 Tim Farron: You will have read
things people have said.
Sir Nicholas Stern: I have interaction
with academic colleagues in the States. I have not spoken yet
to the Chief Economist of Chrysler; but I have spoken to academic
counterparts. First, with China we should recognise (and people
very often do not) how ambitious China is being on the environmental
front. Essentially China saw the importance, particularly under
Zhu Rongii, when it started, and he was PM in the mid 1990s, and
the challenges of air pollution in cities, of soil erosion, water
stress and so on, and that consciousness was strong. They now
have reforestation, increasing forests in China and not reducing.
The headline ambitions in the Chinese "Five-Year Plan"
are two really: growth rate, 9% or so, which I guess they will
achieve; and to cut the energy output ratio by 20% in five years.
In the five-year plan they talk about a number of harmonies: harmonies
associated with income distribution; harmonies associated with
the economy and the environment; harmonies associated with the
balance between domestic growth and foreign growth. There are
four or five harmonies of which, I think it is fair to say, environment
and the economy is the leading one. They are engaging quite strongly
in these issues and that context is very important. I have been
working in China now for nearly 20 years, India for more than
30 years, and living in both places at various times, and I think
both places in the last year or two have seen a focus on climate
change and energy efficiency of a kind I have not seen in those
decades previously in those two countries. The resentment on the
equity front is strong in both places, and understandably. That
is why we have to think through how we can be good partners for
action. I think the key elements (and these were the key elements
in our discussions) are making sure that the carbon trading scheme,
the greenhouse gas trading scheme, would generally work strongly.
We are going to need carbon financial flows far, far higher than
the $½ billion or $1 billion per year we are currently seeing
under the CDM. It should be in the $10/$20/$30 billion in the
kind of area we should be looking at if it is going to play a
strong part in financing the carbon reduction; because India and
China have a very strong and understood (and it is an action point
for them) incentive to be more energy efficient—it saves
them money and makes them more secure. It is that carbon step
from energy to carbon where there has to be strong incentives.
That is now I think the subject of discussion, the carbon flows,
which depend on the demand side on strong action in the rich countries;
and we have to work out with India, China and the other developing
countries, the supply side; which means, how do you recognise
the carbon reduction you are buying? It needs some kind of benchmarking
to do that in order to have a supply side reduction that matches
with the demand side. The demand side comes from strong ambitions
in the rich countries and that is why we emphasise the 60-80%
reductions in total emissions by 2050 for the rich countries as
being so important. That is the subject of discussion: how will
that work? The second subject of discussion is the process of
technology transfer. Carbon capture and storage, for example;
there are others: solar; nuclear; wind; hydro; they will all be
very important for India and China. Nevertheless, there will be
at least 70% electricity generation from coal for the next 20
to 30 years or more. That means the carbon capture and storage
for coal will be fundamental, given that they are the fastest
growing economies of the world in which there is a population
of over a billion; and they look for a proving of that technology.
They, quite understandably, challenge and say, "Look, does
it work in Europe?" You say, "We're on the way",
and we are; we are working on it, but that is the kind of test
that they are looking for, and they are looking for collaboration
there. In both India and China those are the key issues: the carbon
finance development of technology, and the proving of technology
in the rich countries, as well as in the partnership with them.
In the United States I think we can see the whole story moving
on quite rapidly. I am not claiming credit for any of these moves.
I am observing these moves. There is lots of discussion going
on, of which we are just one bit. If you look at the re-election
of Governor Schwarzenegger, with a handsome majority on, amongst
others, an environmental climate change platform. The US administration
emphasises strongly, and rightly in my view, their devotion and
commitment of resources to technology. There is this strong recognition
in the administration that this is something that comes from human
action. The suggestion that it might not has gone. That link is
clearly acknowledged. So you have got strong movement in some
parts of the United States, not just California which has an 80%
reduction target; a number of US cities, the north-eastern United
States, the policy in the administration; you have now got Barbara
Boxer, Chair of the Environment Committee and Jeff Bingaman, Chair
of the Energy Committee; and I will be giving evidence to Bingerman's
Energy Committee and meeting Barbara Boxer. Those two have a very
different view of the challenge of climate change from their predecessors,
to put it mildly. I think you are seeing strong movement of the
discussion in the United States. I have had tos and froes with
my friend and colleague in economic and public policy Bill Nordhaus
on discount rates; and Bill has organised a gathering in Yale
where we will be discussing these. My reaction has been fairly
robust, it is in the postscript. Whilst I see good scope for discussion
about the ethics of discounting for growth and how strongly you
would want to discount for growth, I find high pure time discount
rates in the context of climate change ethically extremely puzzling.
I just do not see a good argument for deciding that benefits a
hundred years from now for somebody whom we assume today has the
same income as now, I do not see any argument for saying that
just because that person is a hundred years in the future they
will get only 30% or so of a weight relative to me. I just do
not see the logic in that. That is the consequence of having a
1% pure time discount rate—it is pure time discounting.
We will talk about that, but I do not find his arguments persuasive
and told him so, told him why and we will go on discussing it.
Q8 Tim Farron: How close do you think
the US is to agreeing to binding action on greenhouse gas reduction?
Sir Nicholas Stern: That is a
very hard judgment call. All I can say is that the public discussion
of these issues is moving quite strongly in that direction. When
and if it will get there I do not know. I think it is extremely
important that it does, because this 60-80% reduction in the rich
countries which we need must include the United States.
Q9 Mr Chaytor: How do you deal with
the argument that the United Kingdom's share of global emissions
is so tiny that any action within the UK is almost irrelevant,
because what really matters is growth in China? Do you think there
is a role for the United Kingdom to take a lead in terms of reducing
its own emissions, or does it not matter, and should we focus
more on building an international framework?
Sir Nicholas Stern: I think that
the UK does have to be seen in the context of how it contributes
to bringing people with us. I have worked in international institutions
as Chief Economist of the EBRD and Chief Economist of the World
Bank for nearly ten years, and I learnt to be very careful about
"the UK taking the lead". We are part of an international
community; we have to work together with partners; and key partnerships,
of course, are the EU, but there are others. I will be going to
India with the Chancellor tonight to work taking forward work
on that partnership. If you just look at the EU I think we have
been pitching our policy, rightly, in the context of the EU Emissions
Trading Scheme. It does cover half of European emissions; and
we have been pushing for ambition. I think we have been pushing
quite effectively. You have to have arguments; you have to lay
it out; you have to persuade in a rational way, and that is what
we have been doing. To be persuasive I think you have to show
what you yourself are also doing. Again I think the UK, in terms
of meeting Kyoto targets, is in a reasonable position to persuade.
Our emphasis on technology research I think puts us in a reasonable
position to persuade. You have to see it in that context. It is
not a matter of the UK being irrelevant; it is how do we design
our policy in a way that makes us a persuasive partner, and in
a way through the EU ETS, and in other ways in technology, that
promotes international action.
Q10 Mr Chaytor: Would we, therefore,
be more persuasive within the European Union if we were prepared
to take more unilateral action in the UK?
Sir Nicholas Stern: I think it
clearly would add to the persuasiveness. The question is: how
persuasive is that position now? How does that look? I think relative
to other partners it does not look bad. It means we can be in
a position to raise these issues strongly and say, "Look,
let's work together to move forward internationally". The
international perspective, you are right, is absolutely fundamental.
Q11 Mr Chaytor: You mentioned your
discussions in China and India, but what do you think is the best
formal international framework to really concentrate the minds
of the Chinese and the Indians on emissions reductions, given
the huge growth rates they are currently experiencing?
Sir Nicholas Stern: As I emphasised,
they are very focussed on energy efficiency and energy security.
Things like renewable, solar, hydro, wind and wave and so on are
all areas where they have a strong incentive to go forward on
energy efficiency grounds, and on energy security grounds, and
this contributes to carbon and other greenhouse gas reductions.
The key area I think, as I have emphasised, for both of them is
carbon capture and storage for coal. We cannot just tell them
to do that; it has to be (and this is crucial) in the context
of carbon finance; and it has to be in the context of developing
and sharing the technologies for carbon capture and storage for
coal, including improving them in Europe. That is a way of linking
to your direct question about what the UK can do. I think that
is something where the UK should be quite effective in strong
participation and the demonstration of taking forward carbon capture
and storage of coal and its sharing; and strong action in making
sure that our action as Europe on the Emissions Trading Scheme
is done in a way that is a) ambitious, b) long-term and c) open,
so that it is open to start driving those trains. One of the aspects
of the Pre-Budget Report was to see how we can bring more countries,
as it were, to link up with the EU ETS so it is still stronger
in its effect.
Q12 Colin Challen: One of the reasons
you have given this morning why you have chosen the discount rate
that you have is because it is ethically motivated and that has
been rather controversial with some other economists who perhaps
think that a different discount rate would have been preferable.
I think the way that you have justified it is very well summarised
by Partha Dasgupta who said: "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". I was wondering if you apply the arguments
not only generationally but inter-generationally; so it is not
just the future generations who take on this one-to-one basis,
but also current generations, if you like?
Sir Nicholas Stern: The discount
rate is quite a technical subject but essentially what you are
doing is looking at small changes and asking the question: how
much is one unit in the future worth relative to one unit now?
That is the discount factor and its rate of form is the discount
rate. That is the conceptual question you are asking. Putting
it that way, which is the way you have to put it because it is
a technique for looking at small changes, you immediately recognise
that for a number of aspects of climate the discount rate
is not a legitimate concept for doing the basic appraisal of policy.
Why, because you are dealing with different strategies which involve
very different growth parts. That marginal technique, which is
what discounting does, is inappropriate. That is why we go back
to the basic underlying economics of welfare; the basic underlying
theory from which the discounting shortcut is derived. You have
the same conceptual framework, but we say for many aspects of
what we do in the Report you have to go back to the objectives
and you cannot use a simple discounting shortcut. If you go back
to those objectives you have an element which is called the "pure
time discount rate", and Partha and I agree very strongly
that the pure time discount rate should be very low. We were a
year or two apart as graduate students in Cambridge when we were
discussing this issue and that was 40 years ago, so we have been
discussing this issue for some time. The argument that the pure
discount rate should be zero goes back to Ramsay, Keynes, Solow,
Sen—it has got a very long history and 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.
Q13 Colin Challen: That is an economic
description between our relationship and the future.
Sir Nicholas Stern: You asked
a question about wealth in the future versus wealth now; and wealth
now in this part of the world versus now in other parts of the
world. That is a different kind of set of issues from the pure
time discount rate. The pure time discount rate looks at the question,
how much you disregard the future simply because it is in the
future; nothing to do with people being rich or poor. There it
seems if you are talking about the future of the planet, then
to argue that it might become irrelevant in some way analogous
to an industrial project or a road or a railway, that is a very
different story. I think the argument the pure time discount rates
should be low is very strong. What we can discuss, and what people
should discuss, is the ethics (and there can be different views
because it is ethics) of valuations of richer people in the future
versus richer people now. The ethics of richer people here at
this moment in time versus poorer people in other parts of the
world. What we did for that, we used the same thing as involved
in the Treasury Green Book on cost benefit, we used a formulation
which says that an extra unit for somebody earning 10 times as
much is worth one-tenth of a unit's worth to somebody who is getting
one-tenth of what they are getting. That is quite a strong fall,
as it were. That is quite a strong egalitarian approach there,
and it is the one that is embodied in the Green Book. A number
of people would put it and it is an argument that is interesting
but you could have still higher attitudes to inequality than embodied
in that one. If you want the jargon, in the Report we took the
key parameter, ETA, as equal to one. You can have it as higher
than that, which would involve a still stronger view of how far
your weight on somebody richer relative to somebody poorer should
be lower. In other words, the higher value of that ETA would say,
"I think an extra unit in the future to somebody who is richer
should be worth still less", and that increases your discounting
for growth. We do have discounting for growth in the same way
as it is in the Treasury Green Book. In the postscript which was
published with the book, unless you managed to buy a book yesterday—
Q14 Colin Challen: I have already
got a copy.
Sir Nicholas Stern: Very good.
In the postscript in that, and you heard me refer to it yesterday,
we do do some sensitivity to these higher egalitarian values.
We show that the results we get, in terms of the basic argument
that the costs of action are much lower than the damages that
they say, our argument is pretty robust, and there are very sensitive
league tables given in the postscript of the Review.
Q15 Colin Challen: Do you not think
your argument on the ethics for climate change should lead to
a description about rights?
Sir Nicholas Stern: The approach
we have got is the standard one in the economics of policy that
looks at it were at the consumption of people and compares consumption
of people in different parts of the world, and different scenarios,
different times in the future. It is a different approach from
a rights-based approach. In Chapter 2 we do discuss some aspects
of rights. As ever, these are quite difficult concepts to establish.
I am more than happy to have a discussion of how you would do
that. I think that on the whole, if we are to discuss rights,
we have to think about the principles from which they are derived
because otherwise you just assert them. Most of the rights discussions
I think are well founded in a notion of some kind of equality
of people to participate in a society. That is why we talk about
a right to free education. That is why we worry about some aspects
of rights to health. We speak about equality in terms of equality
before the law. We talk about equality in the voting procedures.
These are about your ability to participate in a society, and
what it means to be a human being and what it means to be a society,
and those are the kinds of ethical discussions that we have if
we are trying to establish rights. The reason I go through that
is because, if you are talking about rights to emit, how does
that actually relate to the kind of discussion I have been describing
where we derive rights from other basic principles. I find the
rights discussion in this area a little bit difficult for that
reason. I like to see how it is derived from other basic principles
of equality and participation, which we normally use to derive
rights in other contexts. A sense of injustice, a sense of inequality
in terms of the responsibility for where we are now, and that
being much more strongly in rich countries than poor countries,
does seem to be an important part of the story. It is not necessary
a rights based discussion.
Q16 Colin Challen: You might assert
the right to breathe. Of course when we exhale, we exhale CO2
and that certainly must be a right. We can build from that.
Sir Nicholas Stern: How we do
it is building from the principle.
Q17 Colin Challen: Certainly. Finally,
I just wondered whether or not the process of doing the Review
has changed your view about economics? Have you gone through any
great sea change in your thinking about how we should be informed
by economics, as this well known "dismal science" as
I believe it is called—by some!
Sir Nicholas Stern: That originated
around Thomas Malthus I think in his doom-mongering in terms of
population and so on. Obviously in doing any piece of work you
learn. I think that the Report itself is quite optimistic. It
is saying that these risks are severe, but if we act now and if
we act internationally then we can remove a great deal of the
risks at an acceptable cost. It is quite a positive Report in
that sense. What I learnt in doing it—I learnt lots of things
obviously and it is difficult to be precise about what you learnt—I
was struck by the urgency of the challenge. I was struck by the
fact that we can do something about it. I would not have been
sure about either of those things in advance of doing the work.
On the basic subjects I think those were the two lessons that
came to me most strongly. I think it was pretty obvious it was
an international collective action problem at the beginning. In
terms of the scope and the applicability of economics, I hope
I learnt some humility some time ago. I have been working on the
economics of development and the economics of policy for most
of my adult life, 40 years now, in some shape or form, and I think
we have to recognise the limits to what formal modelling can do,
the limits to what formal analysis can do. We have to do a series
of small pieces of work and put them together with our understanding
of politics, our understanding of the environment, and our understanding
of justice and come to judgments on policy. You do a bit of work
on the costs of climate change by looking at different kinds of
technologies. You look across the world at the kind of impacts
that you might see from climate change. You will do a little bit
of formal modelling, which is what was in Chapter 6. You will
look at what is possible in terms of the way in which international
communities can work together. As I say, I have seen a lot of
that in the ten years I was in international institutions. You
put all those bits together and you try to come to a judgment,
and that is setting economics in a context of internationalism,
environment and political possibilities and trying to make suggestions
on policy by putting that together. That came through very strongly
in this work; still more strongly probably than I have seen it
in the past. It is the biggest challenge I have seen in terms
of getting people together internationally; the biggest challenge
in what we have to do; and the biggest challenge in terms of the
rewards from so doing. I think it is the type of experience I
have had before, and perhaps this is a more intense one than I
had before.
Q18 David Howarth: You have mentioned
in your opening remarks various ways in which you have been quite
cautious on the cost side and we do not have time to go through
them all. Could I just mention one and you have commented on it,
and that was the question of socially contingent events caused
by climate change, wars over water supplies and massive movements
of population caused by an environmental crisis. You say you do
not really take these matters into account. Could you just comment
further on why that is? Also on the sensitivity side, how sensitive
is the analysis to that omission?
Sir Nicholas Stern: If I can relate
that to past work in the area because that is what you are building
on. Much of it in the past, science and economics, has looked
at temperature increases up to 2°C or 3°C, and what
I describe on the Business As Usual and the 15% probability or
more than of being at a point in a 100 years' time which will
take us above 5°, that is the kind of thing which the science
has not really come to grips with. It is completely outside the
range of experience of humankind. It is very difficult for science
to get the data, as it were. There is nothing in the past; you
have to model it in some way and that is very difficult to do.
That is just a physical effect. We do not know very much about
being 5°C, 6°C, 7°C above, although we do know
that we now risk that. You could trigger all kinds of positive
feedback effects that could take you still further away. The collapse
of the Amazon; the emission of the methane from the permafrost
and so on, there are all kinds of triggers that could amplify
it still further from the probabilities and give probabilities
still higher than I have described. The first part of the difficulty
is not knowing about the science, other than that there are big
dangers there which are not yet in the mould, and that we are
dealing with experiences way outside what humankind has seen.
That is one difficulty. Another difficulty is being explicit about
movements of population; reactions of countries to movements of
population; and what kinds of things that would cause. There are
many people who link what we are seeing now in Darfur to changing
environment. We know that big movements of population can be extremely
difficult and very costly. If you just look at the movement of
population in the partition of India in 1947, it was dramatically
costly in terms of human life. I think it is fair to say that
the world is not terribly good at dealing with big movements of
population, and it is probably not getting any better. If you
look at the way in which populations moved in the first big wave
of globalisation prior to the First World War, you see far higher
movements of population measured by the percentage of people born
outside the country where they now live. You saw far higher mobility
of population than you see now. I do think that is something that
would clearly transform the physical geography of a world in a
way we do not really understand if we went above 5°C or 6°C.
That would surely transform the human geography of the world.
It would surely lead to big pressures of population movement,
and they would carry very large costs. It is very difficult, in
the essence of these things, to model that; but I do think it
is an important way in which some of what we have done may have
been underestimating, rather than overestimating. We did try a
little bit in our sensitivity analysis to pick that up. We did
it in a very, very crude way. There is a relationship in these
models between the concentration of greenhouse gases in the atmosphere
and temperature. There is a relationship between temperature and
damages. What we did—and there is one parameter you can
flick in the model we have been using—you can change that
relationship between temperature and damages. We did experiment
with that, and that is in the postscript to the Review as a result
of questions to climate you are rightly raising in seminars and
presentations, and that does of course increase the estimates
of the damages. Increase in pure time discounting drops it down
again, as it obviously would. There are basically three reasons
why you can get rid of all this stuff and just reach for the suntan
lotion and the hat: one is that you deny the science, in which
case you do not have to reach for the suntan lotion and the hat
because you have denied this thing is happening. That is method
number one. You could say, "Well, maybe it is happening,
but we'll deal with it when it comes along. It won't be hard to
deal with it. Humankind is fantastically adaptable and inventive.
We'll sort it all out. It may not be as bad as you think and,
anyway, even if it is we'll handle it". That is the adaptation
story. We have not spoken much about adaptation. It is a big part
of the Report. We come back to the discussion we have just had:
how do you adapt to 5°, 6° or 7°? We will do something.
Movement of population is adaptation; but it is itself very, very
difficult to cope with. The third way is to say, "Sure it
might happen. Sure it might be difficult, but it's a long way
in the future and I don't care about the future". That gets
rid of the problem too. You see in discussion all three of these
ways being trotted out at some time or another. I do not find
any of them convincing for the reasons we have been discussing
today.
Q19 David Howarth: Could I just ask
about another assumption and that is about the rate of growth,
because there is a whole school of economic growth pessimists
who think, for example, of physical limits to growth. They would
produce a lower band for the estimate much lower than you have
put it at. Could you comment on that school of thought and on
the effect it has on your results? One of the mathematical reasons
for urgency is if you assume that economic growth factors are
less in the future that completely changes what you should do
now.
Sir Nicholas Stern: If growth
is less you have got more time; but "completely changes"
is too strong. If you just look at the arithmetic of the accumulation
story—we are already at 2½ ppm adding extra per year;
that is going up and is going up strongly for the kind of growth
we can see now. Over the next 20, 30, 40 years if you look at
the way in which India and China and other parts of the world
are growing, that 2½ ppm adding per year is very likely to
become at least four, probably more; just from the growth we see
now, not thinking yet about your point about looking out into
the very long future. That would be saying over a century we would
be adding another 400 or so, which gets us to the 800 and something
which I was talking about. Even if that is on the high side, because
you might think growth over a century will not be what we might
have thought—adding, instead of that extra 400, 250 or 300
would still take you into the order of 650-700, and there are
very big risks involved in that. I think the case for urgent action,
given the way we can see growth in the next couple of decades,
is pretty powerful, even if it does slow down later on in the
century.
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