Kyoto2 and the Stern Review

The single most important finding of the Stern Review is that it is much cheaper to act now to reduce future climate change impacts, than it is to wait until they happen and deal with them then. Consequently society must be prepared to accept modest costs now in order to avoid far greater costs in the future.

"Mitigation - taking strong action to reduce emissions - must be viewed as an investment, a cost incurred now and in the coming few decades to avoid the risks of very severe consequences in the future. If these investments are made wisely, the costs will be manageable, and there will be a wide range of opportunities for growth and development along the way ... Costs of mitigation of around one per cent of GDP are small, relative to the costs and risks of climate change that will be avoided."

The purely economic cost of carbon dioxide emitted on a "business as usual" basis is, he concludes, $85 per tonne of CO2 - a far higher price than the cost of saving it today, to judge by the price of CERs in the CDM market, or the price of Allowances under the EU-ETS (which sunk to €1.40 in February 2007).

And this is to disregard entirely two things:

• all of the other, non-economic costs that would result from extreme climate change - for example impacts on biodiversity and human culture.
• the possibility that the impacts of climate change could be far worse than currently supposed (for example by the IPCC), as a result, for example, of positive feedbacks involving methane emissions, and faster than expected melting of ice sheets leading to accelerated sea level rise.

In his review he makes the powerful point that

"The shift to a low-carbon global economy will take place against the background of an abundant supply of fossil fuels. That is to say, the stocks of hydrocarbons that are profitable to extract (under current policies) are more than enough to take the world to levels of greenhouse-gas concentrations well beyond 750ppm CO2e, with very dangerous consequences. Indeed, under BAU, energy users are likely to switch towards more carbon-intensive coal and oil shales, increasing rates of emissions growth.

In other words, we need to find ways of keeping that carbon in the ground. He believes that this can be done at a relatively modest cost, equivalent to 1% of GDP, and that in order to keep this cost as low as possible there should be positive encouragements given to low carbon technologies in order to reduce costs.

"Policy ... should also foster the development of technology that can drive down the average costs of abatement; although pricing carbon, by itself, will not be sufficient to bring forth all the necessary innovation, particularly in the early years ... The development and deployment of a wide range of low-carbon technologies is essential in achieving the deep cuts in emissions that are needed. The private sector plays the major role in R&D and technology diffusion, but closer collaboration between government and industry will further stimulate the development of a broad portfolio of low carbon technologies and reduce costs ...

But investing in new lower-carbon technologies carries risks. Companies may worry that they will not have a market for their new product if carbon-pricing policy is not maintained into the future. And the knowledge gained from research and development is a public good; companies may under-invest in projects with a big social payoff if they fear they will be unable to capture the full benefits. Thus there are good economic reasons to promote new technology directly."

Another key aspect of any solution will be an effective carbon market.

"Establishing a carbon price, through tax, trading or regulation, is an essential foundation for climate-change policy. The first element of policy is carbon pricing.

Greenhouse gases are, in economic terms, an externality: those who produce greenhouse-gas emissions are bringing about climate change, thereby imposing costs on the world and on future generations, but they do not face the full consequences of their actions themselves. Putting an appropriate price on carbon - explicitly through tax or trading, or implicitly through regulation - means that people are faced with 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. Economic efficiency points to the advantages of a common global carbon price: emissions reductions will then take place wherever they are cheapest ...

Taxation has the advantage of delivering a steady flow of revenue, while, in the case of trading, increasing the use of auctioning is likely to have strong benefits for efficiency, for distribution and for the public finances ... To reap the benefits of emissions trading, schemes must provide incentives for a flexible and efficient response. Broadening the scope of trading schemes will tend to lower costs and reduce volatility. Clarity and predictability about the future rules and shape of schemes will help to build confidence in a future carbon price."

He also believes that substantial new funding will be needed for climate impacts mitigation:

"Adaptation is the only response available for the impacts that will occur over the next several decades before mitigation measures can have an effect ... The additional costs of making new infrastructure and buildings resilient to climate change in OECD countries could be $15 - 150 billion each year (0.05 - 0.5% of GDP).

The challenge of adaptation will be particularly acute in developing countries, where greater vulnerability and poverty will limit the capacity to act. As in developed countries, the costs are hard to estimate, but are likely to run into tens of billions of dollars ... Adaptation efforts in developing countries must be accelerated and supported, including through international development assistance ...

The poorest developing countries will be hit earliest and hardest by climate change, even though they have contributed little to causing the problem. Their low incomes make it difficult to finance adaptation. The international community has an obligation to support them in adapting to climate change. Without such support there is a serious risk that development progress will be undermined.

Serious international collective action across a range of policy areas will be needed:

• "International co-operation must cover all aspects of policy to reduce emissions - pricing, technology and the removal of behavioural barriers, as well as action on emissions from land use. And it must promote and support adaptation ... Greater international co-operation to accelerate technological innovation and diffusion will reduce the costs of mitigation."
• "An efficient and equitable framework for international collective action requires a broad, deep and liquid market for carbon, covering the major emitters and operating with transparent rules. This emphasises the importance of an increase in the size and scope of emissions trading markets globally."
• "Creating a broadly similar carbon price signal around the world, and using carbon finance to accelerate action in developing countries, are urgent priorities for international co-operation ... A broadly similar price of carbon is necessary to keep down the overall costs of making these reductions, and can be created through tax, trading or regulation. The transfer of technologies to developing countries by the private sector can be accelerated through national action and international co-operation."
• "Scaling up flows of carbon finance to developing countries to support effective policies and programmes for reducing emissions would accelerate the transition to a low-carbon economy ... a transformation in the scale of, and institutions for, international carbon finance flows will be required to support cost-effective emissions reductions. The incremental costs of low-carbon investments in developing countries are likely to be at least $20-30 billion per year."
• "There is still time to avoid the worst impacts of climate change if strong collective action starts now ... The challenge is to broaden and deepen participation across all the relevant dimensions of action - including co-operation to create carbon prices and markets, to accelerate innovation and deployment of low-carbon technologies, to reverse emissions from land-use change and to help poor countries adapt to the worst impacts of climate change."
• "Above all, reducing the risks of climate change requires collective action. It requires co-operation between countries, through international frameworks that support the achievement of shared goals. It requires a partnership between the public and private sector, working with civil society and with individuals. It is still possible to avoid the worst impacts of climate change; but it requires strong and urgent collective action. Delay would be costly and dangerous."

This international cooperation should extend to tackling deforestation:

"Curbing deforestation is a highly cost-effective way of reducing greenhouse gas emissions. Emissions from deforestation are very significant - they are estimated to represent more than 18% of global emissions, a share greater than is produced by the global transport sector ... Action to preserve the remaining areas of natural forest is needed urgently. Largescale pilot schemes are required to explore effective approaches to combining national action and international support.

Policies on deforestation should be shaped and led by the nation where the particular forest stands. But those countries should receive strong help from the international community, which benefits from their actions to reduce deforestation. At a national level, defining property rights to forestland, and determining the rights and responsibilities of landowners, communities and loggers, is key to effective forest management. This should involve local communities, respect informal rights and social structures, work with development goals and reinforce the process of protecting the forests.

Research carried out for this report indicates that the opportunity cost of forest protection in 8 countries responsible for 70 per cent of emissions from land use could be around $5 billion per annum initially, although over time marginal costs would rise. Compensation from the international community should take account of the opportunity costs of alternative uses of the land, the costs of administering and enforcing protection, and the challenges of managing the political transition as established interests are displaced."

The Kyoto2 proposals are entirely in accord with Nicholas Stern's findings, including of course all of those highlighted above. Specifically, they would:

• create precisely the kind of large-scale, liquid, long term carbon market he calls for, with a single global carbon price
• yield the substantial funds needed to pay for adaptation to climate impacts; to support low carbon technology research and development; and to mitigate climate impacts by co-financing the application and installation of these technologies
• offer a solution to the deforestation problems he highlights, by offering direct financial recompense to Governments who manage and maintain their forest estates to the benefit of carbon storage or sequestration, biodiversity and local livelihoods.
• provide a mechanism for international cooperation and collective action across the full range of climate policy areas.

In other words, we believe that the Kyoto2 proposals offer a framework capable of delivering the very solutions that Nicholas Stern is calling for.