Climate Policy Needs a Stern Review

Tony Blair's admission that any international climate change treaty to follow <?xml:namespace prefix = st1 />Kyoto is unlikely to be based on the same model is probably the best news this sterile debate has received in a long time. For too long now the debate over climate change has been about angels dancing on pinheads. Arguments have become futile, with neither climate alarmists nor economic realists willing to budge an inch. We have the debate over the hockey stick, which tells us far more about lax standards of peer review in climatology than it does about climate history (although for that reason it is valuable in itself), while on the other hand we are subjected to a vast propaganda campaign aimed at telling us that science now compels us to take certain specified policy actions now (see, for instance, this Rolling Stone article).<?xml:namespace prefix = o />

Science, however, can never prescribe a policy choice; it can just lay out policy options. But the more we learn about the climate, the more it is clear that our knowledge is just scratching the surface. The National Research Council, for instance, last year issued a complex but fascinating report that spelled out that we know very little about the various “forcings” on our climate system beyond the effect of greenhouse gases. It also pointed out that the global temperature metric may not be the best signal as to what is going on with the climate. If the scientific discovery process can be likened to a police investigation, then focusing policy attention on greenhouse gases is akin to finding a murder victim in a house with a broken window and picking up a usual suspect whose modus operandi involves breaking windows. Unwise though it may seem to those who are convinced they've got the right man, much more investigation is needed.


Just as it is becoming increasingly clear that mankind cannot fine tune the climate system it is also becoming clear that the Kyoto-style policy solution of reducing greenhouse gas emissions by means of binding targets is just as simple-minded. The vast majority of countries, recognizing the link between energy use and economic growth, have rejected any binding targets on them. Most of the countries that have accepted targets are now looking increasingly unlikely to meet them. The few countries that are likely to meet their targets are mostly Eastern European nations that have done it the old-fashioned way, by economic collapse. The United Kingdom, which had a huge head-start in emissions reduction since the benchmark date of 1990 thanks to Margaret Thatcher's victory over the coal mining unions, has seen itself knocked off course not just to meet its self-imposed target of additional emissions reductions but even its Kyoto obligations themselves.


Faced with this simple reality, economics and finance ministers all over the world are beginning to pay attention to the issue. If the circle of emissions reductions and economic growth cannot be squared, economic growth will win every time, much to the chagrin of the environmentalist lobby. Even Sir David King, the British government's chief scientific adviser and one of the world's leading alarmists, has said, “The message needs to be got across that this isn't at the expense of growing economies. I don't think that any country is going to manage a process where the suspicion is that they will need to reduce their GDP growth.” The news that a recent economic study found that simply meeting its modest Kyoto targets would cost the UK 1 percent of GDP is directly relevant here. If an advanced economy with a built-in advantage will have to shrink to meet Kyoto Stage I requirements, what hope is there for the rest of the world? And, of course, as the environmentalist lobbyists often gleefully admit, Kyoto itself is but a baby step on the way to the massive reductions they think necessary.


It is clear, therefore, that new thinking is necessary to solve this seemingly intractable problem. The old nostrums of targets and timetables must give way. Tony Blair has therefore asked Sir Nicholas Stern, head of the Government Economic Service, to conduct a review of the economics of climate change, specifically:


  • The implications for energy demand and emissions of the prospects for economic growth over the coming decades, including the composition and energy intensity of growth in developed and developing countries;
  • The economic, social and environmental consequences of climate change in both developed and developing countries, taking into account the risks of increased climate volatility and major irreversible impacts, and the climatic interaction with other air pollutants, as well as possible actions to adapt to the changing climate and the costs associated with them; 
  • The costs and benefits of actions to reduce the net global balance of greenhouse gas emissions from energy use and other sources, including the role of land-use changes and forestry, taking into account the potential impact of technological advances on future costs; and
  • The impact and effectiveness of national and international policies and arrangements in reducing net emissions in a cost-effective way and promoting a dynamic, equitable and sustainable global economy, including distributional effects and impacts on incentives for investment in cleaner technologies


Stern is to provide the prime minister with:


  • An assessment of the economics of moving to a low-carbon global economy, focusing on the medium to long-term perspective, and drawing implications for the timescales for action, and choice of policies and institutions.
  • An assessment of the potential of different approaches for adaptation to changes in the climate. 


It is possible, given the nature of such reviews, that Stern may attempt to find a compromise between the Kyoto approach and more innovative, “no regrets” policies. For that reason, it would be valuable if there was more than one such review ongoing in the world. The issue is one that affects every economy; it would be irresponsible for the US, for instance, essentially to outsource such economic considerations to Her Majesty's Treasury.


Therefore, it would seem prudent for President Bush to commission just such a review, with similar terms of reference, from the Council of Economic Advisers. The UK review has called for evidence by December 9 to consider before reporting in Fall 2006. A similar timetable would be appropriate and achievable for a US-based review.


The advantages of such an approach should be obvious. If the two reviews came to similar conclusions, then there would be grounds for optimism that an international agreement could be worked out quickly. If the two reviews came to different conclusions then there would be two different policy packages on offer, with all the advantages that competition normally brings.


Rather than attempting to fine tune greenhouse gas reductions by means of tax breaks for hybrid vehicles and cutting down wilderness to make corn fields for ethanol production, Congress should urge the President to take such a path. Given the $4 billion it appropriates for the Climate Change Science Program each year, a few hundred thousand for a Climate Change Economics Program does not seem unreasonable.


Most of all, such a review would move us beyond the shrill alarms of the doomsters and allow us to concentrate on what really matters: what course of action, given the state of the science, is really best for humanity and the world?