Scientific American: Is climate change a problem?

Sir Nicholas Stern: It clearly is. The science has given us now probability distributions of various different kinds of outcomes in terms of temperature and climate change in relation to given stocks of greenhouse gases in the atmosphere. We know, for example, that stabilization at 550 parts per million [of carbon dioxide equivalent in the atmosphere] would give us around a 50–50 chance of being [on] either side of a 3-degree Celsius [5.4-degree Fahrenheit] rise from the temperatures in preindustrial times. We also know that if we do very little about climate change we'll be at 550 ppm probably within a period of around 30 or 35 years. If we did business as usual for a century we'd be in extremely dangerous terrain—concentrations of 750 to 800 ppm—and that would give us a 50–50 chance of being [on] either side of [a] 5-degree C (9-degree F) rise, which would essentially transform the planet. It is likely that conditions in much of the heavily populated equatorial regions woudl be intolerable and there would be big movements of population. I think there's absolutely no doubt that climate change is a problem. The better news is that we can head off those risks.

SA: What are sound estimates of the damages from climate change?

NS: Those are actually quite difficult to put together. My own preferred way of looking at this is to describe the kinds of risks we might run. We can describe what would happen if the snows and glaciers melted away in the Himalayas: disruptions in India, China and Bangladesh. You can describe the dangers of more frequent hurricanes in Central America and the southern U.S. You can describe the problems associated with Cairo being subjected to substantial sea level rise. You can describe the kinds of problems that would arise with massive population migrations. But putting precise numbers on those things is very difficult. We came up with numbers that business as usual would give you: losses, averaged over space, over time and uncertain outcomes, of around 5 percent of global gross domestic product and upwards, probably substantially more than 5 percent of GDP. You can avoid a big percentage of those damages by keeping greenhouse gases below 550 ppm. That kind of extrapolation, however, actually badly underestimates the risks we run at these higher temperatures.

SA: What should be done?

NS. We run enormous risks and we know what kind of reductions of greenhouse gases are necessary to drastically reduce risks. Reducing emissions by half by 2050 is roughly in the right ballpark. It would bring us below 550 ppm. And I think it would be accepted by most people that the rich countries should take on much more of that responsibility because they have contributed much more greenhouse gas. The current stock increase relative to preindustrial levels is due largely to the past behavior of the rich countries. They have the technology and economic flexibility to tackle this. Within an overall 50 percent reduction by 2050, rich countries should take on a target of 75 percent reductions.

SA: What will that cost?

NS: If we do such reductions well, it will cost around 1 percent of the world's gross domestic product, subject to pluses or minuses. You must think in terms of ranges rather than just point estimates. A rich country, say, spends 4 percent of GDP or so on primary energy. If the effective cost of energy went up 30 to 40 percent, that figure would go up 1 to 1.5 percent. It could be less if we learn quickly; find more energy efficiency. It could be more if we do it badly. Still, I think it's a very reasonable insurance premium to pay for the kinds of damages to be avoided.

SA: Should this be viewed as an insurance or risk management problem?

NS: It is a risk management problem. You are trying to reduce the risk, which you have some ability to quantify. You reduce the risk by emitting less and that's costing you about 1 percent of GDP. Simple decision theory tells us that's a good way to go. If the risks turn out to be less than we thought, we spent 1 percent of GDP, we have cleaner lives and save biodiversity. If, on the other hand, risks turn out to be as much or more than we think now and we do nothing, we will get ourselves into a position where it's almost impossible to reverse the damages.

SA: We are reducing risks in future at some cost today. What is the value of the well-being of future generations compared with that of the present generation?

NS: I would give equal status to people born 20 years from now as to people born now, just as I would give equal status to people born now and people born 20 years ago. That's the issue of pure time discounting—how much you discount something simply because it's in the future. Why should I give a much higher weight to somebody born 35 years ago than a person born now? With pure time discounting of, say, 2 percent, you'd be giving half the weight to somebody born now as someone born 35 years ago. You would be discriminating by date of birth. That's a fundamental ethical question. I see no ethical justification for it. Giving lower weights to increases in consumption to richer people, now or in the future, is a different question; that kind of weighting should indeed be part of the analysis.

SA: What is an appropriate policy solution then?

NS: A trading scheme should be a big part of this process for the obvious reason that you need a price for carbon dioxide, given that this is an externality [uncosted in normal markets]. There's considerable benefit from the price coming from this kind of market. You can focus on overall quantitative reduction targets and let the market find the price that will deliver those reduction targets. It also enables financial flows to developing countries, which gives them incentives to come in and participate. It's crucial to have them involved. They feel that the rich countries are largely responsible for the difficult situation we find ourselves in. I think they're right.

We will need to demonstrate new technology, combat deforestation and embedded in all that would be a very big emphasis on energy efficiency. In the short to medium term, it's energy efficiency and combating deforestation that are the best ways to get quick results. Going forward longer term, it's better technology.

There are also areas of the economy where you decide to do things by taxes. In Europe we have high taxes on petrol. I think a combination of regulations and standards, taxes, and cap and trade is a good solution, provided they don't overlap too much and confuse each other, as they can do. Over a good portion of the economy, some kind of cap and trade is important. It keeps the focus on an overall quantity, which is the key variable, and allows for some incentives.

SA: Is something like the Kyoto Protocol, which imposes a global cap-and-trade regime, a good solution?

NS: The idea that we all have to get together and think through targets together, and [that] we have to look at the adding up of all the countries' targets must be right because this is a global issue. You need some kind of forum to talk that through because this is a global issue. In those kinds of ways the Kyoto format or something like it is crucial.

SA: What is the appropriate price for carbon?

NS: Probably you'd need a price of carbon dioxide in the range of $30 to $40 a ton to give incentives to the right kind of technology, such as carbon capture and storage [(CCS)], to give it some chance of breaking even. Unless we have CCS as a viable economic process it's going to be very difficult to see cutbacks in the medium term. We know that so much of the world will be using coal for awhile. It's plentiful, it's below your own ground and you can build coal-fired electricity generation in a hurry. Because of that reality we have to get good at CCS.

SA: Why should people trust your analysis?

NS: You have to look at the assumptions and the way it is done. On the whole, in terms of magnitudes of risks that we used in our analysis [in the Stern Review Report on the Economics of Climate Change for the U.K. government], my best guess is that we underestimated them. I think it's more risky than expressed in the review and there are explicit scientific reasons why. One example is the collapse of the Amazon. There is a genuine possibility that the Amazon forests would be under serious risk of collapse at temperature increases of 3 or 4 degrees C [5.4 to 7.2 degrees F]. But we don't know enough to put it formally into climate models. It's also pretty likely that global warming would give you substantial thawing of the permafrost and emissions of methane. We know these are very serious risks but they aren't in the models because not enough quantitative work has been done. We know there are big risks left out of the models.

The issue is the arguments and how they stack up. I haven't really heard anything since the Stern Review was published [in October 2006] that would really make me think that the argument was wrong. I think if anything, if I'd rerun it, I'd have looked much more closely at these bigger risks and been a bit more sensitive in the analysis to various ranges of value judgments as well as to changing risks. But the fundamental answer that the costs of weak action or late action in terms of damages are much more than strong and timely action—that conclusion is pretty robust. We have to take strong action. How we do it? There is plenty of room for debate.