Industry can do well by doing good

Nov. 29, 2006
Ignoring climate change could eventually damage economic growth, according to an authoritative report, says Mike Spear, editor at large, in this month's End Point column. Read more on the economics of climate change.

Economics and politics have always had a close relationship. One influences the other, and vice versa, in a seemingly endless cycle that helps keep both economists and politicians in gainful employment — well, economists anyway. But economics has far more influence than its occasional use as an aid to pollsters’ predictions. Take, for example, the recently published “Review of the economics of climate change,” commissioned by the U.K. government and aptly named the Stern report.

Overseen by the former chief economist at the World Bank, Sir Nicholas Stern, the report certainly makes for sober, if not stern, reading — not least because a team of economists, not scientists, put it together. Sceptics might quibble over cause and effect, but starting from an acceptance that the scientific evidence “is now overwhelming that climate change is a serious global threat that demands an urgent global response,” Stern says the evidence gathered by the review team leads to a simple conclusion — “the benefits of strong and early action far outweigh the economic costs of not acting.”

Note the emphasis on “economic” costs rather than environmental costs. The two are inseparable, of course, but this is very much a cost-centric analysis. Using formal economic models, the review estimates that the overall costs and risks of climate change equates to losing at least 5% of global Gross Domestic Product (GDP) each year “now and forever.” And if that isn’t sufficiently sober reading, taking a wider range of risks and impacts into account, the estimated worldwide damage could rise to 20% of GDP or more.

That, according to Stern, is the cost of inaction. In contrast, the costs of action — essentially reducing greenhouse gas emissions to avoid the worst impacts of climate change — can be limited to around 1% of global GDP each year by adopting measures aimed at stabilizing greenhouse gas levels in the atmosphere at between 500 and 550 ppm CO2 equivalent. Given that the current level is 430 ppm, such a level might seem a reasonable target. But the level is increasing at 2 ppm a year, so stabilizing at 500 ppm to 550 ppm would still call for emissions to be at least 25% below current levels by 2050. And that, of course, is a global average figure.

The costs of taking action aren’t evenly distributed across sectors or around the world, Stern says. “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,” notes the report. Persuading them to take on the full costs of this action won’t be easy, but Stern maintains they won’t have to — because of the new markets that action on climate change will create. Emissions trading is perhaps the most obvious example, but low-carbon technologies in the energy and industrial sectors open up “significant business opportunities” around the world.

Now all this might be dismissed as just so much economic theory, with a cost of even 1% of GDP wishful thinking. But support for action is growing. Almost coinciding with the publication of the Stern report, and entirely coincidentally, came an announcement from DuPont, Wilmington, Del., that it expects to gain an additional $6 billion or more in revenue by 2015 from its new “sustainable growth” strategy. Setting new goals in the areas of greenhouse gas emissions, energy efficiency, environmental protection and safety, the company is doubling its R&D spending on “environmentally smart” technologies and products to $800 million.

“What we’re talking about is very much where the growth is,” said DuPont chairman and CEO Chad Holliday. “We see sustainable growth as the biggest market opportunity on the horizon for the next two or three decades… All these goals we think are good for the shareholder, not just the right thing for the environment.”

And if that’s not the economy talking, this is what the economist Stern has to say by way of summary: “The world does not have to choose between averting climate change and promoting growth and development… Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries.”

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