“We need a new form of economic growth that breaks the destructive relationship between economic activity and the environment”
Fiona Harvey: The 2021 United Nations Climate Change Conference (COP26) is bringing together world leaders and 25,000 representatives of governments, businesses and civil society. COP26 has been called one of the last chances to put the world on track to tackle the climate crisis and limit global heating to 1.5C, the aspiration of the 2015 Paris Agreement. What would success look like?
Lord Nicholas Stern: We should look at the main aims for COP26 in three or four dimensions. One is the targets for emissions reductions, known as Nationally Determined Contributions, or NDCs. We should look for good progress in closing the gap between the NDCs that were set for Paris, which were way too high for “well below 2C” (the upper limit set in the Paris Agreement) let alone 1.5C (the aspiration limit in the agreement).
We will not close that gap completely. But we should hope for good progress, and for mechanisms and ways forward on how we close that gap further between now and 2025. We should look at the total emissions targeted for 2030. That is how we should think about what is a good, better or worse result. A language of success or failure doesn’t seem to me to be very helpful. To have a tick box doesn’t really make a lot of sense, the question is whether we have made good progress on these key dimensions: NDCs, climate finance, phasing out coal, looking at nature-based solutions to climate change, and the over-arching goal of net zero.
The goal of reaching net zero emissions globally by mid-century is important and the degree of commitment is actually quite promising on that front. If you look at the number of countries that have declared for net zero in some shape or form, it’s well over 100, and those countries are responsible for the bulk of emissions globally. Having the US and China both committed to zero is very important, so we should regard progress on net zero as rather positive, but we need to do more.
Harvey: Developing countries were promised in 2009 that by 2020 they would receive at least $100bn a year in finance to help them cut greenhouse gas emissions and cope with the impacts of the climate crisis. That target has been missed so far. What needs to be done on climate finance?
Lord Stern: We will probably hit the $100bn for next year. The latest figure the Organisation for Economic Co-operation and Development (OECD) came up with for climate finance delivered in 2019 was about $80bn. The US has just pledged an increase in climate finance, as have other countries, and the development banks including the World Bank are having meetings ahead of COP26 where we could see more. So let’s hope that the $100bn is delivered by next year; it should be, it’s not good if it’s delayed.
There are three main forms of climate finance: bilateral (coming directly from donor countries); multilateral (coming through the development banks); and private. The private sector is very significant.
If we have good figures from bilateral and multilateral sources, then we could see some big multipliers on the private side. My own view is we must push very hard to get the $100bn, and then look to 2025 to get a bigger package of bilateral, multilateral and private finance.
Another important dimension is to raise the profile of resilience and adaptation, helping people cope with the impacts of the climate crisis, extreme weather, heatwaves, floods, droughts, rising sea levels and fiercer storms. There are so many examples of how resilience and adaptation can be achieved. Mangroves, for instance: they capture carbon, they protect against storm surges, they help fish and they are good with the environment; in some places they help the tigers, which in turn helps with tourism, which is good for development. Adaptation includes public transport, decentralised solar and restoring degraded land (there is so much degraded land and so much you can do to restore it, such as looking after the forests and planting some more). There is so much we need to do.
Harvey: Some countries have already improved their NDCs. For example, the UK has set a target of reducing emissions by 68% by 2030 and by 78% by 2035, the toughest target of any developed country. The US and the EU have also set stretching targets. What other countries should we look to for strong plans?
Lord Stern: It is going to matter a lot how China and India come in, simply because of their size. I’m working very much on getting something specific from India. I am hoping that there will be some progress and the UK Prime Minister, Boris Johnson, will be in touch with Prime Minister Narendra Modi of India about that, but it is not settled yet. That would be valuable. Driving past coal is the really important point here, and orienting climate finance around driving past coal.
Harvey: You have mentioned private sector capital. One way of raising capital is through the sale of carbon credits. Projects in the developing world that reduce emissions, such as preserving forests or restoring peatlands or growing more trees, are awarded carbon credits that can be used by companies in the developed world to offset their greenhouse gas emissions. This has been controversial and some say it is a way for companies to carry on with high emissions. What is your view?
Lord Stern: The voluntary carbon markets for carbon credits and offsets could be very significant. A lot of existing climate finance is in the form of loans, and if you get a loan you have to repay it. But the voluntary carbon market doesn’t have to be repaid, you just have to do the thing that you said you would: restore degraded land or phase out coal, whatever it might be. It’s quite possible that those voluntary carbon markets, given the way in which the firms have committed, could turn out to be very substantial and very valuable.
Mark Carney, the former Governor of the Bank of England and now a UN and UK climate envoy, and others are doing some tremendous work on the voluntary carbon markets. The whole transparency, commitment and stability that Mark has been striving for should be urging financial firms to be very clear with shareholders and customers about their own targets, and moving to net zero.
Harvey: You have mentioned the development banks, which include the World Bank, where you were chief economist. We have had a climate change action plan from the World Bank, discussed at its annual meeting in October 2021. Is it a good plan, and does it go far enough?
Lord Stern: It is a good start. It really does show commitment and focus on a country level. We all know that this needs to happen on a big scale and the World Bank will be a leader in that. We need to have a discussion between shareholders, the World Bank and the other development banks about the next five to 10 years, and how fast the banks can ramp up on climate development.
I am increasingly moving away from the idea that a fraction of World Bank funding is designated as climate finance. All of its spending should be sustainable and that is where the World Bank is moving. The scale and the urgency of the challenge is now such that we need to have a discussion on how we can expand this.
Harvey: What scale of investment should we be looking at, and what do we need to invest in?
Lord Stern: We ought to be seeing something like the doubling of multilateral lending from the development banks, at least, in these next few years. That would be a major step up, and within that we need very strong focus on sustainability planning and development. It’s just a logical consequence of the scale of investment that we have to make. In a recent paper I co-wrote for the G7, we argued that we are going to have to increase investment by two or three percentage points in GDP around the world (though not for China, as its investment is so high already).
They will be very good investments that will drive growth and change the nature of economic growth, because they will be sustainable investments. A lot of the investment will be in infrastructure, which we need to build anyway, but we should be making it environmentally sustainable.
Harvey: What about the private sector? What is its role in this and is it moving fast enough?
Lord Stern: If you look back to Paris in 2015, what’s changed since then is that the whole net zero language has, quite rightly, risen to the top of the list of priorities. Resilience and adaptation have moved up in a very strong way, and so too has natural capital.
While those three concepts existed in Paris, they were not the most prominent, but they have now moved right up the agenda. And while the movement from the private sector since Paris has been remarkable, it’s still not enough. However, though we are way behind where we need to be, you also have to recognise the momentum from the private sector that has been generated; it has been particularly striking over the past few years.
Harvey: What about the companies that have caused the most emissions? There are 20 companies that are responsible for about a third of all carbon emissions. Do we need to clamp down on them somehow?
Lord Stern: In a world where energy is changing very rapidly, there have to be energy companies. On the supply side, these firms need to invest in new technologies and new ways of doing things. They should be moving very rapidly to net zero, and there should be strong pressure on them to produce credible plans and actions for delivering this. Some of these companies, like BP and Shell, have taken up this issue very seriously. Have they moved fast enough? Probably not, but their commitment should be recognised.
But you have to be a little careful about saying that just 20 companies are responsible for a vast amount of emissions. It’s the people who demand it as well, and the companies are supplying this demand for energy from oil, gas and coal. So you have to change both sides of the market, and changing consumer demand is very important.
Harvey: Do you think any of these companies think they might be bailed out by the state at some point?
Lord Stern: I don’t know. The issue is how they are going to change, because if they don’t move fast enough, they may be in trouble. A company that fails because it doesn’t react in an agile way to the change in circumstances is not necessarily a company that should be bailed out. The big question is, how are we going to move quickly in a world that is changing so quickly?
Harvey: You also talk about the demand side. Some campaigners argue that energy companies put too much emphasis on the consumer, and that we need systemic change from companies, rather than behavioural change from people. What do you think?
Lord Stern: If you are shifting the whole economy to net zero by 2050, it is a change of such fundamental importance that it has to come from both sides. It isn’t a race between behaviour and systems.
Some parts of changing behaviour, like buying and using electric cars, are not so dramatic. After all, you want a car to be reliable and to get you around. Similarly with electricity, when you use it you are not really focused on how those electrons reach you.
The important thing is to work on changing the systems, making it easier for people to buy and use electric cars and having the right kind of incentive structures, regulations and carbon prices to encourage companies to change the electricity supply to the low-carbon generation.
That is not a fundamental behavioural shift, it’s fostering change on the supply side. Other things, like walking and cycling more and changing how we consume and produce food, do require a behavioural shift. And we have to design the systems that enable that, such as the energy-charging infrastructure, or making it easier and safer to walk and cycle in towns. It’s about doing both together, not one versus the other.
Harvey: You are an economist, and your 2006 The Economics of Climate Change: The Stern Review was the first time we had an answer to the questions of the cost of dealing with climate change, and the economic benefits. What do you think economists can do for other aspects of the environment?
Lord Stern: The challenge for economists now is to focus on the question of how to generate very fast, systemic change and gain a great potential benefit from a new form of economic growth: one that breaks the destructive relationship between economic activity and the environment.
So we want an economics of innovation, an economics of system change, an economics of rapid change. Too much of economics is still rooted in the comparatively static variety, one that posits that if you have a market failure, this is how you correct it, and then your new equilibrium will be better than the old one. We now need to deal with the question of how we change the whole economy in just 20 or 30 years.
In 2018, I wrote a piece in honour of the late British economist, Tony Atkinson, who focused on social justice, which was published in the Journal of Public Economics. I argued that we need a programme of public economics as if time matters, one that focuses on very rapid change. It will look rather different from the standard economic techniques, although they will be embedded in it.
Harvey: One of the revolutionary aspects of the Stern Review, which was controversial at the time, was how you changed the way people looked at the concept of the discount rate; how we value costs today versus benefits tomorrow. Before your work, the way conventional economists viewed climate change was very skewed, because costs today were counted in full, but the value of future benefits was discounted. You argued it was wrong to discount the lives of future generations as if they were worth less than the lives of people today. Are there other big changes in how we look at things that would be helpful?
Lord Stern: I never talk about the discount rate; the subject is discounting: how you treat the future relative to now. That is a much better description than talking about the discount rate, because how you value the future depends on what you think it will look like. We have created the climate catastrophe, so resources in future will be far more valuable than if we had acted more sensibly.
Discounting in the future is dependent on how well we tackle climate change now. This is something that economists didn’t understand very well at the time. It’s much better to talk about discounting and its relation to standards of living, and what we will actually have created in the future. That two-way relationship is very important.
It’s the economics of innovation and rapid changes to systems where we need to do much more. While we are not doing too badly on the economics of innovation, we need to get better. We have to think about how we bring forward the big changes, not only in technology but in systems management.
Cities, energy, transport, land, these are the areas where economists need to look very closely and intensely at rapid change.
Lord Nicholas Stern is an academic, economist and author of The Economics of Climate Change: The Stern Review
Fiona Harvey is Environment Correspondent at The Guardian
This article first appeared in the RSA Journal Issue 4 2021
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