The 21st Century climate challenge

1The 21 st Century climate challengeDo the costs and benefitsof climate changemitigation support thecase for urgent action?time. Future generations will gain from lowerrisks and the world’s poor will benefit fromenhanced prospects for human developmentwithin our own lifetime. Do the costs and benefitsof climate change mitigation support thecase for urgent action?That question was addressed by the SternReview on The Economics of Climate Change.Commissioned by the United KingdomGovernment, the Review provided a strongresponse. Using cost–benefit analysis basedon long-run economic modelling it concludedthat the future costs of global warming wouldbe likely to fall between 5 and 20 percent ofannual world GDP. These future losses couldbe avoided, according to the review analysis, byincurring relatively modest annual mitigationcosts of around 1 percent of GDP to achievegreenhouse gas stabilization at 550 ppm CO 2e(rather than the more ambitious 450 ppmadvocated in this Report). The conclusion: anoverwhelming case for urgent, immediate, andrapid reductions in emissions of greenhousegases on the grounds that prevention is better,and cheaper, than inaction.Some critics of the Stern Review havereached different conclusions. They maintainthat cost–benefit analysis does not support thecase for early and deep mitigation. The counterargumentsare wide-ranging. The Stern Reviewand its critics start from a similar proposition:namely, that the real global damages fromclimate change, whatever their level, will beincurred far into the future. Where they differ isin their evaluation of these damages. The Sternreview’s critics argue that the welfare of peopleliving in the future should be discounted at ahigher rate. That is, it should receive less weightthan allowed for in the Stern Review comparedto costs incurred in the present.Policy prescriptions emerging from theseopposing positions are different. 85 Unlike theStern review, the critics argue for a modest rateof emission reductions in the near future, followedby sharper reductions in the longer termas the world economy grows richer—and astechnological capacities develop over time. 86The ongoing debate following the Sternreview matters at many levels. It matters mostimmediately because it goes to the heart of thecentral question facing policymakers today:namely, should we act with urgency nowto mitigate climate change? And it mattersbecause it raises questions about the interfaceof economics and ethics—questions that havea bearing on how we think about humaninterdependence in the face of the threats posedby dangerous climate change.Discounting the future—ethics andeconomicsMuch of the controversy has centred on theconcept of social discounting. Because climatechange mitigation implies current costs togenerate future benefits, one critical aspect ofthe analysis is about how to treat future outcomerelative to present outcome. At what rate shouldfuture impacts be discounted to the present?The discount rate is the tool used to address thatquestion. Determining the rate involves placinga value on future welfare simply because it is inthe future (the rate of pure time preference). Italso involves a decision on the social value ofan extra dollar in consumption. This secondelement captures the idea of diminishingmarginal utility as incomes rise. 87The argument between the Stern reviewand its critics over the costs and benefits ofmitigation—and the timing of action—can beattributed in large measure to the discount rate.To understand why the different approachesmatter for climate change mitigation, considerthe following example. At a discount rate of 5percent, it would be worth spending only US$9today to prevent an income loss of US$100caused by climate change in 2057. Without anydiscounting, it would be worth spending up toUS$100 today. So, as the discount rate goes upfrom zero, the future damages from warmingevaluated today shrink. Applied over the longtime-horizon necessary for considering climatechange impacts, the magic of compound interestin reverse can generate a strong cost–benefit casefor deferred action on mitigation, if discountrates are high.From a human development perspective,we believe that the Stern review is right inits central choice for a low value for the rate62 HUMAN DEVELOPMENT REPORT 2007/2008