Lord Nicholas Stern says low-carbon economy will foster growth, reduce poverty

How have the data on climate change shifted in the six years since Lord Nicholas Stern's critical review of climate risks? During today's E&ETV Event Coverage of a discussion sponsored by the International Monetary Fund and World Resources Institute, Stern, chairman of the Grantham Research Institute, explains why he believes the transition to a low-carbon economy will usher in a period of growth. Introductory remarks are delivered by IMF Managing Director Christine Lagarde.


Christine Lagarde: I'm absolutely thrilled not only to welcome you all, of course, but particularly to welcome Lord Stern, and if I may call you publicly Nick. Everybody knows you. We all respect you. You are a prophet in the area of climate change, sustainability, and. although not all of us have been your students, we tend to learn from you a great deal, and we're thrilled that you could on this occasion be with us at the IMF.

You did mention the fact that I put climate change quite high on the agenda of my IMF speech at Davos, and I think that's what people eventually remember when I mention the fact that if nothing is done, we'll be toasted, roasted, and grilled. And I continue to think the same. Actually, the first time I was sort of hit by that issue of climate change, sustainability, is when much, much younger, I started playing with that sentence that you all know, which has to do with, you know, we inherent from our parents the future that we borrow from our children.

And a little bit like that sentence, you know, if you want something to change, nothing should change, you sort of turn it around in your head many times around until you actually figure out what it means. And I do think that really encapsulates quite well what we are doing and who we are putting at risk.

Now a question is what does the IMF have to do with it? Anything?


Christine Lagarde: Actually, the IMF is in three businesses. We lend money to countries that are in bad need of it. We provide policy advice as part of our surveillance business. And we give technical assistance. You don't really see climate change there. And yet when you look at what is the core mandate of the IMF, you see that we are in charge of helping with financial stability and growth and employment and issues that are directly and indirectly related to stability and growth.

Now that's where climate change hits, because if climate change issues are not appropriately addressed, if we keep running those nice energy subsidies, if the price of carbon is not adequately set, and if policy makers do not have that on their radar screen, then stability in the medium and long term is clearly at stake.

So we're not pretending at the IMF that we will reinvent ourselves into the climate change experts. Far from it. We try to stand and be vocal where we have expertise, and where we have most expertise that can actually touch on climate change issues is in relation to fiscal affairs. When we put together with great research work competence a strong paper on energy subsidies, as we introduced it last week, we are right in our expertise, and I would say we hit on two accounts. We hit on the climate change account. We hit on the revenue raising account. We hit on the general sustainability and stability, and from that perspective, we contribute to this enterprise that, Nick, you cover in a much broader sense.

So the same goes when we offer some expertise in terms of carbon pricing, and clearly, the fiscal affairs department has done that extensively. We must get prices right. As I said, it has many ramifications in terms of climate change, in terms of revenue raising, and that's how you can actually enlarge the horizon.

You are mostly concerned, I suppose, about climate change, but to bring to the same table finance ministers, people engaged in revenue raising, actually enlarges the horizon and makes the table bigger and more likely to actually engage people.

So what did we do? Last year, the IMF published a book on this topic of getting the price right. I did mention the paper that we released last week on energy subsidies, which was quite well-covered, and in which you pulled that number of $1.9 trillion. We published a book on the topic of pricing, and I've asked the IMF staff actually to prepare a report on how the membership can actually put principle into practice, because we all know well that to do academic research, to publish, is one thing, but to make sure that it happens in the reality of government life, of policy decision-making, is actually quite important. So we will be doing that as well.

You know, how the membership, we have 188 members doing it, can put principle into practice, changing the way they tax fuels, they tax energy, and they deal with transportation system issues that have to do with it.

All of that is not easy. Designing the reforms is difficult enough, and implementing them is even more complicated. One of the component that I, components that I should have mentioned, in addition to the climate change, sustainability, in addition to the revenue-raising, is of course the issue of doing it right, and making sure that there is enough of social safety and cushioning for the poor people in the countries where those reforms are undertaken. So we are also trying to help with that. And we will continue to do so.

Lord Stern is, as you know, launching a much broader initiative, and the IMF will be very pleased to actually contribute its expertise in the area of particularly fiscal policies to make sure that those voices are heard, and they are complemented with the technical expertise that is needed to sure that the message is not just about a loud and ambitious message, but is also substantiated by actual research and work that documents the reasons why it is necessary to do it, not just because it's good, not just because it's necessary for the children and grandchildren, but also because finance ministers have a vested interest in doing so rightly in order to make sure that they make their respective objectives.

So I personally am delighted to contribute to that initiative, and we will in our respective fields where we have expertise, and because it makes sense from our mandate point of view, certainly help out in that respect. So without further ado, Professor Lord Stern, if I may give you the floor, you are the one that everybody wants to hear, not me. So over to you.


Lord Nicholas Stern:: Thank you, Christine. Thank you very much for coming, and it was very kind of you to express those thoughts that you expressed so clearly and strongly, and thank you very much. And I look forward to continuing to exchange ideas where we can to work together. So thank you very much. Thank you.

And Andrew, Monsieur Le Presidente, thank you very much for your very kind introduction.

And I look round this room, and I see so many of my old friends here. It's a special pleasure to speak in this room to this group.

Now I want to argue that on this issue of management of immense risk, we know roughly what to do in terms of how much we have to cut emissions. We know roughly what to do in terms of the technologies and investments that can be brought to that task. We know roughly what to do in terms of the kinds of economic policies that will foster that change. We don't know exactly, but we know enough to get started, and we'll learn like mad along the way.

What's missing is political will, and what I want to argue through the course of what I have to say is why that political will is such an obstacle and what we can do to overcome that obstacle. Now I hope this is going to work. Yes?

So I tried to get this very rapidly into the time that I have available. I'll say in a moment a few words about what I've learned since the Stern Review. Andrew wanted me to start there. I've learned that life is difficult and complicated, but I can be a little bit more specific than that.

I want to look at the first, parts two, three, and four will really be about one of the major obstacles to political will, which is that the understanding of the risks which we face is not deep and strong enough. And I want to try to be explicit about why that understanding is not strong enough, and how we can go about explaining ourselves in a much better way. It's not easy, but we have to do that, because I really don't think the risks that we run are well enough understood.

The second group of parts of this, parts four and five, will be about the alternative path. What does the alternative path look like, or what do alternative paths, plural, look like? And what kind of policies are necessary to get us there?

And finally, I'll say something briefly about collaboration and mutual understanding and working together across nations, because clearly that's a crucial part of the story.

So essentially, I'll be arguing that the three major obstacles of political, to creating the political wheel is one, a deep enough understanding of the risks, which we're not there yet, or at least the broad body politic is not there yet. An understanding of the alternative path and how attractive that alternative path can be is not there yet. We still see an entirely artificial horse race between growth on the one hand and climate responsibility on the other, and that is a deep mistake. And lastly, we're not very good at understanding what other people are doing, and if we understand what other people are doing, we're likely to do much better at the collaboration. So those are the three elements, the three obstacles to the political will, which I'll try to touch on during the course of what I have to say.

So let me start, though, with the place that Andrew asked me to start, which is the six years since the Stern Review, what have I, what have we learned? There we are.

Now I think from the point of view of the science, the Stern Review underestimated the risks, I think actually badly underestimated the risks. The story wasn't strong enough in terms of describing the risks that we face. We described I think, I hope fairly clearly, but what we described should have been much stronger.

Why? Emissions are at the top or above the projections which we thought about six or seven years ago as we were doing the work. Some of the effects are coming through faster than we thought then. We didn't say enough about the interactions of climate and ecosystems and other planetary boundaries, which I think we've learned more about since then.

I think the importance of those elements that have been missing from the scientific models, a number of the feedbacks and tipping points, I think we recognize that those are still more important than we thought at the time. Most of you probably will not know that a lot of the things that scientists worry about, but which they cannot yet model very precisely, get left out of these models. A crucial example is the thawing of the permafrost. They're not in these scientific models, but most scientists would argue that this is actually a very substantial danger.

Now the best estimate of that danger can't possibly be zero, which is what you get if you leave it out of the model. But you can understand why it's left out, but then as in all models, you have to interpret the significance of what's been left out, and that I think is of great importance here.

And what all this points to is a radical transformation, a potential radical transformation in how and where people can live. And if that transformation takes place, as it likely would under anything like business as usual, then we'd see movement of people. We'd possibly see movement of people on a massive scale. There has to be lots of likelys, probablys, possiblys in this story. This is about the management of risk, but it's management of immense risk.

If hundreds of millions of people move, then we get extended and severe conflict, and that isn't anywhere in these models. Those of us who talk and look at the effects of climate change think about the transformation, but when it gets into the modeling, the transformation of where people can be, it's not there in any very explicit way. So for all these reasons, I think that we underestimated the risks associated in the Stern Review.

On the positive side, I think technical progress, and I'll amplify this just a little bit, have been moving much faster than we thought, and I've already argued that the political will is, has been the big problem. So let me move into the first part of the story of the obstacles to political will, the underestimation of the risk, and let me give it a little bit more substance.

So I'll go very fast here. I haven't got time to go through all the details of these slides. I hope the slides, perhaps they'll be available in WRI website so you can look at them. So I'm going to go fairly rapidly through this story. The slides here are somewhere between a paper and a slide show, so you don't have to read it all, but I hope that you'll just listen to me and I'll go quickly through the storyline.

Basically, we're about, as stock concentrations of greenhouse gases, around 445 parts per million. That's where we are now. That contrasts to something like 285 parts per million, all this measured in CO2 equivalent, in the 19th century. We're adding at 2.5 parts per million a year. That's rising, so that probably will not be far away from 3 parts per million a year before long. A hundred years of that, business as usual, adds at least 300 parts per million. So after 100 years, you might be near 750 parts per million.

That would give around a 50/50 chance of 5 degrees Centigrade, 50 percent below, 50 percent above. I can't tell you whether it's 30 percent or 60 percent, but the point is, it's a big probability of being above 5 degrees Centigrade. We haven't been above five degrees Centigrade on this planet for about 30 million, 3-0 million years. We haven't been above three degrees Centigrade on this planet for about three million years. And so you can see that this is radical change way outside human experience.

What is it likely to bring? Well, extreme weather events, and we are seeing extreme weather events at 0.8 degrees Centigrade of the kind that Andrew Steer was just describing. This is 0.8 degrees Centigrade at the moment. The three, four, five, as Ronnie Reagan would say, you ain't seen nothing yet.

So we have to try to imagine, because we can't model all that well, what three, four, five would look like, but we know enough from the planetary history to indicate that this is a radical transformation, not just extreme weather events. When, obviously, it was a sustained period, but when we were around three degrees Centigrade three million years ago, the sea levels were about 20-some meters above now. On a sea level rise of just two meters, probably a couple hundred million people would have to move.

Now that's a long, slow process, but it's an inexorable process, and we could well see two meters by the end of the century. We don't of course know, but that's a possibility.

So deserts, coastlines, rivers, rainfall patterns. The reason we live where we live would be changed. And many of those things, of course, would happen much more quickly than the sea level rise. We're already seeing expansion of deserts. The North Indian monsoon could change radically. At three, four, five degrees, you'd see most of the snow start to disappear off the Himalayas. That would change the flow patterns and indeed possible locations of the rivers which serve one or two billion people. So these are changes which we can't model precisely, but look like real risks which would affect where lots of people can be.

So that's under something like business as usual. I just took 3 parts per million being added each year, multiplied by 100, and took us to somewhere around 750. Where are we actually going? Because the world has made some promises. What promises has it made? Well, if you look at the Cancun promises, you get something in that shaded area there, starting from something close to 50 billion tons a year of CO2 equivalent as emissions. Previously I was talking about stocks. Now I'm talking about flows. The emissions per year, around 50 parts per million CO2 equivalent. If you look at the Cancun promises and assume people deliver, more or less, then you get something in this shaded area.

The red dotted line is an indication of where we would need to be to have a 50/50 chance of 2 degrees. So you can see that in 2030, whereas we should be heading down to something below 35 for a 50/50 chance of 2 degrees, we're heading not to something below 35, we're heading to something around 55, and that looks roughly like a 4 degree path towards the end of this century or the beginning of the next century. So even embodying the promises, even diverting from business as usual, we are still headed in rather an unpleasant place.

You should also note that in this graph you can see that by 2020, the emissions from the perhaps 7 billion people there will be in the developing world, around 2020 are around 2/3rds of the total. Emissions in the rich world in 2020, 1 billion people roughly, will be about 1/3rd of the total. In 1990 when these discussions really got underway, the proportion was roughly the other way around, 2/3rds of the emissions from the rich world, 1/3rd of the emissions from the poor world.

If you take the contribution to the stocks, of course, the rich world is still a majority of the stocks, because that's the accumulation of past emissions. But you can see now that if we're to cut emissions, we simply can't cut emissions on the scale necessary as a world, unless a major part of that cut relative to what might otherwise be is in the developing world. That underlines that this has to be a cohesive, collective, supportive action.

Now I've already described why this, I've just shown how slow the action is relative to what's necessary, and the first three reasons I've already covered on the obstacles to action in terms of understanding the risks, understanding the alternative path, and understanding what others are going to be doing.

But I also want to underline that one of the reasons we've been moving so slowly is that some of you may have noticed, there's been quite a bit of economic difficulty and recession in the rich world over the last few years. At least some people in the IMF may have noticed that. That has diverted attention in a major way, and the body politic does often find it difficult to think about more than one thing at a time.

I actually think in this case, had we thought about investing in the sensible growth story of the future, had we thought about what to, where that investment should take place, largely in the developing world, had we thought about infrastructure investment being the right, of the right kind, being a sensible policy when you've got unemployed labor and interest rates on the fall, had we put all these things together, we'd have had a much more sensible framework for action, of dealing with problems of recession, macroeconomic imbalances, and climate change at the same time. And we should have done much better as a world at integrating those things, but we simply didn't. It's never too late to wake up, and I think that's something which we really have to take seriously.

Let me say something about the description of the risks. Now I want to argue that both in the science and from the point of view of the economics, we badly underestimated or badly under-portrayed the kind of risks which we faced. I've already said something about what's being left out of the models, and the leaving out of dangerous tipping points. Another aspect of our failure to model very well is extreme weather events have lasting impact. If you knock down the capital structure, then you have knocked down the capital structure, and you are less productive afterwards, whether it be physical capital infrastructure, human capital, and so on. You're less productive as a result afterwards. These are lasting destructions.

But those lasting destructions are not, don't come into the models. Essentially, you get the problems occurring year by year. They're sort of ahistorical in many ways in terms of the economic impact. And some close friends in Pakistan, trying to describe to me what happened with the major floods in 2007, argued that, look, in big parts of the country, development was put back 20 years. Well, if you put back development 20 years every 10 years, you're going to be going backwards. And these are not the kinds of effects which the science, at the moment, scientific models allows us to speak about very clearly.

So I think that what we need, really, is in many ways a new generation of scientific models. I'm not being down on the old generation. I'm saying we've learned from those, but we have to go forward and try to describe better. We need a new generation of scientific models, some of which start with the question, what is it that really affects human lives? Extreme weather events, desertification, inundation. These things really affect human lives. Let's focus the attention of these models on the probabilities and magnitudes of those kinds of events.

And what you find often is people focusing those models on bits they can understand. So they'll tell you that at four degrees, the agricultural output in Northern India may go down by 20 percent. Well, that's relevant, but it doesn't take into account the rerouting of the flows of the rivers of the Himalayas. It doesn't take into account the disruption of the monsoon. It leaves out, in other words, most of the things that are important. And of course, those of you who know India well will know that agricultural output is only about 15 percent of GDP, so if you take away 20 percent of 15 percent, you knock GDP down by 3 percent, and that's in the agricultural part of the economy, and you don't model the impact so well on the service sector, so you end up with actually rather trivial statements of a radical, of small losses, but a radical transformation of what's going on.

So I think as we move forward in the science and in the economics, what we need to do is to look much more closely at the questions about human welfare, and say, can we model the probabilities of those big changes better?

Let me say something quickly about the economic aspects of this story. Basically, the economics is, has its bias in a very similar way to the science. I'm not allocating blame across science or economics. I'm not even allocating blame with the economics. What I'm saying is we've got to move forward in the kind of modeling that we do.

Now Bill Nordhaus, who has been in this game a very long time, a scholar and a gentleman and a friend, has built the generic model DICE, and in the DICE model, you lose 50 percent of output at 19 degrees Centigrade. At 19 degrees, well, you're probably dead at 7, 8, 6. Fifty percent of output at, it can't be sensible in relation to the kinds of events that we're talking about, yet these are the kinds of modelings that people use, including the United States, to measure the social cost of carbon and so on.

It's worse than that, actually, because what you have is not simply a multiplicative loss function, which occurs period by period, with no account of history. What you also have is a exogenous growth rate. So you have a production function of capital, labor, whatever, multiplied by a damage function, which is very small, as I've just described, and multiplied by an exogenous growth factor.

Well, put in one or two percent in your exogenous growth factor and over a century you've got an overall multiplicative factor of two or three, up to eight or nine, depending on what growth rate that you put in. If you knock off even 50 percent of output, you're still forecasting in a very destructive world output and incomes higher than now. It just doesn't resonate with the kind of problems that we're talking about.

So it's not simply that they're ahistorical and damages don't last. It's this structure where you've got essentially separable, to those of you who like your production theory, you know, you've got a separable damage function, a separable multiplicative exponential growth rate, and it just doesn't fit with the kinds of damages in terms of the role of history, in terms of the magnitude effects, and so on.

Now some of the problems I've described can and should be fixed within the models, and stronger damage functions, different ways of modeling growth, taking out the exogenous growth factor. You know, you can put some of these things in the model, and you should. But I also think you need to go beyond the models, and actually, you need to go beyond the models not simply in the new generation of models, but actually asking yourself the question, how do we think about risk, and how do we think about the problems of the world?

If we had to describe the really destructive events of the last century, the First World War, the Second World War, the Holocaust, the loss of life of tens of millions under Stalin's Russia and the different structures of collectivization, the great famine in China, where 30, 35 million people died around 1960, we wouldn't do it in terms of one aggregate GDP. That wouldn't convey to people the kind of things that we're worried about.

So I think we have to learn to discuss risk in a way that describes it as well as we can, is as analytical as possible, covers the different dimensions, including loss of life, and ask ourselves the question, what would we be ready to pay to reduce those risks in a manner ____ this way, like this? And I think most people could understand that kind of question, and it's what we normally do when we think about some aspects of insurance. So I think we have to not only fix the models where we can, not only introduce a broader range of models, but we have to say something about looking at risk in a broader perspective than just that narrow form of modeling.

Now I'm going to allow myself just one slide on discounting, because you'd expect me to, wouldn't you? I was, right. Well, I was the editor of the Journal of Public Economics for about 17 years, from the end of the seventies through the eighties to the early years of the nineties, and sometimes I despair at the ignorance of modern public economics and the way in which we discuss these into temporal issues.

Essentially, we discount for two reasons, if we're thinking about the ethics of discounting. One is because future generations may be better off or worse off than us. If they're worse off than us, then we would be thinking of attaching a strong discount to extra benefits that might occur to people who are much better off than ourselves, and we understand the redistributive reasons for that.

But of course, as I've argued, they could well be poorer than us, and we have to take that endogeneity of income in a story which is all about big changes in standards of living. In those circumstances, of course, they're going to be much poorer than us, you'd want negative discounting rather than positive discount rate.

There's also the question of pure time discounting, and that's how you value lives. How much more or less do you value a life, an identical life, in the future relative to now? If you think it should be less, then that's pure time discounting, separating out anything about standard of living, taking an identical life.

Well, most of, when we approach ethics, we think of symmetry between people. We would regard discrimination by date of birth as arbitrary, from an ethical point of view, and you'd have to have some special reason to do that. Mostly, we think people's sort of human rights and their values of lives as standing equally.

So we should have had, and I did start it, but I should have gone much further in the Stern Review, on the basic underlying principles of discounting. You absolutely can't read off from markets, for example, a discount rate for a collective decision over 100, 150 years, from personal decisions in markets which might be 10 years or so. Sometimes in these discussions, the role of risk has been muddled up, and in many of the models we're dealing with, you take an expectation across states of nature of utilities, so if you have a discount story within the model before you take the expectation, then that discount would be the risk-less discount, because you're taking the discount risk elsewhere.

I could go on, but the discussion of discounting has been truly awful, and it should not have been. And I think if we go back to the basic principles of whether future generations will be better off or worse off, then we will be, you get to the heart of the matter of discounting, and then take on directly the ethical question of whether you want pure time discounting or discrimination in relation to date of birth.

So I've said my piece on discounting. I allowed myself only one slide, so I won't mention it again.

How much do we have to invest? I'll have to speed up here. Well, we have to invest, and there are lots of estimates. We have one or two percent in the Stern Review. The IEA, McKinsey's, a whole lot of other studies have come up with similar kinds of numbers. We would have to invest 1, 2, 3 percent more of GDP over this next 20 or 30 years than we would have done had we never thought about climate change. That seems to me to be a kind of sum which is reasonably robust. Different people have done it in different ways.

And we can then ask ourselves the question, are we prepared to invest that amount, given all the kind of co-benefits of cleaner, quieter, more energy secure, more biodiverse, and so on, and the reduced risk of climate change? We can have an intelligent discussion on that basis. So that's broadly the magnitude of the kinds of extra investment we have to make. I won't into more in any greater detail than that. In an economy where you're investing 20 percent of GDP, that'd be saying that you'd have to invest 10 percent more than you would otherwise have done. So that's the kind of story that we've been telling here.

Now that's the, let me relate that story of the level of investment to the kind of change that we're talking about here. I jumped ahead slightly, but actually, it's, if fits well with what I wanted to say. So what we've got there is, I've finished what I wanted to say about the risks, so I'm now going to speak very quickly about what is the story of this alternative path. I've already mentioned the level of investment that might be involved in this alternative path.

But we have to see this alternative path as a new energy industrial revolution. We have to divide, if you look at the numbers that I had earlier, I won't go into the detail, we have to divide emissions per unit f output by a factor of 7 or 8 over the next 40 years, divide emissions per unit of output by a factor of 7 or 8. That means we have to go to zero carbon, more or less, where can, because there'll be some areas where we can't.

That's simply following the logic of giving yourself a 50/50 chance of 2 degrees Centigrade. That's the kind of change we have to make. I think we have to regard that as an energy industrial revolution.

Now if we see it in that way, we see the economics in a different way, we see the economic history in a different way. If you look back to the mechanization of textiles at the end of the 19th century, if you talk about steam and railways in the middle of the, sorry, the mechanization of textiles at the end of the 18th century, steam and railways the middle of the 19th century, if you look at those periods of waves of technological change, you see two or three decades of innovation, investment, growth, investment flowing to the pioneers, and so on.

So we have to think of this story as, in terms of dynamic technical change and waves of technical change rather than simply extra cost, because this is about discovery, doing things differently, and with all the other benefits I've spoken to about cleaner, quieter, safer, and so on.

So looking back at those previous waves, this is a stylistic account based on the work of Carlotta Perez, who follows the economic history classifications of Christopher Freeman, the great historian of technical change. So those are the waves of innovation. Again, I haven't got time to go into any detail. Just look what's been happening to the price of solar. That's been crashing down over the last eight or nine years. It's come off by a factor of four over the last six, seven, eight, nine years. It's a very radical change. This is an example of the kind of progress which we're thinking about here.

I've spoken about the level of investment. I've said 1 or 2 percent of, or 3 percent of GDP. Of course, what you'll have to invest will be higher if policy is bad, and there's a real risk of bad policy in this area.

Technical progress, of course, is not just in the alternative technologies. Technical progress is also there in the hydrocarbons, and particularly in fracking and natural gas. It could well be, and I won't develop it, but we can talk about it in the questions, that natural gas substituting for coal could be part of a bridge to a new future, because natural gas, provided you don't leak it too much, is about half the emissions of coal. Actually, if you leak three percent of it, it's, all that advantage goes away, so you'd better tighten up your valves and your nozzles and make sure that your transportation of natural gas works well.

But I won't go into any detail in the expansion of technical progress in hydrocarbons, the advance of gas, but it could well be part of a technology story, provided it's transitioned, provided it's a bridge, because natural gas does emit CO2, and the kind of radical changes we'd have to make, it would have to be captured if it were to be used on any scale after 20 or 30 years.

If you look at what hydrocarbon prices are like in relation to the problems we face, you get a very acute contradiction, is that we could, if you just take the known reserves of fossil fuels, we could burn only about 30 percent of those, if it's uncaptured, and still keep to a 2 degree Centigrade increase target, with a 50/50 probability.

The pricing of hydrocarbons in the world is a complete contradiction to the articulated objective to holding to two degrees. You cannot believe two things: that the pricing of hydrocarbons is right, and the world will have a 50/50 chance of holding to 2 degrees Centigrade. I'm not saying which you should believe. I'm just saying logically you can't believe both those things.

So we're going to have to have a good look at hydrocarbons, what the prices are, what they mean, and so on. I won't say any more about the gas story. Happy to talk about it in questions. But from the point of view of technology, I think we need everything. We need nuclear. We need solar. We need wind. We need everything we can get. We probably need gas as a bridge. We certainly don't need coal.

Now that's the story of technological change. I've had to go through that fairly rapidly, but you'll find more of it in the text of the slides, which you'll get from the WRI.

Let me now turn to the policies. Now first and foremost, price for the externality. If you don't, we know it's inefficient. We know that quite rightly, as the IMF has said, if you give people for free the right to do something which is very costly, like pump greenhouse gases into the atmosphere, essentially you're subsidizing that activity, because it does not bear the cost that it inflicts on others. So first and foremost, tax the, whether it's carbon taxes, cap and trade, indirectly through regulations, fix that price.

But it's much more than that. It's much more than that. And we shouldn't rest the story of policy there. Research and development's of fundamental importance here, because the use of the product of research and development by any one person greatly benefits the other. It's not just the public goodness nature of the discovery. It's also the public good nature of the use, because other people, the whole world benefits from the, your using these alternative technologies. And of course, we're in a hurry.

We know that there are imperfections in capital markets of profound importance for long-term investment. That's why some of us have been involved in creating the new BRICS-led bank which was announced last week at the BRICS summit in South Africa. We need to expand the support for long-term investment, essentially correcting for the externalities and market failures in long-term risk capital markets.

Networks are of fundamental importance here. Recycling, electricity grids, public transport, broadband. They all need some kind of public sector foundation, if only in regulation, for these things to function well. Network externalities, of course, at the heart of the story.

Lots of information issues arising very strongly here in periods of very rapid change, and very strong co-benefits associated with interaction between climate and ecosystems.

So you've got six major market failures here, all of which we can think about in terms of policy, and one thing I hope that these two institutions, World Bank and IMF, will think very carefully about, is how to make policy which puts all these six market failures together to help really drive this new energy industrial revolution. It's fascinating modern dynamic public economics, and this is one city in the world, indeed on street in the world, where that kind of work is of special importance.

Two last remarks on policy. The first one is that we must be very careful to think of development, mitigation, and adaptation as bound up together. Sometimes they get separated out. There's development and growth here. There's carbon reduction here. And there's adaption here. That's a logical and policy mistake of great magnitude.

Low till, let me just give a few examples. Low till techniques for rice can save on inputs, particularly water and energy. They can provide more resilience against adverse weather, and of course methane from flooded paddy fields is a very strong greenhouse gas.

So if you do low till, more careful on the water rice, that's development, mitigation, adaptation, all bound up together. You could go on. Decentralized solar in many ways carries the same description of development, mitigation, adaptation. Much about public transport, development, mitigation, adaptation, all bound up together.

So whilst we can sometimes logically for a moment separate development, adaptation, mitigation, it should only be for a moment, and whenever we think more deeply about these things, we should think of putting them together.

The final remark I want to make about policy is really what I have already said. Surely the time to embark on this new story is when there is less pressure on resources and interest rates are very low. The worry is that what we've seen in many countries, including my own in the UK, is hesitation and vacillation. And if you're investing in, for example, power plants that are going to last for 20, 30, 50 years, you're going to have to worry about policy. Policy certainty can't be offered over a 20, 30, 50 year period, but you can reduce the policy uncertainty. And government-induced policy risk has been a major problem in this area. So it's not just getting the policies right. It's also getting the policies credible.

And if only we could be much stronger and clearer about our policies, then many private sector firms, which have got lots of liquidity, lots of cash, that in itself could unleash a lot of investment, without there being actually any direct public expenditure involved, just the clarity on policy. And I fear that we have for a while missed that sort of boat.

Now the last part of what I want to say is collaboration, internationalism, understanding what others are doing. Let me just make a few brief points here.

Understanding what others are doing is a crucial part in collaboration, and this is an area where, you know, I and others give talks in many different countries, and I'm going to exaggerate just a little bit here to make the point. They'll say, thank you very much, Professor Stern. We understand what you're saying. We agree that the responsible thing to do is to cut back on carbon emissions. We are responsible, decent people, but we live in a world of rogues, and all these other people cheat and lie, and what can we do by ourselves? So we might as well just get on with it, and we all dive off the cliff together.

So what other people, of course, that is an exaggeration, but understanding what other people are doing is a very important part of the whole process of collaboration. And again, I think that's something that these institutions can do, because you see a bigger range of what people are doing than many other people.

We can talk the right kind of language. In Cancun, we talked about equitable access to sustainable development. This was actually a term created by Jairam Ramesh, the Minister of Environment in India, in the process of the Cancun discussions. And that was a much more valuable piece of language that burden sharing.

Those of you who are Europeans here know that the standard language in the European Union is burden sharing, and it's, bureaucrats love it, because they sit around and they carve things up, and they carve up the burdens. But this is a very different story. This is a story of finding a different way of doing things, finding a different growth path. It's a story of dynamic partnership. And that's why I felt that equitable access to sustainable development was a much more positive form of language than the kind of burden sharing language and incremental cost language that had been embedded in earlier stories of the UNFCCC.

So learn about what others are doing. Get a language and set of concepts which fit with the challenge which we have, and those will be a crucial part of the process of collaboration. But we should also remind ourselves that many people are actually moving ahead, even if it's too slow. You're seeing radical change in China, in the 12th Five-Year Plan. The European Union has stuttered a bit recently, but over the years, they've done quite a lot.

You are seeing people, Ethiopia and Mauritius have very strong low carbon development plans. You are seeing people prepare to move all the way across the world. And it's, that is a cheerful thing, but when you add it up, of course, it's much too slow. But it does tell us that there are examples and willingnesses to work together there that could be and should be much stronger.

These institutions I think are absolutely fundamental to this whole story. Their mandates are about poverty reduction, growth, development, sustainability, stability. If you look across the international institutions, those are their mandates. This is all about poverty reduction, growth, development, sustainability, and stability. It's all about public finance. It's all about integrating across different problems that I've already described, as well as different nations.

So I think that these institutions here have a fundamental role in this leadership story of putting together a low carbon growth, poverty reduction, economic development more generally, and I think that leadership here is actually quite strong, and all I would ask for is that it gets still stronger.

So let me draw my remarks to a close, and then say one thing very briefly about the political circumstances that we're now in. The question Andrew asked me, what have you learned six years since the Stern Review? The risks are bigger than we thought. The technical change is more promising. Secondly, as part of that story, we're going far too slowly, and we're going to a dangerous place, and the problem is political will.

How do we overcome the problems of generating political will? We get much better at modeling and describing and articulating the risks. We get much better at understanding the way in which low carbon growth is the only sensible growth story. High carbon growth will kill itself. Low carbon growth and the transition to it, if it's done the right way, can be a very strong driver of the growth process. We can't represent this as an artificial horse race between growth on the one hand and climate responsibility on the other.

We've learned quite a lot, I think, now, about major aspects of policy, but we've got lots of work to do on the six policy market failures that I described. And we have to learn much better about what others are doing and how to collaborate.

And let me close my remarks with a suggestion that this combination of political circumstance in 2013 is as good as we're likely to get. I spent last evening, a long discussion with John Kerry, who has a big long-term commitment on this issue, as does President Obama. But John Kerry's goes back many, goes back a number of decades.

You've got the new leadership in China, Xi Jinping and Li Keqiang. Li Keqiang at the China Development Forum, where I was last week, himself raised the issue, in fact, the visiting businesspeople didn't do it very much, himself raised the issue of climate change. And both the current administration and the Chinese administration, for rather different reasons, don't have to face elections again.

So you've got people who are in a position to decide who take this issue seriously. You've got the head of the IMF, as you just heard, the head of the World Bank, as you heard in the Georgetown speech today, which Andrew described, very strong public commitment. Angel Gurria, OECD, the same.

In Europe, you've got, the Angela Merkel of 2007, who was a very strong leader on this issue, it would be nice if the Angela Merkel of 2007 reappeared at the end of this year, after the German elections. But she personally takes this issue very seriously. Francois Hollande is going to be the host of COP 21, which will be the attempt to get an international agreement in 2015 in Paris, and he is very keen to get a strong result here.

You look at the plans in Ethiopia, South Africa, other parts of the world, Mexico, they're all, in all those countries, you've got leadership which is taking these issues seriously. My own view is that 2013 is the best possible year to try to work and redouble our efforts to create the political will that hitherto has been much too weak. Thank you very much.


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