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Economics of climate change

The report on the economics of climate change prepared by Sir Nicholas Stern for the British government presents leaders of all countries with this important message — not doing anything to reduce global warming is no longer a valid choice. The report argues that the uncertainty surrounding the long-term impacts of green house gas emissions on climate warrant stronger, not weaker, goals to limit them before they cause permanent and dangerous climate change. Professor Stern, a former chief economist at the World Bank, has relied on economic models to show that stabilising emissions to a level of about 550 parts per million of carbon dioxide (nearly double the quantity in the atmosphere at the start of the industrial revolution) appears possible with an investment of one per cent of Gross Domestic Product by 2050. On the other hand, a business as usual approach can set the world economy back by the equivalent of a 5 per cent to 20 per cent reduction in consumption per capita. In economic and social terms, the distress could be comparable to the great wars and the depression of the 20th century. Fortunately, collective international action has been initiated to avert such a catastrophe and most countries accept the need to curb emissions. The Stern Review makes the case that the transition to a low carbon economy presents a business opportunity and a net benefit in the medium- to long-term of an estimated 2.5 trillion dollars in present value terms for measures taken today.

As scientific evidence strengthens the link between green house gases and climate change, attention has turned to the role of China, India, and the United States. The decisions these countries take will be crucial to the success of the United Nations Framework Convention on Climate Change and the Kyoto Protocol. Given the global consensus on the issue and the extreme risks, the U.S., which pulled out of Kyoto citing high costs among other things, has little choice but to reduce its emissions over time. China and India have no obligations in the first Kyoto round to reduce emissions until 2012 but they risk becoming heavily dependent on carbon for decades if they invest anew in power generation facilities based on fossil fuels. Failure to protect forests, spend adequately on modern public transport, and levy a realistic carbon price for personal transport will also escalate emissions. The Stern Review commends China for setting domestic goals to reduce energy use by 20 per cent relative to each unit of GDP between 2006 and 2010 and India for creating an Integrated Energy Policy. For India, the challenge lies in turning policies into practice with appropriate public investments and liberal fiscal incentives to encourage energy efficient products and processes.

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