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Climate Change: The Economics of and Prospects for a Global Deal

11/19/2007 4:30 PM Wong Auditorium
Sir Nicholas Stern, Professor of Economics, London School of Economics

Description: From Nicholas Stern's market perspective, climate change constitutes an "externality" that, like traffic grid lock in a city center, arises when some people's actions affect the welfare of others, at no cost to the perpetrators. Simple price mechanisms can fix congestion, says Stern, but climate change, which he views as "the greatest market failure the world has ever seen," requires unprecedented measures to contend with its potentially cataclysmic, long"term global impacts.

Stern is the author of an influential and provocative review prepared for the British government describing the economics of climate change and development. Here he outlines, in non"technical jargon, the key issues, choices and potential responses of a world facing warming.

Scientific modeling suggests that if nations continue on their present course, the Earth will move from CO2 levels of around 450 parts per million (ppm) today to over 800 ppm a century from now. That could bring a 5o C change, says Stern, accompanied by storms, droughts, and sea level rise, which would trigger massive human migration and "severe conflict." While totting up the costs of such a scenario is nearly unimaginable, Stern has more of a handle on the "scale of damage" -- disruptions to economic and social activity -- a 3o C increase might inflict. This is the kind of increase that many climate models suggest will come if we manage to stabilize CO2levels at 550 ppm.

Stern argues that if we don't act to rein in greenhouse gases to such a target, the costs to the global GDP will exceed 5% each year, forever. ( If the impacts of a 3o C increase have been underestimated, the costs might rise to 20% GDP, or more.) If nations think of this as "an insurance problem," says Stern, they ought to be willing to invest 1%"2% of their current GDP in reducing emissions and achieving stabilization in the next 10"20 years. This is the timeframe societies have to put into play appropriate policies for carbon pricing, new technologies for conservation and non"carbon based energies. What's needed, says Stern, is a global deal, a framework of understanding that guides all nations of the world. His six"point plan relies on rich nations acknowledging their obligation to reduce carbon emissions by greater amounts than developing nations; funding efforts to develop and share technologies, and to tackle deforestation; and monies to help needier nations adapt to change. Stern sees some evidence that the international community -- perhaps even the U.S. _ is positively inclined toward cutting a global deal.

About the Speaker(s): Sir Nicholas Stern served as Adviser to the UK Government on the Economics of Climate Change and Development, and reported to the Prime Minister from 2003"2007. He was Head of the Stern Review on the Economics of Climate Change.

Previously, Stern was Head of the Government Economic Service. From 2003"2005, he was Second Permanent Secretary to Her Majesty's Treasury and from 2004"2005, Director of Policy and Research for the Prime Minister's Commission for Africa. From 2000"2003, Stern was World Bank Chief Economist and Senior Vice President, Development Economics. From 1994 until late 1999, he served as Chief Economist and Special Counsellor to the President, European Bank for Reconstruction and Development.

His most recent book Growth & Empowerment: Making Development Happen was published in April 2005. The Stern Review on the Economics of Climate Change was published in October 2006 ( He has published more than 100 articles.

Nicholas Stern is a Fellow of the British Academy (July 1993), Foreign Honorary Membership of the American Academy of Arts and Sciences (1998). He received a B.A. from Cambridge University (Mathematics), and a D.Phil. from Oxford University (Economics).

Host(s): Office of the President, MIT Energy Initiative

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