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  • Report n° 7: The Stern review

Report n° 7: The Stern review

  • Table of contents
    • Three questions on the Stern Review
      • What are the challenges for economic actors?

What are the challenges for economic actors ?

The Stern review, with a more committed message than the IPCC's, alerts us to the implications of climate change, be it the risks involved in the change or the mitigation policies adopted.
The issue will weigh on the business environment, if only because of possible remedial policies whose content will depend on highly geopolitical diplomatic processes.
However, the preceding section highlights that it is infrastructure industries and providers of essential services that are mainly concerned. They are engaged in businesses that are characterized by very long term vistas so that present decisions determine to a great extent our margins for manoeuvre by the end of the century.

  • The challenge is to design infrastructure integrating the decarbonisation imperative while supporting adaptive strategies to changes in local climate throughout their lifetime. Therefore, architects must design low net energy intake buildings while planning their adaptation to a wide range of temperature, rainfall and extreme event variations over more than 100 years; electric power generating companies must switch to alternative energies (and/or carbon storage) while taking into consideration changes in water availability and sea levels over the lifetime of a power plant (60 years); energy transmission and distribution network managers will have to minimize network losses while improving equipment resilience to climate uncertainties; the transport industry will have to provide a credible alternative to private car travel and air transport. Other actors, as in the water industry for instance, are less concerned by mitigation policies (except through the electricity or agricultural sectors) but will be in the front line for adaptation.

  • Since uncertainty regarding climate change is greater on a regional scale than on a global one, and since local climate alterations will be concealed by natural variability, detecting climate change will be particularly difficult at local level, the only one which is relevant for adaptation. Consequently, necessarily less carbon-emitting infrastructure capable of withstanding a wider climate range will have to be designed (see three examples in Annex 1 of the Stern Review), but they will be more complex and more expensive. Public-private interaction will have to be adapted accordingly in the infrastructure sector (local and regional authorities, government, and businesses) in order to improve their proactive capacity so that controversies unavoidably linked to uncertainties do not lead to a policy freeze.

  • The economic challenge is huge, as are the economic risks and opportunities. In developed countries, infrastructure represents about 300% of GDP, and replacing just 1% each year would cost 3% of GDP annually. In developing countries, infrastructure stock will double over the next two decades.
    On the one hand, short- and medium-term choices will rapidly determine achievable concentration objectives, on the other, the vulnerability of economies to even slight impacts on infrastructure is widely underestimated today; the damage inflicted by Hurricane Katrina represents "only" two weeks' investment in the United States, but its local impact is much larger if technical, economic and human constraints linked to reconstruction, spillover to the regional economic fabric and the irreversible effects of such a disaster are taken into account.
    Annex 2 of the Stern Review puts forward a number of economic mechanisms that need here to be taken into consideration.

  • All this leads to both new market opportunities for infrastructure industries or essential services and greater social accountability from two aspects: proactive, by recommending and helping to anticipate climate change, and reactive, to avoid rising political and legal challenges. Such challenges may of course relate to the incapacity of companies to supply suitable equipment but also to the fact they compounded the problem through their emissions
    (the debate on the "allocation" of responsibility for climate change). Similarly, actors involved in reconstruction will be faced with more pressing demands and their capacity to respond will be crucial. The difficulty is that companies cannot go too far without regulations being adopted by governments and the international community.

  • For decarbonisation policies, the real risk is uncertainty regarding policies adopted at national, European and international levels. The last fifteen years have shown the extent to which the international negotiation process consists in a series of diplomatic compromises and lobbying actions whose ultimate consequences are poorly controlled (Hourcade).
    The role of industry is to exert its influence to emphasize the need for stable and recognizable compromises in order to ensure safe investments in carbon-low projects and technology.
    In that context, in addition to sustained attention paid to the debate on the future of a "cap and trade" system after 2012, one of the challenges is to rapidly develop international financial mechanisms that may interest developing countries in setting up infrastructure adapted to strong "carbon constraints". It is indeed very likely that the price of carbon and the income it generates will not be high enough initially to incite developing countries to drastically change direction in infrastructure sectors where carbon prices are only one of the parameters.

  • For adaptation, the central issue is the financial, institutional and insurance context. On the one hand, international disaster relief should play an increasing role by extending the emergency phase (the weeks following a disaster) to the reconstruction phase which can spread over several years. More particularly, original reconstruction funding methods could be developed, drawing inspiration for instance from the agreement between AXA Ré (now Paris Ré) and the United-Nations World Food Programme to respond rapidly to humanitarian climate disasters in Ethiopia.
    On the other hand, making technical expertise and equipment available to affected countries (whether rich or poor) might accelerate reconstruction, thereby containing short- and long-term costs. Urgently restoring drinking water supplies is a prerequisite to reconstruction, but additionally water management infrastructure is part and parcel of the reconstruction process and boosts economic recovery. All in all, the heterogeneous nature of the increased risks which hit the poorest countries hardest calls for stronger international cooperation.
    Building such cooperation may imply insurance mechanisms or international funds such as the Adaptation Fund established by the Kyoto Protocol whose modes of implementation were discussed recently in Nairobi.