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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
      • How should Stern's vacillations on decarbonisation policies be interpreted?

How should Stern's vacillations on decarbonisation policies be interpreted ?

The Stern review contains nothing dramatically new regarding decarbonisation policies.
He recommends an objective of 550 ppm (all gases included) which the E.U. advocates, and adopts the consensus of economists on the need for an international carbon price.
This leads him to reassert the relevance of the Kyoto system to implement a policy that is efficient while including a concern for equitable burden-sharing. But closer reading reveals qualified and inconclusive statements on sensitive issues, and a distinction should be made between firm and more hesitant stands.

  • Stern adopts a figure of -1% of GDP in 2050 as the cost for emissions paths stabilised at concentrations of 550 ppm. This is an average between -5 and +2% as provided by existing models. Stern insists on the fact that the figures will not be attained without a rapid learning process of carbon-low technologies.

  • It allows him to assert that the cost of a 550 ppm objective is strongly justified by avoided damage. But he hints that a target of 450 ppm would be desirable to keep warming between
    2°C and 3.8°C. Because of the upward revision of climate sensitivity, 550 ppm would lead to temperature rises between 1.5°C and 4.7°C above pre-industrial levels.

  • Achieving these objectives is conditional on the rapid emergence of a carbon price, whether explicitly (taxes or tradable emissions rights) or through normative action. The Kyoto Protocol allows this while leaving every government free to choose its own internal measures, and using quota allocations as a tool to deal with issues of equity between countries. It considers the European trading scheme (EU ETS) as a prototype for a carbon market but noticeably draws a distinction between such a local and partial scheme and an interstate system based on national quantitative commitments.

  • After insisting on the fact that there are strong reasons for building an international scheme based on Kyoto instead of attempting to replace it, Stern introduces several qualifications :

    - Regarding the EU-ETS, he insists on the need for clear allocation rules for future commitments so as to increase system predictability for investors as the only guarantee of efficient technological choices. However, after explaining it is almost impossible to develop equitable, efficient and robust inter-country rules, he does not take a stand on the issue of whether such an approach (described as "cap and trade") could be used to accelerate the inclusion of developing countries.

    - He does however mention the need for convergence between various initiatives (in or outside Kyoto, at country or industry level), by organizing allowance trading schemes between them. Allowance levels and trade flows would eventually make the initiatives comparable.

    - Implicitly, this means keeping Kyoto at the heart of the system but abandoning the idea of getting the USA or developing countries on board. This is typical of UK diplomacy: adhering to the European consensus to exert pressure on the United States, while including from the outset what they think the Americans cannot accept for a given period. However, applying Kyoto (partly) as such depends on a quota agreement within a group of countries representing a minority in global emissions and who might be penalized in terms of competition.
  • For developing countries, Stern proposes "risk-free" quantitative commitments, i.e. without penalties in case of non-compliance. But raising the 20 to 30 G$ annual investment required to redirect the content of infrastructure to be built over the next 20 years will not be possible with this method. The Kyoto framework would need to be supplemented by new carbon-related financial mechanisms (including investment risk insurance) to allow the private sector to participate in the funding of structural policies and programmes, and not just projects as in the Kyoto Protocol Clean Development Mechanism (CDM).

  • In addition, R & D investment in carbon-free technology (34 million $/annum currently) will have to increase two to fivefold. One sensitive issue in this regard is intellectual property rights. Stern, for reasons which again have to do with diplomacy, insists on the fact that those rights are not the only key barriers to the transfer of technology, and that innovative systems of technological cooperation and public private partnerships must be sought. However, in doing so he opens the way to possible considerations without providing a formal solution.

  • N. Stern does however take a firm stand against the imposition of border taxes in order to avoid industries in the most ambitious countries in the field of decarbonisation policies being penalized compared to those countries that make purely token commitments or no commitments at all. His point is that such taxes are the most efficient instrument in theory, but that attempting to introduce them would trigger retaliation measures that would threaten the opening of global markets, worsen difficulties in advancing WTO, and might even spark off protectionist withdrawal. Here again, we recognize the consistent UK diplomatic position.