The New Climate Economy: Report of the Global Commission on the Economy and Climate

The Report of the Global Commission on the Economy and Climate has a distinguished cast of authors, including an economics team led by Nick Stern. It is measured, well-researched and optimistic: technically rich and politically astute. Its release was timed to coincide with the UN Climate Summit, and the Report was welcomed as a contribution to the momentum the Summit was designed to impart to global talks. But what is new? And what are the implications for developing countries?

The report consists of an Overview, seven substantive chapters and a Global Action Plan. The substantive chapters cover three ‘economic systems’ described by the report as ‘critical’, viz cities, land use and energy; and then deal with the economics of change, finance, innovation and international cooperation. Country cases and working papers are promised on the website, but are not yet available. There is plenty there to get one’s teeth into. It helps that there is an extended Overview and a separate 70-page (and very well-written) synthesis report (SR). Someone must have had fun trying to make sure the story line was consistent in all these different versions.

Much of the story is familiar. Climate change will have high and rising costs, affecting especially the poorest. There is a strong case for early action. Government policies need to change. That needs leadership. A global deal is essential. In fact, reading the ten-point action plan (Box 1), one could be forgiven a resigned sigh of recognition. Carbon pricing . . . innovation . . . fossil fuel subsidies . . . innovative financing . . . climate smart agriculture. . .

On the other hand, there are innovative elements, or at least elements which merit new prominence. Prime among these is the argument that the economics of climate action have been transformed, first by technical change, and second by better understanding of the co-benefits associated with different growth trajectories.

As far as technical change is concerned, the best example is solar, where costs have fallen by nearly 90% in twenty-five years (Figure 1), to a point where solar is close to competing with coal and natural gas. As to co-benefits, the Report points particularly to the health benefits of reduced air pollution, which is said to cost an average of 4% of GDPGross Domestic Product in the fifteen largest emitters (figure 2), with the figure in China being 11% and that in India over 6%. Put these together and we are offered a strong conclusion:

‘There is a perception that strong economic growth and climate action are not, in fact, compatible. Some people argue that action to tackle climate change will inevitably damage economic growth, so societies have to choose: grow and accept rising climate risk, or reduce climate risk but accept economic stagnation and continued under-development. . . . (However) the evidence presented in this report suggests that the low-carbon growth path can lead to as much prosperity as the high-carbon one, especially when account is taken of its multiple other benefits: from greater energy security, to cleaner air and improved health.’ (SR: 15-16).

                                                                                                                                                                             Figure 1

Figure 2

In turning these key ideasinto action, the Report focuses on the three critical sectors and on three key drivers of change, viz. resource efficiency, infrastructure investment and innovation (Figure 3). It also deals with financing, arguing that a green growth path might actually be cheaper than the alternative – perhaps $1tn cheaper to 2030. This is because of savings by virtue of higher energy efficiency, reduced distribution costs, and reduced operating expenditure (Figure 4).

Figure 3

Figure 4

Of course, not everything is straightforward (see above, carbon pricing, fossil fuel subsidies, leadership . . .). A key point is that losers need to be supported in order to achieve a ‘just’ transition. As the Report concludes (Pg 22):

‘Explicit measures will need to be implemented to support and compensate workers displaced as a consequence of the shift towards a lower-carbon economy, and communities affected by industrial decline.These might include direct financial assistance, retraining and reskilling, and investment in community economic development.Strategies of these kinds to achieve a “just transition”, tailored to different sectors in different countries, will need to be developed by governments at both the national and sub-national levels. “Just transition” strategies will also need to ensure that support is provided to low-income households affected by rising energy and resource prices. Higher prices are the likely consequence of two kinds of policies which the Commission argues will be essential for a low-carbon transition: the phase-out of fossil fuel subsidies, and the introduction of carbon pricing. The Commission fully recognises the political difficulties associated with such policies.’

This brief summary cannot do justice to the report. However, it triggers six quick thoughts.

First, it is true that the ‘new economics’ is not that new. The UNEP Bridging the Emissions Gap Report (on whose steering committee I sit) has been publicising the co-benefits argument for several years, for example in relation to traffic congestion and air pollution. I remember that the Climate Vulnerability Report for 2012 made a big issue of pollution causing health problems. It also, by the way, emphasised the adverse impact of higher temperatures on labour productivity, describing this as the single biggest near-term impact of climate change. However, the new Climate Economy Report gives new prominence to these issues, is systematic in its treatment, and, sometimes bravely, makes quantitative estimates (see Box 1: SR:25). This is useful. Figure 5 below, taken from the Synthesis Report, illustrates how the inclusion of co-benefits alters the technological choices of the kind captured by a McKinsey Marginal Abatement Cost Curve, here transformed into a benefits curve: most options are markedly more attractive, and quite a few move from the non-viable to viable category. It is interesting, however, that saving on adaptation or relief costs do not feature (in the Report) as a quantified benefit.

Figure 5

Second, I really like the emphasis in the report on deep structural changes that will take place in the world economy over the next generation, with or without climate change – not surprisingly, perhaps, since this is a core theme of CDKN’s model of climate compatible development. Thus, the Report says

‘New pressures on resources, changing structures of global production and trade, demographic change and technological advances have already altered countries’ growth paths. They will make the future inescapably different from the past. The reality is that under any circumstances the next 15 years will see major structural transformations in the global economy. As population growth and urbanisation continue, global output is likely to increase by half or more.Rapid technological advances will continue to reshape production and consumption patterns. Total investment in the global economy is likely to be of the order of US$300–400 trillion.Of this, around US$90 trillion is likely to be invested in infrastructure across the cities, land use and energy systems where emissions will be concentrated. The global scale and speed of this investment will be unprecedented: it will inevitably result not in incremental or marginal changes to the nature of economies, but in structural ones.’ (SR:15)

Third, and another theme of my own work, I of course like the idea of a ‘just transition’ which compensates losers in this process of deep, structural transformation. This was point 3 of my five-point plan on ‘How to Win the Argument on Climate Change’. As I pointed out, there is a literature on this, which yields many useful insights. However, it is in the realm of political science, so perhaps was not thought to count.

Fourth, I find myself unsure about the focus on cities, land use and energy as the three ways to cut the sectoral cake. There are some semantic and category issues to worry about. Is ‘land use’ an economic system, for example? Do cities not use energy? I wonder why the Commission didn’t focus on ‘industry’ for example, or transport? One reason for doing that might have been to speak more directly to sectoral ministers who hold sway in national governments.  Now they have to dip in an out to find relevant material that applies to them.

Fifth, and now we are getting more serious, there is very little in the Synthesis Report about what any of this might mean for particular categories of developing countries. There are general references to the fact that emerging economies ‘fear getting stuck in an outdated model of economic development’ (SR: 14), to the fact that the poorest people are likely to bear the highest costs of climate change (ibid), and to the need for additional finance (SR:23). Beyond this, the Synthesis Report observes that

‘lower-carbon growth will look different in low-, middle-and high-income economies, and according to national circumstances. The Commission’s work has drawn on national studies in countries as diverse as Brazil, China, Ethiopia, India, the Republic of Korea and the United States. All exhibit multiple opportunities to achieve strong economic performance while reducing GHG emissions, but with very different policy, sectoral and investment mixes.’ (SR:18-19).

In practice, different developing countries could be expected not just to have different endogenous growth mixes, but to be affected very differently by the structural changes taking place in the world economy, by how technical or policy change elsewhere in the world might affect their own comparative or competitive advantage, and of course by the location-specific co-benefits that might arise.  Closed-economy approaches are of no value in thinking about climate compatible development.

More insight will be available when the country cases are eventually published. In the meantime, probably the best guidance comes in a chapter headed ‘Overview – strategic context’ (SC).  This deals separately with low income and middle income countries. It says that

‘Low-income countries are characterised by high absolute poverty and low levels of human development and institutional capacity; limited industrial development; low access to energy; and a high reliance on foreign aid and concessional financing to support infrastructure investment and the public budget. As noted earlier, they account for negligible proportions of world energy consumption and GHG emissions.Large fractions of the population are typically rural and derive their livelihoods from agriculture. Along with geographic issues that may expose them to more natural hazards, socio-economic conditions in these countries make them particularly vulnerable to climate risks.The key challenge in these countries is to overcome poor governance and low institutional capacity, to spark rapid, widely shared and sustainable economic growth and poverty reduction.’ (SC:24)

The priorities for low countries are then summarised as in Figure 6 below (ibid).

Figure 6

As to middle income countries,

‘Growth itself, however, is creating new pressures in middle-income countries. Industrialisation and urbanisation are generating substantial local air pollution, congestion and other stresses. Expanding middle-class populations are becoming more vocal in demanding solutions to these problems. But these countries also have institutional advantages that differentiate them from low-income countries: more effective governance, more educated populations, more diverse economies and greater private-sector capacity, on average. Thus, they have a growing capacity to tackle complex and institutionally challenging economic and environmental reforms.’ (SC 25-26)

The priorities are as in Figure 7 (SC:24):

Figure 7

There is more in the text on what these groups of countries might do, but don’t we think this is a bit feeble? I wouldn’t want to appear in Ethiopia, for example, armed only with Figure 6. Instead, I would be hoping for an important discussion (inter alia) on large- and small-scale hydro, energy efficiency in the burgeoning industrial export sector, the resilience of the coffee sector to higher temperatures, and the very high level of emissions from the livestock sector. Similarly, I would not want to land in Peru equipped only with Figure 7. I would expect to spend a lot of time talking about water resource management, and also about energy efficiency in the mining sector. These are the kind of detailed discussions that CDKN has every day at country level.

Finally, and as so often with this kind of report, it would be so much better if the politics were brought out of the shadows. Frankly, stirring calls to cut fuel subsidies don’t really carry much weight without more political analysis, even when Reports, as this one does, mention the importance of compensation to poor consumers and the need for safety nets. I did not see much here, for example, about stranded assets and the power of the large oil and gas companies or oil-dependent countries. I haven’t checked, but I don’t suppose Naomi Klein is referenced. Nor, because it came too late, is there mention of the Rockefeller family’s decision to disinvest from fossil fuels. I talk about how to create a leadership group in ‘How to Win the Argument’, referencing Anthony Giddens on the need to achieve ‘political transcendence’ for climate change. There are many practical steps that can be taken – as Globe, for example, has demonstrated in its work on climate legislation.

Does it matter that there are these gaps? Up to a point, I think. On the one hand, an optimistic report with a fairly broad brush approach is politically astute and probably appropriate in terms of the global negotiations. On the other hand, the devil for individual countries is in the detail, and it does not help them to over-promise win-win options. I don’t know whether climate change ‘changes everything’, as Naomi Klein alleges, but it certainly changes enough to make it hard – just like development, in fact.