Climate negotiations, sustainable development and growth – speech


Text of ‘Négociations climatiques, développement durable et croissance’ speech given by Nicholas Stern in Paris on 26 August 2015

The two defining challenges of our century are overcoming poverty and managing climate change: if we fail on one, we will fail on the other.

It is this understanding that links the climate negotiations, sustainable development and growth.

So success in Paris will depend on a shared understanding of the profound interweaving of these challenges, and particularly the complementarity of sustainable development, economic growth and climate responsibility.

Sustainable growth and climate responsibility are mutually supportive and intertwined.

And international collaboration and coordination on finance and technology have never been more important to progress on sustainable development.

After working on economic development for all of my professional life, including as chief economist of the World Bank and of the European Bank for Reconstruction and Development, it strikes me that there are three critical insights that have emerged strongly, or have become much clearer, since COP15 in Copenhagen in 2009.

They can bring a perspective on the twin challenges which should change the politics and momentum and bring the prospects of agreement much closer.

It is important that they are stated fully, explicitly and strongly.

First, as the report of the Global Commission on the Economy and Climate, ‘Better Growth, Better Climate’, clearly showed last year, there is now much greater understanding of how economic growth and climate responsibility can come together and, indeed, how their complementarity can help drive both forward.

To portray them as in conflict is to misunderstand economic development and the opportunities that we now have to move to the low-carbon economy.

To pretend otherwise is diversionary and indeed creates an ‘artificial horse race’ which can cause real damage to the prospects for agreement.

Second, our understanding has become more intense about the dangers of delay as we see the structure of the global economy changing, particularly in terms of cities, energy systems and land use, over the next two decades.

Billions are moving into our cities.

The number of city-dwellers will nearly double in the next three decades or so.

Huge and long-lasting investments will be made in the infrastructure of cities.

These investments can be made well or badly.

Similarly with energy systems and land use, including how we treat our forests and soil.

There is a great danger of high-carbon lock-in.

The urgency is intensifying with both continuing structural change and continuing inadequate approaches to the management of cities and energy systems.

Third, we have learned how the use of fossil fuels is creating a whole range of problems in addition to climate change, particularly huge damage through air pollution.

Lives and livelihoods are being destroyed now on a great scale by air and other pollution.

The number of deaths from this source is many millions a year globally, with affliction and maiming of many millions more.

A new study published last week concluded that breathing the air in China is equivalent to smoking 40 cigarettes a day, and is responsible for more than 4000 deaths each day.

Air pollution in India is even worse, while Germany, Korea and, indeed, most other countries, rich or poor, have severe problems.

Such pollution is mainly within country and cutting it down is strongly in the self-interest of all these countries.

These three new or enhanced perspectives can help discussions at COP21 in Paris in two main ways.

First, they help us to understand the enormous opportunities that we now have in reducing poverty and raising living standards worldwide from the transition to the low-carbon economy.

Second, they focus attention on the urgency required in accelerating the transition to sustainable low-carbon growth and development, including through greater international collaboration, underpinned by a strong agreement in Paris.

These new perspectives emphasise the crucial importance of strong interaction and co-ordination with the issues being addressed through the Sustainable Development Goals, due to be agreed in September in New York, and their finance, as discussed in Addis Ababa in July.

While the US$100 billion remains an important part of the commitment by rich countries to supporting the low-carbon transition in developing countries, it is arguably even more important that there is strong international collaboration so that investments in infrastructure promote, rather than derail, sustainable development.

The overall magnitude of global investments needed, in all countries, is of the order of US$90 trillion over the next 15 years, more than twice the stock of global public capital.

How these investments are made, and their scale and quality, is crucial to both sustainable development and managing climate change.

But many, or even most, of those opportunities will be lost if we hesitate.

There is a danger that high-carbon, polluting, wasteful and long-lasting structures will be locked-in.

There is so much we can do now that it is in our self-interest, country-by-country and in our collective interest, if we co-ordinate and collaborate.

Let me come back to the US$100 billion per annum committed by the rich countries at COP15 in Copenhagen and at COP16 in Cancún, and which will be a key element at COP21 in Paris.

The extra contribution or additionality of this commitment must be judged in relation to development contributions by rich countries in general, and particularly the finance of the Sustainable Development Goals.

As I have argued earlier this year, we can test that additionality in four ways.

First, we can assess it in terms of programmes or projects that would not have come about without the climate finance.

Second, we can assess whether the finance stimulates action in areas, such as forests, which would not otherwise be covered or financed adequately.

Third, we can assess if it mobilises new sources of financing, such as expansion of multilateral development banks for climate action, or carbon pricing revenues that would not otherwise have been forthcoming or available.

Four, we can assess it in terms of the scale of overall Official Development Assistance resources for climate action which is additional to what would otherwise have been to development.

Whilst there are always conceptual difficulties around additionality, these assessments should be done in an open and fair-minded way.

There are some useful ideas in the 2010 report of the United Nations Secretary-General’s High-Level Advisory Group on climate finance, of which I was part.

Let me turn now to the US$90 trillion that needs be invested worldwide in infrastructure over the next 15 years.

Most of this investment will be in emerging and developing economies.

Much, but far from all, of it will happen somehow, but we need both better quality and greater scale.

Investments in infrastructure are a means to an end.

Those ends are embodied in the Sustainable Development Goals.

At the heart of these Goals is the elimination of absolute poverty, which means securing a better life for all, and in particular, a world in which every child can survive and thrive.

And the Sustainable Development Goals embody, crucially and centrally, a sustainable future for our planet.

The scarcity of infrastructure is one of the most pervasive impediments to growth and sustainable development.

It can undermine the functioning of economies in so many ways.

Good infrastructure unshackles and removes constraints to growth and inclusion, while also fostering education and health.

Bad infrastructure kills people and leaves unsustainable economic burdens for future generations.

Furthermore, at a period of low world demand, a concerted focus on infrastructure can boost global demand in the short run while at the same time raising productivity and long-term growth.

We are at a critical moment in the transformation of the global economy, requiring massive investments in sustainable cities, energy systems and other infrastructure.

We have to remember that the world’s urban population will increase from 3.5 billion today to 6.5 billion by 2050, and that our forests, agricultural lands and water systems will come under tremendous pressures.

Too little and bad infrastructure will lock us into trajectories that cause lasting damage for this century and beyond.

Badly structured cities and polluting energy infrastructure can impose burdens and inflict damage for decades or centuries.

This is a defining moment.

We can take the opportunity or lose it.

We must therefore tackle the fundamental impediments that are holding back the quantity, and quality, of investment.

Government-induced policy risk worldwide is, by far, the most important of these impediments, particularly for infrastructure because of the longevity of investments and their inevitable and intimate links to government policy.

As a result, we tend to have a price for capital for infrastructure financing which is far too high, often 500 to 700 basis points above benchmark when long-term interest rates are close to zero.

And we are unable to mobilise the huge pool of private savings, probably US$100 trillion or more, that is held by long-term institutional investors, but very little is presently invested in infrastructure.

We should therefore simultaneously fix both the failures in government policy around infrastructure and the financial system.

One cannot wait for the other, and moving on one front alone will not produce the scale of investments needed.

The only way to tackle the scale of the challenge, and build a better and more productive infrastructure than we have had in the past, is through a concerted set of actions.

I laid these out in a paper with Amar Bhattacharya and Jeremy Oppenheim for the summit in Addis Ababa, but let me just mention the key elements in terms of policy and finance.

On the policy side, there is a need for national authorities to clearly articulate their development strategies on sustainable infrastructure.

Not one project at a time, but as comprehensive development strategies to support the Sustainable Development Goals and tackle the impediments that I have highlighted.

Investors need stronger ideas of where the economy and its infrastructure are going, if they are to manage risk and if the perceived risk is to be reduced.

The G20 can play an important leadership role in taking the actions needed to bridge the infrastructure gap and in incorporating climate risk and sustainable development factors more explicitly in infrastructure development strategies.

The G20 can change perspectives on, and set standards for, sustainable infrastructure.

On the finance side, the capacity of development banks to invest in sustainable infrastructure and sustainable agricultural productivity should be substantially augmented in order for them to pioneer and support the changes needed for better infrastructure.

Central banks and financial regulators could take further steps to enable the productive and profitable redeployment of private investment capital from high-carbon infrastructure to better low-carbon infrastructure.

The official community, including the G20, OECD, and other relevant institutions, working with institutional investors could lay out the set of policy, regulatory, and other actions needed to increase their infrastructure asset holdings from between US$3 and 4 trillion to between US$10 and 15 trillion, over the next 15 years.

Together this action on policy and finance can foster private sector investment, crucial to this whole story, and boost infrastructure investment overall in terms of the scale and quality needed, increasing the size of the economy and drawing in new finance.

But we will also need to tackle the market distortions and policy failures that undermine the quality of infrastructure investments.

The biggest distortions affecting the quality of infrastructure investments are pervasive fossil fuel subsidies, including the lack of carbon pricing, and especially a distorted price for coal.

The International Monetary Fund has recently estimated that the total cost of fossil fuel subsidies, including the failure to price in pollution and climate change which together contribute three-quarters of the total, is of the order of US$5.3 trillion a year.

We also know that the real price for coal is not US$50 per tonne, but well over US$200 per tonne when we take into account its impact on pollution and the climate.

These are not abstract externalities, but the killing of people now and in the future from air pollution and climate change, which are surely real costs by anybody’s standards.

As a result, incentives are heavily tilted towards bad infrastructure and against sustainability.

Wrongly, and perversely, high-carbon is still seen as the low-cost option.

So where does the analysis of what has changed since COP15 in Copenhagen leave an analysis of key factors for success at COP21 in Paris?

First they demonstrate that much, or even most, of the necessary action, country-by-country, is in the vital interest of the country itself.

Second the urgency is still greater than we thought.

There is great danger of lock-in to high-carbon systems as our economies are transformed, our cities and energy systems are constructed, and our land and forests continue to be damaged, degraded or destroyed.

Third, this underlines still more clearly the returns to, and importance of, collaboration, particularly on finance and technology.

Rich countries should be setting strong examples.

And there must be clarity, soundness and stability of policy.

Examples will come from across the world as we can now enter a period of extraordinary creativity, innovation, investment and growth.

These conclusions are of particular importance because we know that the ‘intended nationally determined contributions’ imply global emissions in 2030 that will be much higher than the paths generally estimated to be consistent with the goal of limiting global warming to no more than two centigrade degrees above pre-industrial average temperature.

Our analysis is that the pledges would mean global annual emissions in 2030 of about 55 to 60 billion tonnes of carbon-dioxide-equivalent.

This is a substantial improvement on a ‘business as usual’ pathway, which would mean emissions in 2030 of more than 65 billion tonnes of carbon-dioxide-equivalent.

But most climate model pathways that are consistent with a reasonable chance of avoiding global warming of more than 2 centigrade degrees have emissions in 2030 that are about 40 billion tonnes, and even lower if ‘negative emissions’ later in the century are not assumed.

So COP21 in Paris must not be regarded as a one-off opportunity to set targets, but rather it should be the first, and vital, step of many, with regular reviews of progress.

We must now recognise that the likely high levels of annual emissions over the next 20 years will imply that we must reach zero emissions of carbon dioxide in the second half of this century, as leaders at the G7 summit in Elmau in Germany earlier this year acknowledged.

A key test for the agreement from COP21 in Paris will therefore be the extent to which it maps out how we can, as a world, close the gap.

More broadly, the Paris summit will be a chance to build an understanding not only of the threats and risks posed by climate change, but also of the great opportunities that arise from the transition to a low-carbon economy.

Creating an understanding that there is no horse race between economic growth and climate action, and that richer countries must support poorer countries in making the transition to low-carbon growth by setting an example and through finance and technology, the summit in Paris should provide the confidence that can underpin a ramping up of ambition and thus should contribute strongly to the success of the summit.

A successful summit in turn further bolsters the confidence necessary for increased ambition.

Confidence will come from credible processes to review, assess and learn from experience.

Confidence will come from specific agreements to support collaboration on finance and technology, particularly from rich countries.

In this context, the US$100 billion per annum from rich to poor countries, promised at COP15 in Copenhagen and COP16 in Cancún, is an essential ingredient for building the confidence necessary for countries to commit to a process of ramping up ambition after Paris.

Confidence comes too from the analysis that shows the transition to the low-carbon economy combines strongly with development and poverty reduction.

And that analysis is being increasingly supported by examples from around the world on what is possible, and the evidence grows by the day.

The confidence to underpin a Paris agreement will also come from confidence in the ‘big development picture’ around support for the Sustainable Development Goals.

It is here that the international system, the multilateral development banks, including the new ones, the United Nations system, the G20, and countries working together, can play such a powerful role.

And COP21 in Paris should not just be for environment ministers and foreign ministers.

It must have the support and involvement of Presidents, Prime Ministers, economy and finance ministers as well.

Remember, this is all about development and growth.

This is about the two defining challenges of our century: overcoming poverty and managing climate change.

If we fail on one, we will fail on the other.