A time for action on climate change and a time for change in economics

A version of this paper has also been published in The Economic Journal.

In this paper, Nicholas Stern argues that the COVID-19 and climate crises, and the weaknesses that produced them, should be tackled together and that the response must be a new sustainable, resilient and inclusive approach to growth and development. The paper explores relevant policies and actions and then turns to the changes to economics necessary to pursue these ideas and imperatives.

The core finding of The Economics of Climate Change: The Stern Review – that the costs of inaction on climate change are much greater than the costs of action – was compelling when the Review was published in 2006; 15 years on it is even stronger. While greenhouse gas emissions have continued to rise and the impacts of climate change have manifested faster and with greater intensity than expected, the costs of clean energy technologies have been falling further and more quickly than anticipated. Any reasonable estimate of the costs of inaction would be still higher now, and the costs of action lower, than in 2006. The deeper understanding of the problem that we now have, the paper argues, implies that we must shift the focus of our economic analyses towards the dynamics of change, the fostering of investment and innovation necessary, the management of disruption, and the great opportunities that lie in a new form of development.

Key points for decision makers

• This paper is based on Nicholas Stern’s past president’s address to the Royal Economic Society Conference on 12 April 2021.
• The author argues that over the coming years investment will be central to actions taken to recover from the COVID-19 pandemic, to transform countries’ development pathways, and to achieve net-zero greenhouse gas emissions. He also calls for rapid technological change, including the adoption of renewable energy technologies and electric vehicles, for the world to decarbonise its economies in just three decades and drive sustainable increases in productivity and living standards.
• The necessary increase in investment, it is argued, will require strong policy, including both carbon pricing and complementary policies, such as regulation, standards and investments in R&D, as well as a positive investment climate, including the functioning of relevant governmental institutions. The author also emphasises that the necessary investment will only be realised if it can be financed in a way that helps reduce, share and manage the associated risk.  
• On the whole, the approaches to examining economic policy towards climate change that are standard in the economics literature have failed to grasp the nature and pace of the necessary economic transformation, and have biased results against strong ambition. Early attempts to examine climate and growth involved the development of Integrated Assessment Models but the potential reality of climate change is of a magnitude way beyond what can be analysed within that framework.
• The author states that economic analyses of climate change should capture extreme risk; recognise that many relevant markets have important failures, that crucial markets may be absent, and that there are limits on the ability of government to correct these market failures or absences; embody rapid change in the structure of economies and technologies; examine rapid changes in individuals’ beliefs and preferences; and take into account the unequal distribution of risks and impacts, across and within generations.
• The paper concludes by recognising that understanding and managing the extreme risks associated with climate change and the necessary rapid transformation of economies is not only urgent and important, but also a fascinating research and policy agenda.