Cover story on climate change economics

In: Uncategorized

13 Dec 2006

This week Fund Strategy published a cover story by me on the economics of climate change. Unfortunately it is too long to fit on this blog and there is no direct internet link. However, I have pasted one of the boxes below:

The discussion on the economics of climate change is typically steeped in the culture of precaution. Even when the language of catastrophe is eschewed – as it is in the Stern report – similar conclusions can be drawn from a precautionary approach. Essentially the idea is that because the future is so uncertain, it is necessary to be particularly cautious about the appropriate action to take. The idea that climate change could be irreversible and harmful to the whole of humanity adds weight to the precautionary approach.

Precaution was certainly built into the Stern review. In a section on “risk and uncertainty” it states: “The analytical approach [in the report] incorporates aspects of insurance, caution and precaution directly, and does not therefore require a separate ‘precautionary principle’ to be imposed as an ethical criterion.”

To Stern, and other advocates of a precautionary approach, this outlook is based on common sense. It is akin to buying insurance for a house except, in relation to climate change, there is only one Earth. If Earth is destroyed or seriously damaged, there is no chance of moving to another planet.

But the idea of precaution is not as straightforward or positive as is generally assumed. An alternative would be to argue that a timid approach towards humanity’s relationship with the environment itself entails risks. The bolder and more ambitious the development plans, the better able humans will be to control their environment. In contrast, a limited approach to development leaves humans prey to environmental changes.

Despite seemingly ambitious rhetoric elsewhere, the low horizons of Stern are apparent in its definition of sustainable development: “Future generations should have a right to a standard of living no lower than the current one.” Such a miserable definition runs directly counter the experience of the past two centuries. Since about 1800 the level of output per person has risen enormously. As a result, humans have come to live longer, healthier and more fulfilling lives.

Arguably, a precautionary approach is the worst possible response to climate change. It deters humanity from developing the means to control its environment. Greater development, and more widespread prosperity, enhance the ability of humans to create a better life for themselves.