> Climate Change Edition

Commentary by Bill Bowen, ITS Global for the Australian APEC Study Centre

For the first time in human history, it is feasible to contemplate the eradication of poverty. Yet the Stern Report and the Garnaut Review on climate change are advocating an approach to climate change that would increase, not decrease, poverty.

In the developing world, the percentage of the population living on less than US$1 a day has fallen from 40 percent in 1981 to 18 percent in 2004. Assuming these trends continue, the World Bank has forecast that the proportion of the population living in extreme poverty in the developing countries will fall from 29 percent in 1990 to 12 percent in 2015.

The impact is uneven however. In Sub-Saharan Africa, the share of the population in extreme poverty has remained static at 41 percent since 1981, with the region now accounting for 30 percent of the world’s extreme poor.

They are part of the bottom billion poor, as described by Oxford Professor, Paul Collier, who points out that economic growth is the essential anti-poverty tool. Research by the World Bank and the IMF shows a one percent growth in GDP leads to a 1.3 percent reduction in poverty.

Economic growth is the best way to continue to reduce poverty. However the Stern Report recommends we decrease growth.

Stern argues the world can afford to reduce world growth by an annual average of one per cent (his report concedes his strategy could cost as much as 5 percent) to reduce emissions of greenhouse gases.

Analysis published by the Australian APEC Study Centre at Monash University last year (available on www.apec.org.au/docs/07_SR.pdf ) shows a reduction of one percent in world growth would have far more dramatic impacts on individual economies, particularly poor ones.

It would translate into a cut in GDP in China of around 15 percent, 13 percent in India, 12 percent for most ASEAN economies and four percent of GDP for the United States. The impacts on ordinary people would be greater, reducing money available for household expenditure by them by nearly 30 percent in China and between 15 and 30 percent for most developing countries. The estimate for the US is 11 percent and the average estimate in Europe is 6 percent.

The Stern strategy would reverse the current trends to eliminate poverty. It would increase the number of people in poor countries in absolute poverty.

The Stern report argues that the cost to developing countries will be greater if dramatic action to reduce greenhouse gases is not taken quickly.

Stern’s position is decidedly outside the mainstream of development economists and enjoys little support among leading economists.

Most consider he significantly overestimated the economic benefits of the immediate and substantial cuts in global greenhouse gas emissions. The Stern report expressed the benefit as equivalent to a cost of US$85 per ton of carbon.  This ''benefit'' is gained by avoiding the cost of not taking dramatic action (deep cuts) to reduce emissions.

Stern is a newcomer to climate change economics. Most leading economists in this field reject his analysis. The leading climate change economist in the US, Professor Richard Nordhaus at Yale, has estimated the cost of not taking dramatic action at US$7 per ton of CO2-e - less than one tenth of Stern’s estimate.

The Nordhaus estimate is representative of the estimates in the peer-reviewed literature on the subject. It is the mainstream assessment.

More importantly, Nordhaus considers that cost easily affordable by developing countries in the future, provided continuing economic growth enables them to raise their living standards.

This question, how people value money today compared with how they value it in future, the ''discount rate'', is the part of the Stern report over which economists took issue. They are very critical.

The Stern Review assumed that:

• the pure rate of time preference was virtually zero; and
• the interests of future generations should be given equal weight to those of the present
  generation.

Neither assumption is in accordance with mainstream economic thinking. Yet reliance on these assumptions accounts for virtually all of the differences between the modeling results used in the Stern Review and those used in peer reviewed literature, particularly for assessing the impacts of substantial and immediate emissions cuts, such as by Nordhaus.

The Stern Review also significantly underestimated the economic costs of the immediate and substantial cuts in global greenhouse gas emissions. The Review concluded that the 'upper bound' of the cost of stabilization ''…is likely to be around one percent of GDP by 2050''.

By its own admission the Review acknowledged that its central estimate was '' …subject to important uncertainties'' and that the resource cost of mitigation could be as much as 5 percent of GDP by 2050.

As shown above, a one percent cut would have dramatic effects on economic growth in China and other countries with large numbers of poor.

It is perverse that the Stern Report should argue its strategy is in the interests of poor countries when it is so plainly contrary.

Eight global economist laureates joined the ''Copenhagen Consensus'' in 2004 that climate change ranked nine out of the ten most pressing issues confronting poor countries today. Leading the list was poverty.

The Productivity Commission described the case made by Stern more as advocacy than objective analysis.

The Garnaut Review appears to have accepted Stern’s basic analysis and assumptions. 

If it retains in that position, it too will find itself sidelining the human cost and the importance of eradicating poverty in the process of developing strategies to tackle climate change – with implications for Australian leadership in the climate change negotiations and for our economic relations with North East Asia.
 
17 March 2008

Bill Bowen is Principal Consultant at ITS Global.  He was formerly an advisor on Climate Change in the Department of Prime Minister and Cabinet and the Department of Foreign Affairs and Trade.  He also worked at the World Bank.