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Costing the Earth

The Stern Review on the Economics of Climate Change has forced even hardened neoliberals to acknowledge that there is a serious problem. But we need to look beyond Stern's emphasis on the market to provide a solution, writes Derek Wall

December 1, 2006
11 min read

The Stern Review is nearly 600 pages long and much of it is written in economese. It can be summarised in a line or two, though. In short, it argues that climate change is occurring; that it will cause chaos if it continues; and that the antidote to such chaos is market-based economics.

Its initial chapter on the scientific evidence for climate change moves through the technical complexities with a surprising burst of clarity. The message, buttressed with references from numerous scientific reports, is sobering.

Stern argues that ‘an overwhelming body of scientific evidence now clearly indicates that climate change is a serious and urgent issue’. This evidence suggests that if annual greenhouse gas emissions continue to grow at current levels, global temperatures will rise by between three and 10 degrees centigrade by 2100. The consequences are startling.

A four-degree rise in temperatures would mean entire regions of the world will be too hot to grow agricultural crops. Australia will be hit hardest. Glaciers that provide water for hundreds of millions of people are disappearing.

At the same time, 200 hundred million people live on coastal floodplains that are less than one metre above sea level.

Twenty-two of the world’s 50 largest cities are at risk from coastal surges. ‘The world’s major financial centres (London, New York and Tokyo) are all located in coastal areas,’ the report points out. ‘The insurance industry estimates that in London alone at least $220 billion of assets lie the floodplain.’Around 150 million people could be displaced by sea level rises.

The concentration of CO2 in the atmosphere has risen from 220 parts per million in the 19th century to 430ppm today. Stern argues that while adaptation is possible through sea defences, unless further growth is limited to keep CO2 to a maximum of 550ppm, which would require a 70 per cent cut in emissions, feedback mechanisms such as the thawing of permafrost containing methane will lead to disaster. (A recent study by the Tyndall Centre for Climate Change Research finds even this figure too high to prevent such a crisis. )

I could continue.

At its heart, the Stern Review offers a clear understanding of ecological feedback. The consequences of rising temperatures could be a little better than predicted, but are likely to be far worse. In this context, Stern argues, just 1 per cent of global GDP spent annually could prevent a 20 per cent fall in global economic activity by the middle of the 21st century.

Stern’s solution to climate change will make the average economist swoon. Sir Nicholas and his team have reached for their micro economic textbooks in the way that a Midwest preacher would reach for the bible. Economists are not centrally concerned with the ‘end of civilisation’ as we know it, social justice or ecological sustainability. They are out to maximise ‘welfare’. Conventional economics is based on utilitarianism, the greatest good for the greatest number. Costs must be minimised and ‘benefits’ maximised. Costs and benefits are measured in cash terms. Where supply and demand curves meet, overall benefits are maximised.

Viewed in these terms, environmental problems come down to unpaid costs. For example, the motorist pays the private cost of the car, petrol and other expenses of keeping on the road but does not pay for the ecological and social costs of car use. Economists argue that by calculating the monetary costs to society of pollution, congestion and the other ills from car use, and then making the motorist pay, efficiency can be restored.

Stern takes this approach. Climate change costs money, the cost can be measured and added to the price of all the things we do that lead to climate change. If consumers choose to pay and continue wrecking the planet, so be it. This shows that they are prepared to pay because they value driving 4x4s, fly-commuting to Hong Kong and generally indulging in a wasteful lifestyle. Stern suggests that while technological solutions must be promoted, awareness enhanced and forests protected, the essential policy response to climate change involves taxation and a global market in carbon to limit CO2 emissions.

Stern is genuinely concerned with the devastating effects of climate change. However, even a robust and sophisticated set of policy prescriptions based on the logic of ‘internalising externalities’ to remove ‘market failure’ has its limits.

Environmental taxes have a surprisingly Thatcherite logic. Making the polluter pay sounds radical but the polluters who pay the most tend to be the poorest. To take a local example, £2,000 a year in congestion charges is nothing to a city lawyer but an awful lot to a single parent. The congestion charge in London is likely, as a result of Stern, to be replaced by a system of road pricing across the whole of Britain. Despite a probable middle England revolt and confusion on the part of David Cameron, the wealthy will still be able to flaunt their 4x4s while the poor will be priced off of the roads.

This is consistent with a huge shift in recent decades, both in Britain and globally, from direct taxes on income and profits to indirect taxes on consumer items. Lower income and corporation tax has been replaced by higher value added tax and excise duty. The tax burden shifts from city workers, who in the last financial year enjoyed bonuses of £7. 5 billion, to those on the lowest incomes.

The much-vaunted green taxes will further push up the bills for the poorest and cut them for the wealthy. While taxes might seem a way of moving beyond the market, the logic of green taxes is simply to make the ‘price mechanism’ reflect costs. As Tom Burke, professor at Imperial College London, has observed,’The reality is that applying cost-benefit analysis to questions such as these [climate change] is junk economics … It is a vanity of economists to believe that all choices can be boiled down to calculations of monetary value.’

Market-based instruments, essentially involving carbon taxes and global emissions trading, are blunt as a means to achieve environmental sustainability. This is because they do not address the need for deeper social changes, let alone offer a framework for social justice. For instance, consumers will only shift out of their cars if alternatives exist. Yet Stern has nothing to say about the deregulation of bus services, among other things, which means that abandoning the car is not an option for many in rural areas.

In fact, markets generally work when we consume more. Take the example of postal ‘deregulation’, which is currently being pushed as part of an EU-wide process strongly supported by Britain. The likely result is that the Post Office will be privatised and forced to compete against new firms entering the market. To make a profit, it must seek to cut costs while increasing revenue. The results will be seen in terms of local post office closures, forcing individuals to travel further to access these services. At the same time, the Post Office has removed junk mail restrictions to increase revenue – yet the environmental impact of producing and transporting increasing quantities of glossy pieces of paper remains uncalculated.

The market-driven approach produces similar problems at a global level, where carbon trading schemes also mean that environmental considerations are secondary to profit.

Carbon trading, which has been reaffirmed at the recent UN Climate Change conference in Nairobi, commodifies the atmosphere. In place of regulation to prevent climate change, it offers a market in which countries buy and sell the right to pollute. This is the basis of the Kyoto protocol, which, ironically, is a product of US corporate lobbying – despite George Bush’s rejection of it. Many environmentalists are reluctant to point out the problems with this, thankful for crumbs of ecological comfort.

Carbon emissions are hard to measure and policing such a market is difficult. While it produces opportunities for investors, rich countries can buy the right to pollute. At worst, this can even mean that those with the most ecological lifestyles are kicked off their land, displaced by fast-growing eucalyptus plantations that are used as ‘offset’ credits.

The market for carbon is an institutional version of the consumerist carbon offset process (see Kevin Smith, this issue). One can clean up one’s act and sell the right to pollute to others, or buy credits through often-dubious offset schemes.

But this emissions trading process is a form of global ‘green’ imperialism, according to campaigners like the Durban Group for Climate Justice. ‘The problems with carbon trading are compounded when carbon credits are used to fund destructive projects like large dams and industrial tree plantations, which is a frequent occurrence in the global South,’ argues Cristian Guerrero, a climate justice organiser based in Mexico. ‘This never benefits the local populations who become displaced,’ he says, ‘and it harms biodiversity too.’

In a letter to Kofi Annan, Soumitra Ghosh of the National Forum of Forest Peoples and Forest Workers in India notes: ‘We’re creating a sort of “climate apartheid”, wherein the poorest and darkest-skinned pay the highest price – with their health, their land, and, in some cases, with their lives – for continued carbon profligacy by the rich.’

Stern argues that climate change will impact most on the poor but does not describe how carbon reduction through trading or tax can meet the goal of global social justice. This is not to say that the Stern Review is without its merits. It is a weapon in the fight against global warming because it shows even the most hardened neoliberal that it is vital to deal with the problem. For example, the Economist recently argued that ‘the world should invest a small proportion of its resources in trying to avert the risk of boiling the planet’. Stern is clearly aimed at the climate sceptic in the White House, and will be part of the process of getting Democrats to sign up to Kyoto.

The point is not merely to criticise Stern but to look at the politics of the path beyond Stern. The logic of market based instruments such as green taxes and a global carbon market should make way for more radical policies.

The Green Party has long backed more redistributive and greener taxes by simply replacing VAT with green taxes. George Monbiot’s call for an end to road building and new airports is also essential. The international Rising Tide network has identified a number of key policies and social changes to tackle the root causes of climate change, including a moratorium on all new fossil fuels extraction; the rapid phase-out of coal for energy; cancellation of airport expansion plans, a tax on aviation fuel and plane tickets, and an end to short haul flights; abandonment of fossil fuel-intensive industrial agriculture in favour of decentralised, locally-grown, sustainable food sources; drastic increases in energy conservation; and the immediate transition to clean energy sources such as wind, solar and tidal power.

‘Contraction and convergence’, whereby every individual on the planet is given the right to use an equal and declining quantity of C02, provides a framework for such radical but essential measures. The poorest and the richest would share the same allowance and an absolute limit on greenhouse gas growth could be created.

Hair-shirtism is no option. We must make the move to an ecologically sustainable society as enjoyable as possible. Local production for local need, a huge expansion of public transport and renewables, zero waste and all the rest are possible. Ecologically sensitive and diverse forms of economics that meet the needs of those most in need must be preserved and extended.

The most important part of change will be the demand that policy is governed not by the needs of more economic growth but on the basis of what is good for humanity and the rest of nature. The real lesson of Stern is that to create a liveable future we will need to develop more sophisticated and detailed eco-socialist solutions. Climate change is a product of capitalism, and its solution will come about by creating practical alternatives to the market. This is a political task, not simply a form of accountancy. Derek Wall is a visiting lecturer in economics at Goldsmiths College and a prominent member of the Green Party. He blogs at The Stern Review is available, both in summary and in full, with all submissions and other documents, at

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