Comment: Speaking at the Royal Society, top climate economist reflects on challenges and opportunities a decade after his seminal review into implications of a warming world

By Lord Stern of Brentford

I am going to speak about five issues. First, I will outline the risks, the required action and the global agenda.

Next, I will speak about the urgency and scale of action required.

Third, I will describe the 21st century growth story, and how to deliver on the global agenda.

Then I will turn to the importance of building sustainable infrastructure.

And finally I will look forward to the next ten years and the prospects for the future.

Let us begin by considering where we may be headed on our current pathway in terms of atmospheric concentrations of greenhouse gases and global average temperatures.

It is worth remembering just how robust the science of climate change is, built on two centuries of theory and evidence since Joseph Fourier first observed that the Earth is warmer than it otherwise would be without its atmosphere.

Emissions of carbon dioxide and other greenhouse gases from the burning of fossil fuels and other human activities increase concentrations in the atmosphere, trapping more infra-red radiation around the Earth, leading to the rise in global mean surface temperature that has been recorded instrumentally since the mid-19th century.

Importantly, the evidence has been growing ever stronger that the risks of unmitigated climate change are immense.

Current annual emissions of greenhouse gases are about 50 billion tonnes of carbon-dioxide-equivalent, compared with about 41 billion tonnes in 2005, so we are still on an upward trend.

Atmospheric concentrations of greenhouse gases are rising rapidly, and have now reached around 450 parts per million of carbon-dioxide-equivalent.

We are adding to greenhouse gas levels by more than 2.5 parts per million of carbon-dioxide-equivalent every year, and that rate is likely to accelerate with little or weak action to reduce emissions.

This rate has risen from about 0.5 parts per million of carbon-dioxide-equivalent per year between 1930 and 1950, one part per million from 1950 to 1970, and 2 parts per million between 1970 and 1990.

Inaction or weak action over the rest of the century, such that global emissions follow the equivalent of the high emissions pathways considered by the Intergovernmental Panel on Climate Change for instance, could take us to well above 850 parts per million of carbon-dioxide-equivalent by 2100.

That would result in the possibility of global mean surface temperature reaching more than 4°C or 5°C above its level in the second half of the 19th century.

Such rises in temperature would create risks that are unprecedented for humankind.

The potential damage from climate change intensifies as the world gets warmer.

Annual global mean surface temperature is already close to 1°C higher than its pre-industrial level, and some months of this year were more than 1.5°C above pre-industrial level.

Hence we are approaching the edge of the range of global mean temperature that has existed over the past 10,000 years, known as the Holocene epoch, during which human civilisation has developed.

The stable climate provided the conditions necessary for the cultivation of cereals, which allowed the formation of villages, and the possibility of surpluses, leading to trade.

We are already seeing the impacts around the world today associated with only 1°C of warming, with shifts in precipitation, the decline of glaciers and ice sheets, and rising sea levels.

Yet these are comparatively small compared with the risks we would face in the future from unmitigated climate change.

There is strong and growing evidence that a rise in global mean surface temperature of more than 1.5°C above pre-industrial level would have very serious consequences, and an increase of more than 2°C would carry still higher risks.

For instance, according to the most recent assessment by the Intergovernmental Panel on Climate Change, the last interglacial period about 125,000 years ago was probably no more than 2°C warmer than pre-industrial levels, yet global sea levels were about 5 to 10 metres higher than today.

Recent modelling suggests that if the rise in global mean surface temperature is held at 1.5°C, sea level rise would tail off during the next century, whereas 2°C of warming would mean sea level rise continues for many centuries.

That is an indication that even 2°C of warming would eventually lead to a radical redrawing of the world’s coastlines.

While such a sea level rise would not happen immediately, we do not know how quickly the land-based ice sheets in Greenland and Antarctica might destabilise.

Indeed, some researchers think that the destabilisation of large parts of the West Antarctic ice sheet has already become unstoppable.

This is just one example of a so-called tipping point, beyond which impacts accelerate, become unstoppable, or become irreversible.

We do not know where these tipping points lie, but we know that there could be many such examples, including the thawing of the permafrost, leading to the release of carbon dioxide and methane, or the die-back of the Amazon and other tropical rainforests, which would reduce the take-up of atmospheric carbon dioxide.

Such tipping points could have rapid and potentially catastrophic impacts.

And we do not know how many tipping points might lie between today’s climate and a world that is 2°C warmer than pre-industrial level.

And if we go beyond warming of 2°C, to 3°C or more, we will create a climate that has not occurred on Earth for millions of years.

That is far beyond the evolutionary experience of modern Homo sapiens, which have only been around for less than 250,000 years.

Warming of 4°C or 5°C would likely be enormously destructive.

The reasons we live where we do would be drastically changed, usually through too much or too little water, as both floods and droughts increase in different parts of the world, and sea level rises across the globe.

These radical changes would cause the migration of hundreds of millions, perhaps billions, of people, potentially leading to severe and sustained conflict.

That is the future our children, grandchildren and future generations face if we do not act.

It is those risks that helped to focus the attention of governments last year as they considered the creation of a new global agenda.

The milestone events of 2015 have set a new global agenda focused on three simultaneous challenges: re-igniting global growth, delivering the sustainable development goals, and driving strong action on climate change.

At the centre of all three of these challenges lies sustainable infrastructure.

Well-designed infrastructure can be pro-growth, pro-poor, and pro-climate.

But it must be delivered with much greater urgency and scale.

Delay is dangerous.

The uncertainty and ‘publicness’ of the causes of climate change might lead us to conclude that we should delay action until we learn more.

But that would be a profound mistake.

The ‘flows’ of annual emissions of greenhouse gases into the atmosphere has a ratchet effect on atmospheric concentrations because carbon dioxide and other gases remain for decades or even centuries.

In addition, long-lived high-carbon capital and infrastructure create a ‘lock-in’ effect, which results in either a commitment to high emissions, or the early scrapping of capital and infrastructure, so-called ‘stranded assets’.

Rapid urbanisation and the building of infrastructure makes the dangers of lock-in even more acute.

The later the action, the less the likelihood of holding global warming to “well below 2C”, the target of the Paris Agreement, and the more costly it will be to achieve it.

Delay also increases the reliance on either unproven future technologies, particularly to produce so-called negative emissions, or on more ambitious action in the future, which may not be politically feasible.

So what can we do to hold warming to well below 2°C?

We have the choice of doing a little more earlier and a little less later, or vice versa, but the shape of feasible paths for annual emissions are similar.

To stabilise global average temperature, atmospheric concentrations of greenhouse gases must be stabilised which requires net zero annual emissions.

The lower the target threshold for the rise in global average temperature, the earlier the necessary achievement of net zero annual emissions.

Most pathways for annual emissions that meet the target of holding warming to well below 2˚C require zero net annual emissions well before the end of this century.

That will mean net negative emissions in some major sectors well before the end of the 21st century, because some sectors are unlikely to be able to reach net zero emissions.

The pledges on post-2020 annual emissions that were contained in the ‘intended nationally determined commitments’ collectively are consistent with annual global emissions of around 55 to 60 billion tonnes of carbon-dioxide-equivalent in 2030.

Whilst this would be an improvement on ‘business as usual’, which would mean annual emissions of 65 to 68 billion tonnes of carbon-dioxide-equivalent, a path that is consistent with the goal of holding warming to well below 2˚C would need to be about 40 billion tonnes per annum of carbon-dioxide-equivalent or less by 2030.

So holding the rise in global average temperature to well below 2°C requires immediate action.

Fortunately, such action is consistent with the 21st century growth story, and delivering on the global agenda.

Sustainable growth requires strong investment.

If policy-makers provide clear direction for new investments, they can realise many significant benefits.

They can create new sources of economic growth, and lay the foundation for sustainable growth in the long term.

They can make our cities more resilient, more efficient, less polluted, and less congested.

They can make economic growth more inclusive growth, with for instance better access to jobs in more mobile urban populations, and more communities connected to decentralised power generation.

They can protect forests, land, ecosystems, water sources and biodiversity.

Although the benefits are many and significant, there will be some disruption to the status quo.

It will be important to manage constructively the dislocations in some parts of the economy, and to recognise the costs of change.

There is currently no shortage of savings around the world, with many companies holding surplus capital.

The challenge that policy-makers face is to create an environment in which great investment opportunities can be turned into real investment projects.

Strong investment will only come about if governments offer clear and credible direction and policies.

Policy-makers must recognise that the urgency is still greater than we thought.

There is great danger of lock-in to high-carbon systems as our economies develop and as the pace of urbanisation accelerates in developing countries.

Spurring low-carbon, climate-resilient growth requires the redirection of investment and financial flows over long periods.

Policy-makers must act quickly, but also consistently.

The consistency, clarity and credibility of policies to both tackle climate change and to advance economic development are imperative.

Policy makers must set a clear, long-term direction of travel.

Government-induced policy risk is the biggest deterrent to investment worldwide.

While policy-makers cannot offer certainty in an uncertain world, they can be ‘predictably flexible’.

Circumstances will change and there will be learning and technological advances.

Indeed, a key objective is to bring about changes.

As these changes occur, policies will need revision, but the approach to, and criteria for, revision should be made clear.

The market failures holding back the transition to low-carbon economic growth and development go beyond the failure of prices of products and services that emit greenhouse gases to reflect the costs they impose on others through the damage caused by climate change.

There are six key market failures relating to climate change.

Each failure requires a different policy or instrument to correct it, but collectively these actions should be mutually reinforcing.

The greenhouse gas market failure can be addressed through carbon pricing, implemented through carbon taxes, cap-and trade, or regulation.

The market failure relating to research, development and deployment can be corrected by tax breaks, feed-in tariffs for deployment, and public-funding for research.

Imperfections in the capital and risk markets can be targeted by risk-sharing and risk reduction through guarantees, equity, feed-in tariffs, and floors on carbon prices.

Feed-in tariffs can be used to tackle these three sets of market failures.

Green investment banks and infrastructure development banks can also help to reduce policy risk, while providing leverage, ensuring a longer-term horizon for investment decisions, and offering encouragement through the power of the example.

The market failure relating to the absence of networks can be corrected by government frameworks to develop electricity grids, public transport, broadband, recycling and community-based insulation schemes.

The market failure connected to information can be corrected for consumers through labelling and information requirements on cars, domestic appliances, and products more generally, and to build greater awareness of the options on offer.

Finally, correction of the large market failure relating to co-benefits can be achieved through valuing ecosystems and biodiversity, valuing energy security, and properly regulating dirty and dangerous technologies.

The damages caused by air pollution from the burning fossil fuels are immense, and of the order of US$3-4 trillion every year, according to an analysis published by the International Monetary Fund last year.

Governments, businesses and the public all need to work together to bring about the scale and urgency of action required.

Governments, particularly the G20 nations, should commit clearly to the global agenda of sustainable growth and sustainable infrastructure in order to create the confidence that investors need in the overall direction of policies.

The G20 have an important leadership role to play by taking the actions needed to foster the necessary infrastructure and incorporating climate risk and sustainable development factors more explicitly into their economic plans.

Companies should invest more strongly in research and development to drive the new wave of innovation.

Businesses should also strive for clean supply chains, greater energy efficiency, which could lead to about half the emissions cuts required, and by operating internal carbon prices during decision-making.

Automobile, aircraft and shipping manufacturers can promote and ramp up production of clean vehicles, to replace older dirty models.

And the public can exert pressure on both governments and businesses, as voters, citizens and consumers.

Particular attention must be given to the institutions for prices, innovation and finance.

The global understanding of the importance of carbon pricing must be deepened, including through initiatives such as the Carbon Prices Leadership Coalition.

There must be a strengthening of investment frameworks, institutional capacities and policies.

The regional and national development banks, together with the organisations that distribute aid and climate finance, can provide information, incentives and facilities to promote clean and energy efficient infrastructure.

The development banks can also leverage private capital.

For instance, the Green Economy Transition initiative by the European Bank for Reconstruction and Development has invested €20 billion since 2006 in 22 countries, partnering with local financial institutions.

And there must be a ramping up of investments in clean technology development and deployment.

The Mission Innovation initiative was jointly announced at the Paris climate change summit last year by 20 countries, including the United States, China and the European Union.

These countries have committed to doubling their public investments in clean energy research over the next 5 years.

Banks, including national and regional development banks, together with regulators and the wider finance community, such as the G20 and members of the Organisation for Economic Cooperation and Development, should work to mobilise lending capacities, and foster productive and profitable private capital.

The capacities of the development banks must be expanded, to foster profitable and long-term capital.

Importantly, the finance community must heed the warnings of Mark Carney, the chair of Financial Stability Board, about the risks that climate change poses, and companies should fully implement the recommendations of the Task Force on Climate-related Financial Disclosures which will report later this year under the chairmanship of Michael Bloomberg.

In addition to Governments and businesses, cities must also be drivers of the transition to low-carbon growth and development.

The 200 largest metropolitan economies in the world host 20% of the global population yet generate 46% of global GDP.

But cities are the main source of global annual emissions of greenhouse gases, and they are growing rapidly.

Cities are also particularly vulnerable to climate risks, including floods, droughts and heatwaves.

Crucially, cities are well placed to benefit from strong action against climate change, which will boost innovation, increase efficiency, reduce noise, cut congestion and decrease pollution.

This will create and attractive environment for skilled labour, entrepreneurs, innovative firms, and other components of economic strength.

In cities and elsewhere, infrastructure is at the centre of the story of sustainable development.

The expected future emissions from the world’s existing power plants alone would be sufficient to create a 50 per cent chance of global warming of more than 2°C.

In order to achieve the Sustainable Development Goals and the targets set in the Paris Agreement, while spurring economic growth and development around the world, global infrastructure investment from now on must nearly all be clean and green.

In particular, sustainable infrastructure holds the key to achieving many of the 17 sustainable development goals, ranging from making cities and human settlements resilient and sustainable, to ensuring access to affordable and clean energy for all.

The next 10 to 20 years are of crucial importance.

Long-lasting infrastructure investments on scale will need to be made in our cities, and in our energy, water and transport systems.

The huge anticipated investment needs for sustainable infrastructure are driven by three key factors.

The aging infrastructure in advanced economies.

The higher growth and growing importance of emerging market and developing countries in the global economy.

And the structural changes in the emerging market and developing countries, including rapid urbanisation from around 3.5 billion people today, about half of the global population of over 7 billion, to 6.5 billion by 2050, or 70% of a global population of over 9 billion.

These factors together represent a transition of historic proportions.

Altogether, US$80-$90 trillion in infrastructure investments will be required over the next 15 years.

That is even greater than the current existing stock of infrastructure.

One way or the other, most of this infrastructure will be built, but how it is done will have a crucial bearing on the outcomes for growth, development and climate.

But scaling up the investments in infrastructure will be a huge challenge.

Over the past decade, annual infrastructure investment globally has increased by US$1 trillion, reaching an estimated US$3.4 trillion in 2014.

China alone accounts for around 40% of global investment in infrastructure, more than the developed world combined.

Given the huge investment needs, annual infrastructure investment will need to rise to US$5.5-$6.0 trillion per year on average between 2015 and 2030.

Emerging market and developing countries will need to account for almost 70% of the required increase, with developing countries other than China accounting for the bulk of investments.

A major shift will also be needed in the composition of infrastructure towards low-carbon investments.

These overall cost of these infrastructure investments will not be any higher because there will be significant reductions in the costs of low-carbon technologies and downstream savings.

But low-carbon investments do involve a higher proportion of upfront capital costs.

Governments and businesses must recognise this crucial point that making infrastructure sustainable requires a shift in investment, but does not need to cost more.

This message most also be appreciated by the development banks, which can play a catalytic role in the building of sustainable infrastructure.

There is no current shortage in savings in the world, but there are major obstacles in transforming investment opportunities into real investment demand, and major difficulties in bringing forward the right kind and scale of finance at the right time.

To create the right conditions for investment, strong government policy is required.

But there is a key role for the national, regional and multilateral development banks in supporting investment by enhancing the quality of projects, reducing risks, and crowding in private finance.

The involvement of development banks in projects imparts confidence, reduces risks, brings the relevant investment instruments, and encourages the participation of other sources of financing, both at the initial phase and once the project reaches maturity.

Hence, the development banks bring down the cost of capital, which is absolutely critical for ensuring the quantity and quality of sustainable infrastructure.

As trusted conveners, the development banks can help bring together governments, the private sector, investors and civil society, and help to establish models that can be replicated and scaled up.

In this way, the development banks can catalyse change to make infrastructure more sustainable.

But this can only happen if there is an expansion of the development banks.

The development banks will need to increase their infrastructure lending five-fold over the next decade, from around US$30-40 billion per year to over $200 billion per year in order to help meet overall infrastructure financing requirements.

Augmenting the lending capacity of the development banks is also the most effective way for developed countries to meet their commitments on climate finance, and to ensure that this finance has the maximum development and climate impact.

The Paris Agreement incorporates the commitment for flows of US$100 billion per year in public and private climate finance from developed to developing countries.

Combined with official development assistance, climate finance and export credit agencies, this total pool of development finance could be used to mobilise a much larger sum of private capital.

The key will be to put together viable and well-structured financing packages where the development banks have a comparative advantage.

Based on past experience, it should be possible to mobilise between two and four times the level of development finance through total private capital.

The newly established multilateral development banks, such as the Asian Infrastructure Investment Bank and the New Development Bank, or BRICS, Bank, are increasingly a source for financing infrastructure in emerging market economies.

The first four investments of the BRICS Bank that were announced as of April 2016, a total of US$811 million in loans, are in renewable energy or clean grid infrastructure development in Brazil, China, India and South Africa.

And the Asian Infrastructure Investment Bank is committed to supporting ‘clean and green’.

The presence of a multilateral or national development bank brings extra confidence in policy and skills, and ensures the appropriate mix of equity, long-term loans and other kinds of finance.

Such backing can take projects through the difficult initial phases, and make them suitable eventually for institutional investors.

Mobilising both long-term debt finance and the large pool of institutional investor assets for low-carbon infrastructure can boost, and mutually reinforce, confidence.

And successful examples can act as powerful multipliers.

All this can amount to trillions of dollars of investment in sustainable infrastructure.

Let me now turn to the prospects for the future and the criticality of the next 10 years.

First, let us consider the urgent need and opportunities for ramping up ambition.

Our climate performance is currently off-track.

Collectively, the ‘nationally determined contributions’ for the Paris Agreement are insufficient to meet the goals of holding global warming to well below 2°C and achieving zero net emissions during this century.

The next 10 years will be absolutely crucial if we are to get on track.

There is grave danger of lock-in of emissions.

What we do in the next 10 years will determine our progress for the next 20 years.

The window of opportunity for making the right choices is uncomfortably narrow because bad infrastructure and other investments can lock-in capital, technology and emissions patterns for decades.

And the remaining carbon budget for well below 2°C is shrinking rapidly as emissions continue to ratchet up atmospheric concentrations.

On the other hand, there is much clearer recognition around the world now, as shown by the Paris Agreement, of not only the immense risks of unmitigated climate change but also the great attractions that lie in the transition to low-carbon and climate-resilient economic growth.

We have a unique opportunity now, with historically low interest rates, rapid technological change, particularly in energy production and use, digital communications, new materials, biotechnology and construction, coinciding with a period of strong investment in infrastructure to build a new path of sustainable growth.

But if we do not seize this opportunity quickly, the target of holding global warming to well below 2°C will soon be out of our reach, with grave consequences.

The next 20 years will be a decisive period in world history, as I pointed out last year in my book ‘Why Are We Waiting’, and as the Global Commission on the Economy and Climate highlighted in its report on ‘Better Growth, Better Climate’ in 2014.

We all share a deep responsibility, as well as facing a great opportunity.

The policies and actions of the next 10 years will shape these 20 years.

The next 10 years can chart the way to a much better future.

We can create a world in which our energy systems are efficient and clean.

It will mean a radical improvement in energy efficiency across industry, heating and transport.

It will mean that the power systems of most countries become largely clean, and coal use ends unless burned with carbon capture and storage technology.

It will mean the production of new electric and clean transport overtakes production of new fossil-fuel-powered land transport.

We can create a world in which our cities are healthy, innovative, efficient and resilient places to live and work.

It will mean that cities have to tackle greenhouse gas emissions and air pollution together, by reducing congestion, promoting low-carbon transport, and ensuring strong improvements in the energy efficiency of buildings.

It will mean cities develop much greater climate resilience, against floods, droughts and heatwaves for instance, particularly in developing countries.

We can create a world in which policy sets the framework for the private and financial sectors.

It will mean every country implements ‘nationally determined contributions’ consistent with limiting global warming to well below 2°C.

It will mean the major economies double their public and private investment in clean energy research and development.

And it will mean the widespread adoption of national policies to reduce greenhouse gas emissions, including strong prices on carbon.

We can also create a world in which our food systems are more resilient, with much lower embodied carbon emissions, and our ecosystems thrive.

It will mean an end to deforestation, and programmes of land rehabilitation and of afforestation are widespread.

And it will mean agriculture becomes more sustainable, by lowering emissions and becoming more resilient to the impacts of climate change.

Our response must be swift and strong now, but our actions must also deliver radical change later this century.

We must build the right infrastructure within the next 10 to 20 years.

But the agenda for action is not just about building the right infrastructure, but also about what we invent and how we innovate.

Around three-quarters of energy use and emissions occur outside the power sector, in heating, industry and transport.

Innovation and research are crucial in these areas.

The work of Energy Transition Commission under Adair Turner and Jeremy Oppenheim could yield important results.

Future possibilities include the introduction of hydrogen for heating, the implementation of carbon capture and storage in industry, the growth of electricity and hydrogen to power land transport and biofuels for air travel.

These changes could mean the global power sector is responsible for half of energy generation in the future, but we can make the power sector entirely clean.

There will need to be far greater resource efficiency everywhere, and the development of a circular economy, with greater re-use and recycling.

In these, as in so many areas, research and innovation will be crucial.

A fundamental question we have to answer is what can we do to deliver negative emissions?

Stabilising global average temperature means stabilising atmospheric concentrations of greenhouse gases, which will require the achievement of zero net emissions.

Zero net emissions can only be achieved if we reach negative emissions in some activities and areas because there will be other areas in which emissions cannot be eliminated altogether.

We are already perilously close to overshooting the atmospheric concentration that is consistent with the goal of the Paris Agreement of holding global warming to well below 2°C, so we are likely to need negative emissions.

What can be done to achieve negative emissions?

Carbon capture and storage technology is key.

Analyses by the International Energy Agency and others show that carbon capture and storage is likely to play an important role in reducing emissions.

Ten countries, together responsible for about a third of global annual emissions, explicitly referred to carbon capture and storage in their ‘intended nationally determined contributions’ submitted ahead of the Paris climate change summit.

These included key countries such as China, Canada and Saudi Arabia, along with less developed countries like Malawi, which expressed interest in the technology conditional on its economic feasibility.

But there are not many options for sustained negative emissions on scale.

Some negative emissions can be achieved by growing and intensifying forest cover, or by rehabilitating degraded land and soil to capture more carbon dioxide.

There is also the possibility of using bioenergy with carbon capture and storage, as well as innovative geoengineering methods of carbon dioxide removal.

Forests and land rehabilitation could play a strong role for a while but not for as long as we would need.

Therefore negative emissions technology must be a strong priority for research and development over the next 10 years.

But the potential limitation of achieving negative emissions highlights the importance of achieving radical reductions in emissions across economy quickly.

In conclusion, we have made progress in the 10 years since The Stern Review was published.

But we must now seize the opportunities presented by the next 10 years.

The transition to low-carbon economic growth and development offers something much more than a fundamental reduction in climate risks.

It is an opportunity for a much more attractive, sustainable and inclusive path for development which delivers on the global agenda for growth, climate responsibility and the Sustainable Development Goals.

With strong policy that sets clear expectations, market forces and private sector initiatives have a central role to play in shifting economies onto new low-carbon pathways.

Political will is critical to making the radical changes necessary.

Building political will depends on increasing the understanding of the great attractions of alternative paths of growth as well as of the great risks from climate change.

The power of examples will be of great importance.

So too will be leadership in politics, business and civil society.

There are tremendous opportunities from a dynamic few decades of innovation, creativity and growth.

We can create cities where we can move and breathe, and develop ecosystems that have a chance of flourishing.

We can rise to the two defining challenges of the century, overcoming poverty and managing climate change.

We can make this the best of centuries, but it could be the worst of centuries if we make the wrong decisions.

I am very optimistic about what we can do.

We already have an understanding of what is possible is a necessary condition for action.

But will it be sufficient?

There lies both the responsibility and the anxiety.

It is for us to manage these and to choose.

This is a transcript of a speech given by Professor Lord Stern of Brentford at The Royal Society on 28th October 2016. An original version can be found here.