The economy is what drives production, distribution, and consumption of goods and services. The current Canadian economy relies heavily on resource extraction, as well as production, transportation and consumption of products that require use of fossil fuels. A system that relies heavily on fossil fuels creates large amounts of greenhouse gas emissions, which accumulate in the atmosphere and contribute to climate change. According to scientists, human activity (i.e. the use of fossil fuels and other products that create emissions) is the main contributing factor to current climate change (IPCC). 

In 2006 a major analysis of the Economics of Climate Change was led by Nicholas Stern. It observed that serious human health issues, poverty, violence, human displacement, and rising costs of production are among the costly impacts of climate change, working against prosperity and the quality of life that are goals of a healthy economy. 

Contents

Uncertainty and the Cost of Climate Change

What does the business-as-usual scenario look like?

Proposed Solutions

Key Resource

Uncertainty and the Cost of Climate Change

The Stern Review indicated that one of the challenges of planning for mitigating and adapting to climate change is the uncertainty of impacts on economies because the effects of change and the effects of action are not immediate. Emissions being put into the atmosphere now will take time to have an effect, and any reductions made now will be subject to the same principle.

The Review provides some examples of damage costs that could be incurred by rich countries due to climate change:

 “Based on simple extrapolations, costs of extreme weather alone could reach 0.5 - 1% of world GDP per annum by the middle of the century, and will keep rising if the world continues to warm.

• A 5 or 10% increase in hurricane wind speed, linked to rising sea temperatures, is predicted approximately to double annual damage costs, in the USA.
• In the UK, annual flood losses alone could increase from 0.1% of GDP today to 0.2 - 0.4% of GDP once the increase in global average temperatures reaches 3 or 4°C.
• Heat waves like that experienced in 2003 in Europe, when 35,000 people died and agricultural losses reached $15 billion, will be commonplace by the middle of the century.

At higher temperatures, developed economies face a growing risk of large-scale shocks - for example, the rising costs of extreme weather events could affect global financial markets through higher and more volatile costs of insurance.”

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What does the business-as-usual scenerio look like?

Business-as-usual (BAU) refers to continuing or growing the production and consumption cycles currently in place, using similar technologies and fuel sources. There are two main issues associated with the BAU scenario: economic costs and environmental costs. These costs are mutually reinforcing and cannot be correctly analysed in isolation from each other, since the economy is wholly dependent on the environment’s resources to provide products and services to people.

The current BAU best case scenario according to climate models is that the planet would warm, at the least, approximately 2-3 degrees Celsius by 2100. In the extreme case, the temperature increase would be approximately 4-5 degrees Celsius or higher, prompting greater and more unpredictable challenges. The predictions for climate change and economic costs associated with them have tended to be averaged to provide a global scenario, but the Stern Review examines these models further to deal with some of the realities the planet may face, such as accelerating climate change due to feedback systems that release methane or weaken carbon sinks, and effects that are difficult to represent in economic terms, such as damages to environmental and human health.

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Proposed Solutions

The overwhelming consensus among the world's climate scientists regarding accelerated climate change is that it is happening, and that immediate action must be taken to mitigate its effects. Since climate change is caused by carbon dioxide and other greenhouse gas emissions, it is imperative that climate change strategies involve reducing greenhouse gas emissions. The Stern Review makes recommendations based on the unpredictability of the climate scenario, which may additionally be affected by any actions taken to mitigate change, or any actions that will increase greenhouse gas emissions in the atmosphere. A solution must be proposed that will tackle the greatest number of possibilities and the most extreme scenarios:

“Economic forecasting over just a few years is a difficult and imprecise task. The analysis of climate change requires, by its nature, that we look out over 50, 100, 200 years and more. Any such modelling requires caution and humility, and the results are specific to the model and its assumptions. They should not be endowed with a precision and certainty that is simply impossible to achieve. Further, some of the big uncertainties in the science and the economics concern the areas we know least about (for example, the impacts of very high temperatures), and for good reason - this is unknown territory. The main message from these models is that when we try to take due account of the upside risks and uncertainties, the probability-weighted costs look very large. Much (but not all) of the risk can be reduced through a strong mitigation policy, and we argue that this can be achieved at a far lower cost than those calculated for the impacts. In this sense, mitigation is a highly productive investment.”

The Review’s main conclusions about climate change issues and proposed solutions as of 2006 were:

• There is still time to avoid the worst impacts of climate change, if we take strong action now. 
• Climate change could have very serious impacts on growth and development.
• The costs of stabilizing the climate are significant but manageable; delay would be dangerous and much more costly.
• Action on climate change is required across all countries, and it need not cap the aspirations for growth of rich or poor countries.
• A range of options exists to cut emissions; strong, deliberate policy action is required to motivate their take-up.
• Climate change demands an international response, based on a share understanding of long-term goals and agreement on frameworks for action.

The Review also acknowledges the differing circumstances of countries around the world, and suggests that solutions be tailored to the needs of the societies that must implement them. It emphasizes a global solution, and recommends four key principles for a global solution:

Emissions trading as a way to bring the world together to achieve greater and more cost-effective reductions, through:

Technology cooperation to increase research and development for energy technologies, and coordinate product standards worldwide to increase energy efficiency;

Action to reduce deforestation as a highly cost-effective and potentially fast way to curb global emissions;

Adaptation to climate change by developing new policies and strategies for development strategies in developing countries, through assistance from rich countries.

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Key Resource

The Stern Review: The Economics of Climate Change (2006) is a highly regarded review written by Sir Nicholas Stern, former chief economist at the World Bank, Head of the Government Economic Service and Adviser to the Government on the economics of climate change and development in the UK. The Review outlines the economic impacts of climate change, based on commissioned research for the report. The Stern Review bases its recommendations in science and economic models, and is a useful resource for information about the environmental and economic costs of climate change. It compliments and reinforces the information in the Overview on Climate Change section put forth by the IPCC, and emphasizes economic analysis and solutions for climate change. The Stern Review focuses on explaining the problems and solutions at a global level. Information on this page that references The Stern Review can be found directly from the Stern Review’s Executive Summary, a recommended place to begin understanding The Review and its key findings and conclusions.

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