Climate change—the world’s greatest market failure

StoryImage( ‘/Images/Story//Auto-img-116482343832206.jpg’, ”, ‘Nicholas Stern’);
StoryImage( ‘/Images/Story//Auto-img-11648235148511.jpg’, ‘Image courtesy of’, ‘A September 2005 NASA satellite image shows the shrinking concentration of Arctic sea ice compared to the 1979 ice-sheet, indicated by the yellow line.’);

Sir Nicholas Stern, former World Bank Chief Economist commissioned by the UK Chancellor in 2005 to review the economics of climate change, has declared that climate change “is the greatest and widest-ranging market failure ever seen.”

If we continue failing to adequately invest in controlling climate changing gases, economic growth will be undermined, causing a loss of 5 percent to 20 percent of global Gross Domestic Product (GDP), similarly reducing per capita consumption. If we start investing 1 percent of global GDP now, we can avoid the worst impacts. Stern views taking strong actions to limit carbon emissions as a wise investment that will send the appropriate market signals to overcome the prevailing market failure.

When industrialization began in the 1800s, the atmosphere contained 280 ppm of CO2 equivalents. Current concentrations of 430 ppm are rising at a rate of 2 ppm/year. To stop the increase, annual emissions must be lowered to 80 percent below current levels. If used, existing reserves of fossil fuels could raise greenhouse gases above 750 ppm.

If we fail to act, we will experience more extreme weather events, including major storms, tornadoes, hurricanes, coastal damage, floods, droughts and increased brush and forest fires. These, in turn, cause damage to physical infrastructures increasing the amount of money required for their repair and replacement.

Increased storm damage causes higher insurance costs; some storm-prone areas will lose insurance protection.

The Stern review calls attention to the key role local government officials and planners will play in responding to climate change. Four major options relying on local conditions for reducing greenhouse gas emissions include reducing demand for emissions-intensive goods and services; increasing efficiency; protecting local carbon storage capacity by preserving forests and grasslands; and switching to low carbon technologies for power, heat and transportation.

Neither the call for action nor the recommended actions are new. What is new is increasing scientific and public fervor to act on climate change now. Investment banker Morgan Stanley recently announced a $3 billion plan to invest in carbon trading. Seven states in the northeast have joined together to cap regional emissions. California has set limits on carbon emissions. Some cities have agreed to do the same.

These actions are likely to increase pressure on Congress to enact limits on carbon emissions, if only to resolve differences in local, regional and state efforts.

Additional pressure to act is likely to come from the International Panel on Climate Change’s report, due in January. Judging by press releases and scientific reports published in professional journals, signs of global climate change are increasing at a rapid rate. Since the IPCC report summarizes scientific data gathered over the last five years, the level of alarm is expected to rise.

While the call for action will have adverse consequences on some interests, overall investment opportunities in energy efficiency and renewable energy will increase. If fossil fuel use is reduced and climate changing gases are captured, the world’s greatest market failure will have been corrected.

From the Nov. 29 – Dec. 5, 2006, issue

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