The Business Times, Weekend Edition, May 17-18, 2008

THE RAFFLES CONVERSATION 3

In the medium term, there's no trade-off between growth and climate responsibility. If we grow in a way that's irresponsible relative to the climate, we'll undermine growth. So, it's a mistake to present this as some kind of horse race between climate responsibility and growth. Unless we work to get both, we'll get neither.
Nicholas Stern

LSE and the India connection

AS a devoted student of the Indian economy, it is fitting for Lord Stern to be the first occupant of the newly created IG Patel chair at the London School of Economics (LSE), as well as the first head of LSEs India Observatory, which is dedicated to the study of India. The late Dr Patel, himself a distinguished economist and former governor of the Reserve Bank of India, served as LSEs director from 1984 to 1990. It was during his tenure that Mr Stern got his first professorship at LSE, in 1986, following teaching assignments at the Universities of Warwick and Oxford. Prof Sterns connection with India however goes much further back. Since 1974, as part of a study of the impact of the green revolution in India, he has been tracking in detail the development of one particular village called Palanpur in the state of Uttar Pradesh, which he has visited regularly for more than 30 years. He even co-wrote a book about it, entitled Palanpur: The Economy of an Indian Village.

HEN the Stern Review of the Economics of Climate Change one of the most comprehensive studies on the environment ever produced was released on Oct 30, 2006, it was splashed all over the media. The response from economists, environmentalists and the general public was overwhelming. The 700-page report, which had been commissioned by the UK government and called for urgent action to combat climate change, was both praised and trashed. Nobel Prize winning economist James Mirlees said: It deserves the widest circulation. I wish it the greatest possible impact. Another Nobel laureate, Joseph Stiglitz, described it as the most thorough and rigorous analysis to date of the costs and risks of climate change, and the costs and risks of reducing emissions. Yet another laureate, Robert Solow, called it a calm, reasonable, carefully argued approach to the issue. On the other side of the divide, Richard Tol, an environmental economist and lead author for the UNs Intergovernmental Panel on Climate Change, said: If a student of mine were to hand in this report as a Masters thesis, perhaps if I were in a good mood I would give him a D for diligence; but more likely I would give him an F for fail. Harvard economist Martin Weitzman described the reports documentation as elusive, frustrating, and ultimately unsatisfactory. Former UK chancellor of the exchequer Nigel Lawson joined the chorus of critics, warning darkly of the dangers of eco-fundamentalism. At the epicentre of this storm of controversy was the reports lead author, Nicholas Stern, 62, a soft-spoken and reflective academic with a quietly persuasive manner. Prof Stern, who now holds the IG Patel Chair in economics at the London School of Economics, did not have a background in environmental issues. Im not an environmentalist, says Prof Stern. Im an analyst and a policy person. Last year, he was raised to the peerage as Baron Stern of Brentford, Elsted and Wimbledon and became a member of the UK House of Lords. Apart from stints at the UK Treasury including as head of the Government Economic Service, Prof Stern had served for a total of almost a decade as chief economist at both the European Bank for Reconstruction and Development and the World Bank, where he dealt with a wide range of issues on economic development. In 2004, he was roped in to head the climate change study by the then chancellor of the exchequer (and now, prime minister) Gordon Brown. Gordon Brown and I both felt that on the fact of climate change, its causes and the risks associated with it, there was a growing understanding, says Prof Stern, over a cup of green tea. But on policy, there wasnt. So thats what he and I were looking for and Tony Blair (who was then prime minister) shared that view. So thats how it was conceived. The idea was to build a discussion on policy towards climate change that could be shared with world leaders. Prof Stern rejects the charge from some critics that there was an element of advocacy in his mandate even though the study had been commissioned by a politician. Thats a supposition, and its wrong, he says. There was nothing preconceived in the answers at all. Usually, that allegation comes only from those who dont like the answers. In fact, looking back now, Prof Stern reflects that, if anything, he and his team underestimated the damage from climate change, and the risks. Emissions are growing faster than we thought, he says. The ability of the earth to absorb emissions is weaker than we thought; and the risks of temperature increases are higher than we thought.

A sort of growth
He now wants to write another. One possible title I was thinking of for the book is A Sort of Growth you know, like the title of Graham Greene's autobiography, A Sort of Life. Rural UP has probably shown weaker growth than most other parts of India, he says, but there has been a sort of growth. In 1974, nobody in the village had been to Delhi. Now, lots of people have been there and have children working there. Back then, not many people had jobs outside the village, now lots do the place has been through a kind of internal globalisation. There's much greater awareness of the broader India, and to some extent, of the world. In 1974 there were seven water pumping sets, there are probably fifty now. There are half a dozen electric tube wells, there were none then. The majority of households have mobile phones and TVs. Electricity came about 10 years ago and it was a huge change. But education is still not widespread, medical support is not much either. Poor people have something on their feet my very crude index as I travel around the world is the shoe-to-foot ratio; it's a very casual by-eye index. If you go to parts of Orissa or the slums of Nairobi, most people have nothing on their feet. Go to Delhi though not all parts of it or to Singapore, everybody has something on their feet. In short, Prof Stern sees the village of Palanpur as a microcosm of much of rural India. There has been a lot of progress, but there remains vulnerability as well. So, a sort-of growth.

ARTHUR LEE

The Stern view on climate change

British economist Nicholas Sterns widely publicised report was both praised and panned. He shares his ideas with VIKRAM KHANNA
And whats the best way to go about it? Energy efficiency and stopping deforestation: those are two things we can do more quickly, says Prof Stern. Other forms of activity take longer-term investment. But we already know we can generate electricity without hydrocarbons. In large parts of Germany, after just four or five years, about half the electricity comes from wind power. France went from very little nuclear to 75 per cent nuclear in just 20 years. You can do it in two years. But if you give yourself 20 years, you can radically transform the way in which your energy is generated. Different countries will do it in different ways. But he acknowledges that making the transition to a low-carbon world will entail some costs. The overall costs may be higher for a while, and a while may be 30 years by about 1-1.5 per cent of GDP. That would be a one-off increase. But we go through one-off increases in costs of that order from time to time. And even if the increase in costs was 2.5 per cent of GDP instead of 1.5, it still wouldnt stop growth. Look at the costs associated with changes in exchange rates, which can last quite a long time. But 1.5 per cent of GDP still works out to about six times the annual aid budget of rich countries which Prof Stern says should take the lead in reducing emissions. How would taxpayers in these countries be persuaded to fork out so much more for benefits that would materialise many years later? This is not a budget, he says. This is respecting the costs we are inflicting on ourselves and others. I dont think anyone has a right to damage others free of charge. What you try to do is get the incentives right. You set appropriate prices on greenhouse gases and the damage inflicted from those. Or you tax people. Some of that tax revenue would be reinvested in, for example, new technologies. In some cases, you would regulate, for example, on emissions for cars. So, the costs will appear in different ways in the economy, Some will yield revenues to spend on technologies, some will appear in the form of more regulation and will be borne by, for example, people who buy cars. So its not like an aid budget where we say well set this much aside. Its a series of measures which I think most people would regard as basically good sense. They are justified on the basis of the simple idea that no one has the right to undermine the lives of other people as a direct result of their own actions. Basically, were talking about correcting a market failure. And this is the biggest market failure the world has ever seen. Were all involved, in one way or the other, and the consequences are global. So how do you respond to it? Not by giving up markets or stopping growth. You fix the market failure, you sort out the problem. And not to do it is anti-market and anti-growth. wrong, he adds, is that they miss the point about risk. What we're doing essentially is looking at policies to control risk, he points out. If we just wait and carry on with business as usual for 100 years, there would be a 50 per cent probability, sometime early in the next century, of a 5C increase in world temperatures. That would be earth transforming. Where people can live would be totally transformed. It would be incredibly disruptive and lead to intense conflict. But Prof Stern claims that on hearing his arguments, his critics are increasingly being persuaded. Not very cheerfully, and not all of them, but some who originally raised these issues are coming around. The way he sees it, while the costs of doing nothing about climate change would be enormous, so would the benefits of corrective action. And those would include some exciting business opportunities. This is, in some respects, an industrial revolution, he says. Now, one shouldnt exaggerate. Its not as dramatic as electricity, or rail and road transport, or the Internet. Those are bigger revolutions. But this will be an important change, and such changes in the past have often spurred bursts of growth. People estimate that the market for low carbon energy generation will be many hundreds of billions of dollars in 20 years or so. Look at the changes in transport that we can already see: We already have hybrid cars, and theyre getting better and better. And while I worry about certain types of biofuels, like those based on corn and sugar, there are others based on cellulose, for example, or which are grown on marginal land, which hold great promise. Solar energy is moving very fast with photovoltaic, and other new materials. There are many interesting ideas, right across the board. We can already see where these things are going. Were not groping in the dark. We can see the future.

Dynamism intact
Still, hes convinced that for India as a whole, the high-growth story is intact and the country is an emerging economic power. If you look at the big drivers of growth in India, at the aggregate level it's high savings rates and the more productive use of capital. Thats happened as a result of the opening of the economy and rising payoffs to some long term investments at the higher end, such as scientific and technological education. Also, the relaxation of the license raj, which was really stifling. And then, India has fantastic entrepreneurs and some leading world companies look at Tata, Infosys, Wipro, Reliance. There will be obstacles. Large parts of India much of UP, Orissa and Bihar are not growing so fast. Rural areas are not growing so fast either. And the participation of women in the paid workforce is still pretty low. India will grow even faster if there's more inclusion. But the dynamism of the Indian economy is real, and I think it'll last.

Future generations
One of the most frequent criticisms of the Stern Review is that it exaggerates the damage to future generations arising from climate change by giving almost equal weight to the welfare of future generations as it does to that of the present generation (by using a very low social rate of discount, in economists parlance). These critics, which include some eminent professors, argue that if the present generation were given more weight, the case for action to combat climate change becomes much less urgent. That criticism is fundamentally wrong, says Prof Stern. There is no ethical or economic reason to give the welfare of someone born in the year 2000 half the weight of someone born in 1970. Why would you penalise a life that starts 30 years later by a factor of half? I would give almost equal weights to individuals. Another reason why these critics are

Misguided view
One of the key messages of the Stern Review is that countries can dramatically reduce emissions without sacrificing economic growth. The commonly held view that there is a trade-off between the two is misguided, he suggests. Essentially, this is about low-carbon growth; its not about low growth. And in the medium term, theres no trade off between growth and climate responsibility. If we grow in a way thats irresponsible relative to the climate, well undermine growth. So, its a mistake to present this as some kind of horse race between climate responsibility and growth. Unless we work to get both, well get neither.

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