Past President’s Address, 12 April 2021 – Nicholas Stern A time for action on climate change and a time for economics to change

The potential risks from unmanaged climate change are immense. Our current emissions trajectory is still rising and, unless we change strongly and quickly, the world is likely headed for upwards of 3°C of warming[1] by the end of the century. This path could destroy lives and livelihoods across the world, displace billions and lead to widespread, prolonged and severe conflict. In order to reach the Paris temperature targets, the challenge now is to accelerate action to peak emissions in the next few years and go to net-zero global emissions by mid-century for 1.5°C, and within five decades for 2°C.

The Covid pandemic and the associated impacts and responses have generated major crises in the world economy, finances, health, society and politics; with tragic human costs and loss of life; major threat of global depression; and severe debt stress. Moreover, the climate crisis and the global economic impact of the Covid crisis have occurred against a background of falling investment rates and secular stagnation, slowing growth and productivity in many countries, increasing challenges around social cohesion and populism, and faltering internationalism. Indeed, the Covid crisis has underlined the dangers, weaknesses and fragilities that had been building in the world economy.

We must tackle the Covid and climate crises together. The response to these twin crises, and to the weaknesses that produced them, must be a new sustainable, resilient and inclusive approach to growth and development. The lecture explores relevant policies and actions and then turns to the changes to economics necessary to pursue these ideas and imperatives.

Investment will be at centre stage for action over the coming years, right through from rescue to recovery to transformational growth and net zero. The realisation of the necessary investment, in both scale and composition, requires sound policy and the right kind of finance, on the right scale, at the right time.

We are at a moment that requires urgent action, at scale and across the whole economy. Technological change must be radical if we are to decarbonise our economies in just three decades and drive sustainable increases in productivity and living standards. Thus, the economics of action must be focused on the achievement of fundamental economic change at real pace. On the whole, the approaches which are standard in the economics literature have failed to get to grips with the key challenges of the nature and pace of economic policy towards climate, and have biased results against strong ambition.

Early attempts to examine climate and growth involved the development of Integrated Assessment Models. In large measure, these constituted an attempt to shoehorn a ‘new’ problem into a framework based on the standard workhorses and toolkit of exogenous growth models and marginal change. But the potential reality of climate change is of a magnitude way beyond that framework. We must have an economics that can handle both extreme risk and fundamental and rapid structural and technological change.

Further we must recognise that many key markets have critically important failures (beyond the crucially important greenhouse gases externality), including R&D, capital markets, networks (e.g. grids and transport), information, ‘co-benefits’ (e.g. better biodiversity, less pollution). Further, sometimes markets are absent so that expectations and how they are formed and influenced will be critical. All this should be central to policy analyses. So too the limits on the ability of government to ‘correct’ these market failures. Distributional issues, both intratemporal and intertemporal, are of vital importance, and have often been treated inadequately or mistakenly in the literature.

This is not only urgent and important, but also a fascinating research and policy agenda, which will involve bringing the best of economic analysis to the table. This should include at centre stage innovation, behaviour, efficiency, systems and biodiversity. But we must recognise the importance and relevance of all our subject, from economic history to game theory, to this most fundamental set of issues of risk and change across all our activities. Further, we must not only learn from many branches of economics, we must also work together with science and technology and all of the social sciences and humanities.

[1] The increase in average global surface temperature above the level of the latter part of the 19th century, the usual benchmark.

Lord Nicholas Stern

Past President’s Address