A British economist has issued a wide reaching report into climate change policy, saying that if the world fails to act, then there will be dire economic consequences. As Sir Nicholas Stern put it, what is done over the next two decades will have a "profound effect on the climate" in the second half of this century. In the lengthy report, he warns of all the risks — both economic and environmental — and outlines some of the decisions that governments, business and the public can take to avoid this.

"Our actions now and over the coming decades could create risks of major disruption to economic and social activity, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century," he wrote. "And it will be difficult or impossible to reverse these changes."

Here are his recommendations on how government and private interests can work toward getting climate change under control:

Pricing carbon

He notes that carbon emitters — the biggest are industry — should face a "marginal cost" that reflects "the damage they cause." Only then will the emitter invest in alternative technologies and will energy users will start to change their habits, Stern says. In short, if emitters and energy users face the cost of climate change, then the policy can be more effective.

By pricing carbon in much the same way as commodity prices are set, Stern says governments will be able to quantify the cost of releasing greenhouse gases. There are two common approaches that have been tried: taxes and tradable quotas.

A tax-based approach offers a way for a price signal to be sent across regions and sectors, allowing different countries to recognize the cost of outputting emissions. These taxes also raise public money, which can be sent back into innovation and research. These taxes also have the advantage of being stable. There are some drawbacks — for example, the use of taxes in developed countries does not result in money being invested in devloping countries — where emissions cuts can usually be made more effectively.

Tradable quotas also drive carbon reductions, allowing for funds to flow between regions or countires. They also have the ability to generate public money. Stern said that some countries would choose to use taxes to reduce emissions while others may decide to focus on trading emissions with other countries.

"Taxes and tradable quotas can both support the financing of carbon reductions across different countries," Stern writes. But he also notes that "effectiveness of any tax or emissions trading scheme depends on its credibility and on good design."

Driving innovation

Stern says that improved technology in such sectors as power generation, transportation and energy use can be used to reduce emissions. He says this is where the private interests enter the picture.

Governments can use taxes or quotas to help fund and research new ways to reduce emissions and also raise the level of support for research and development. The government could also help by supporting commercialization, making new technology like hybrid fuels more widely accepted.

Some sectors have real roadblocks to adopting new technology, however. It's simply cheaper, for example, to use fossil-fuel based technology than to use newer, more efficient methods. Stern says the challenge is to get companies and governments to invest in this approach with the promise of rewards in the future.

The report also notes that the power generation sector is a huge emitter, yet in the United States, it tends to invest a small amount in research and development compared with other sectors, such as the electronics and pharmaceutical sectors. And the energy sector has tended to switch focus from new technologies to the tried and true, like natural gas for power and heat.

Meanwhile, in transportation, which accounts for 14 per cent of emissions worldwide, there have been advances, such as the use of alternative energy sources and hybrid vehicles. But the report notes that a free market would not foster a massive change. For example, alternative fuels need new networks. And even when cleaner fuels are possible, if they draw from high emission coal plants, the benefit is negligible.

The private sector will have to take a lead role, Stern says, but it's the government that will provide a "stable framework of incentives." The government can also directly fund education in universities that can lead to such technologies.

Stern puts a price tag on how much governments should be investing in newer technologies — such as introducing incentives, regulations or new standards. He says that spending should rise by about two to five times the $34 billion US that's currently being spent by governments. In terms of public energy funding, he says governments should double their spending.

But there is hope that innovation will pick up. Wind power is an example of a technology that has been used since the 1940s but little progress was made until an oil shock and mandated targets in some jurisdictions spurred use. In the past 10 years, the report says, renewable energy programs have led that sector to an annual growth rate of 28 per cent.

Removing barriers

Stern notes that there are various ways that the government can encourage emissions reductions by regulation, setting standards and promoting education.

There are times when a government will choose to use regulations as an effective tool, Stern says, pointing to the decision to ban CFCs (chlorofluorocarbons) in cooling systems as a way to quickly enforce change.

In the same way, setting up performance standards can help take away products that are inefficient and replace them with more environmentally friendly products. One example would be setting codes and standards that make buildings more energy efficient.

He said that private investment is important in order to encourage energy-using industries to be more efficient. To make it work, policy should tax negative aspects "rather than subsidize preferable outcomes."

The government can also introduce programs to promote behaviour that would result in a more energy efficient society. Stern says that the use of labelling and education policies can be effective. In terms of power use, he says smart meters and real-time displays can help households change their habits.

"Individual preferences play a key role, both in shaping behavior and demand for goods and services affecting the environment, as well as in underpinning political action. Public policy on climate change should seek to change," he wrote.

Increase in temperature — C	Risks associated with temperature rise
1 degree	Glaciers in Andes at risk; 300,000 may die from climate-related disease; 10% of land species face extinction
2 degrees	Up to 30% decrease in water available in certain regions; declines in crop yield in tropical regions; 10 million displaced by flooding
3 degrees	Serious droughts in southern Europe; up to 3 million could die from malnutrition; up to 50% of species face extinction; risk of collapse of West Antarctic ice sheet
4 degrees	Loss of around half of Arctic tundra; 7 to 300 million affected by coastal flooding
6 degrees	Disappearance of large glaciers in Himalayas; ocean acidity rises, threatening fish stocks; More risk of abrupt changes to climate
More than 6 degrees	"Level of global temperature rise would be equivalent to the amount of warming that occurred between the last age and today" and likely to lead to a "major disruption and large scale movement of population."

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