This is an edited transcript of a speech delivered by Britain's Lord Stern – one of the world's top climate economists – to the National Press Club in Canberra on Wednesday.

I want to talk today about the economics of climate change, and set that in three clear perspectives that really do influence the way in which we see the opportunities and the challenges and the way forward on managing climate change.

The first of them is of fundamental importance and that is that the two defining challenges of this century are overcoming world poverty and managing climate change and we succeed or fail on those two things together. 

If we try to manage climate change by putting obstacles or appearing to be putting obstacles in the way of rising standard of living in the developing world, and not just the developing world, in the next two or three decades… if we try to manage climate change that way, we will not succeed in putting together the coalition which is vital on a global scale to manage climate change. 

If of course on the other hand we fail to manage climate change, then the environment will become so hostile over the course of this century and into the next that we will reverse, set back the whole story of development.  So, we succeed or fail… If you take a view of this century, we succeed or fail on those two issues together and we have to keep that firmly in mind.

The second of the perspectives I want to bring is that this is a story of great risks and I’ll develop that only briefly because I’ve spoken about that kind of thing here before, but it’s also a story of great opportunity.  We are at the beginnings of a new industrial revolution.  If you count these things in the manner of the economic historian and technology economist, Chris Freeman, this is the sixth of the industrial revolutions with the first being the mechanisation of textiles at the end of the eighteenth century.

We’re at the beginning of a new energy industrial revolution.  These energy industrial revolutions which we see are very exciting events; events of dynamism, creativity and of growth and that’s a story which I really do want to emphasise in what I have to say.

And thirdly we have to take the global view.  This is a global issue.  The science and the planet doesn’t recognise where the greenhouse gases come from.  What matters is the total of the greenhouse gases in the atmosphere.  And this means we have a global problem.  We require global action.

And further if we’re to put it together, a good strategy in whichever country, in your country or in my country, whichever country we’re talking about, we have to understand the way the world is going, not simply in terms of emissions reductions, but also the kind of way in which it’s embracing the other countries of the world, the industrial revolution.

Now, let me say something very briefly about the risks.  The story of climate change is that people through consumption and production emit more than the planet can absorb through the carbon cycle.  That means that the stock, the flow each year is not fully absorbed.  The stocks or concentrations of greenhouse gases go up.  That through the greenhouse effect raises temperatures.  Rising temperatures are associated also with climate change.

Climate change operates through water mainly in some shape or form; storms, floods, droughts, sea level rise and that affects profoundly what people can do and how they can live their lives.  It starts with people.  It ends with people.  Every step along the way has got uncertainty in it.

 We can’t forecast any of these effects with certainty, but science has over the years… actually over 200 years of studied development and insight, has helped us understand what the probabilities are and how we through our actions can affect those probabilities. 

This is about risk management and the risks are… You know we’re taught to be measured, middle class and careful in our language and we should be, but the risks are immense by anybody’s standards. 

Emissions

If we run something like business as usual for a century or so, the greenhouse gases will build up from the 435 parts per million this year to the equivalent we see now to something around 750 or above and that would give us a high probability, perhaps 30, 40 or 50% ,of  temperatures increasing more than five degrees Centigrade relative to say the middle of the nineteenth century.  We’ve not seen that as a planet for 30 million years.

We’ve been around as homo sapiens for about two hundred thousand.  It… Humans have not experienced anything like this.  It would probably, no certainties here… It would probably rewrite where we could live, rewrite where the deserts were, rewrite where the seas are, rewrite where the rivers flow, rewrite the patterns of rainfall and it’s the change that’s crucial because that would lead hundreds of millions, probably billions of people, to have to move and if we’ve learned anything from the movement of people and we haven’t seen that kind of scale, but if we’ve learned anything about the movement of people on scale, it leads to conflict and this of course would be on a global scale.

It would be protracted, intense and global conflict.  Those are the stakes which we’re playing.  Now, we can’t take away all these risks, but we can reduce them radically and we can reduce them radically by changing the way we do things and that’s the story of the energy industrial revolution.

I’ll say a few words on the scale. That is a story full of opportunity.  It’s innovative.  It’s creative.  It’s investment.  It’s learning.  It’s the story of growth in the 21^st century. Old style economic theory dealt very much fixed ways of doing things, not much technical progress, all about capital accumulation.  That’s not an empty story, but it’s a story largely about growth in the last century.  The growth in this century will be about creativity, substitutability, doing things in different kinds of ways using different inputs.

It’ll be about ideas and human capital and technology and learning and it will be about a growth that interacts with the physical environment, both in consumption and production.  That’s the growth theory of the future and that’s already manifesting itself in the very rapid pace, that technological advance we’re already seeing. 

The business people of the world are looking ahead. They know that we’re going to be carbon constrained.  They know that we have to find different ways of doing things and they know that there are going to be great returns to finding those ways.  And that ‘green race’ if you’d like to call it that has begun and we’re already seeing some winners emerging, but it’s a race that is entirely healthy and indeed the opposite would be very unhealthy. 

It’s a race that’s entirely healthy, both in terms of its greenness and in terms of its competitiveness. This is a story about markets playing their role in discovery, markets playing their role in the right kind of incentives, but here in this industrial revolution some policy matters. 

Industrial revolution

We need a price for greenhouse gases.  We need  people through the markets to see the consequences of our actions.  That’s how markets work.  If you buy labour, you deprive somebody else of that labour.  If you buy raw materials, you deprive somebody else of those raw materials.  Markets work by signaling scarcity. It’s good that they do and they’re the best way to run economic activity.  If you have a market failure, good policy fixes that market failure and then leaves the story to the markets to get on with it and that’s the way in which public policy has to play a leading role in this industrial revolution.

I’ve seen a different way from the past because in the other industrial revolutions governments could get in the way and often did, but it didn’t depend on some strong element in government policy. 

This one does.  And I’ll say just a few words about what those policies might be.  And if we find as we will a greener way of doing things, low carbon growth specifically, it’s cleaner, quieter, safer, more energy secure and importantly more biodiverse.  So, the story of the transition from where we are now to low carbon economies full of ideas and creativity and as we get there it’s a much better way from all the attractiveness I’ve just described of doing things.

So, this story is deeply worrying in the risks we’re trying to manage, but actually rather cheerful in terms of the attractiveness of the route which we can follow, and we’re starting to see that route in a clearer way.  But this is a story of discovery.  We won’t see all the way through that route.  We’re going to discover as we go. 

Now, very briefly on scale in policy because I’ve spoken about that here on other occasions, the numbers matter and you’ve got to remember them. We are about 47 billion tonnes of CO2 equivalent now in terms of our emissions as a world, per annum. 

If we’re to have much chance, say a fifty- fifty chance of holding temperature increases to two degrees Centigrade as we should, and I haven’t got the time to develop why that’s a good objective but let me take it as read, we should be cutting that forty-seven down well below 35 billion 20 years from now and well below 20 billion tonnes of CO2 equivalent per annum in 2050, at a time when we hope and trust that the world economy is going to be growing. 

We’ve got to cut emissions in 40 years by a factor of two and a half.  If the world economy grows by a factor of three at that time, we’ve got to cut emissions by seven and a half over a 40 year period. That is a radical change. It means that because we can’t go carbon neutral everywhere, it means that where we can we should and probably in some cases we should go carbon negative, and increasingly we’re understanding how to do that too. 

So, we understand the scale of the action that’s necessary. It will be in per capita terms going from about seven tonnes per capital CO2 equivalent now to about four tonnes in 2030 and about two tonnes in 2050, all up divided by the anticipated populations at that time.  Be about nine billion in 2050, at close to twenty or below billion tonnes; twenty divided by nine, close to two.  You can all do that.  So, that’s just the arithmetic of the story.

USA, Canada, Australia are well over twenty now; much of Europe and Japan ten, eleven, twelve.  This is a measure of the kind of radicalness that we have to follow, but it’s good that the story of following it is as cheerful as I believe it to be in terms of creativity and technology and discovery and so on, but it means that this change is big and we can’t kid ourselves that it’s anything other than radical.

Now, that’s the scale.  We can see where we have to act.  Energy efficiency, that’ll be about half the story actually.  Energy efficiency, low carbon, technology and deforestation, those are the areas in which we have to act. 

We can see the new technologies developing whether they be renewables or carbon capture and storage or nuclear or whatever.  We’d need a very broad approach for the technologies.  We can see those developing and there’s been tremendous learning over these last years. 

We can understand the economics of the incentive structures that we need to put in place.  A price for carbon… We’ve got to remove the biggest market failure the world has ever seen and I think people can see why.  If you build a house, nobody gives the builder the right to chuck the rubbish over the wall.  You expect the builder to take the rubbish away and you expect to pay that in the costs of building your house and we can all understand why.  Similarly, we should expect to pay something for the cost of chucking the rubbish over the wall to our next generation.  It’s simple, basic economics.

To try to knock down carbon price is to refuse to allow our markets to play their proper role in the allocation of goods and scarcity.  It’s anti market.  So, we need a carbon price, but we also need strong support for this whole learning process and discovery process in new technologies.  That’s fundamental too.  We need a discussion of what’s responsible.

 We recycle because we believe it to be responsible, not necessarily because there’s a penalty. So, as well as the sticks and carrots of my trade and abandon the sticks and carrots of my trade at your peril, we also need a discussion of what’s responsible and that discussion is occurring and people take it seriously. 

So, what I’m saying is that we can see the scale of action.  We can see where we have to act; energy efficiency, low carbon.  We can see the technologies coming through.  We can see the instruments that we have to apply.

Politics

What’s left?  Political will. What’s left is the choice, the willingness to do this. 

Now, we’re in this as a world and we have to understand what other people are doing and we have to work with them wherever we are, my country, your country, whichever country you’re talking about.  And the world is moving.  Europe is genuine on this and our discussions in Europe are about how fast and under what conditions we move from 20per cent cuts 1990 to 2020 to 30 per cent cuts 1990 to 2020. 

The energy environment ministers of UK, France and Germany have already declared for 30% reductions 1990 to 2020.  United States is actually in a stall on the making of policy at the Federal level.  They’ve found great difficulty in pulling it together, but that hasn’t stopped many states and cities in the United States going forward strongly on these issues.  And California is arguably the greatest sort of creativity of these new technologies that you’ll find in the world. 

But also and of fundamental importance China is now seeing very clearly that the future is low carbon.  They’ve grown in rather an intense way, very dependent on coal.  Nobody knows that better than you do.  The… But they are looking ahead now and asking are we vulnerable?  The answer to that question which they identify very quickly is yes, China is very vulnerable to climate change. 

They’re asking the question can we continue to grow simply by penetrating markets which are growing at two or three per cent?  Can we grow at the eight, nine, ten per cent we’re looking for?  The answer is no because we’re now big in those markets.  Part of the answer to that growth question will be the Chinese consumer, but part of the answer will also be getting ahead in the fast growing technologies of the world, getting ahead in this new energy industrial revolution and they see that very clearly and they’re moving.

I don’t want to pretend that the argument is over in China.  The people in China like their people in my own country who follow the economic growth theories of the last century… It’s takes time for ideas to change, but they’re changing.  They’re changing because of serious analysis which Chinese economists, engineers, policymakers are carrying through about the risks that they face and about the opportunities there if they move quickly.  And it’s happening.

 Of course they’re still opening a coal fired power station every week, but we have to recognise that the change is taking place and it’s picking up pace.  So, what do we as any particular country in the world learn from this?  That this green race has begun, this new industrial revolution is still very much in the early stages is on the way, so what do we do? 

Well, we can step out of it and not bother and hope that it won’t last.  We’ll get it wrong, but we can… hopefully it won’t last and carry on as normal.  You then don’t move at anywhere near as fast as you could and should on the new technologies. 

Trade barriers

You fall behind technologically, but you run another risk because those countries which are moving strongly because they recognised the risks and the opportunities, ten or fifteen years from now will not take kindly to those who haven’t taken this story seriously.  And those who produce dirty will or should expect to see some kind of difficulty in export markets.

 I mean crudely ten or fifteen years from now those who produce in dirty ways are likely to face trade barriers and for good reason. 

Most of the arguments for protectionism that we hear in the world are wrong, logically, empirically wrong and most of us have spent much of our lives working in growth and development combating the argument for protectionism.  But if you tax the good that’s produced in a dirty way in a world that is moving very strongly and for very good reasons to do things differently, that argument actually isn’t wrong.  It’s right.  There is a reason in those circumstances. 

Now, I hope very much we never go there and many of us will work very hard to avoid that, but we have to realise that’s a serious risk.  So, not participating in this new industrial revolution runs two types of risk.  You drop behind technologically and you risk, not tomorrow or the next day, but ten or so years from now, finding real difficulty in the trade story.

That’s the way I think the world is going.  How far will that depend on international agreements at the Copenhagen, Cancun and next year in South Africa kind?  To some extent, it will.  Understanding how other people are doing does depend on sitting down together and thinking through the ways ahead and coming to some common understanding. 

But this doesn’t… this story I’m telling doesn’t turn on firm, hard, legally binding agreements signed in blood and in fortified some exterior force with Mars or Venus.  This is about people getting together understanding where they’re going, trying to work out the opportunities, sharing ideas and technology and that’s why global agreements are important on this with the kind of formality that people sometimes think of here is not necessary.

 If you wait until everybody has agreed formally on absolutely everything before you do anything at all, nothing will happen, but that fortunately is not the route that we’re going down.  So, in the story I’m telling international agreements are important, but we have to have a broad view of what they might look like. 

We need one with the other, this country and that country, we need some understanding and confidence in the way the world is going.  We need to be sharing the technologies.  The global carbon capture and storage institute in this country is an important contribution to the process of sharing technologies and any other ways of doing it.  These are the kinds of routes we have to go. 

We need strong agreements on forests and we can put those together as we go and we are making strong progress on that. I’m a member of the United Nations high level advisory group on climate finance and Australia is working very constructively I should say. We’re working on the elements of this overall understanding.

 In Cancun I hope we get something which is a political agreement, but deeper and stronger than the Copenhagen Accord.  I’m more than happy to talk about the Copenhagen Accord in questions.  It’s provided a platform for going forward.  It emerged right at the end of the story.  It’s nowhere near as strong as many of us would have hoped.  Copenhagen was cold, chaotic and quarrelsome and very disappointing, but it wasn’t nothing. 

We came out with the two degree target.  Countries promised to submit their emissions targets for 2020 six weeks later.  We didn’t know they would.  They did.  More than 85% of world emissions are now covered by those Copenhagen Accords. Do I wish Copenhagen had been much more productive?  Of course I do.  But to say nothing happened, to say it was a total failure is wrong.  To say we could have done much better and it was very disappointing is right.  So, we do have to see that there’s something to build on and it’s being built on. 

So, we can move forward in Cancun.  I don’t think we’ll move very far forward actually, but we could move forward in Cancun and I think it’ll be a deepening of a political agreement and next year we could hope for something stronger in Durban in South Africa.  So, that’s the story of where the world is moving in the world of international agreement.

Australia

I think I’ve got two or three minutes left and I’m going to chance my arm and talk about Australia.  You know far more about Australia than I will ever know.  This is my second visit, but I’m going to stick to what are the pretty well known facts.  Australia has got lots of land and it’s got lots of sun.  Nobody disagrees with that.

It actually has a lot of natural resources and you’ve it’s got some very good universities, and high skills in technology.  This is a very advantageous position for this new industrial revolution.  Australia’s extremely well placed whether it be solar or bio fuels or the skills in high tech or from the endowments it has in natural resources the ability to invest.

 What might a country do with really strong and natural resources?  In other words with capital that’s underground?  Well, you remove it from being underground and you put it on the markets and you’ve taken capital and you put them on the markets. 

What do you do with the money?  Well, the answers to those questions I think are illustrated by different countries round the world including your own.  Probably want some in a sovereign wealth fund, bank it for the future and thereby stop your exchange rate rising too hard and impoverishing your manufacturing. 

Believe me, we know about that in the UK.  We squandered the North Sea oil in the unwanted leisure of the British unemployed as we deindustrialised in the ‘80s and ‘90s.  I don’t recommend that route.

You invest in bringing your costs down in the future.  That’s infrastructure.  It is an important part of that story.  You develop the human capital which is going to be vital to this story of the new industrial revolution; invest your people, in your universities, in your technologies and you think about laying the foundations of the growth story of the future, not picking winners, but asking the question where is the growth likely to come? 

Now, I’ll describe where I think it’s likely to come, not only, but in large measure in the new industrial revolution, the energy efficient and low carbon technologies.  That seems to be a set of ways of using the blessings which you have in the natural resources which you have. 

Work on carbon capture and storage and, you know, keep open the markets for coal.  That’s a valuable resource which you have over time unless we know how to… learn how to use coal in a clean way, we won’t be able to use it because it’ll be inconsistent with the constraints that we face on greenhouse gases in the atmosphere, but I’m optimistic that we can find ways of using coal in clean ways, but it does involve investment.  It does involve learning.  It does involve sharing ideas. 

These are the kinds of ways in which it seems to me that you are just extraordinarily lucky and I’m sure that you will use that, those blessings and that luck in a very constructive and positive way and I think in a world which is now having its discussions in terms of a G20, Australia has enormous advantages.  You are not the G8.  It carries a lot of baggage.  You are not the big developing countries where there’s inevitably a certain amount of power game going on for readjusting the world economic order, but you’re there at the table.  You can do so much and you’ve got so much and I’m enormously optimistic as a friendly visitor in the future of this country.  Thanks very much.