What is the economics of climate change?

This discussion paper, known as the "Stern Review", written by Sir Nick Stern of the UK's HM Treasury, discusses the long term economic challenges posed by climate change, warning that global warming itself may impede global economic growth.

The economic challenges posed by global warming are central to EU efforts at trying to build a consensus for international action after 2012 when targets agreed under the Kyoto Protocol will expire.

The Stern Review argues effective action requires an understanding of how mitigation measures, such as the EU CO2 Emissions Trading Scheme adopted under the Kyoto Protocol, may affect economic growth. It says the effectiveness of such action, "depends on how quickly current energy production and consumption patterns are shifted, on how co-ordinated countries are in their actions, and on how far action eliminates energy inefficiencies and promotes innovation".

The Stern Review says a combination of policies will be needed for effective action, including setting "clear, long-term and credible incentives" for the private sector. Such action, it adds, should "take into account the complexities and imperfections in energy markets, including possible responses of fossil fuel prices, and the importance of other energy policy goals including security of supply and access to energy".

Commenting on the widely recognised need for international action, the Stern Review recommends that groups of countries act together. This, it says should ensure that "the impacts of particular policy instruments on the competitiveness of individual sectors can be managed more successfully". It says developed countries, "which bear most of the historical responsibility for the problem, should show leadership" in multilateral action.