STERN REVIEW: The Economics of Climate Change 

 i 

Executive Summary 

The scientific evidence is now overwhelming: climate change presents very serious 

global risks, and it demands an urgent global response. 

This independent Review was commissioned by the Chancellor of the Exchequer, 

reporting to both the Chancellor and to the Prime Minister, as a contribution to 

assessing the evidence and building understanding of the economics of climate 

change. 

The Review first examines the evidence on the economic impacts of climate change 

itself, and explores the economics of stabilising greenhouse gases in the 

atmosphere. The second half of the Review considers the complex policy challenges 

involved in managing the transition to a low-carbon economy and in ensuring that 

societies can adapt to the consequences of climate change that can no longer be 

avoided. 

The Review takes an international perspective. Climate change is global in its 

causes and consequences, and international collective action will be critical in driving 

an effective, efficient and equitable response on the scale required. This response 

will require deeper international co-operation in many areas - most notably in creating 

price signals and markets for carbon, spurring technology research, development 

and deployment, and promoting adaptation, particularly for developing countries. 

Climate change presents a unique challenge for economics: it is the greatest and 

widest-ranging market failure ever seen. The economic analysis must therefore be 

global, deal with long time horizons, have the economics of risk and uncertainty at 

centre stage, and examine the possibility of major, non-marginal change. To meet 

these requirements, the Review draws on ideas and techniques from most of the 

important areas of economics, including many recent advances. 

The benefits of strong, early action on climate change outweigh the costs

The effects of our actions now on future changes in the climate have long lead times. 

What we do now can have only a limited effect on the climate over the next 40 or 50 

years. On the other hand what we do in the next 10 or 20 years can have a profound 

effect on the climate in the second half of this century and in the next. 

No-one can predict the consequences of climate change with complete certainty; but 

we now know enough to understand the risks. Mitigation - taking strong action to 

reduce emissions - must be viewed as an investment, a cost incurred now and in the 

coming few decades to avoid the risks of very severe consequences in the future. If 

these investments are made wisely, the costs will be manageable, and there will be a 

wide range of opportunities for growth and development along the way. For this to 

work well, policy must promote sound market signals, overcome market failures and 

have equity and risk mitigation at its core. That essentially is the conceptual 

framework of this Review. 

The Review considers the economic costs of the impacts of climate change, and the 

costs and benefits of action to reduce the emissions of greenhouse gases (GHGs) 

that cause it, in three different ways: 

• Using disaggregated techniques, in other words considering the physical 

impacts of climate change on the economy, on human life and on the 
STERN REVIEW: The Economics of Climate Change 

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environment, and examining the resource costs of different technologies and 

strategies to reduce greenhouse gas emissions; 

• Using economic models, including integrated assessment models that 

estimate the economic impacts of climate change, and macro-economic 

models that represent the costs and effects of the transition to low-carbon 

energy systems for the economy as a whole; 

• Using comparisons of the current level and future trajectories of the ‘social 

cost of carbon’ (the cost of impacts associated with an additional unit of 

greenhouse gas emissions) with the marginal abatement cost (the costs 

associated with incremental reductions in units of emissions). 

From all of these perspectives, the evidence gathered by the Review leads to a 

simple conclusion: the benefits of strong, early action considerably outweigh the 

costs. 

The evidence shows that ignoring climate change will eventually damage economic 

growth. Our actions over the coming few decades could create risks of major 

disruption to economic and social activity, later in this century and in the next, on a 

scale similar to those associated with the great wars and the economic depression of 

the first half of the 20th century. And it will be difficult or impossible to reverse these 

changes. Tackling climate change is the pro-growth strategy for the longer term, and 

it can be done in a way that does not cap the aspirations for growth of rich or poor 

countries. The earlier effective action is taken, the less costly it will be. 

At the same time, given that climate change is happening, measures to help people 

adapt to it are essential. And the less mitigation we do now, the greater the difficulty 

of continuing to adapt in future. 

*** 
STERN REVIEW: The Economics of Climate Change 

 iii 

The first half of the Review considers how the evidence on the economic impacts of 

climate change, and on the costs and benefits of action to reduce greenhouse gas 

emissions, relates to the conceptual framework described above. 

The scientific evidence points to increasing risks of serious, irreversible 

impacts from climate change associated with business-as-usual (BAU) paths 

for emissions. 

The scientific evidence on the causes and future paths of climate change is 

strengthening all the time. In particular, scientists are now able to attach probabilities 

to the temperature outcomes and impacts on the natural environment associated with 

different levels of stabilisation of greenhouse gases in the atmosphere. Scientists 

also now understand much more about the potential for dynamic feedbacks that 

have, in previous times of climate change, strongly amplified the underlying physical 

processes. 

The stocks of greenhouse gases in the atmosphere (including carbon dioxide, 

methane, nitrous oxides and a number of gases that arise from industrial processes) 

are rising, as a result of human activity. The sources are summarised in Figure 1 

below. 

The current level or stock of greenhouse gases in the atmosphere is equivalent to 

around 430 parts per million (ppm) CO2 

1

, compared with only 280ppm before the 

Industrial Revolution. These concentrations have already caused the world to warm 

by more than half a degree Celsius and will lead to at least a further half degree 

warming over the next few decades, because of the inertia in the climate system. 

Even if the annual flow of emissions did not increase beyond today's rate, the stock 

of greenhouse gases in the atmosphere would reach double pre-industrial levels by 

2050 - that is 550ppm CO2e - and would continue growing thereafter. But the 

annual flow of emissions is accelerating, as fast-growing economies invest in highcarbon infrastructure and as demand for energy and transport increases around the 

world. The level of 550ppm CO2e could be reached as early as 2035. At this level 

there is at least a 77% chance - and perhaps up to a 99% chance, depending on the 

climate model used - of a global average temperature rise exceeding 2°C. 

 

1

 Referred to hereafter as CO2 equivalent, CO2e 
STERN REVIEW: The Economics of Climate Change 

 iv 

Figure 1 Greenhouse-gas emissions in 2000, by source 

Power

(24%)

Transport

(14%)

Buildings

(8%)

Industry (14%)

Other energy

related (5%)

Waste (3%)

Agriculture

(14%)

Land use

(18%)

NON-ENERGY

EMISSIONS

ENERGY

EMISSIONS

Energy emissions are mostly CO2 (some non-CO2 in industry and other energy related).

Non-energy emissions are CO2 (land use) and non-CO2 (agriculture and waste).

Total emissions in 2000: 42 GtCO2e.

Source: Prepared by Stern Review, from data drawn from World Resources Institute Climate 

Analysis Indicators Tool (CAIT) on-line database version 3.0. 

Under a BAU scenario, the stock of greenhouse gases could more than treble by the 

end of the century, giving at least a 50% risk of exceeding 5°C global average 

temperature change during the following decades. This would take humans into 

unknown territory. An illustration of the scale of such an increase is that we are now 

only around 5°C warmer than in the last ice age. 

Such changes would transform the physical geography of the world. A radical 

change in the physical geography of the world must have powerful implications for 

the human geography - where people live, and how they live their lives. 

Figure 2 summarises the scientific evidence of the links between concentrations of 

greenhouse gases in the atmosphere, the probability of different levels of global 

average temperature change, and the physical impacts expected for each level. The 

risks of serious, irreversible impacts of climate change increase strongly as 

concentrations of greenhouse gases in the atmosphere rise. 
STERN REVIEW: The Economics of Climate Change 

 v 

Figure 2 Stabilisation levels and probability ranges for temperature increases 

The figure below illustrates the types of impacts that could be experienced as the world comes into 

equilibrium with more greenhouse gases. The top panel shows the range of temperatures projected at 

stabilisation levels between 400ppm and 750ppm CO2e at equilibrium. The solid horizontal lines indicate 

the 5 - 95% range based on climate sensitivity estimates from the IPCC 20012 and a recent Hadley 

Centre ensemble study3. The vertical line indicates the mean of the 50th percentile point. The dashed 

lines show the 5 - 95% range based on eleven recent studies4. The bottom panel illustrates the range of 

impacts expected at different levels of warming. The relationship between global average temperature 

changes and regional climate changes is very uncertain, especially with regard to changes in 

precipitation (see Box 4.2). This figure shows potential changes based on current scientific literature. 

1°C 2°C 5°C 3°C 4°C

Risk of weakening of natural carbon absorption and possible increasing 

natural methane releases and weakening of the Atlantic THC

400 ppm CO2e

450 ppm CO2e

550 ppm CO2e

650ppm CO2e

750ppm CO2e

5% 95%

Sea level rise threatens 

major world cities, including 

London, Shanghai, New 

York, Tokyo and Hong Kong

Food Falling crop yields in many developing regions 

Water

Ecosystems

Risk of rapid 

climate 

change and 

major 

irreversible 

impacts

Eventual Temperature change (relative to pre-industrial)

0°C

Rising crop yields in high-latitude developed 

countries if strong carbon fertilisation

Yields in many developed regions 

decline even if strong carbon fertilisation

Large fraction of ecosystems unable to maintain current form

Increasing risk of abrupt, large-scale shifts in the 

climate system (e.g. collapse of the Atlantic THC 

and the West Antarctic Ice Sheet)

Significant changes in water availability (one 

study projects more than a billion people suffer 

water shortages in the 2080s, many in Africa, 

while a similar number gain water Small mountain glaciers 

disappear worldwide –

potential threat to water 

supplies in several areas Greater than 30% decrease 

in runoff in Mediterranean 

and Southern Africa

Coral reef ecosystems 

extensively and 

eventually irreversibly 

damaged

Possible onset of collapse 

of part or all of Amazonian 

rainforest 

Onset of irreversible melting 

of the Greenland ice sheet

Extreme 

Weather 

Events

Rising intensity of storms, forest fires, droughts, flooding and heat waves

Small increases in hurricane 

intensity lead to a doubling of 

damage costs in the US

Many species face extinction

(20 – 50% in one study)

Severe impacts 

in marginal 

Sahel region

Rising number of people at risk from hunger (25 

– 60% increase in the 2080s in one study with 

weak carbon fertilisation), with half of the 

increase in Africa and West Asia.

Entire regions experience 

major declines in crop yields 

(e.g. up to one third in Africa)

 

2 Wigley, T.M.L. and S.C.B. Raper (2001): 'Interpretation of high projections for global-mean warming', Science 293: 

451-454 based on Intergovernmental Panel on Climate Change (2001): 'Climate change 2001: the scientific basis. 

Contribution of Working Group I to the Third Assessment Report of the Intergovernmental Panel on Climate Change' 

[Houghton JT, Ding Y, Griggs DJ, et al. (eds.)], Cambridge: Cambridge University Press. 3

 Murphy, J.M., D.M.H. Sexton D.N. Barnett et al. (2004): 'Quantification of modelling uncertainties in a large 

ensemble of climate change simulations', Nature 430: 768 - 772 4

 Meinshausen, M. (2006): 'What does a 2°C target mean for greenhouse gas concentrations? A brief analysis based 

on multi-gas emission pathways and several climate sensitivity uncertainty estimates', Avoiding dangerous climate 

change, in H.J. Schellnhuber et al. (eds.), Cambridge: Cambridge University Press, pp.265 - 280.
STERN REVIEW: The Economics of Climate Change 

 vi 

Climate change threatens the basic elements of life for people around the 

world - access to water, food production, health, and use of land and the 

environment. 

Estimating the economic costs of climate change is challenging, but there is a range 

of methods or approaches that enable us to assess the likely magnitude of the risks 

and compare them with the costs. This Review considers three of these 

approaches. 

This Review has first considered in detail the physical impacts on economic activity, 

on human life and on the environment. 

On current trends, average global temperatures will rise by 2 - 3°C within the next 

fifty years or so. 5

 The Earth will be committed to several degrees more warming if 

emissions continue to grow. 

Warming will have many severe impacts, often mediated through water: 

• Melting glaciers will initially increase flood risk and then strongly reduce water 

supplies, eventually threatening one-sixth of the world’s population, 

predominantly in the Indian sub-continent, parts of China, and the Andes in 

South America. 

• Declining crop yields, especially in Africa, could leave hundreds of millions 

without the ability to produce or purchase sufficient food. At mid to high 

latitudes, crop yields may increase for moderate temperature rises (2 - 3°C), 

but then decline with greater amounts of warming. At 4°C and above, global 

food production is likely to be seriously affected. 

• In higher latitudes, cold-related deaths will decrease. But climate change will 

increase worldwide deaths from malnutrition and heat stress. Vector-borne 

diseases such as malaria and dengue fever could become more widespread 

if effective control measures are not in place. 

• Rising sea levels will result in tens to hundreds of millions more people 

flooded each year with warming of 3 or 4°C. There will be serious risks and 

increasing pressures for coastal protection in South East Asia (Bangladesh 

and Vietnam), small islands in the Caribbean and the Pacific, and large 

coastal cities, such as Tokyo, New York, Cairo and London. According to one 

estimate, by the middle of the century, 200 million people may become 

permanently displaced due to rising sea levels, heavier floods, and more 

intense droughts. 

• Ecosystems will be particularly vulnerable to climate change, with around 15 - 

40% of species potentially facing extinction after only 2°C of warming. And 

ocean acidification, a direct result of rising carbon dioxide levels, will have 

major effects on marine ecosystems, with possible adverse consequences on 

fish stocks. 

 

5

 All changes in global mean temperature are expressed relative to pre-industrial levels (1750 - 1850). 
STERN REVIEW: The Economics of Climate Change 

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The damages from climate change will accelerate as the world gets warmer. 

Higher temperatures will increase the chance of triggering abrupt and large-scale 

changes. 

• Warming may induce sudden shifts in regional weather patterns such as the 

monsoon rains in South Asia or the El Niño phenomenon - changes that 

would have severe consequences for water availability and flooding in tropical 

regions and threaten the livelihoods of millions of people. 

• A number of studies suggest that the Amazon rainforest could be vulnerable 

to climate change, with models projecting significant drying in this region. One 

model, for example, finds that the Amazon rainforest could be significantly, 

and possibly irrevocably, damaged by a warming of 2 - 3°C. 

• The melting or collapse of ice sheets would eventually threaten land which 

today is home to 1 in every 20 people. 

While there is much to learn about these risks, the temperatures that may result from 

unabated climate change will take the world outside the range of human experience. 

This points to the possibility of very damaging consequences. 

The impacts of climate change are not evenly distributed - the poorest 

countries and people will suffer earliest and most. And if and when the 

damages appear it will be too late to reverse the process. Thus we are forced 

to look a long way ahead. 

Climate change is a grave threat to the developing world and a major obstacle to 

continued poverty reduction across its many dimensions. First, developing regions 

are at a geographic disadvantage: they are already warmer, on average, than 

developed regions, and they also suffer from high rainfall variability. As a result, 

further warming will bring poor countries high costs and few benefits. Second, 

developing countries - in particular the poorest - are heavily dependent on 

agriculture, the most climate-sensitive of all economic sectors, and suffer from 

inadequate health provision and low-quality public services. Third, their low incomes 

and vulnerabilities make adaptation to climate change particularly difficult. 

Because of these vulnerabilities, climate change is likely to reduce further already 

low incomes and increase illness and death rates in developing countries. Falling 

farm incomes will increase poverty and reduce the ability of households to invest in a 

better future, forcing them to use up meagre savings just to survive. At a national 

level, climate change will cut revenues and raise spending needs, worsening public 

finances. 

Many developing countries are already struggling to cope with their current climate. 

Climatic shocks cause setbacks to economic and social development in developing 

countries today even with temperature increases of less than 1°C.. The impacts of 

unabated climate change, - that is, increases of 3 or 4°C and upwards - will be to 

increase the risks and costs of these events very powerfully. 

 

Impacts on this scale could spill over national borders, exacerbating the damage 

further. Rising sea levels and other climate-driven changes could drive millions of 

people to migrate: more than a fifth of Bangladesh could be under water with a 1m 

rise in sea levels, which is a possibility by the end of the century. Climate-related 
STERN REVIEW: The Economics of Climate Change 

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shocks have sparked violent conflict in the past, and conflict is a serious risk in areas 

such as West Africa, the Nile Basin and Central Asia. 

Climate change may initially have small positive effects for a few developed 

countries, but is likely to be very damaging for the much higher temperature 

increases expected by mid- to late-century under BAU scenarios. 

In higher latitude regions, such as Canada, Russia and Scandinavia, climate change 

may lead to net benefits for temperature increases of 2 or 3°C, through higher 

agricultural yields, lower winter mortality, lower heating requirements, and a possible 

boost to tourism. But these regions will also experience the most rapid rates of 

warming, damaging infrastructure, human health, local livelihoods and biodiversity. 

Developed countries in lower latitudes will be more vulnerable - for example, water 

availability and crop yields in southern Europe are expected to decline by 20% with a 

2°C increase in global temperatures. Regions where water is already scarce will face 

serious difficulties and growing costs. 

The increased costs of damage from extreme weather (storms, hurricanes, typhoons, 

floods, droughts, and heat waves) counteract some early benefits of climate change 

and will increase rapidly at higher temperatures. Based on simple extrapolations, 

costs of extreme weather alone could reach 0.5 - 1% of world GDP per annum by the 

middle of the century, and will keep rising if the world continues to warm. 

• A 5 or 10% increase in hurricane wind speed, linked to rising sea 

temperatures, is predicted approximately to double annual damage costs, in 

the USA. 

• In the UK, annual flood losses alone could increase from 0.1% of GDP today 

to 0.2 - 0.4% of GDP once the increase in global average temperatures 

reaches 3 or 4°C. 

• Heat waves like that experienced in 2003 in Europe, when 35,000 people 

died and agricultural losses reached $15 billion, will be commonplace by the 

middle of the century. 

At higher temperatures, developed economies face a growing risk of large-scale 

shocks - for example, the rising costs of extreme weather events could affect global 

financial markets through higher and more volatile costs of insurance. 

Integrated assessment models provide a tool for estimating the total impact on 

the economy; our estimates suggest that this is likely to be higher than 

previously suggested. 

The second approach to examining the risks and costs of climate change adopted in 

the Review is to use integrated assessment models to provide aggregate monetary 

estimates. 

Formal modelling of the overall impact of climate change in monetary terms is a 

formidable challenge, and the limitations to modelling the world over two centuries or 

more demand great caution in interpreting results. However, as we have explained, 

the lags from action to effect are very long and the quantitative analysis needed to 

inform action will depend on such long-range modelling exercises. The monetary 

impacts of climate change are now expected to be more serious than many earlier 

studies suggested, not least because those studies tended to exclude some of the 
STERN REVIEW: The Economics of Climate Change 

 ix 

most uncertain but potentially most damaging impacts. Thanks to recent advances in 

the science, it is now possible to examine these risks more directly, using 

probabilities. 

Most formal modelling in the past has used as a starting point a scenario of 2-3°C 

warming. In this temperature range, the cost of climate change could be equivalent to 

a permanent loss of around 0-3% in global world output compared with what could 

have been achieved in a world without climate change. Developing countries will 

suffer even higher costs. 

However, those earlier models were too optimistic about warming: more recent 

evidence indicates that temperature changes resulting from BAU trends in emissions 

may exceed 2-3°C by the end of this century. This increases the likelihood of a wider 

range of impacts than previously considered. Many of these impacts, such as abrupt 

and large-scale climate change, are more difficult to quantify. With 5-6°C warming - 

which is a real possibility for the next century - existing models that include the risk of 

abrupt and large-scale climate change estimate an average 5-10% loss in global 

GDP, with poor countries suffering costs in excess of 10% of GDP. Further, there is 

some evidence of small but significant risks of temperature rises even above this 

range. Such temperature increases would take us into territory unknown to human 

experience and involve radical changes in the world around us. 

With such possibilities on the horizon, it was clear that the modelling framework used 

by this Review had to be built around the economics of risk. Averaging across 

possibilities conceals risks. The risks of outcomes much worse than expected are 

very real and they could be catastrophic. Policy on climate change is in large 

measure about reducing these risks. They cannot be fully eliminated, but they can 

be substantially reduced. Such a modelling framework has to take into account 

ethical judgements on the distribution of income and on how to treat future 

generations. 

The analysis should not focus only on narrow measures of income like GDP. The 

consequences of climate change for health and for the environment are likely to be 

severe. Overall comparison of different strategies will include evaluation of these 

consequences too. Again, difficult conceptual, ethical and measurement issues are 

involved, and the results have to be treated with due circumspection. 

The Review uses the results from one particular model, PAGE2002, to illustrate how 

the estimates derived from these integrated assessment models change in response 

to updated scientific evidence on the probabilities attached to degrees of temperature 

rise. The choice of model was guided by our desire to analyse risks explicitly - this is 

one of the very few models that would allow that exercise. Further, its underlying 

assumptions span the range of previous studies. We have used this model with one 

set of data consistent with the climate predictions of the 2001 report of the 

Intergovernmental Panel on Climate Change, and with one set that includes a small 

increase in the amplifying feedbacks in the climate system. This increase illustrates 

one area of the increased risks of climate change that have appeared in the peerreviewed scientific literature published since 2001. 

We have also considered how the application of appropriate discount rates, 

assumptions about the equity weighting attached to the valuation of impacts in poor 

countries, and estimates of the impacts on mortality and the environment would 

increase the estimated economic costs of climate change. 
STERN REVIEW: The Economics of Climate Change 

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Using this model, and including those elements of the analysis that can be 

incorporated at the moment, we estimate the total cost over the next two centuries of 

climate change associated under BAU emissions involves impacts and risks that are 

equivalent to an average reduction in global per-capita consumption of at least 5%, 

now and forever. While this cost estimate is already strikingly high, it also leaves out 

much that is important. 

The cost of BAU would increase still further, were the model systematically to take 

account of three important factors: 

• First, including direct impacts on the environment and human health 

(sometimes called ‘non-market’ impacts) increases our estimate of the total 

cost of climate change on this path from 5% to 11% of global per-capita 

consumption. There are difficult analytical and ethical issues of measurement 

here. The methods used in this model are fairly conservative in the value they 

assign to these impacts. 

• Second, some recent scientific evidence indicates that the climate system 

may be more responsive to greenhouse-gas emissions than previously 

thought, for example because of the existence of amplifying feedbacks such 

as the release of methane and weakening of carbon sinks. Our estimates, 

based on modelling a limited increase in this responsiveness, indicate that the 

potential scale of the climate response could increase the cost of climate 

change on the BAU path from 5% to 7% of global consumption, or from 11% 

to 14% if the non-market impacts described above are included. 

• Third, a disproportionate share of the climate-change burden falls on poor 

regions of the world. If we weight this unequal burden appropriately, the 

estimated global cost of climate change at 5-6°C warming could be more than 

one-quarter higher than without such weights. 

Putting these additional factors together would increase the total cost of BAU climate 

change to the equivalent of around a 20% reduction in consumption per head, now 

and into the future. 

In summary, analyses that take into account the full ranges of both impacts and 

possible outcomes - that is, that employ the basic economics of risk - suggest that 

BAU climate change will reduce welfare by an amount equivalent to a reduction in 

consumption per head of between 5 and 20%. Taking account of the increasing 

scientific evidence of greater risks, of aversion to the possibilities of catastrophe, and 

of a broader approach to the consequences than implied by narrow output measures, 

the appropriate estimate is likely to be in the upper part of this range. 

Economic forecasting over just a few years is a difficult and imprecise task. The 

analysis of climate change requires, by its nature, that we look out over 50, 100, 200 

years and more. Any such modelling requires caution and humility, and the results 

are specific to the model and its assumptions. They should not be endowed with a 

precision and certainty that is simply impossible to achieve. Further, some of the big 

uncertainties in the science and the economics concern the areas we know least 

about (for example, the impacts of very high temperatures), and for good reason - 

this is unknown territory. The main message from these models is that when we try to 

take due account of the upside risks and uncertainties, the probability-weighted costs 

look very large. Much (but not all) of the risk can be reduced through a strong 

mitigation policy, and we argue that this can be achieved at a far lower cost than 
STERN REVIEW: The Economics of Climate Change 

 xi 

those calculated for the impacts. In this sense, mitigation is a highly productive 

investment. 

Emissions have been, and continue to be, driven by economic growth; yet 

stabilisation of greenhouse-gas concentrations in the atmosphere is feasible 

and consistent with continued growth.

CO2 emissions per head have been strongly correlated with GDP per head. As a 

result, since 1850, North America and Europe have produced around 70% of all the 

CO2 emissions due to energy production, while developing countries have accounted 

for less than one quarter. Most future emissions growth will come from today’s 

developing countries, because of their more rapid population and GDP growth and 

their increasing share of energy-intensive industries. 

Yet despite the historical pattern and the BAU projections, the world does not need to 

choose between averting climate change and promoting growth and development. 

Changes in energy technologies and the structure of economies have reduced the 

responsiveness of emissions to income growth, particularly in some of the richest 

countries. With strong, deliberate policy choices, it is possible to ‘decarbonise’ both 

developed and developing economies on the scale required for climate stabilisation, 

while maintaining economic growth in both. 

Stabilisation - at whatever level - requires that annual emissions be brought down to 

the level that balances the Earth’s natural capacity to remove greenhouse gases 

from the atmosphere. The longer emissions remain above this level, the higher the 

final stabilisation level. In the long term, annual global emissions will need to be 

reduced to below 5 GtCO2e, the level that the earth can absorb without adding to the 

concentration of GHGs in the atmosphere. This is more than 80% below the 

absolute level of current annual emissions. 

This Review has focused on the feasibility and costs of stabilisation of greenhouse 

gas concentrations in the atmosphere in the range of 450-550ppm CO2e. 

Stabilising at or below 550ppm CO2e would require global emissions to peak in the 

next 10 - 20 years, and then fall at a rate of at least 1 - 3% per year. The range of 

paths is illustrated in Figure 3. By 2050, global emissions would need to be around 

25% below current levels. These cuts will have to be made in the context of a world 

economy in 2050 that may be 3 - 4 times larger than today - so emissions per unit of 

GDP would need to be just one quarter of current levels by 2050. 

To stabilise at 450ppm CO2e, without overshooting, global emissions would need to 

peak in the next 10 years and then fall at more than 5% per year, reaching 70% 

below current levels by 2050. 

Theoretically it might be possible to “overshoot” by allowing the atmospheric GHG 

concentration to peak above the stabilisation level and then fall, but this would be 

both practically very difficult and very unwise. Overshooting paths involve greater 

risks, as temperatures will also rise rapidly and peak at a higher level for many 

decades before falling back down. Also, overshooting requires that emissions 

subsequently be reduced to extremely low levels, below the level of natural carbon 

absorption, which may not be feasible. Furthermore, if the high temperatures were to 

weaken the capacity of the Earth to absorb carbon - as becomes more likely with 

overshooting - future emissions would need to be cut even more rapidly to hit any 

given stabilisation target for atmospheric concentration. 
STERN REVIEW: The Economics of Climate Change 

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Figure 3 Illustrative emissions paths to stabilise at 550ppm CO2e. 

The figure below shows six illustrative paths to stabilisation at 550ppm CO2e. The rates of emissions 

cuts given in the legend are the maximum 10-year average rate of decline of global emissions. The 

figure shows that delaying emissions cuts (shifting the peak to the right) means that emissions must be 

reduced more rapidly to achieve the same stabilisation goal. The rate of emissions cuts is also very 

sensitive to the height of the peak. For example, if emissions peak at 48 GtCO2 rather than 52 GtCO2 in 

2020, the rate of cuts is reduced from 2.5%/yr to 1.5%/yr. 

0

10

20

30

40

50

60

70

2000 2020 2040 2060 2080 2100

Global Emissions (GtCO2e)

2015 High Peak - 1.0%/yr

2020 High Peak - 2.5%/yr

2030 High Peak - 4.0%/yr

2040 High Peak - 4.5%/yr (overshoot) 

2020 Low Peak - 1.5%/yr

2030 Low Peak - 2.5%/yr

2040 Low Peak - 3.0%/yr

Source: Reproduced by the Stern Review based on Meinshausen, M. (2006): 'What does a 2°C target 

mean for greenhouse gas concentrations? A brief analysis based on multi-gas emission pathways and 

several climate sensitivity uncertainty estimates', Avoiding dangerous climate change, in H.J. 

Schellnhuber et al. (eds.), Cambridge: Cambridge University Press, pp.265 - 280.

Achieving these deep cuts in emissions will have a cost. The Review estimates 

the annual costs of stabilisation at 500-550ppm CO2e to be around 1% of GDP 

by 2050 - a level that is significant but manageable. 

Reversing the historical trend in emissions growth, and achieving cuts of 25% or 

more against today’s levels is a major challenge. Costs will be incurred as the world 

shifts from a high-carbon to a low-carbon trajectory. But there will also be business 

opportunities as the markets for low-carbon, high-efficiency goods and services 

expand. 

Greenhouse-gas emissions can be cut in four ways. Costs will differ considerably 

depending on which combination of these methods is used, and in which sector: 

 

• Reducing demand for emissions-intensive goods and services 

• Increased efficiency, which can save both money and emissions 

• Action on non-energy emissions, such as avoiding deforestation 

• Switching to lower-carbon technologies for power, heat and transport 

Estimating the costs of these changes can be done in two ways. One is to look at the 

resource costs of measures, including the introduction of low-carbon technologies 

and changes in land use, compared with the costs of the BAU alternative. This 
STERN REVIEW: The Economics of Climate Change 

 xiii 

provides an upper bound on costs, as it does not take account of opportunities to 

respond involving reductions in demand for high-carbon goods and services. 

The second is to use macroeconomic models to explore the system-wide effects of 

the transition to a low-carbon energy economy. These can be useful in tracking the 

dynamic interactions of different factors over time, including the response of 

economies to changes in prices. But they can be complex, with their results affected 

by a whole range of assumptions. 

On the basis of these two methods, central estimate is that stabilisation of 

greenhouse gases at levels of 500-550ppm CO2e will cost, on average, around 1% of 

annual global GDP by 2050. This is significant, but is fully consistent with continued 

growth and development, in contrast with unabated climate change, which will 

eventually pose significant threats to growth. 

Resource cost estimates suggest that an upper bound for the expected annual 

cost of emissions reductions consistent with a trajectory leading to 

stabilisation at 550ppm CO2e is likely to be around 1% of GDP by 2050. 

This Review has considered in detail the potential for, and costs of, technologies and 

measures to cut emissions across different sectors. As with the impacts of climate 

change, this is subject to important uncertainties. These include the difficulties of 

estimating the costs of technologies several decades into the future, as well as the 

way in which fossil-fuel prices evolve in the future. It is also hard to know how people 

will respond to price changes. 

The precise evolution of the mitigation effort, and the composition across sectors of 

emissions reductions, will therefore depend on all these factors. But it is possible to 

make a central projection of costs across a portfolio of likely options, subject to a 

range. 

The technical potential for efficiency improvements to reduce emissions and costs is 

substantial. Over the past century, efficiency in energy supply improved ten-fold or 

more in developed countries, and the possibilities for further gains are far from being 

exhausted. Studies by the International Energy Agency show that, by 2050, energy 

efficiency has the potential to be the biggest single source of emissions savings in 

the energy sector. This would have both environmental and economic benefits: 

energy-efficiency measures cut waste and often save money. 

Non-energy emissions make up one-third of total greenhouse-gas emissions; action 

here will make an important contribution. A substantial body of evidence suggests 

that action to prevent further deforestation would be relatively cheap compared with 

other types of mitigation, if the right policies and institutional structures are put in 

place. 

Large-scale uptake of a range of clean power, heat, and transport technologies is 

required for radical emission cuts in the medium to long term. The power sector 

around the world will have to be least 60%, and perhaps as much as 75%, 

decarbonised by 2050 to stabilise at or below 550ppm CO2e. Deep cuts in the 

transport sector are likely to be more difficult in the shorter term, but will ultimately be 

needed. While many of the technologies to achieve this already exist, the priority is to 

bring down their costs so that they are competitive with fossil-fuel alternatives under 

a carbon-pricing policy regime. 
STERN REVIEW: The Economics of Climate Change 

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A portfolio of technologies will be required to stabilise emissions. It is highly unlikely 

that any single technology will deliver all the necessary emission savings, because all 

technologies are subject to constraints of some kind, and because of the wide range 

of activities and sectors that generate greenhouse-gas emissions. It is also 

uncertain which technologies will turn out to be cheapest. Hence a portfolio will be 

required for low-cost abatement. 

The shift to a low-carbon global economy will take place against the background of 

an abundant supply of fossil fuels. That is to say, the stocks of hydrocarbons that are 

profitable to extract (under current policies) are more than enough to take the world 

to levels of greenhouse-gas concentrations well beyond 750ppm CO2e, with very 

dangerous consequences. Indeed, under BAU, energy users are likely to switch 

towards more carbon-intensive coal and oil shales, increasing rates of emissions 

growth. 

Even with very strong expansion of the use of renewable energy and other lowcarbon energy sources, hydrocarbons may still make over half of global energy 

supply in 2050. Extensive carbon capture and storage would allow this continued 

use of fossil fuels without damage to the atmosphere, and also guard against the 

danger of strong climate-change policy being undermined at some stage by falls in 

fossil-fuel prices. 

Estimates based on the likely costs of these methods of emissions reduction show 

that the annual costs of stabilising at around 550ppm CO2e are likely to be around 

1% of global GDP by 2050, with a range from –1% (net gains) to +3.5% of GDP. 

Looking at broader macroeconomic models confirms these estimates. 

The second approach adopted by the Review was based comparisons of a broad 

range of macro-economic model estimates (such as that presented in Figure 4 

below). This comparison found that the costs for stabilisation at 500-550ppm CO2e 

were centred on 1% of GDP by 2050, with a range of -2% to +5% of GDP. The 

range reflects a number of factors, including the pace of technological innovation and 

the efficiency with which policy is applied across the globe: the faster the innovation 

and the greater the efficiency, the lower the cost. These factors can be influenced by 

policy. 

The average expected cost is likely to remain around 1% of GDP from mid-century, 

but the range of estimates around the 1% diverges strongly thereafter, with some 

falling and others rising sharply by 2100, reflecting the greater uncertainty about the 

costs of seeking out ever more innovative methods of mitigation. 
STERN REVIEW: The Economics of Climate Change 

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Figure 4 Model cost projections scatter plot 

Costs of CO2 reductions as a fraction of world GDP against level of reduction

-30

-25

-20

-15

-10

-5

0

5

10

-100 -80 -60 -40 -20 0 20

CO2 difference from base (%) 

Global and US GWP

 difference from base (%)

IMCP dataset post-SRES dataset WRI dataset (USA only)

Source: Barker, T., M.S. Qureshi and J. Köhler (2006): 'The costs of greenhouse-gas mitigation with 

induced technological change: A Meta-Analysis of estimates in the literature', 4CMR, Cambridge Centre 

for Climate Change Mitigation Research, Cambridge: University of Cambridge. 

 

A broad range of modelling studies, which include exercises undertaken by the IMCP, EMF 

and USCCSP as well at work commissioned by the IPCC, show that costs for 2050 consistent 

with an emissions trajectory leading to stabilisation at around 500-550ppm CO2e are 

clustered in the range of –2% to 5% of GDP, with an average around 1% of GDP. The range 

reflects uncertainties over the scale of mitigation required, the pace of technological 

innovation and the degree of policy flexibility. 

The figure above uses Barker’s combined three-model dataset to show the reduction in 

annual CO2 emissions from the baseline and the associated changes in world GDP. The wide 

range of model results reflects the design of the models and the choice of assumptions 

included within them, which itself reflects uncertainties and differing approaches inherent in 

projecting the future. This shows that the full range of estimates drawn from a variety of 

stabilisation paths and years extends from –4% of GDP (that is, net gains) to +15% of GDP 

costs, but this mainly reflects outlying studies; most estimates are still centred around 1% of 

GDP. In particular, the models arriving at higher cost estimates make assumptions about 

technological progress that are very pessimistic by historical standards. 

Stabilisation at 450ppm CO2e is already almost out of reach, given that we are likely 

to reach this level within ten years and that there are real difficulties of making the 

sharp reductions required with current and foreseeable technologies. Costs rise 

significantly as mitigation efforts become more ambitious or sudden. Efforts to 

reduce emissions rapidly are likely to be very costly. 

An important corollary is that there is a high price to delay. Delay in taking action on 

climate change would make it necessary to accept both more climate change and, 

eventually, higher mitigation costs. Weak action in the next 10-20 years would put 

stabilisation even at 550ppm CO2e beyond reach – and this level is already 

associated with significant risks. 
STERN REVIEW: The Economics of Climate Change 

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The transition to a low-carbon economy will bring challenges for 

competitiveness but also opportunities for growth. 

Costs of mitigation of around 1% of GDP are small relative to the costs and risks of 

climate change that will be avoided. However, for some countries and some sectors, 

the costs will be higher. There may be some impacts on the competitiveness of a 

small number of internationally traded products and processes. These should not be 

overestimated, and can be reduced or eliminated if countries or sectors act together; 

nevertheless, there will be a transition to be managed. For the economy as a whole, 

there will be benefits from innovation that will offset some of these costs. All 

economies undergo continuous structural change; the most successful economies 

are those that have the flexibility and dynamism to embrace the change. 

There are also significant new opportunities across a wide range of industries and 

services. Markets for low-carbon energy products are likely to be worth at least 

$500bn per year by 2050, and perhaps much more. Individual companies and 

countries should position themselves to take advantage of these opportunities. 

Climate-change policy can help to root out existing inefficiencies. At the company 

level, implementing climate policies may draw attention to money-saving 

opportunities. At the economy-wide level, climate-change policy may be a lever for 

reforming inefficient energy systems and removing distorting energy subsidies, on 

which governments around the world currently spend around $250bn a year. 

Policies on climate change can also help to achieve other objectives. These cobenefits can significantly reduce the overall cost to the economy of reducing 

greenhouse-gas emissions. If climate policy is designed well, it can, for example, 

contribute to reducing ill-health and mortality from air pollution, and to preserving 

forests that contain a significant proportion of the world’s biodiversity. 

National objectives for energy security can also be pursued alongside climate change 

objectives. Energy efficiency and diversification of energy sources and supplies 

support energy security, as do clear long-term policy frameworks for investors in 

power generation. Carbon capture and storage is essential to maintain the role of 

coal in providing secure and reliable energy for many economies. 

Reducing the expected adverse impacts of climate change is therefore both 

highly desirable and feasible. 

This conclusion follows from a comparison of the above estimates of the costs of 

mitigation with the high costs of inaction described from our first two methods (the 

aggregated and the disaggregated) of assessing the risks and costs of climate 

change impacts. 

The third approach to analysing the costs and benefits of action on climate change 

adopted by this Review compares the marginal costs of abatement with the social 

cost of carbon. This approach compares estimates of the changes in the expected 

benefits and costs over time from a little extra reduction in emissions, and avoids 

large-scale formal economic models. 

Preliminary calculations adopting the approach to valuation taken in this Review 

suggest that the social cost of carbon today, if we remain on a BAU trajectory, is of 

the order of $85 per tonne of CO2 - higher than typical numbers in the literature, 

largely because we treat risk explicitly and incorporate recent evidence on the risks, 
STERN REVIEW: The Economics of Climate Change 

 xvii 

but nevertheless well within the range of published estimates. This number is well 

above marginal abatement costs in many sectors. Comparing the social costs of 

carbon on a BAU trajectory and on a path towards stabilisation at 550ppm CO2e, we 

estimate the excess of benefits over costs, in net present value terms, from 

implementing strong mitigation policies this year, shifting the world onto the better 

path: the net benefits would be of the order of $2.5 trillion. This figure will increase 

over time. This is not an estimate of net benefits occurring in this year, but a measure 

of the benefits that could flow from actions taken this year; many of the costs and 

benefits would be in the medium to long term. 

Even if we have sensible policies in place, the social cost of carbon will also rise 

steadily over time, making more and more technological options for mitigation costeffective. This does not mean that consumers will always face rising prices for the 

goods and services that they currently enjoy, as innovation driven by strong policy 

will ultimately reduce the carbon intensity of our economies, and consumers will then 

see reductions in the prices that they pay as low-carbon technologies mature. 

The three approaches to the analysis of the costs of climate change used in the 

Review all point to the desirability of strong action, given estimates of the costs of 

action on mitigation. But how much action? The Review goes on to examine the 

economics of this question. 

The current evidence suggests aiming for stabilisation somewhere within the range 

450 - 550ppm CO2e. Anything higher would substantially increase the risks of very 

harmful impacts while reducing the expected costs of mitigation by comparatively 

little. Aiming for the lower end of this range would mean that the costs of mitigation 

would be likely to rise rapidly. Anything lower would certainly impose very high 

adjustment costs in the near term for small gains and might not even be feasible, not 

least because of past delays in taking strong action. 

Uncertainty is an argument for a more, not less, demanding goal, because of the size 

of the adverse climate-change impacts in the worst-case scenarios. 

The ultimate concentration of greenhouse gases determines the trajectory for 

estimates of the social cost of carbon; these also reflect the particular ethical 

judgements and approach to the treatment of uncertainty embodied in the modelling. 

Preliminary work for this Review suggests that, if the target were between 450-

550ppm CO2e, then the social cost of carbon would start in the region of $25-30 per 

tonne of CO2 – around one third of the level if the world stays with BAU. 

The social cost of carbon is likely to increase steadily over time because marginal 

damages increase with the stock of GHGs in the atmosphere, and that stock rises 

over time. Policy should therefore ensure that abatement efforts at the margin also 

intensify over time. But it should also foster the development of technology that can 

drive down the average costs of abatement; although pricing carbon, by itself, will not 

be sufficient to bring forth all the necessary innovation, particularly in the early years. 

The first half of the Review therefore demonstrates that strong action on climate 

change, including both mitigation and adaptation, is worthwhile, and suggests 

appropriate goals for climate-change policy. 

The second half of the Review examines the appropriate form of such policy, and 

how it can be placed within a framework of international collective action. 
STERN REVIEW: The Economics of Climate Change 

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Policy to reduce emissions should be based on three essential elements: 

carbon pricing, technology policy, and removal of barriers to behavioural 

change. 

There are complex challenges in reducing greenhouse-gas emissions. Policy 

frameworks must deal with long time horizons and with interactions with a range of 

other market imperfections and dynamics. 

A shared understanding of the long-term goals for stabilisation is a crucial guide to 

policy-making on climate change: it narrows down strongly the range of acceptable 

emissions paths. But from year to year, flexibility in what, where and when reductions 

are made will reduce the costs of meeting these stabilisation goals. 

Policies should adapt to changing circumstances as the costs and benefits of 

responding to climate change become clearer over time. They should also build on 

diverse national conditions and approaches to policy-making. But the strong links 

between current actions and the long-term goal should be at the forefront of policy. 

Three elements of policy for mitigation are essential: a carbon price, technology 

policy, and the removal of barriers to behavioural change. Leaving out any one of 

these elements will significantly increase the costs of action. 

Establishing a carbon price, through tax, trading or regulation, is an essential 

foundation for climate-change policy. 

The first element of policy is carbon pricing. Greenhouse gases are, in economic 

terms, an externality: those who produce greenhouse-gas emissions are bringing 

about climate change, thereby imposing costs on the world and on future 

generations, but they do not face the full consequences of their actions themselves. 

Putting an appropriate price on carbon – explicitly through tax or trading, or implicitly 

through regulation – means that people are faced with the full social cost of their 

actions. This will lead individuals and businesses to switch away from high-carbon 

goods and services, and to invest in low-carbon alternatives. Economic efficiency 

points to the advantages of a common global carbon price: emissions reductions will 

then take place wherever they are cheapest. 

The choice of policy tool will depend on countries’ national circumstances, on the 

characteristics of particular sectors, and on the interaction between climate-change 

policy and other policies. Policies also have important differences in their 

consequences for the distribution of costs across individuals, and their impact on the 

public finances. Taxation has the advantage of delivering a steady flow of revenue, 

while, in the case of trading, increasing the use of auctioning is likely to have strong 

benefits for efficiency, for distribution and for the public finances. Some 

administrations may choose to focus on trading initiatives, others on taxation or 

regulation, and others on a mix of policies. And their choices may vary across 

sectors. 

Trading schemes can be an effective way to equalise carbon prices across countries 

and sectors, and the EU Emissions Trading Scheme is now the centrepiece of 

European efforts to cut emissions. To reap the benefits of emissions trading, 

schemes must provide incentives for a flexible and efficient response. Broadening 

the scope of trading schemes will tend to lower costs and reduce volatility. Clarity 

and predictability about the future rules and shape of schemes will help to build 

confidence in a future carbon price. 
STERN REVIEW: The Economics of Climate Change 

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In order to influence behaviour and investment decisions, investors and consumers 

must believe that the carbon price will be maintained into the future. This is 

particularly important for investments in long-lived capital stock. Investments such as 

power stations, buildings, industrial plants and aircraft last for many decades. If there 

is a lack of confidence that climate change policies will persist, then businesses may 

not factor a carbon price into their decision-making. The result may be 

overinvestment in long-lived, high-carbon infrastructure – which will make emissions 

cuts later on much more expensive and difficult. 

But establishing credibility takes time. The next 10 to 20 years will be a period of 

transition, from a world where carbon-pricing schemes are in their infancy, to one 

where carbon pricing is universal and is automatically factored into decision making. 

In this transitional period, while the credibility of policy is still being established and 

the international framework is taking shape, it is critical that governments consider 

how to avoid the risks of locking into a high-carbon infrastructure, including 

considering whether any additional measures may be justified to reduce the risks. 

Policies are required to support the development of a range of low-carbon and 

high-efficiency technologies on an urgent timescale. 

The second element of climate-change policy is technology policy, covering the full 

spectrum from research and development, to demonstration and early stage 

deployment. The development and deployment of a wide range of low-carbon 

technologies is essential in achieving the deep cuts in emissions that are needed. 

The private sector plays the major role in R&D and technology diffusion, but closer 

collaboration between government and industry will further stimulate the 

development of a broad portfolio of low carbon technologies and reduce costs. 

Many low-carbon technologies are currently more expensive than the fossil-fuel 

alternatives. But experience shows that the costs of technologies fall with scale and 

experience, as shown in Figure 5 below. 

Carbon pricing gives an incentive to invest in new technologies to reduce carbon; 

indeed, without it, there is little reason to make such investments. But investing in 

new lower-carbon technologies carries risks. Companies may worry that they will not 

have a market for their new product if carbon-pricing policy is not maintained into the 

future. And the knowledge gained from research and development is a public good; 

companies may under-invest in projects with a big social payoff if they fear they will 

be unable to capture the full benefits. Thus there are good economic reasons to 

promote new technology directly. 

Public spending on research, development and demonstration has fallen significantly 

in the last two decades and is now low relative to other industries. There are likely 

to be high returns to a doubling of investments in this area to around $20 billion per 

annum globally, to support the development of a diverse portfolio of technologies. 
STERN REVIEW: The Economics of Climate Change 

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Figure 5: The costs of technologies are likely to fall over time 

Historical experience of both fossil-fuel and low-carbon technologies shows that as scale increases, 

costs tend to fall. Economists have fitted ‘learning curves’ to costs data to estimate the size of this effect. 

An illustrative curve is shown above for a new electricity-generation technology; the technology is 

initially much more expensive than the established alternative, but as its scale increases, the costs fall, 

and beyond Point A it becomes cheaper. Work by the International Energy Agency and others shows 

that such relationships hold for a range of different energy technologies. 

A number of factors explain this, including the effects of learning and economies of scale. But the 

relationship is more complex than the figure suggests. Step-change improvements in a technology might 

accelerate progress, while constraints such as the availability of land or materials could result in 

increasing marginal costs. 

In some sectors - particularly electricity generation, where new technologies can 

struggle to gain a foothold - policies to support the market for early-stage 

technologies will be critical. The Review argues that the scale of existing deployment 

incentives worldwide should increase by two to five times, from the current level of 

around $34 billion per annum. Such measures will be a powerful motivation for 

innovation across the private sector to bring forward the range of technologies 

needed. 

The removal of barriers to behavioural change is a third essential element, one 

that is particularly important in encouraging the take-up of opportunities for 

energy efficiency. 

The third element is the removal of barriers to behavioural change. Even where 

measures to reduce emissions are cost-effective, there may be barriers preventing 

action. These include a lack of reliable information, transaction costs, and 

behavioural and organisational inertia. The impact of these barriers can be most 

clearly seen in the frequent failure to realise the potential for cost-effective energy 

efficiency measures. 

Regulatory measures can play a powerful role in cutting through these complexities, 

and providing clarity and certainty. Minimum standards for buildings and appliances 

have proved a cost-effective way to improve performance, where price signals alone 

may be too muted to have a significant impact. 

Information policies, including labelling and the sharing of best practice, can help 

consumers and businesses make sound decisions, and stimulate competitive 
STERN REVIEW: The Economics of Climate Change 

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markets for low-carbon and high-efficiency goods and services. Financing measures 

can also help, through overcoming possible constraints to paying the upfront cost of 

efficiency improvements. 

Fostering a shared understanding of the nature of climate change, and its 

consequences, is critical in shaping behaviour, as well as in underpinning national 

and international action. Governments can be a catalyst for dialogue through 

evidence, education, persuasion and discussion. Educating those currently at school 

about climate change will help to shape and sustain future policy-making, and a 

broad public and international debate will support today’s policy-makers in taking 

strong action now. 

Adaptation policy is crucial for dealing with the unavoidable impacts of climate 

change, but it has been under-emphasised in many countries. 

Adaptation is the only response available for the impacts that will occur over the next 

several decades before mitigation measures can have an effect. 

Unlike mitigation, adaptation will in most cases provide local benefits, realised 

without long lead times. Therefore some adaptation will occur autonomously, as 

individuals respond to market or environmental changes. Some aspects of 

adaptation, such as major infrastructure decisions, will require greater foresight and 

planning. There are also some aspects of adaptation that require public goods 

delivering global benefits, including improved information about the climate system 

and more climate-resilient crops and technologies. 

Quantitative information on the costs and benefits of economy-wide adaptation is 

currently limited. Studies in climate-sensitive sectors point to many adaptation 

options that will provide benefits in excess of cost. But at higher temperatures, the 

costs of adaptation will rise sharply and the residual damages remain large. The 

additional costs of making new infrastructure and buildings resilient to climate change 

in OECD countries could be $15 – 150 billion each year (0.05 – 0.5% of GDP). 

The challenge of adaptation will be particularly acute in developing countries, where 

greater vulnerability and poverty will limit the capacity to act. As in developed 

countries, the costs are hard to estimate, but are likely to run into tens of billions of 

dollars. 

Markets that respond to climate information will stimulate adaptation among 

individuals and firms. Risk-based insurance schemes, for example, provide strong 

signals about the size of climate risks and therefore encourage good risk 

management. 

Governments have a role in providing a policy framework to guide effective 

adaptation by individuals and firms in the medium and longer term. There are four 

key areas: 

• High-quality climate information and tools for risk management will help to 

drive efficient markets. Improved regional climate predictions will be critical, 

particularly for rainfall and storm patterns. 

• Land-use planning and performance standards should encourage both 

private and public investment in buildings and other long-lived infrastructure 

to take account of climate change. 
STERN REVIEW: The Economics of Climate Change 

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• Governments can contribute through long-term polices for climate-sensitive 

public goods, including natural resources protection, coastal protection, and 

emergency preparedness. 

• A financial safety net may be required for the poorest in society, who are 

likely to be the most vulnerable to the impacts and least able to afford 

protection (including insurance). 

Sustainable development itself brings the diversification, flexibility and human capital 

which are crucial components of adaptation. Indeed, much adaptation will simply be 

an extension of good development practice – for example, promoting overall 

development, better disaster management and emergency response. Adaptation 

action should be integrated into development policy and planning at every level.

An effective response to climate change will depend on creating the conditions 

for international collective action. 

This Review has identified many actions that communities and countries can take on 

their own to tackle climate change. 

Indeed, many countries, states and companies are already beginning to act. 

However, the emissions of most individual countries are small relative to the global 

total, and very large reductions are required to stabilise greenhouse gas 

concentrations in the atmosphere. Climate change mitigation raises the classic 

problem of the provision of a global public good. It shares key characteristics with 

other environmental challenges that require the international management of 

common resources to avoid free riding. 

The UN Framework Convention on Climate Change (UNFCCC), Kyoto Protocol and 

a range of other informal partnerships and dialogues provide a framework that 

supports co-operation, and a foundation from which to build further collective action. 

A shared global perspective on the urgency of the problem and on the long-term 

goals for climate change policy, and an international approach based on multilateral 

frameworks and co-ordinated action, are essential to respond to the scale of the 

challenge. International frameworks for action on climate change should encourage 

and respond to the leadership shown by different countries in different ways, and 

should facilitate and motivate the involvement of all states. They should build on the 

principles of effectiveness, efficiency and equity that have already provided the 

foundations of the existing multilateral framework. 

The need for action is urgent: demand for energy and transportation is growing 

rapidly in many developing countries, and many developed countries are also due to 

renew a significant proportion of capital stock. The investments made in the next 

10-20 years could lock in very high emissions for the next half-century, or present an 

opportunity to move the world onto a more sustainable path. 

International co-operation must cover all aspects of policy to reduce emissions – 

pricing, technology and the removal of behavioural barriers, as well as action on 

emissions from land use. And it must promote and support adaptation. There are 

significant opportunities for action now, including in areas with immediate economic 

benefits (such as energy efficiency and reduced gas flaring) and in areas where 

large-scale pilot programmes would generate important experience to guide future 

negotiations. 
STERN REVIEW: The Economics of Climate Change 

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Agreement on a broad set of mutual responsibilities across each of the relevant 

dimensions of action would contribute to the overall goal of reducing the risks of 

climate change. These responsibilities should take account of costs and the ability to 

bear them, as well as starting points, prospects for growth and past histories. 

Securing broad-based and sustained co-operation requires an equitable distribution 

of effort across both developed and developing countries. There is no single formula 

that captures all dimensions of equity, but calculations based on income, historic 

responsibility and per capita emissions all point to rich countries taking responsibility 

for emissions reductions of 60-80% from 1990 levels by 2050. 

Co-operation can be encouraged and sustained by greater transparency and 

comparability of national action. 

Creating a broadly similar carbon price signal around the world, and using 

carbon finance to accelerate action in developing countries, are urgent 

priorities for international co-operation. 

A broadly similar price of carbon is necessary to keep down the overall costs of 

making these reductions, and can be created through tax, trading or regulation. The 

transfer of technologies to developing countries by the private sector can be 

accelerated through national action and international co-operation. 

The Kyoto Protocol has established valuable institutions to underpin international 

emissions trading. There are strong reasons to build on and learn from this 

approach. There are opportunities to use the UNFCCC dialogue and the review of 

the effectiveness of the Kyoto Protocol, as well as a wide range of informal 

dialogues, to explore ways to move forward. 

Private sector trading schemes are now at the heart of international flows of carbon 

finance. Linking and expanding regional and sectoral emissions trading schemes, 

including sub-national and voluntary schemes, requires greater international cooperation and the development of appropriate new institutional arrangements. 

Decisions made now on the third phase of the EU ETS provide an opportunity 

for the scheme to influence, and become the nucleus of, future global carbon 

markets. 

The EU ETS is the world’s largest carbon market. The structure of the third phase of 

the scheme, beyond 2012, is currently under debate. This is an opportunity to set out 

a clear, long-term vision to place the scheme at the heart of future global carbon 

markets. 

There are a number of elements which will contribute to a credible vision for the EU 

ETS. The overall EU limit on emissions should be set at a level that ensures 

scarcity in the market for emissions allowances, with stringent criteria for allocation 

volumes across all relevant sectors. Clear and frequent information on emissions 

during the trading period would improve transparency in the market, reducing the 

risks of unnecessary price spikes or of unexpected collapses. 

Clear revision rules covering the basis for allocations in future trading periods would 

create greater predictability for investors. The possibility of banking (and perhaps 

borrowing) emissions allowances between periods could help smooth prices over 

time. 
STERN REVIEW: The Economics of Climate Change 

 xxiv 

Broadening participation to other major industrial sectors, and to sectors such as 

aviation, would help deepen the market, and increased use of auctioning would 

promote efficiency. 

Enabling the EU ETS to link with other emerging trading schemes (including in the 

USA and Japan), and maintaining and developing mechanisms to allow the use of 

carbon reductions made in developing countries, could improve liquidity while also 

establishing the nucleus of a global carbon market. 

 

Scaling up flows of carbon finance to developing countries to support effective 

policies and programmes for reducing emissions would accelerate the 

transition to a low-carbon economy. 

Developing countries are already taking significant action to decouple their economic 

growth from the growth in greenhouse gas emissions. For example, China has 

adopted very ambitious domestic goals to reduce energy used for each unit of GDP 

by 20% from 2006-2010 and to promote the use of renewable energy. India has 

created an Integrated Energy Policy for the same period that includes measures to 

expand access to cleaner energy for poor people and to increase energy efficiency. 

The Clean Development Mechanism, created by the Kyoto Protocol, is currently the 

main formal channel for supporting low-carbon investment in developing countries. It 

allows both governments and the private sector to invest in projects that reduce 

emissions in fast-growing emerging economies, and provides one way to support 

links between different regional emissions trading schemes. 

In future, a transformation in the scale of, and institutions for, international carbon 

finance flows will be required to support cost-effective emissions reductions. The 

incremental costs of low-carbon investments in developing countries are likely to be 

at least $20-30 billion per year. Providing assistance with these costs will require a 

major increase in the level of ambition of trading schemes such as the EU ETS. This 

will also require mechanisms that link private-sector carbon finance to policies and 

programmes rather than to individual projects. And it should work within a context of 

national, regional or sectoral objectives for emissions reductions. These flows will be 

crucial in accelerating private investment and national government action in 

developing countries. 

There are opportunities now to build trust and to pilot new approaches to creating 

large-scale flows for investment in low-carbon development paths. Early signals from 

existing emissions trading schemes, including the EU ETS, about the extent to which 

they will accept carbon credits from developing countries, would help to maintain 

continuity during this important stage of building markets and demonstrating what is 

possible. 

The International Financial Institutions have an important role to play in accelerating 

this process: the establishment of a Clean Energy Investment Framework by the 

World Bank and other multilateral development banks offers significant potential for 

catalysing and scaling up investment flows. 
STERN REVIEW: The Economics of Climate Change 

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Greater international co-operation to accelerate technological innovation and 

diffusion will reduce the costs of mitigation. 

The private sector is the major driver of innovation and the diffusion of technologies 

around the world. But governments can help to promote international collaboration to 

overcome barriers in this area, including through formal arrangements and through 

arrangements that promote public-private co-operation such as the Asia Pacific 

Partnership. Technology co-operation enables the sharing of risks, rewards and 

progress of technology development and enables co-ordination of priorities. 

A global portfolio that emerges from individual national R&D priorities and 

deployment support may not be sufficiently diverse, and is likely to place too little 

weight on some technologies that are particularly important for developing countries, 

such as biomass. 

International R&D co-operation can take many forms. Coherent, urgent and broadly 

based action requires international understanding and co-operation. These may be 

embodied in formal multilateral agreements that allow countries to pool the risks and 

rewards for major investments in R&D, including demonstration projects and 

dedicated international programmes to accelerate key technologies. But formal 

agreements are only one part of the story - informal arrangements for greater coordination and enhanced linkages between national programmes can also play a 

very prominent role. 

Both informal and formal co-ordination of national policies for deployment support 

can accelerate cost reductions by increasing the scale of new markets across 

borders. Many countries and US states now have specific national objectives and 

policy frameworks to support the deployment of renewable energy technologies. 

Transparency and information-sharing have already helped to boost interest in these 

markets. Exploring the scope for making deployment instruments tradable across 

borders could increase the effectiveness of support, including mobilising the 

resources that will be required to accelerate the widespread deployment of carbon 

capture and storage and the use of technologies that are particularly appropriate for 

developing countries. 

International co-ordination of regulations and product standards can be a powerful 

way to encourage greater energy efficiency. It can raise their cost effectiveness, 

strengthen the incentives to innovate, improve transparency, and promote 

international trade. 

The reduction of tariff and non-tariff barriers for low-carbon goods and services, 

including within the Doha Development Round of international trade negotiations, 

could provide further opportunities to accelerate the diffusion of key technologies. 

Curbing deforestation is a highly cost-effective way of reducing greenhouse 

gas emissions. 

Emissions from deforestation are very significant – they are estimated to represent 

more than 18% of global emissions, a share greater than is produced by the global 

transport sector. 

Action to preserve the remaining areas of natural forest is needed urgently. Largescale pilot schemes are required to explore effective approaches to combining 

national action and international support. 
STERN REVIEW: The Economics of Climate Change 

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Policies on deforestation should be shaped and led by the nation where the particular 

forest stands. But those countries should receive strong help from the international 

community, which benefits from their actions to reduce deforestation. At a national 

level, defining property rights to forestland, and determining the rights and 

responsibilities of landowners, communities and loggers, is key to effective forest 

management. This should involve local communities, respect informal rights and 

social structures, work with development goals and reinforce the process of 

protecting the forests. 

Research carried out for this report indicates that the opportunity cost of forest 

protection in 8 countries responsible for 70 per cent of emissions from land use could 

be around $5 billion per annum initially, although over time marginal costs would rise. 

Compensation from the international community should take account of the 

opportunity costs of alternative uses of the land, the costs of administering and 

enforcing protection, and the challenges of managing the political transition as 

established interests are displaced. 

Carbon markets could play an important role in providing such incentives in the 

longer term. But there are short-term risks of destabilising the crucial process of 

strengthening existing strong carbon markets if deforestation is integrated without 

agreements that strongly increase demand for emissions reductions. These 

agreements must be based on an understanding of the scale of transfers likely to be 

involved. 

Adaptation efforts in developing countries must be accelerated and supported, 

including through international development assistance. 

The poorest developing countries will be hit earliest and hardest by climate change, 

even though they have contributed little to causing the problem. Their low incomes 

make it difficult to finance adaptation. The international community has an obligation 

to support them in adapting to climate change. Without such support there is a 

serious risk that development progress will be undermined. 

It is for the developing countries themselves to determine their approach to 

adaptation in the context of their own circumstances and aspirations. Rapid growth 

and development will enhance countries’ ability to adapt. The additional costs to 

developing countries of adapting to climate change could run into tens of billions of 

dollars. 

The scale of the challenge makes it more urgent than ever for developed countries to 

honour their existing commitments – made in Monterrey in 2002, and strengthened at 

EU Councils in June 2005 and at the July 2005 G8 Gleneagles Summit – to double 

aid flows by 2010. 

Donors and multilateral development institutions should mainstream and support 

adaptation across their assistance to developing countries. The international 

community should also support adaptation through investment in global public goods, 

including improved monitoring and prediction of climate change, better modelling of 

regional impacts, and the development and deployment of drought- and floodresistant crops. 
STERN REVIEW: The Economics of Climate Change 

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In addition, efforts should be increased to build public-private partnerships for 

climate-related insurance; and to strengthen mechanisms for improving risk 

management and preparedness, disaster response and refugee resettlement.

Strong and early mitigation has a key role to play in limiting the long- run costs of 

adaptation. Without this, the costs of adaptation will rise dramatically. 

Building and sustaining collective action is now an urgent challenge. 

The key building blocks for any collective action include developing a shared 

understanding of the long-term goals for climate policy, building effective institutions 

for co-operation, and demonstrating leadership and working to build trust with others. 

Without a clear perspective on the long-term goals for stabilisation of greenhouse 

gas concentrations in the atmosphere, it is unlikely that action will be sufficient to 

meet the objective. 

Action must include mitigation, innovation and adaptation. There are many 

opportunities to start now, including where there are immediate benefits and where 

large-scale pilot programmes will generate valuable experience. And we have 

already begun to create the institutions to underpin co-operation. 

The challenge is to broaden and deepen participation across all the relevant 

dimensions of action – including co-operation to create carbon prices and markets, to 

accelerate innovation and deployment of low-carbon technologies, to reverse 

emissions from land-use change and to help poor countries adapt to the worst 

impacts of climate change. 

There is still time to avoid the worst impacts of climate change if strong 

collective action starts now. 

This Review has focused on the economics of risk and uncertainty, using a wide 

range of economic tools to tackle the challenges of a global problem which has 

profound long-term implications. Much more work is required, by scientists and 

economists, to tackle the analytical challenges and resolve some of the uncertainties 

across a broad front. But it is already very clear that the economic risks of inaction 

in the face of climate change are very severe. 

There are ways to reduce the risks of climate change. With the right incentives, the 

private sector will respond and can deliver solutions. The stabilisation of greenhouse 

gas concentrations in the atmosphere is feasible, at significant but manageable 

costs. 

The policy tools exist to create the incentives required to change investment patterns 

and move the global economy onto a low-carbon path. This must go hand-in-hand 

with increased action to adapt to the impacts of the climate change that can no 

longer be avoided. 

Above all, reducing the risks of climate change requires collective action. It requires 

co-operation between countries, through international frameworks that support the 

achievement of shared goals. It requires a partnership between the public and 

private sector, working with civil society and with individuals. It is still possible to 

avoid the worst impacts of climate change; but it requires strong and urgent collective 

action. Delay would be costly and dangerous.