Lord Stern’s Call for a $400 Billion “Green” Fiscal Stimulus

Stimulus plans could fix the global financial system and the climate. Now all we need is for governments not to blow the chance, argues Lord Nicholas Stern, ex-chief economist of the World Bank, in a new report, An Outline of the Case for a "Green" Stimulus:

"With billions about to be spent by governments on energy, buildings and transport, it is vital that these public investments do not lock us for many more decades into a costly and unsustainable high-carbon economy."

The report, co-authored by many of the same economists who contributed to the influential Stern Review, calls on governments to include $400 billion in green spending in their stimulus plans. That’s 20 percent of the estimated $2 trillion that nations are likely to spend on economic packages in total, or four percent of global GDP.

That kind of green cash injection would create "a more effective fiscal stimulus, building the foundations for sustainable, strong growth in the future, rather than unsustainable bubbles," the report says. In the short-term it would create a substantial number of new green jobs.

The biggest employment gains would be made through energy efficiency and renewable energy measures. Here’s why:

Renewable energy industries appear to be more labour intensive than the existing energy sector, particularly at the initial construction, manufacture and installation stage that is most relevant for a short-term fiscal stimulus.

Similarly, energy efficiency measures would be "particularly effective as part of a fiscal stimulus, as they could be implemented quickly and would be relatively labour-intensive." More:

Spending on energy efficiency measures is likely to be directed towards domestic construction sector activity and hence have a low rate of leakage into imports, increasing the domestic fiscal multiplier — a potentially important consideration for any government that is uncertain about the likely fiscal policies of its trading partner.

Speed is key. The money must be set aside by summer 2009 and spent by mid-2010.

Indeed, any delay would be costly.

That is essentially the same message Lord Stern delivered in his seminal 2006 report, The Economics of Climate Change: The Stern Review. In it, he concluded that doing nothing on global warming would wreck the global economy, deflating it by a fifth and creating risks "on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century."

To avert disaster, he concluded, nations would need to spend one percent of their GDP.

It was the first report of its kind from a world renowned economist, and its underlying conclusion, that climate action is cheaper than inaction, is approaching an economic consensus.

In 2008, Stern issued a correction to his findings to account for faster than expected climate change. The cost of avoiding climate catastrophe is actually two percent of global GDP, he said. That’s still much cheaper than business as usual.

Importantly, this week’s report blows apart the convenient untruth that it is better to delay such aggressive climate action until the world economy recovers. The truth is:

Action on climate change remains urgent. If policy-makers were to put action off until the impacts of climate change forced the issue to the top of the political agenda, the stock of greenhouse gases that would have built up in the atmosphere as the flows of emissions accumulated would entail severe and increasing risks for many decades.

Some 34 nations have started stimulus programs to beat the economic downturn, according to The Christian Monitor, worth over two trillion dollars in public funds. The opportunity offered by the recession must be harnessed. In Lord Stern’s words:

The economic case for tackling the global climate crisis is more compelling than ever.