<p>What is the Economics
of Climate Change?
Nicholas Stern
The science of climate change
Climate change is a serious and urgent issue. There is now an over-
whelming body of scientific evidence that human activity is causing global
warming, with the main sources of greenhouse gases, in order of global
importance, being electricity generation, land-use changes (particularly
deforestation), agriculture and transport (see Figure 1); the fastest growing
sources are transport and electricity.
WORLD ECONOMICS • Vol. 7 • No. 2 • April–June 2006
1
Professor Sir Nicholas Stern is Adviser to the UK Government on the economics of climate change and
development and Head of the Government Economic Service. He leads the Stern Review on the
Economics of Climate Change, reporting to the United Kingdom’s Chancellor of the Exchequer and to the
Prime Minister. The report will be published in Autumn 2006. The article, which sets out some of the issues
under consideration, is based on the lecture ‘What is the Economics of Climate Change?’ given at OXONIA,
The Oxford Institute for Economic Policy, as part of their Distinguished Lecture Series, on 31 January 2006.
The author would like to thank his team for their work in helping him to develop his thinking on climate
change and to prepare this article. See also in this issue his Reply to Byatt et al., pp. 153–157.
All greenhouse gases
in CO2 equivalent
Energy –
25.6 Gt 61%
Consuming fossil fuels
Agriculture –
5.6 Gt 14%
Mostly from soils and livestock
Land use changes –
7.6 Gt 18%
Primarily deforestation
Figure 1: Global emissions of greenhouse gases by source
Source: World Resources Institute. 2000 estimate.
Industry
Transport
Electricity
and heat
generation
Other
energy
2
WORLD ECONOMICS • Vol. 7 • No. 2 • April–June 2006
Nicholas Stern
There do remain uncertainties about the nature and scale of long-term
impacts, with wide margins of error. But it is clear that anything like busi-
ness-as-usual will take us into dangerous territory. And the most recent sci-
ence indicates that some