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Connecting climate change and economic recovery

Economist Nicholas Stern discusses the downturn and its effect on the climate change agenda.

March 2009

The economic slowdown has prompted some public and private leaders to question whether the world can afford to address climate change now, while others argue that green investments will stimulate the growth we need. There are thoughtful voices on both sides of the debate. In this exclusive video interview, noted economist Nicholas Stern makes the case for investment.

The interview was conducted by McKinsey’s Matt Hirschland in Brussels on January 26, 2009. Click to watch the video, or read the transcript below.

Video

Connecting climate change and economic recovery

Economist Nicholas Stern on the downturn and its effect on the climate change agenda.

Two thousand and nine is a crucially important year. We are in the middle, I hope it’s the middle, of one of the worst economic crises the world has seen—certainly the worst since the 1930s. We have to have a big fiscal stimulus package to pull us out of this. Monetary policy is moving in the right direction, but there’s a limit to what monetary policy can do. This needs a stimulus package probably around 4 percent of world GDP—around $2 trillion, taking all countries together.

The second thing we must have in 2009 is a strong international agreement to deal with an even bigger crisis, which is the climate crisis. That, too, means that we’re under great pressure on time. The longer we delay, the more the greenhouse gasses build up, the more difficult the starting point for action becomes.

The good news is that there are great returns to handling these two things together. But we have to be clear about what’s necessary very quickly, because the basic budgetary decisions are being made now and will be made—have to be made—over the next two or three months. To start taking the decisions on how to reflate the economy on the expenditure and tax side over the next 9 or 12 months is to miss the boat, because we’ve got to get demand back in the economy right now.

So this is a real hurry. Perhaps even faster moves are required on the economic crisis than the climate crisis. In other words, we might have two or three months to work out our response to the economic crisis, and six or nine months to work out our response to climate crisis. But these are both in the here and now—in 2009. I think that they do come together. They come together for a number of reasons. They come together because we should be understanding how we got ourselves into this difficulty in the economic crisis. It was by ignoring risk. It was by not understanding what was going on. It was by postponing action.

And what do we find? The bigger the postponement, the bigger the ignoring of risk, the more troublesome and difficult the outcome. That’s even more true for climate change. And we’ve got to learn that lesson. We should also learn another lesson from the past, of economic fluctuation and economic growth, and that is that when we reflate the economy, we should do it in a way that lays foundation for future growth, that brings on the supply side.

How did we reflate the economy after the bust of the dot-com? We lowered interest rates, had a big asset price bubble, and demand increased on the back of inflated house prices. That’s not sustainable. We need to have a reflationary package, which lays the foundation for future growth. And if we look into the future, it’s actually quite exciting. Because what we see is the biggest technological opportunity that we’ve had for a very long time: as big as the railways, as big as electricity, as big as the motorcar, and, most recently, information technology. It’s the opportunity to go for low-carbon growth.

And we understand, roughly speaking, what technologies are needed. Some of them will be very quick—like insulating houses, promoting energy efficiency—and that will put unemployed construction workers back into work now, this year. Others will be bringing forward infrastructure investment, which takes a little longer. Others, like R&D, have a still further lead time. But we have to put these kinds of packages together.

To take the opportunities of the kind I described, there are a number of things that we have to overcome. One is the idea that the economic crisis takes precedence over the climate crisis. That’s just confusion. That just misses the point about how we can put our policies on these two things together in a very constructive way.

So we can be much more energy efficient. We can insulate our homes and get unemployed construction workers back into work. Those are the kinds of ways in which we can put things together. So to say that first one and then the other is just analytical confusion. We have to look at what’s involved in doing both and see and recognize how one can support the other. So that’s one kind of objection that has to be overcome.

There are bound to be people whose activities are threatened by these kinds of policies. Now, the answer to that is to be constructive: to help with carbon capture and storage through markets for carbon; to promote development activities which do not put such pressure on the forests; to promote the retooling of the car industry so that the less-polluting cars become cheaper to produce, and the demand for those cars starts to appear.

The challenge is to move that change fast enough. I don’t know if we’ll move it fast enough, but at least the understanding of the hurry and the pressure, I think, is increasing in the political leadership around the world.

Podcast

Connecting climate change and economic recovery

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The material on this page draws on the research and experience of McKinsey consultants and other sources. To learn more about our expertise, please visit the Sustainability & Resource Productivity Practice.