Lord Stern: Flexible policy approach will catalyse low-carbon transition

Lord Nicholas Stern has called on governments across the world to implement "predictably flexible" policy frameworks that enable businesses to map investment opportunities during the transition to a low-carbon economy.

Speaking at a Bloomberg event on the Taskforce on Climate Related Financial Disclosures (TCFD) recommendations in London today (31 October), Lord Stern claimed that policy makers should account for uncertainty and learning curves by creating climate-related policies that could be adapted as macro and micro issues were better understood.

“Government-induced policy risk is the biggest deterrent to investment around the world,” Stern said. “We’re thinking about the long-term and there are big risks involved. Government policy should be clear, credible and predictable.

“We’re going to learn like mad along the way, the learning process should lead to change and revision, so policy will have to be revised, it has to be predictably flexible.”

The TCFD introduced a range of voluntary recommendations that businesses can adopt, so that the financial sector could make better judgement calls on future investments into low-carbon projects, initiatives and businesses.

The recommendations use “scenario approaches” for businesses and investors to map their course of action, and Lord Stern believes that this approach could be “an enormously attractive growth story”.

However, the Grantham Research Institute chair at the London School of Economics (LSE) noted that previous policy frameworks failed to provide clarity as to how they would evolve over time, which in turn has damaged investor views on certain sectors.

This has been evident in the UK, where a host of sudden policy changes – such as Feed-in Tariffs for solar deployment, onshore wind being exempt from Contract for Difference (CfD) auctions and the U-turn on a zero-carbon homes policy – all dented investor confidence in those respective sectors.

Understanding uncertainty

As co-chair of the High-Level Commission on Carbon Prices, Lord Stern highlighted the importance of a carbon price in creating a financial pathway towards low-carbon business actions, but the former head of the Government Economic Service also claimed that city and network design and coordination were critical.

But if businesses want to be able to tailor their operations and investments to match these recommendations, then a strong communications link would be needed between the private sector and governments, he added.

It has been more than a decade since the launch of Lord Nicholas Stern’s pioneering 700-page report, which concluded that the benefits of strong, early climate action far outweigh the costs of not acting. At today’s event, Stern admitted that he would never have anticipated that leading carmakers were talking about the end of the internal combustion engine, and warned others not to underestimate the scope and pace of the low-carbon transition.

“By investing in the growth story for the future, it sets off a great wave of innovation and discovery,” Stern added. “In the long-term there’s no high-carbon growth path, it’s a contradiction. The delay is fundamentally dangerous, because of the ratchet effect of emissions, and there’s the danger of locking in high-carbon infrastructure.

“A very important lesson for scenario analysis is always be aware that you may be underestimating the pace of technical change.”

Matt Mace

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