Net zero will require the biggest economic transformation ever seen in peacetime, says Nicholas Stern

Posted on 26 Oct 2021 in

The pursuit of net zero emissions by countries across the world will require the biggest economic transformation ever seen in peacetime, Professor Lord Nicholas Stern will say today (Tuesday 26 October) in a lecture to mark the 15th anniversary of the publication of the landmark report ‘The Economics of Climate Change: The Stern Review’.

Speaking at the London School of Economics and Political Science ahead of the crucial COP26 climate change summit in Glasgow, Lord Stern, who is Chair of the Grantham Research Institute on Climate Change and the Environment and the ESRC Centre for Climate Change Economics and Policy, will argue that countries can end their dependence on fossil fuels and completely decarbonise while also enjoying strong economic development and growth.

He will say: “The drive for net zero emissions will result in the biggest and most fundamental transformation in the global economy that has ever occurred during peacetime.

“This will not be a narrow horse race between economic growth and decarbonisation. The new and cleaner investment and innovation can drive sustainable, resilient and inclusive growth. This growth will be more resource-efficient, more productive, and healthier, and will offer greater protection to our biodiversity. The new challenge is how to foster greater innovation and creativity, and to recognise and create the key mechanisms and dynamics of change.”

Lord Stern will also highlight the past failures of economics profession to come to terms with climate change. He will say: “Economists have failed to capture the immense scale of risks and potential loss of life that could occur as a result of climate change. They have badly underestimated the speed with which the costs of new clean technologies, such as solar and wind energy, would fall, and the potential of discovery, innovation and economies of scale.

“The economics profession has also misunderstood the basics of discounting, in relation to, particularly, its dependence on future living standards. It means economists have grossly undervalued the lives of young people and future generations who are most at threat from the devastating impacts of climate change.”

Lord Stern will draw attention to some significant trends that have developed since the publication of the Stern Review on 31 October 2006. He will say: “The science has become ever more worrying while technology has become more promising. Both of these should have created pressure to reduce annual global emissions substantially between 2006 and 2019. So why did they rise instead by almost 20 per cent?

“While many developed countries have slightly reduced their annual emissions over this period, many emerging market countries have increased their emissions. This has arisen, in large measure, from the misconception that climate action requires a trade-off with economic development and growth. Climate action does involve strong strategic choices and increased investment, but this can drive  economic development across all its dimensions. This misconception has been fed by inadequacies in many economic approaches that underestimate climate risks, while failing to grapple with the dynamics and recognise the potential of innovation.

“Many economic assessments and analyses fail to capture the full range of benefits from the transition to a sustainable, resilient and inclusive economy. And many severely undervalue the lives and livelihoods of today’s young people and future generations. Discounting has been applied in such a way that it is effectively discrimination by date of birth.

“The central issue now is how to create fundamental structural change and how to foster the investments and innovation that is required. And we must think more deeply about policy instruments.”

In an accompanying paper published today, which will be published next year by the Economic Journal of the Royal Economic SocietyLord Stern sets out his analysis in more detail. In it, he challenges economists to think more imaginatively about how they can help tackle climate change. He urges economists to move beyond their conventional approaches, writing: “many discussions of policy suggest that “economic theory says” that policy should be overwhelmingly about a carbon price. A carbon price should indeed be at centre stage, but we need so much more in terms of policy and perspectives, and understanding of the issues. However, we must be clear that the suggestion that “theory says” that the carbon price is the most effective route is simply wrong.”

Lord Stern writes of the climate challenge: “The task requires expertise ranging across the entirety of our subject and, indeed, collaboration with other disciplines. And an engagement by our profession in a way beyond what we have seen so far. It is time for economics and economists to step up.”

He adds: “This is a moment – with the crises of COVID and climate, the criticality of raising investment, the centrality of rapid change, and the importance of internationalism – to expand and strengthen our international financial institutions. In doing so, we should expect them to ramp up their support for developing investment programmes, expand their finance for investment, and expect them to ramp up and reorient their activities towards sustainability. It would be a “grand bargain” with great potential rewards for the world.”

Prof Stern is speaking at a hybrid in-person and online event at 6.30pm at LSE, chaired by Baroness Shafik. You can register for tickets here.

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Notes to editors:

  • The Economics of Climate Change: The Stern Review was published on 31 October 2006. It was commissioned by the then UK Prime Minister Tony Blair and Chancellor Gordon Brown. The review concluded that the benefits of strong and early action on climate change far outweigh the economic costs of not acting.
  • The Grantham Research Institute on Climate Change and the Environment was established in 2008 at the London School of Economics and Political Science. The Institute brings together international expertise on economics, as well as finance, geography, the environment, international development and political economy to establish a world-leading centre for policy-relevant research, teaching and training in climate change and the environment. It is funded by the Grantham Foundation for the Protection of the Environment, which also funds the Grantham Institute – Climate Change and the Environment at Imperial College London.
  • The ESRC Centre for Climate Change Economics and Policy was established in 2008 to advance public and private action on climate change through rigorous, innovative research. The Centre is hosted jointly by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council.