ECONOMICS:Economists should turn their attention to the next big issue facing the global economy: climate change, writes EOIN FAHY

ALTHOUGH TURNING points in economies are rarely noticed at the time, it is highly probable that the recession in the US is ending, if it is not already over, and that the recession in Europe will end within the next few months.

Economists must now switch their attention to the next major issue facing the global economy: the generally accepted risk of significant global climate change and the measures governments around the world are, rightly or wrongly, implementing in response.

At first, it seems odd to compare the banking and debt crisis that caused the global recession and is costing taxpayers hundreds of billions of euro with the issue of global warming, which is in a sense a “soft and fuzzy” issue, seemingly not as dramatic or severe as the banking crisis.

But the Stern report in the UK, probably the most definitive study to date of the economic impact of climate change, estimated that the cost to the global economy of the expected climate change would be in the range of 5 per cent to 20 per cent of gross domestic product per year, a figure that would be many times larger than the cost of cleaning up the banking crisis.

That’s the bad news. Policymakers are responding. Hardly a week goes by without a significant announcement about the latest effort to counter climate change or deal with its effects.

A recent study by HSBC showed the “green” element of the stimulus packages announced by various governments in recent months amounted to $478 billion (€338 billion).

Measures have been announced, including, for example, schemes to replace old, high-polluting cars with newer, more efficient cars (it is known as the “cash for clunkers” scheme in the US, but is also available in the UK, Germany and many other countries). There are also schemes to boost insulation in housing (as in Ireland), to incentivise renewable energy sources such as wind and solar power, and to cap carbon emissions from industry.

Many of the measures are steering large sums into particular sectors, showing that in every crisis there is an opportunity to make money. And, whether from a private investment point of view or from a taxpayer’s perspective, the investment can be very profitable.

A recent report by McKinsey consultants said: “Boosting energy efficiency will . . . create opportunities for businesses and consumers to invest $170 billion a year from now until 2020, at a 17 per cent average internal rate of return.”

Crucially, the US has had a significant change of heart on these issues since US President Barack Obama came to power and the Democrats gained more control over Congress.

The American Clean Energy and Security Bill that is making its way through the US legislative process mandates a cut of 20 per cent in carbon emissions by 2020, relative to a no-change benchmark estimate, and would bring in a “cap and trade” system for US industrial carbon emissions.

Climate-change experts say the Bill is by no means perfect, but a year ago even the notion of such a Bill was unthinkable in the US.

Some governments have been slower than others to act. Poorer countries have often taken the view that they should be allowed room to grow their economies. After all, this argument goes, the richer economies have far more emissions per head of population than poorer countries and need to get their own house in order before issuing instructions to the rest of the world.

But overall “world economic policy” is a bit like steering a supertanker. It takes policymakers around the world a long time to learn important lessons about any new challenge or issue, and still longer to implement measures to address it. But once a global consensus emerges, and all major governments believe change is necessary, the momentum of changed policies, of measures to steer the supertanker in a different direction, so to speak, becomes irresistible.

We are very close to the tipping point where one of the single-most important factors driving economic policy internationally will be climate change. While we economists focus on when, exactly, the US economy comes out of recession or how much bank-rescue packages will end up costing taxpayers, we may be missing an even more important turning point.

From an Irish perspective, this could be a (relative) positive for our economy. Last year’s smart economy paper from the Government lacked much to catch the public’s imagination and more or less sank without trace. But the concept of building a smart economy was good.

What is needed now is a determination to get ahead of our competitors in the fields in which we could have a relative advantage, creating the “green-collar” jobs that will be created somewhere in the world – and why not Ireland?

That, rather than the technicalities and cost of the National Asset Management Agency (Nama), may be the real issue for economists to grapple with.

Eoin Fahy is an economist at KBC Asset Management