We need a green stimulus plan urgently, both to help boost the economy and to address the climate challenge. Indeed, the structure and scale of national stimulus plans around the world are being determined this spring. Many people, myself included, argue that in order to pull world economies out of a deep recession, we need a large fiscal stimulus—on the order of $2 trillion, or 4 percent of global GDP.

A significant part of this stimulus should be directed toward green investment. But we need to act now. Even nine months down the road, it will be too late for a green stimulus to play the role it needs to in helping shape carbon-abatement policies.

Economist Nicholas Stern discusses the downturn and its effect on the climate change agenda. The interview was conducted by McKinsey’s Matt Hirschland in Brussels on January 26, 2009.

The economic crisis isn’t the only challenge the world faces. The United Nations climate conference will take place in Copenhagen at the end of the year: if we aren’t ready by the first part of 2009, we will not achieve what we need to in Copenhagen. So, both the economic crisis and the urgent need to address climate change are in the here and now, in the next weeks and months. But there is opportunity in crisis. Because of the recession, we have idle resources. By bringing investment forward, big projects are cheaper now than they would be if we took them on later.

If we take a long-term view—over the next 20 or 30 years—I think many of us would argue (I certainly would) that we are on the verge of a technological revolution similar to what we experienced with the advent of the railway, electricity, the motor car, or information technology—a technological change with the potential to drive growth over decades, not just years. We are at the beginning of such a sea change in terms of economic progress, economic growth, and technological change.

The argument for acting now is thus very powerful, but what exactly should we do? We should start with the kinds of solutions that can be achieved quickly and are labor intensive. Much of the energy-efficiency work—for example, insulating buildings—very clearly falls under that category. We should be getting idle construction workers around the world working on those kinds of projects. We can bring forward infrastructure investment, particularly electricity and transport infrastructure. We can promote prototypes. Now is the time to get our resources behind prototypes for carbon capture and storage. We delayed much too long in Europe on that. We should be helping the car industry to retool and to produce more efficient, greener cars. It’s time to collect our resources and move strongly.

Of course, you have to change the demand side as well, so a steep price for carbon, of course, must be a big part of that story. And we should promote public-sector R&D, which should be increased two-, three-, fourfold in the near future in the energy sector.

Finally, how much do we spend? I’ve suggested $2 trillion for the stimulus. Of that, we should earmark 20 percent—or $400 billion—over the next year or so for green investment. That would be a fairly modest fraction of the money needed for energy infrastructure going forward. So I think we know how big the stimulus should be. I think we know why it should be green. I think we know what types of policies will make it green, and I think we know roughly how much to put in. The challenge then is to test out these arguments. But we must do so quickly, because time is running out.

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