lord nicholas stern lecture

Lord Nicholas Stern made the keynote Jacques de Larosière lecture at the EBRD's 2009 Annual Meeting. Read the transcript below or watch a video of the speech here.

EBRD headquarters, London, 15 May 2009

I think climate change, which is where I am going to focus most of what I want to say today, is a topic where that same EBRD, if I may use that in quotes, clarity of purpose, creativity of institutions, precision in method of working and above all international collaboration prevails. They are together the kind of thing that drives the EBRD and the kind of thing that is going to be absolutely fundamental to a serious attack on climate change. Of course, all these things have to be supported by the wish to create new ways of doing things, to create a new world, if you like. That is what the EBRD was all about and, following it through friends and so on, I am convinced that that is what the EBRD is still about.

The kinds of methods of work, vision and clarity of purpose that the EBRD has shown are exactly what are necessary and internationally fundamental to take on the challenge of climate change. The two biggest challenges of our century, indeed the defining challenges of our century, are the management of climate change and the overcoming of world poverty. We succeed or fail on those two things together. If we fail to manage climate change, we will create a physical environment so hostile – I will say more about that of course – that we will undermine the progress that we have made in advancing living standards around the world, and indeed create an environment so difficult that those living standards will inevitably move backwards.

If, on the other hand, in managing climate change, we appear to place obstacles in the way of rising living standards over the next two or three decades, we will not form the coalition which we have to form which is necessary to tackle climate change. The measures we take to take on climate change cannot be measures which stop or retard growth. Indeed, I will argue that low carbon technology is the growth story of the future. High carbon growth has no future: it kills itself first on very high prices for hydrocarbon but, secondly, it kills itself on the very hostile physical environment that we create. So we have to be clear that the low carbon technologies, the energy efficiency story, which is necessary for tackling climate change, is in fact the growth story. To oppose it is to oppose growth. Just as General Motors did not see the light and was pummelled, so other car companies, other methods of doing things which do look to the future will be the successful growth enterprises. That will be true of countries as well.

I will focus on international collaboration but I have got to start with the basics of the problem because the whole policy story turns on the kinds of problems that you have to deal with. So let me comment on that very briefly.

It starts with people and it ends with people. It is essentially 19th century science, very simple science that goes back to the great French mathematician and physicist called Fourier but it has been worked out and clarified and made more precise in terms of risk and probabilities with the greater information that we have been able to put together as a world over the last 20 or 30 years. At its bottom it is very simple science. Those of you who have been inside a greenhouse will realise that it is warmer for a reason, that the glass traps the heat. It is the same phenomenon; it is very simple basic science.

How does it work? People through their ordinary activities, their consumption, their production, their way of life, emit greenhouse gases. They emit mostly carbon dioxide but not only. They emit more than the planet can absorb. That flow is not fully absorbed and it results in an increase in the stocks, the concentrations of greenhouses gases, in the atmosphere. The increase in concentrations of greenhouse gases in the atmosphere traps more heat and that results in temperature increase – global warming. It is not particularly the temperature increase that is the problem; the problem is climate change. The global warming leads to climate change and that manifests itself mostly in water in some shape of form: storms, floods, droughts, sea level rise. That of course changes fundamentally the environment for people and how they can go about their consumption and their production in their daily lives. So it starts with people and it ends with people logically in very simple steps. That is the structure and it is that structure that shapes the policy.

What is it about that structure with a few key features? Firstly, this is a flow-stop problem. There is a ratchet effect here. Once the concentrations are there in the atmosphere, they last for a very long time; it is difficult to get them out. So the later you leave it, the more difficult it becomes. I will give you some numbers in just a moment. It is a flow-stop problem first.

It is a global problem. The concentrations of greenhouse gases in the atmosphere are what count, not whether those emissions are built up into concentrations in the atmosphere. What is not particularly relevant is whether they come from Johannesburg, Cairo, Beijing, Los Angeles, London or St Petersburg; it does not make any difference. What matters is the concentration. This is a problem that is truly global. One country cannot by itself make a big difference. It is only together that we can make a big difference.

Many of these things are very long term. This is of fundamental importance. When we got together as a world at Bretton Woods in 1944, we had seen the consequences of 30 years of failure to collaborate and 30 years of bad economic policies. It was devastating. We had seen the bodies; we had seen the blood. That was what drove international collaboration in 1944. It drove the foundation of the European Union. The evidence from the failure to collaborate was crystal clear. What we have to do is to be a bit wiser than that. We have got to look ahead and see something much more severe than that that will be coming. I will give you some of the quantities in just a minute.

This is a real test for human beings. There is no evolutionary biology that is going to help us here. What we have to do is to look ahead and anticipate what the problems are because this is a problem with lags; it is a problem of a long-term nature. So it is flow-stop, it is global, it is long term. It is potentially very big, and I will describe that in a moment, and it is full of uncertainty. Each step in the chain that I described – there were five, you were counting – has uncertainty associated with it. This is about risk management; it is about bringing down risks – one reason why the EBRD ought to be good at this problem. This is about risk management by acting wisely, bringing down the odds. We cannot take the risk away altogether but we can affect it very dramatically.

What about some numbers to get a feel for what is going on here? This is a very numerate institution, so you can do the arithmetic fast. I think there will not be much subtraction but there will be some addition, multiplication and division. We start at 435 parts per million, roughly where we are now; we were at 280 in the middle of the nineteenth century, and that will be my benchmark for increases. We are at around 435 now and we are adding about 2½ parts per million a year. That 2½ is going up. The amount we are adding each year is rising.

If we did not do very much, we would average over a century well over 3 parts per million because we are already at 2½; that is getting bigger. Averaged over a century, we would add per year at least 3, probably more. That would take us at least to 750. Suppose we stopped it right there in terms of the accumulation? What would the effect be? I am speaking now of a fairly conservative model of these probabilities associated with one of the four or five best climate change centres in the world, the Hadley Centre in Exeter in the UK. There are other very good centres in Princeton and in Japan and so on but the Hadley probabilities are moderately central to this story and actually leave out quite a lot of the risks.

Just to take a simple model which leaves out the risks of the melting of the permafrost and the release of more methane, leaves out the risk of the collapse of the Amazon forest which is quite likely at 3oC, let us take that Hadley model. It tells us that at around 750 parts per million the temperature increase would likely be 50/50 either side of 5oC, so a 50 per cent probability either side of 5oC.

That may not sound very much if you are contemplating Moscow in February but it is actually huge. The planet has not been there for something like 30 million years. Human beings have been around for 100,000, it depends what weight you put on sapiens in homo sapiens, or at a maximum 200,000 under any definition of sapiens. We have not been at 5oC for 30 million years. We have been 5oC below moderately often and moderately recently – that is the last Ice Age, 10-12,000 years ago. The ice sheets came down to roughly the latitude of London and New York and where were people? People were closer to the Equator than that. What does that tell us? It tells us that these kinds of changes of this magnitude radically affect where people can be. The ice melted and the UK separated from Europe and you can think about whether that was a good idea or not. Of course the rivers of the world changed radically in their flows. We know very recently at about 5oC downwards the effects are dramatic as to where people can live. The same is very likely to be true of 5oC upwards, except that humans have never been there; they have never been anywhere near there. It is around 3 million years since we have been at 3oC, all this above the middle of the nineteenth century. That is my benchmark,

It would transform where people could live. Most of southern Europe would probably look like the Sahara Desert. These things happen quite slowly but relentlessly. Big parts of the world would be inundated. Many rivers would change their patterns and their flows. This is the kind of change we are talking about. Other parts of the world would be so devastated by hurricanes that they would not be suitable for habitation.

This kind of rewriting is just very large. This is not Nick Stern the economist speaking; this is Nick Stern the consumer of the science who sat down quietly with the best scientists in the world, tried to read up and tried to see this as a risk management problem and then ask: what are the kinds of economic instruments, what are the kinds of costs of managing this kind of risk? The science on this is very simple and crystal clear and crystal clear to 99 point something per cent of the climate scientists. It is not crystal clear to every taxi driver, to every guy behind the bar or to every president of the countries in the region. But do you go to them for your nuclear physics or your pharmacology? No. It is the job of political decision makers, people who design policy, to cross-question, to listen, to try to understand but not to do the science.

This is very clear, simple stuff. There are lots of uncertainties there and lots of things to refine but we know much more about the probability distributions than we did before but the basic phenomenon of this relentless rise in concentrations and therefore the warming is very clear.

There will be big fluctuations; there will be El Niño and La Niña as we do see fairly regularly. There will be changes in the structure of the earth’s orbit; that is the kind of thing that brings you ice ages. There will be fluctuations in the solar activity in the sun. All these fluctuations will be there but the basically powerful underlying trend that we are generating through the emissions of greenhouse gases will move us in the direction of these very, very big changes over a very short period of time: 120 years or whatever it might be to get up into 5oC above pre-industrial times is just enormous.

Here is the question. What would you pay to bring down that probability of 50/50 dramatically? If we held at 500 parts per million (we are already at 435) then the probability of going above 5oC drops down to about 3 per cent. We do not really know whether these probabilities at 500 are 2 per cent, 3 per cent, 4 per cent or whether the probability I gave you is 45, 50, 55 or 60, but we do know with some confidence that we could dramatically cut that probability by holding to 500 parts per million. What would we need to do that? By 2050 we would need to bring emissions down as a world from the over 500 gigatonnes they are now to about 20 gigatonnes.

You can always do a bit more before, a bit more later because this is a flow-stop problem but roughly speaking the paths that could stabilise at 500 parts per million and then bring it down from there, because we would have to, would involve having around 20 gigatonnes in 2050. That is a number that you have to keep hold of because wherever you go, people put their arm round you and say, “Nick, this is a really serious problem but you do have to understand that China is different. You do have to understand that the United States is different. You do have to understand that Australia is different. You do have to understand that Russia is different.” Of course the average has to be such that the total is 20 gigatonnes but we are going to have to be more than that.

What will the average have to be? There will be 9 billion people in 2050; 20 divided by 9 is just over 2. We have to average two tonnes per capita. There will not be many people below two tonnes per capita so there cannot be many people above. This is not Lake Wobegon where all the men are beautiful, all the women are strong and all the children are above average. The average is the average. If there are not many people below, there cannot be many people above.

That brutal arithmetic, and it is very simple and very direct, tells us that we have to get down to around two tonnes per capita. For the European Union it is now 10 12 tonnes per capita, if you look at all the greenhouse gases together, not just CO2 and all the sources of greenhouse gases. That means that we have to divide by roughly 5; that is why we talk about 80 per cent reductions 1990 to 2050 and we have our European targets along the way. Europe has acted early and strongly and it has invented the right kinds of economic tools like the European Union Emissions Trading Scheme.

The United States, Australia and Canada are over 20 tonnes per capita. Barak Obama has declared that the US will have 80 per cent reduction 1990 to 2050. He really meant to say 90 per cent but we will excuse him the slip of the tongue because to get done from 20 to 2 you divide by 10. That actually does not matter too much at the moment. The key is to start off strongly down the right road and we will learn like mad along the way; we will revise some of these numbers. Basically, that 20 gigatonnes is what anchors world policy. When we come out of Copenhagen, in December, it has to be on the basis of 20 gigatonnes as the total for the world. We have to keep a score sheet.

We have actually come a very long way in this story because out of this simple logic we have the kinds of reductions we need to make. We have been talking about numbers like that for the world, 50 per cent reductions by 1990 to 2050 at the last two G8 summits; no doubt the Italians will provide the kind of leadership, and I think it will happen, which will take us further along this kind of commitment at the G8 summit this year in L’Aquila.

I have already given the examples of Europe and the United States with targets in the right direction. We are starting as a world to share the understanding of where we need to be. That is very positive and it is actually fairly recent; it is in the last three, four or five years, more recently of course from the United States.

China knows that it is extremely vulnerable. The big rivers of China rise in the Himalayas. The melting of the snow and ice in the Himalayas will radically transform water in China. The biggest cities of China are mostly close to the sea and very vulnerable to sea level rise. China understands it is vulnerable. China understands it is potentially a deal-breaker. It is concentrating very hard working on an energy strategy feeding into the 12th five-year plan, which starts at the beginning of 2011, and, unlike India, China has actually worked out its five-year plan before the plan period begins. They are looking at these issues extremely seriously and carefully. Leadership in China is in large measure engineers, indeed engineers who graduated from Tsinghua University – very practical, numerate and analytical about the risks that are being run and about what needs to be done and about the kinds of technologies that are necessary.

Actually we can see quite clearly the scale of the action that we need to take as a world, getting down to 20 gigatonnes. We can see the kinds of areas where we need to act to do that. They are fairly simple and you know them very well here at the EBRD. They are energy efficiency, low carbon technologies and stopping deforestation. Those are the three broad areas.

We have to act right across the economy. It is about buildings; it is about agriculture; it is about transport; it is about power; it is about heating. It is all these things, and so you have to act right across the economy.

We can see what the problem is in terms of the economics. That problem is that these emissions, particularly carbon dioxide, are not priced. The market is failing. It is the greatest market failure the world has ever seen. People pay for the labour in the goods that they buy and take that for granted and the market signals the costs of labour; it signals the cost of raw materials; it signals the cost of capital, but it is not signalling the cost of the damage caused by emissions. That is a market failure. What do you do? You do not abandon the markets; you do not abandon banking because banking has got into serious trouble. You try to fix it. The right thing to do is to try to fix those markets. What do you have to do? Price the carbon: it can be taxation, it can be carbon trading. You have to try to bring forward the technologies. The failure in the carbon market is not the only market failure here. There are lots of market failures associated with the creation of new ideas. There are market failures associated with the way that housing markets work and the ability of people who invest in green buildings get the extra rent associated with those buildings.

A number of market failures are relevant here. That means that we are going to need a price for carbon, ways of bringing on new technologies, not just the development but also the deployment like feed-in tariffs. It means that in some areas emissions from cars and from houses and so on are going to need regulation.

We can see the quantities that we need – 20 gigatonnes. We can see the areas where we have to act. We can see the economic instruments. What is missing is the political will. That is all. How do you get there? You have to understand, first, some of the costs involved in making the change. This is firstly about the period of transition. The word resonates here and for very good reason. This is about transition to a low carbon economy. That transition will be a Schumpetarian period of innovation and investment and growth. Schumpeter was the great Austrian economic historian and economic theorist who wrote a lot of his stuff in Harvard and he had this story of innovation and new technologies driving growth. He spoke of the railways, electricity, the motor car and more recently we would speak of information technology. This transition, if managed well, is going to be a period of very powerful growth.

When we get to a low carbon economy, we will have something which is more energy secure, safer, quieter, more biodiverse. The transition itself will be a dynamic process but a process which requires investment and cost and, when we get there, we are in a really attractive place.

Here we have a policy which helps us come out of the recession in the very short run, because there are many kinds of energy efficiency investments which are quite labour-intensive and intensive in labour in the building sector, that takes us to a period of very rapid growth of the Schumpetarian variety that I described for two or three decades, and it takes us to a very much more attractive form of growth and it reduces – and this is where we began – most fundamentally the probability of the disastrous climate change. This is a no-brainer that this is what we have to do.

What levels of investment are required? We have worked out and burrowed away and built economic models on kinds of investment cost that might be required over these next two, three or four decades. It comes out at 1 or 2 per cent of GDP. There are lots of ways of doing that. Other people come out with much lower numbers than that actually: the International Energy Agency, McKinseys and so on. I have been a bit conservative because as an economist I have found that in life it makes sense to allow for bad policy and the costs that could be lower but do not turn out to be as low as you thought and in the 1 or 2 per cent there is quite a lot of allowance for that.

Some multiplication here: to get down to 20 gigatonnes – we are already at 50 and we will rise under business as usual probably to something like 85 by 2050 – so 85 down to 20 is taking out 65 gigatonnes. If we did that at $30 a tonne, then $30 times 65 gigatonnes, remembering that giga and billion are the same (scientists like giga and economists like billion) you have to multiply $30 dollars per tonne by 65 billion tonnes. The 30 times 65 is easy but you just have to get your decimal points in the right place. It is 1.95 trillion – 2 trillion.

Where will we be as a world in 2050? With good policies, including on climate change, we could easily double world GDP; take it from 50 trillion or so now or a bit more to a bit more than 100 trillion. That makes the percentages easy: 2 trillion divided by 100, 2 per cent. There is quite a lot of slack in that arithmetic that I have given you. We have all the other co-benefits that I have described. It is not just cost; it is not just burden-sharing. It is about getting on to a different form of dynamics and a different form of growth for the economy.

That is the story. It is quite a simple story that challenges political will. How do you get there? How do you build the international collaboration that is necessary? What does a global deal that is effective on the scale required, efficient to keep the cost down and equitable look like? I have more or less described the guts of that global deal in what I have already said. First, the 50 per cent target overall, 1990 to 2050, get down to the 20 gigatonnes and within that at least 80 per cent from the rich countries.

There is a great inequity here and the rich countries are largely responsible for the bad position of where we start and it is the poor countries that get hit earliest and hardest but the currently developing world is going to be 8 billion out of the 9 billion. If the rich world’s output was zero of emissions in 2050, you are dividing 20 by 8 not by 9. It is going to have to be 2½ tonnes. It simply cannot work unless the developing world is centrally involved. That means that the rich countries have not only got to take these targets but they have to share the technologies as the technologies are developed. Many of them will be developed in the developing world as well. We have to share those technologies and help with the finance and help with the extra cost of development in a more hostile climate. That is what will make it equitable.

Within that, Brazil already has an ambitious climate change action plan; China put one together two years ago and I think it will turn out to be more ambitious than the one they described two years ago; India one year ago; South Africa at the end of the last year as well; Mexico a very promising climate change action plan. You are seeing these action plans developing but the conditions for taking on targets five or ten years from now that will surely be on the rich world and how it performs in developing the technologies, taking on these big targets, sharing of technologies and so on.

That is the rich world, obviously very, very quickly; that is developing countries. We are going to have to have a carbon trading scheme to establish efficiency. The European Union one is going to have to link up with the US one and there are going to have to be other link-ups elsewhere. We have to have ways of developing and sharing the technology; we have to beat deforestation and probably for about $15 billion a year we could cut deforestation in half; and we have to have extra finance for the extra costs of meeting development goals in a more hostile climate.

That is a very thumbnail sketch of a global deal. Those of you who would like to buy my book – here is the academic speaking now – which was published in April, it is called A Blueprint for a Safer Planet in the UK and it is called The Global Deal in the US. This was a big fight between the publishers and the US publisher said it was never going to sell unless it is called The Global Deal and the UK publisher said it was never going to sell unless it is called A Blueprint for a Safer Planet. You could have swapped the emails around; they were exactly the same except for just changing the title. Anyway, that is the plug for the book. If you want to look in more detail at these kinds of arguments, that is where I try to set it out.

Some of you will have noticed that we have an economic crisis on our hands. What difference does that make to this story? First, one thing we should have learnt from the economic crisis is that if you postpone taking on risk, then you face, over time, much bigger consequences. Delay is costly. It is still more true of climate change. You have this ratchet effect in there that I described and of course the kinds of effects we are talking about are far, far bigger than we are seeing right now down the track. That is the difference.

We should also learn that if you want to come out of a crisis, you had better do it in a way that lays the foundation for strong growth in the future. When we came out of the crisis around the burst of the dot-com bubble at the beginning of this century, we sowed the seeds of the next bubble. We do not want to do that this time round. We should be laying the foundation for the strong growth story of the future. What we should not be doing is trying to ratchet back to a form of high carbon growth which has very little future or no future or a destructive future.

I think the lessons we should learn from this crisis are clear. They strengthen the arguments for acting strongly on this. It is cheaper to invest when more resources are idle and many of the kinds of resources that are particularly idle are the kinds of resources that are relevant here. A lot of weatherproofing is done by construction workers. As well as learning the lessons about what we should do next, in terms of risk management and the kinds of foundations for growth, there is also a shorter run story in terms of this actually being a sensible way to come out of the recession.

The crisis we are in is deep and of fundamental importance and it is hard but, at the same time, in thinking about how we come out of this crisis, it is not true that any way will do. There is a route out of this crisis which is much more constructive for the future than some others. I see this as of fundamental importance.

Let me speak for the last few minutes that are left to me on the relationship between the story I have told and how I understand the EBRD. Please forgive me if my understanding is a bit outdated but I am going to stick to principles. First, the phenomenon I have talked about, moving to a low carbon economy, moving to more energy efficiency, a more efficient economy, and the transition to the low carbon economy is also a problem of transition in the sense of the EBRD’s mandate. Why? First, I will give the quantities and I will give my take on the origins of those quantities.

The emissions to output ratio for the eastern part of the region, what we used to call in our unenlightened days the former Soviet Union, is about 3:1. In other words, if you take the European Union and compare it with the eastern parts of this region, the emissions per unit of output are three times higher in the eastern part of the region; two times higher if you just compare central Europe with the European Union as a whole. You have a clear phenomenon where the transition countries are very different in this respect from Europe, their closest neighbours essentially.

How did this come about? It came about in large measure because of the philosophy and practice of the former regime. Those of us who studied economics carefully in the Sixties read both Von Hayek and Marx. I think when Jacques left we gave him an original first edition of Adam Smith and a first edition of Capital.

What is the notion of product in the Marxist concept of product? It is basically stuff you can touch and weigh. The idea of the service sector, for example, as being part of output was not there in the Marxist concept of material output, which stood in place of national income. There was a very particular view of output which was much more focused on energy-intensive industries. There was a total disregard for the environment as an input. There might have been environmental legislation, we all know that, but actually in practice there was a total disregard for the environment, partly because of the very narrow perspective of what meeting planned targets really meant. There was a gross wastefulness and mispricing of a key input, which was energy. Energy was spectacularly under-priced under the old regime.

This high-carbon intensity did not come out of nowhere. It came out of concept, philosophy and the practicality of a particular form of planning system and the misguided use of prices. This phenomenon, which is very clear and strong in terms of the emissions per unit of output, came from the old system. Therefore, this transition to the low carbon economy is very tightly bound up with the transition in a sense to a well-functioning market economy. A market economy which mis-prices energy and mis-prices emissions is not a well-functioning market economy. These are very tightly tied up in terms of the transition.

Why should the EBRD be involved in this? Of course, first and foremost because it is a transition phenomenon but the EBRD has developed from its very early days the tools and sophistication in this area which it has been explaining to many of the other development banks: it has become a core competence in this institution; it has become a comparator of advantage in this institution and not by chance. In the Articles of Association, which we all used to be able to rehearse – I am sure we could all chant Article 1 and I am sure you can still do that – the transition to the well functioning market economy is part of the story. I have already articulated well functioning market in this particular sense. So too was the environment, and that is why energy efficiency was so strong early on and for every good reason, before the other development banks.

I think that as well as it being fundamentally a transition phenomenon, it has also developed as a comparative advantage an area where the EBRD is additional through the sensible polices and practice of the EBRD. It is clearly an area with transition impact, for the reasons I have described. It is clearly an area of additionality and of course fundamentally, as we all learnt to start with, if done well, it follows sound banking principles.

So there you are. It is absolutely central to the EBRD’s story. It has leverage on policy. If you think about the problems of energy efficiency and the kinds of investments you want to make, you have to think very carefully about pricing and energy pricing and energy policy reform. There is great leverage in the project approach when it is bound up with policy reform. If I understand it correctly, that is exactly the kind of thing that the Sustainable Energy Initiative set out to do and has done.

You have, as it were, this whole problem of transition of two kinds together with an EBRD comparative advantage, which it has developed for very good reason. This must be, surely, an area of great activity of the EBRD going forward and that is why the second phase of the Sustainable Energy Initiative is so important.

All this tells us something about graduation. Probably graduation has slipped down the agenda and good – I am looking at some of the people in this hall – but some of us wrote probably in about 1997 some criteria for graduation. We said, “Look, this is not about graduation of a country; it is a conceptual mistake relative to the Articles of Association to see it this way. This is about transition impact, additionality, and sound banking principles. They will tell you about graduation. So it refers to sectors. It refers to forms of activity. It refers to what is going on elsewhere in the markets, because that shapes additionality.

For all these reasons, the story I told about the centrality of this issue for the EBRD is also telling us something about the notion of graduation and how it should be applied because we insisted, on the basis of the Articles of Association, that it was these three principles that shaped any notion of graduation. You can see why the application of these principles tells us very strongly that there is actually no argument that graduation in this area – and it is a big area – makes sense at this stage, and indeed what has been going on in our understanding of climate change and in the markets of the region underline that point still more strongly.

Let me conclude with the role of the region in international agreement. It is probably fair to say – now that I am outside government I can say what I like – that the region has dragged its heels at the governmental policy international level. Probably Russia signed Kyoto in large measure to get into WTO. That is the kind of transaction at the very presidential and prime ministerial level that takes place. Countries in the region are concerned because of the high emissions per unit of output at the higher costs of investment in this area that it might have to face.

I think it is extremely important that in putting a global deal together the recognition of the position and the historical position of the region is taken carefully into account. In the European Union we have a particular responsibility to take that carefully into account. There are lots of measures that can be used in terms of transformation funds, allocation of revenues from auction and speed of movement from auctioning of cap and trade. There are lots of economic instruments that we can use to recognise that difficult and more difficult position of the region relative to the others. What we must not do is argue that the region somehow should move more slowly because that would be extremely damaging. Everybody has to be involved here.

If we ducked out of the challenge of moving to the low carbon economy in this region, it would drive it backwards economically, politically and internationally. I do not believe that will happen. I take that view in large measure because of the creativeness, far-sightedness and commitment to transition and achievement of transition we have seen in the region and what has been achieved. I also take the view that this region will not be a laggard because of what I see happening in the EBRD. (Applause)

Let me just add one anecdotic or even relevant remark which is a non-economic observation. I have, from time to time, the sense that what you have been speaking about of course reacts to economics and incentives. Much can be done in this respect, but my sense is that it also has a cultural element. I say this because my experience from Eastern Germany is that these are the elements that take much more time to change than anything else. Still today, for instance when we present the SEI 2 Initiative to the Board, you will see the most outspoken enthusiasm is shown by the Western Directors and most of the Directors of countries of operation remain relatively silent. I think, if we really look at what can be done in order to come to the very ambitious results you have rightly alluded to, it is probably not exclusively about thinking of economic mechanisms; it is also about what we can do to change a spirit, a culture, if you will a philosophy, that might be as much an obstacle as certain economic shortfalls. But this is just a closing remark.