SIR NICHOLAS STERN yesterday foretold a Biblical disaster with the dramatic flair that befits an economist. “This is the greatest market failure the world has ever seen,” he said, as he set out the findings of his report on The Economics of Climate Change.

Comparing the conditions that have so far brought a summer hosepipe ban and a balmy, sun-dappled October with the Great Depression, the scourge of cancer and the failure of Africa may seem an extravagant claim. But one of the signal qualities of this landmark report from the former chief economist of the World Bank is the absence of emotive hyperbole.

The Stern Review makes two invaluable contributions. The first is that it recasts environmentalism as economics: floods, droughts, deforestation, and death are largely set aside for statistical models of the temperature’s impact on GDP.

If the world continues to conduct business as usual, climate change will result in a 20 per cent fall in consumption per head. By contrast, mitigation — taking action to reduce emissions — would cost only 1 per cent of the world’s economic output by 2050.

Business will, doubtless, have many good reasons to be sceptical of the Stern Review’s win-win conclusion. Global warming is a worldwide problem and Britain’s leadership on this issue will be meaningless if the big emitters — the US, China and India — are not brought on board.

There will be concern that an unproven scientific theory just a few years ago has become a fashionable consensus, which could lead to the rash endorsement of untested policies. Carbon trading may work, but is the emerging market in offsets not just fostering guilt-free consumption, encouraging unbridled demand and, if we are not careful, adding to total greenhouse emissions? Business is also right to be concerned about a rash of new taxes. The measure of effective green levies must be twofold: one, they should genuinely reform behaviour; two, they should be compensated by tax relief elsewhere.

There will also be doubts about the sustainability of the Government’s newfound and modish enthusiasm for the planet. Curbing climate change is a long-term project, which will need to be built on more than the current tree-hugging contest in Westminster.

But Stern’s second serious contribution is to provide a formula for a durable environmentalism, one which binds business and government. Sir Nicholas’s chief proposal is that governments work to create a global, liquid market for carbon.

In its infancy, the carbon market is prone to volatility, susceptible to price manipulation and threatened by political disruption. As it grows, it will become a bankable prospect. Gordon Brown’s job is to turn that idea into an internatiaonal reality.

Beyond carbon trading, Mr Brown is right to see a competitive opportunity for environmental technologies. As Mr Brown championed a new UK hub for environmental science yesterday, The New York Times reported annual federal spending on energy research and development is less than half what it was a quarter-century ago.

The Chancellor still has much to do to improve the climate for business, addressing problems of tax, regulation and infrastructure.

But yesterday saw him at his best, marrying a complex problem with substantive economic policy, promising a partnership between “the responsible company and the empowering Government.”

Much to its credit, business is squaring up to that responsibility. Mr Brown must empower it by building the market.

Storm signals

MEMBERS of the Monetary Policy Committee meet at the Bank of England on Friday to be briefed on new economic developments, including a new Inflation Report to help them to set interest rates. If Bank staff have prepared well, this week’s briefing will be unlike any other in the MPC’s nine-year history.

Money supply, which was the talisman of anti-inflation policy in the 1980s but has largely been ignored since, should be back near the top of the agenda. M0, the purists’ favourite measure of money supply, has since ceased to exist because of changes in the way the Bank enforces interest rates. But M4, the broad measure that includes bank lending, is sending out storm signals.

Growth in M4 has accelerated to an annual 14.5 per cent. That would not worry the People’s Bank of China, but is the fastest expansion of credit in Britain since 1990, when inflation last raged.

A return to boom times in the mortgage market is the latest driver of growth. In previous months, however, it was lending to business (up an adjusted 18 per cent) and lending to other financial companies (up an adjusted 26 per cent). There has been no surge in housebuilding, still less in business investment or even working capital. So whichever sector banks are lending to, they are largely financial higher asset prices and higher loan gearing.

If that is not a threat to inflation, it is surely a threat to future economic stability.

CREATING excuses for eating chocolate is a smooth-talking industry in itself. Cadbury has added a dimension of its own this year, having to apologise for a salmonella threat and now for missing targets on profit margins. The excuse this time was that higher ingredient costs and energy prices had not been allowed for. Rivals face the same cost rises without the red face, suggesting that Cadbury’s targets were as aspirational as a Milk Tray advertisement, designed to impress rather than be robust strategy.

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