Stern Review
Encyclopedia
The Stern Review on the Economics of Climate Change is a 700-page report released for the British government on 30 October 2006 by economist Nicholas Stern
, chair of the Grantham Research Institute on Climate Change and the Environment
at the London School of Economics
and also chair of the Centre for Climate Change Economics and Policy (CCCEP) at Leeds University and LSE. The report discusses the effect of global warming
on the world economy. Although not the first economic report on climate change, it is significant as the largest and most widely known and discussed report of its kind.
The Review states that climate change is the greatest and widest-ranging market failure
ever seen, presenting a unique challenge for economics. The Review provides prescriptions including environmental taxes
to minimize the economic and social disruptions. The Stern Review's main conclusion is that the benefits of strong, early action on climate change far outweigh the costs of not acting. The Review points to the potential impacts of climate change on water resources, food production, health, and the environment. According to the Review, without action, the overall costs of climate change will be equivalent to losing at least 5% of global gross domestic product
(GDP) each year, now and forever. Including a wider range of risks and impacts could increase this to 20% of GDP or more.
The Review proposes that one percent of global GDP per annum is required to be invested in order to avoid the worst effects of climate change. In June 2008, Stern increased the estimate for the annual cost of achieving stabilisation between 500 and 550 ppm CO2e
to 2% of GDP to account for faster than expected climate change.
There has been a mixed reaction to the Stern Review from economists. Several economists have been critical of the Review, for example, a paper by Byatt et al. (2006) describes the Review as "deeply flawed". Some economists (such as Brad DeLong and John Quiggin
) have supported the Review. Others have criticized aspects of Review's analysis, but argued that some of its conclusions might still be justified based on other grounds, e.g., see papers by Martin Weitzman
(2007) and Helm (2008).
, Gordon Brown
announced that he had asked Sir Nicholas Stern
to lead a major review of the economics of climate change, to understand more comprehensively the nature of the economic challenges and how they can be met, in the UK and globally. The Stern Review was prepared by a team of economists at HM Treasury
; independent academics were involved as consultants only. The scientific content of the Review was reviewed by experts from the Walker Institute.
The Stern review was not released for regular peer-review, since the UK Government doesn't undertake peer review on commissioned reviews. Papers were published and presentations held, that outlined the approach in the months preceding the release.
Spokeswoman, said doing nothing is not an option, "we must act now". Simon Retallack of the UK think tank IPPR
said "This [Review] removes the last refuge of the "do-nothing" approach on climate change, particularly in the US." Tom Delay of The Carbon Trust
said "The Review offers a huge business opportunity." Richard Lambert, Director General of the Confederation of British Industry
, said that a global system of carbon trading is "urgently needed". Charlie Kronick of Greenpeace
said "Now the government must act and, among other things, invest in efficient decentralised power stations and tackle the growth of aviation."
Asset managers F&C look to the business opportunities and say "this is an unprecedented opportunity to generate real value for our clients". Brendan Barber, General Secretary of the Trades Union Congress
, was optimistic about the opportunities for industry to meet demands created by investment in technology to combat climate change. The Prince of Wales’ Corporate Leaders Group on Climate Change, formed by 14 of UK’s leading companies shared this hope. Chairman of Shell
UK, James Smith, expressed the hope of the group that business and Government would discuss how Britain could obtain “first mover advantage" in what he described as "massive new global market".
On November 1, 2006, then Australia
n Prime Minister, John Howard
, responded by announcing that AU$60 million would be allotted to projects to help cut greenhouse gas emissions while reiterating that Australia would not ratify the Kyoto Protocol
. Much of this funding was directed at the non-renewable coal industry.
British Prime Minister, Tony Blair
, stated that the Review demonstrated that scientific evidence of global warming was "overwhelming" and its consequences "disastrous" if the world failed to act. The UK Treasury, which commissioned the report, simultaneously published a document of favourable comments on the Review. Those quoted include:
Several academic economists are also quoted praising the Review (see Response of economists).
of the costs of climate change, and underestimates the costs of emission reduction. Other critics have argued that the economic cost of the proposals put forward by Stern would be severe, or that the scientific consensus view on global warming, on which Stern relied, is incorrect. By contrast, some argue that the Review emission reduction targets are too weak, and that the climate change damage estimates in the Review are too small.
, questions the scientific consensus on climate change
on which the Stern Review is based. She says that "authorities on climate science say that the climate system is far too complex for modest reductions in one of the thousands of factors involved in climate change (i.e., carbon emissions) to have a predictable effect in magnitude, or even direction." Lea questions the long-term economic projections made in the Review, commenting that economic forecasts for just two or three years ahead are usually wrong. Lea goes on to describe the problem of drawing conclusions from combining scientific and economic models as "monumentally complex", and doubts whether the international cooperation on climate change, as argued for in the Review, is really possible. In conclusion, Lea says that the real motive behind the Review is to justify increased tax on fuels.
Yohe and Tol (2007) described Lea's article as a climate skeptics 'scattershot approach' aiming to confuse the public by questioning the causal role of CO2, by emphasising the complexity of making economic predictions and by attributing a motive for Stern's conclusions.
Miles Templeman
, Director-General of the Institute of Directors
, said: "Without countries like the US, China or India, making decisive commitments, UK competitiveness will undoubtedly suffer if we act alone. This would be bad for business, bad for the economy and ultimately bad for our climate."
Prof. Bill McGuire of Benfield UCL
Hazard Research Centre said that Stern may have greatly underestimated the effects of global warming
. David Brown and Leo Peskett of the Overseas Development Institute
, a UK think-tank on international development, argued that the key proposals in relation to how to use forests to tackle climate change may prove difficult to implement:
Soon after publication of the Stern Review, former Chancellor of the Exchequer Nigel Lawson
gave a lecture at the Centre for Policy Studies
, briefly criticising the Review and warning of what he called "eco-fundamentalism". In 2008, Lawson gave evidence before the House of Commons Treasury Select Committee, criticising the Review.
Environmental writer Bjørn Lomborg
criticised the Stern Review in OpinionJournal:
Reason magazine's science correspondent Ronald Bailey
describes the "destructive character" of the Stern Review's policy proposals, saying that "Surely it is reasonable to argue that if one wants to help future generations deal with climate change, the best policies would be those that encouraged economic growth. This would endow future generations with the wealth and superior technologies that could be used to handle whatever comes at them including climate change. [...] So hurrying the process of switching from carbon-based fuels along by boosting energy costs means that humanity will have to delay buying other good things such as clean water, better sanitation, more and better food, and more education."
Commenting on the Review's suggested increases in environmental tax, the British Chambers of Commerce have pointed to the dangers to business of additional taxation.The Business, a British magazine, reported that cost estimates for reducing emissions in the Stern Review are wrong. This is based on a leaked United Nations report obtained by the magazine, which says that mitigating climate change could cost up to 5% of global gross domestic product. Journalist Fraser Nelson argues that “if the Intergovernmental Panel on Climate Change
figures are right, they open up the possibility that the British proposals would cost as much as they save, making them redundant.”
Jerry Taylor of the Cato Institute
, a US libertarian
think-tank, criticized Stern's conclusion, taking a calculation by himself:
In the BBC
radio programme The Investigation, a number of economists and scientists argued that Stern assumptions in the Review are far more pessimistic than those made by most experts in the field, and that the Review's conclusions are at odds with the mainstream view (Cox and Vadon, 2007).
In his paper on the Jevons' Paradox, which states that improvements in energy-efficiency of technologies can potentially increase greenhouse gas emission, Steve Sorrel concludes with "A prerequisite for all the above is a recognition that rebound effects matter and need to be taken seriously. Something is surely amiss when such in-depth and comprehensive studies as the Stern(2007) review overlook this topic altogether."
John Bellamy Foster
, Brett Clark and Richard York in "the Ecological Rift" (2010) give considerable attention to the Stern Review, noting that the targets of 550 ppm imply a global temperature increase of at least 3 degrees C "well beyond what climate science consider dangerous, and which would bring the earth's average global temperature to a height last seen in the middle Pliocene around 3 million years ago" (p. 154). They posit that the basis for such high targets is 'economics, pure and simple' (p. 155), that is, lower emissions cuts were seen by the Stern Review authors as "prohibitive, destabilizing capitalism itself" (p. 155). "All of this signals that any reduction in C02 equivalent emissions beyond around 1 percent per year would make it virtually impossible to maintain strong economic growth--the bottom line of the capitalism economy. Consequently, in order to keep the treadmill of accumulation going the world needs to risk environmental Armageddon" (p. 156).
, has said that "climate is not driven primarily by human use of fossil fuels" and that the money to be spent is unlikely to have much effect: it would be better spent on the world's poor.
used in the Review. Discounting is used by economists to compare economic impacts occurring at different times. Discounting was used by Stern in his calculation of the possible economic damages of future climate change. Marginal
climate change damages were calculated for a "business-as-usual" greenhouse gas (GHG) emissions pathway. Residual climate change damages (at the margin) were also calculated for two other emissions pathways: one associated with a 450 ppm CO2e GHG concentration target, and the other at 550 ppm (Stern, 2006, p. 304).
There are four main reasons commonly proposed by economists for placing a lower value on consumption
occurring in the future rather than in the present:
Using a high discount rate decreases the assessed benefit of actions designed to reduce greenhouse gas emissions. The Stern Review's discount rate for climate change damages is approximately 1.4%, which, at the time of the Review, was lower than that used in most previous economic studies on climate change (Dietz, 2008, p. 11).
based on the "Ramsey" formula, which includes a term for inherent discounting, also called the pure rate of time preference
(PTP-rate):
where s is the social discount rate, γ the PTP-rate, η the marginal elasticity
of utility, and g the rate of growth of per-capita
consumption (Dietz, 2008, p. 10).
Stern accepts the case for discounting, but argues that applying a PTP-rate of anything much more than zero to social policy choice is ethically inappropriate. His view is supported by a number of economists, including Geoffrey Heal, Thomas Sterner,William Cline
, and Brad DeLong. Cline wrote a book on global warming, published in 1992, where he made similar ethical choices to Stern for discounting. DeLong, echoing Frank Ramsey
and Tjalling Koopmans
, wrote “My view--which I admit may well be wrong--of this knotty problem is that we are impatient in the sense of valuing the present and near-future much more than we value the distant future, but that we shouldn't do so.” Hal Varian
stated that the choice of discount rate was an inherently ethical judgement for which there was no definitive answer.
William Nordhaus
, of Yale University
, who has done several studies on the economics of global warming
, criticised the Review for its use of a low discount rate:
The difference between Stern’s estimates and those of Nordhaus can largely (though not entirely) be explained by the difference in the PTP-rate. Previous studies by Nordhaus and others have adopted PTP-rates of up to 3 per cent, implying that (other things being equal) an environmental cost or benefit occurring 25 years in the future is worth about half as much as the same benefit today. Richard Tol argues that in estimating discounting rates and the consequent social cost of carbon, the assumptions that must be made about the remote future are so uncertain that they are essentially arbitrary. Consequently the assumptions made dominate the results and with a low discount rate the social cost of carbon is also arbitrary.
In an appearance before the House of Commons Treasury Select Committee (2008), Stern was asked about the discount rate used in the Review:
John Roemer
(along with collaborators Humberto Llavador and Joaquim Silvestre) has argued that an analysis of the problem must consider both the ethical and economic issues associated with discounting. He has made the claim that high rates of discounting as the ones proposed by Nordhaus are only consistent with the infinitely-lived-representative-agent approach to economic modeling. Intergenerational justice would require more realistic assumption: one particular view is what Roemer calls the "sustainabilitarian" approach, which seeks to maximize present consumption subject to the constraint that future generations enjoy a quality of life at least as good as that enjoyed by the current generation. He supports the discount factors used in the Stern analysis, particularly the view that discounting should reflect only the probability that the world will end at a given future date, and not the "impatience" of an infinitely lived representative consumer.)
has argued that standard discounting procedures are inherently incapable of dealing with extreme, low-probability events, such as the risk of catastrophic climate change.
has criticised the Stern Review for parametric choices that, he argues, are inadequately sensitive to inequality. In subsequent debate, Stern has conceded the case for a higher elasticity, but noted that this would call for much more extensive redistribution of income within the current generation (Dietz et al. 2007. pp. 135–137).
of Yale University is a critic of the Review, and has said:
Nordhaus has been very critical of the Ramsey zero pure time preference on the basis of utilitarian ethical stance. He takes a strictly market based view of intergenerational projects arguing that the social rate of time preference reflects the rate of return observed in the marketplace. Nordhaus also raised his view that the present generation will have to for go a large amount of consumption now for the benefit of future generations who will be much richer than the present generation.
Dasgupta argues that there is some confusion in the Stern review about the underlying rationale for the selection of the Ramsey parameters. He states that the review mixes both market returns on investment with parameters selected on ethical grounds.
The discount rate chosen by Stern is close to the real interest rate
for government bonds. The higher rates preferred by Stern's critics are closer to the weighted average cost of capital
for private investment; see the extensive review by Frederick et al. (2002) According to Quiggin, the difference between the two is determined by the equity premium
. Quiggin says that there is no generally accepted theory accounting for the observed magnitude of the equity premium and hence no easy way of determining which approach, if either, should be regarded as the appropriate market comparator.
, Amartya Sen
, Joseph Stiglitz, and Jeffrey Sachs. Sachs and Stiglitz have also written favourable articles on the Review.
Richard Tol
, an environmental economist at the Economic and Social Research Institute
, is highly critical of the Stern Review, and has said that "If a student of mine were to hand in this report [the Stern Review] as a Masters thesis, perhaps if I were in a good mood I would give him a 'D' for diligence; but more likely I would give him an 'F' for fail (Cox and Vadon, 2007). There is a whole range of very basic economics mistakes that somebody who claims to be a Professor of Economics simply should not make. [...] Stern consistently picks the most pessimistic for every choice that one can make. He overestimates through cherry-picking, he double counts particularly the risks and he underestimates what development and adaptation will do to impacts." Tol has referred to the Stern Review as "populist science." In a paper published in 2008, Tol showed that the Stern Review's estimate of the social cost of carbon (SCC) along a "business-as-usual" emissions pathway was an outlier
in the economics literature.
Harvard
economist Martin Weitzman
has written a paper on the Stern Review (Weitzman, 2007). In this paper, Weitzman described himself as "skeptical" in regards to the discount rate used by Stern in the Review's formal (aggregated) assessment of climate change. One of Weitzman's conclusions was that Stern deserved credit for increasing public awareness on the dangers of climate change. However, Weitzman also commented that:
According to a paper Yohe and Tol (2007), the Stern Review is "right for the wrong reasons."
At a seminar held in 2006, Cambridge economist Partha Dasgupta
commented on the Stern Review.
Dasgupta (2006, p. 1) described the Review as "a long and impressive document," but felt that the authors had treated the issue of intergenerational equity
(via the social discount rate) "cavalierly". Dasgupta (2006, pp. 6–7) accepted the Review's argument for a PTP-rate of 0.1%, but did not accept Stern's choice of 1 for the elasticity of marginal utility. He argued this point by calculating a saving rate of 97.5% based on the Review's values for the PTP-rate and elasticity of marginal utility. Dasgupta stated that "[a] 97.5% savings rate is so patiently absurd that we must reject it out of hand." The calculation by Dasgupta was based on a model which had a deterministic economy, constant population, and no technological change.
Dasgupta's calculation was later cited by Berkeley
economist Hal Varian
.
Writing in the New York Times newspaper, Varian commented "Sir Partha’s stripped-down model leaves out uncertainty, technological change and population growth, but even so, such a high savings rate is totally implausible." Varian also questioned whether or not it was ethical for the current generation to transfer wealth to future generations (via investment in mitigation), who, given Stern's assumptions, would be much wealthier than we presently are.
Smith (2009) responded to Dasgupta's criticism of the Stern Review's implied savings rate.
She showed that the rates of PTP and risk aversion in the Stern Review are consistent with saving rates of 25-32% rather than 97.5% when a macroeconomic model with the production function actually used by Stern and Nordhaus is used.
According to Dietz (2008, pp. 10–11), Varian's analysis had apparently confused the PTP-rate with the social discount rate. The PTP-rate, if positive, discounts the welfare
of future generations even if they poorer than the current generation. The social discount rate used by Stern, however, accounts for the possible increased wealth (consumption) of future generations through the product
ηg (see the formula cited in the section on inherent discounting).
Terry Barker
of the Tyndall Centre Climate Change Research
wrote a paper (Barker, 2008) supportive of the Review. Barker was critical of how some economists have applied cost-benefit analysis to climate change:
Eric Neumeyer (2007) of the London School of Economics
thought that the Review could have argued for emission reductions based on the non-substitutable loss of natural capital
. Neumayer argued that the real issue is the non substitutable loss of natural capital, that is to what extent climate change inflicts irreversible and non substitutable damage to and loss of natural capital. Economists define natural capital as the multiple and various services of nature from which human’s benefit- from natural resources to pollution absorption and environmental amenities.
Dieter Helm (2008) of Oxford University was critical of the Review's analysis but accepted its conclusion of the urgent need to reduce emissions. Helm justified this on the grounds that future damages to the environment would probably not be fully compensated for by increases in man-made capital
. The draft report of the Garnaut Climate Change Review
, a similar study conducted in Australia in 2008 by Ross Garnaut
broadly endorsed the approach undertaken by Stern, but concluded, in the light of new information, that Stern had underestimated the severity of the problem and the extent of the cuts in emissions that were required to avoid dangerous climate change
.
that was used in the Review. Hope explained what would happen to the Stern Review's damage estimates if they were made using different assumptions, for example, a higher discount rate. Hope also pointed to the assumptions used in the model to do with adaptation.
In his talk, Nordhaus criticised the fact that the Stern Review had not been subject to a peer-review, and repeated earlier criticisms of the Review's discount rate. William Cline of the Peterson Institute supported the Review's general conclusions, but was uncomfortable about how most (greater than 90%) of the Review's monetised damages of climate change occur after 2200. Cline noted that the Review's large cost-benefit ratio for mitigation policy allows room for these long-term costs to be reduced substantially but still support aggressive action to reduce emissions.
Robert Mendelsohn was critical of the way the Stern justified his suggested mitigation policy in the Review. Mendelsohn said that rather than finding an optimal policy, the Review presented a choice of policy versus no-policy. Jeffrey Sachs of Columbia University
questioned some of the assumptions used in Nordhaus's integrated assessment model (DICE) of climate change. Sachs was supportive of Stern's cost estimates of climate change mitigation.
In response to these talks, Stern accepted Cline's comment about the weighting of future damages, and said that the weighting of these damages could be reduced by the increasing the size of the elasticity of marginal utility in the social discount rate. With regards to criticisms of the discount rate, Stern accepted that differences of opinion could exist on his ethical choice for the PTP-rate (Yale Symposium, 2007, p. 118).
Other comments by Stern included what he viewed as confusion over what he had suggested as a possible level for a carbon tax
. According to Stern, the tax will not necessarily be the same as the social cost of carbon due to distortions and uncertainties in the economy (p. 121). His suggested tax rate was in the range of 25 to 30 dollars per ton of carbon. Stern did not accept Mendelsohn's argument that the Review presented a choice of policy versus no policy. Stern commented that the arguments for his recommended stabilization range were included in Chapter 13 of the Review (pp. 124–125).
of King's College London
(Treasury Committee, 2008) has said that Stern's central mitigation cost estimate is "reasonable," but economists Robert Mendelsohn and Dieter Helm have commented that the estimate is probably too low. According to Mendelsohn, the Stern Review is far too optimistic about mitigation costs, stating that “[one] of the depressing things about the greenhouse gas problem is that the cost of eliminating it is quite high. We will actually have to sacrifice a great deal to cut emissions dramatically” (Mendelsohn, 2007).
Professor Emeritus of Economics at Pepperdine University
George Reisman
has said that "Any serious consideration of the proposals made in the Stern Review for radically reducing carbon technology and the accompanying calls for immediacy in enacting them makes clear in a further way how utterly impractical the environmentalist program for controlling global warming actually is. The fundamental impracticality of the program, of course, lies in its utterly destructive character."
In a response to a paper by members of the Stern Review team, John Weyant of Stanford University
commented on how the cost estimate of mitigation used in the Review was based on idealized models (Mendelsohn et al., 2008). Weyant wrote that his own high short-run cost projection for stabilization, of possibly 10% GDP, resulted "primarily from institutional pessimism rather than technological pessimism."
has commented on the Stern Review in the Economist's Voice (Arrow, 2007a) and for Project Syndicate (Arrow, 2007b):
Arrow analysed the Stern Review's conclusions by looking at the Review's central estimate of GHG stabilization costs of 1% GNP, and high-end climate damages of 20% GNP (Arrow, 2007a, pp. 4–5). As part of the Ramsay formula for the social discount rate, Arrow chose a value of 2 for the marginal elasticity of utility, while in the Review, Stern chose a value of 1. According to Arrow, Stern's recommended stabilization target passes a cost-benefit test even when considerably higher PTP-rate (up to around 8%) than Stern's (0.1%) is used. Arrow acknowledged that his argument depended on Stern's stabilization central cost estimate being correct.
Gary Yohe
of Wesleyan University
noted that Stern's estimates of business-as-usual climate damages were given in terms of per capita consumption equivalents, but Stern's costs of mitigation were given in terms of a percentage reduction in gross world product. Yohe stated that the two different measures are "not really at all comparable." Yohe commented on how the Review gives the impression that all climate damages can be avoided through the investment of 1% of world GDP in mitigation. This, however, would still lead to global warming (as per the Review's 550 ppm CO2e mitigation target) of around 1.5 to 4.5 °C above pre-industrial temperatures. Significant portions of climate damages would therefore still persist with Stern's mitigation target. In order to measure the benefit of Stern's mitigation target, the residual climate damages from mitigation would need to be subtracted from Stern's business-as-usual climate damages.
Members of the Stern Review team have also given several talks that have covered criticisms of the Review. A talk given by Dimitri Zenghelis at the Tyndall Centre looked at criticisms of the Review and presented an overview of its main findings. In an official letter (2008), Joan Ruddock
MP of the UK Government, dismisses the criticisms of the Review made by several economists, which, in her view, show "a fundamental misunderstanding of the role of formal, highly aggregated economic modelling in evaluating a policy issue".
and admitted that in the Stern Review, "We underestimated the risks [...] we underestimated the damage associated with temperature increases [...] and we underestimated the probabilities of temperature increases”. In June 2008, Stern said that because climate change is happening faster than predicted, the cost to reduce carbon would be even higher, of about 2% of GDP instead of the 1% in the original report.
Nicholas Stern
Nicholas Herbert Stern, Baron Stern of Brentford, Kt, FBA is a British economist and academic. He is IG Patel Professor of Economics and Government, Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics , and 2010 Professor of Collège de...
, chair of the Grantham Research Institute on Climate Change and the Environment
Grantham Research Institute on Climate Change and the Environment
The Grantham Research Institute on Climate Change and the Environment is a research centre at the London School of Economics and Political Science founded in May 2008...
at the London School of Economics
London School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...
and also chair of the Centre for Climate Change Economics and Policy (CCCEP) at Leeds University and LSE. The report discusses the effect of global warming
Global warming
Global warming refers to the rising average temperature of Earth's atmosphere and oceans and its projected continuation. In the last 100 years, Earth's average surface temperature increased by about with about two thirds of the increase occurring over just the last three decades...
on the world economy. Although not the first economic report on climate change, it is significant as the largest and most widely known and discussed report of its kind.
The Review states that climate change is the greatest and widest-ranging market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
ever seen, presenting a unique challenge for economics. The Review provides prescriptions including environmental taxes
Ecotax
Ecotax refers to taxes intended to promote ecologically sustainable activities via economic incentives. Such a policy can complement or avert the need for regulatory approaches. Often, an ecotax policy proposal may attempt to maintain overall tax revenue by proportionately reducing other taxes...
to minimize the economic and social disruptions. The Stern Review's main conclusion is that the benefits of strong, early action on climate change far outweigh the costs of not acting. The Review points to the potential impacts of climate change on water resources, food production, health, and the environment. According to the Review, without action, the overall costs of climate change will be equivalent to losing at least 5% of global gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP) each year, now and forever. Including a wider range of risks and impacts could increase this to 20% of GDP or more.
The Review proposes that one percent of global GDP per annum is required to be invested in order to avoid the worst effects of climate change. In June 2008, Stern increased the estimate for the annual cost of achieving stabilisation between 500 and 550 ppm CO2e
Carbon dioxide equivalent
Carbon dioxide equivalent and Equivalent carbon dioxide are two related but distinct measures for describing how much global warming a given type and amount of greenhouse gas may cause, using the functionally equivalent amount or concentration of carbon dioxide as the reference.- Global warming...
to 2% of GDP to account for faster than expected climate change.
There has been a mixed reaction to the Stern Review from economists. Several economists have been critical of the Review, for example, a paper by Byatt et al. (2006) describes the Review as "deeply flawed". Some economists (such as Brad DeLong and John Quiggin
John Quiggin
John Quiggin is an Australian economist and professor at the University of Queensland. Quiggin studied at the Australian National University, obtaining bachelor's degrees in Arts and Economics in 1978 and 1980 respectively, and completing a master's degree in Economics in 1984. Quiggin was awarded...
) have supported the Review. Others have criticized aspects of Review's analysis, but argued that some of its conclusions might still be justified based on other grounds, e.g., see papers by Martin Weitzman
Martin Weitzman
Martin Lawrence "Marty" Weitzman is a well known-economist and a Professor of Economics at Harvard University. He is among the most influential economists in the world according to IDEAS/RePEc...
(2007) and Helm (2008).
Summary of the Review's main conclusions
- The benefits of strong, early action on climate change outweigh the costs.
- The scientific evidence points to increasing risks of serious, irreversible impacts from climate change associated with business-as-usual (BAU) paths for emissions.
- Climate change threatens the basic elements of life for people around the world — access to water, food production, health, and use of land and the environment.
- The impacts of climate change are not evenly distributed — the poorest countries and people will suffer earliest and most. And if and when the damages appear it will be too late to reverse the process. Thus we are forced to look a long way ahead.
- Climate change may initially have small positive effects for a few developed countries, but it is likely to be very damaging for the much higher temperature increases expected by mid-to-late century under BAU scenarios.
- Integrated assessment modellingIntegrated assessment modellingIntegrated assessment modelling is a type of scientific modelling that is increasingly common in the environmental sciences and environmental policy analysis. The modelling is integrated because environmental problems do not respect the borders between academic disciplines. Integrated assessment...
provides a tool for estimating the total impact on the economy; our estimates suggest that this is likely to be higher than previously suggested. - Emissions have been, and continue to be, driven by economic growth; yet stabilisation of greenhouse gasGreenhouse gasA greenhouse gas is a gas in an atmosphere that absorbs and emits radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. The primary greenhouse gases in the Earth's atmosphere are water vapor, carbon dioxide, methane, nitrous oxide, and ozone...
concentrationConcentrationIn chemistry, concentration is defined as the abundance of a constituent divided by the total volume of a mixture. Four types can be distinguished: mass concentration, molar concentration, number concentration, and volume concentration...
in the atmosphereAtmosphereAn atmosphere is a layer of gases that may surround a material body of sufficient mass, and that is held in place by the gravity of the body. An atmosphere may be retained for a longer duration, if the gravity is high and the atmosphere's temperature is low...
is feasible and consistent with continued growth. - 'Central estimates of the annual costs of achieving stabilisation between 500 and 550ppm CO2eCarbon dioxide equivalentCarbon dioxide equivalent and Equivalent carbon dioxide are two related but distinct measures for describing how much global warming a given type and amount of greenhouse gas may cause, using the functionally equivalent amount or concentration of carbon dioxide as the reference.- Global warming...
are around 1% of global GDP, if we start to take strong action now. [...] It would already be very difficult and costly to aim to stabilise at 450ppm CO2e. If we delay, the opportunity to stabilise at 500-550ppm CO2e may slip away.' - The transition to a low-carbon economyLow-carbon economyA Low-Carbon Economy or Low-Fossil-Fuel Economy is an economy that has a minimal output of greenhouse gas emissions into the environment biosphere, but specifically refers to the greenhouse gas carbon dioxide...
will bring challenges for competitiveness but also opportunities for growth. Policies to support the development of a range of low-carbon and high-efficiency technologies are required urgently. - Establishing a carbon price, through taxTaxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
, tradingTradeTrade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
or regulationRegulationRegulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
, is an essential foundation for climate change policy. Creating a broadly similar carbon price signal around the world, and using carbon financeCarbon financeCarbon finance is a new branch of Environmental finance. Carbon finance explores the financial implications of living in a carbon-constrained world, a world in which emissions of carbon dioxide and other greenhouse gases carry a price....
to accelerate action in developing countries, are urgent priorities for international cooperation. - Adaptation policy is crucial for dealing with the unavoidable impacts of climate change, but it has been under-emphasised in many countries.
- An effective response to climate change will depend on creating the conditions for international collective action.
- There is still time to avoid the worst impacts of climate change if strong collective action starts now.
Background
On 19 July 2005 the Chancellor of the ExchequerChancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
, Gordon Brown
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...
announced that he had asked Sir Nicholas Stern
Nicholas Stern
Nicholas Herbert Stern, Baron Stern of Brentford, Kt, FBA is a British economist and academic. He is IG Patel Professor of Economics and Government, Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics , and 2010 Professor of Collège de...
to lead a major review of the economics of climate change, to understand more comprehensively the nature of the economic challenges and how they can be met, in the UK and globally. The Stern Review was prepared by a team of economists at HM Treasury
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
; independent academics were involved as consultants only. The scientific content of the Review was reviewed by experts from the Walker Institute.
The Stern review was not released for regular peer-review, since the UK Government doesn't undertake peer review on commissioned reviews. Papers were published and presentations held, that outlined the approach in the months preceding the release.
Positive critical response
The Stern Review attracted positive attention from several sectors. Pia Hansen, a European CommissionEuropean Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
Spokeswoman, said doing nothing is not an option, "we must act now". Simon Retallack of the UK think tank IPPR
Institute for Public Policy Research
The IPPR is the leading progressive think-tank in the UK. It produces research and policy ideas committed to upholding values of social justice, democratic reform and environmental sustainability. IPPR is based in London and IPPR North has branches in Newcastle and Manchester.It was founded in...
said "This [Review] removes the last refuge of the "do-nothing" approach on climate change, particularly in the US." Tom Delay of The Carbon Trust
The Carbon Trust
The Carbon Trust is a not for dividend company limited by guarantee created by the UK government to help businesses and public organisations to reduce their emissions of carbon dioxide into the atmosphere, through improved energy efficiency and developing commercial low carbon technology...
said "The Review offers a huge business opportunity." Richard Lambert, Director General of the Confederation of British Industry
Confederation of British Industry
The Confederation of British Industry is a British not for profit organisation incorporated by Royal charter which promotes the interests of its members, some 200,000 British businesses, a figure which includes some 80% of FTSE 100 companies and around 50% of FTSE 350 companies.-Role:The CBI works...
, said that a global system of carbon trading is "urgently needed". Charlie Kronick of Greenpeace
Greenpeace
Greenpeace is a non-governmental environmental organization with offices in over forty countries and with an international coordinating body in Amsterdam, The Netherlands...
said "Now the government must act and, among other things, invest in efficient decentralised power stations and tackle the growth of aviation."
Asset managers F&C look to the business opportunities and say "this is an unprecedented opportunity to generate real value for our clients". Brendan Barber, General Secretary of the Trades Union Congress
Trades Union Congress
The Trades Union Congress is a national trade union centre, a federation of trade unions in the United Kingdom, representing the majority of trade unions...
, was optimistic about the opportunities for industry to meet demands created by investment in technology to combat climate change. The Prince of Wales’ Corporate Leaders Group on Climate Change, formed by 14 of UK’s leading companies shared this hope. Chairman of Shell
Royal Dutch Shell
Royal Dutch Shell plc , commonly known as Shell, is a global oil and gas company headquartered in The Hague, Netherlands and with its registered office in London, United Kingdom. It is the fifth-largest company in the world according to a composite measure by Forbes magazine and one of the six...
UK, James Smith, expressed the hope of the group that business and Government would discuss how Britain could obtain “first mover advantage" in what he described as "massive new global market".
On November 1, 2006, then Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
n Prime Minister, John Howard
John Howard
John Winston Howard AC, SSI, was the 25th Prime Minister of Australia, from 11 March 1996 to 3 December 2007. He was the second-longest serving Australian Prime Minister after Sir Robert Menzies....
, responded by announcing that AU$60 million would be allotted to projects to help cut greenhouse gas emissions while reiterating that Australia would not ratify the Kyoto Protocol
Kyoto Protocol
The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change , aimed at fighting global warming...
. Much of this funding was directed at the non-renewable coal industry.
British Prime Minister, Tony Blair
Tony Blair
Anthony Charles Lynton Blair is a former British Labour Party politician who served as the Prime Minister of the United Kingdom from 2 May 1997 to 27 June 2007. He was the Member of Parliament for Sedgefield from 1983 to 2007 and Leader of the Labour Party from 1994 to 2007...
, stated that the Review demonstrated that scientific evidence of global warming was "overwhelming" and its consequences "disastrous" if the world failed to act. The UK Treasury, which commissioned the report, simultaneously published a document of favourable comments on the Review. Those quoted include:
- Paul WolfowitzPaul WolfowitzPaul Dundes Wolfowitz is a former United States Ambassador to Indonesia, U.S. Deputy Secretary of Defense, President of the World Bank, and former dean of the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University...
, former President of the World BankWorld BankThe World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty... - Claude MandilClaude MandilClaude Mandil is a members of the Board of Directors of Total S.A. and the former Executive Director of the International Energy Agency . He is graduated from the France's École Polytechnique and École des Mines...
, Executive Director of the International Energy AgencyInternational Energy AgencyThe International Energy Agency is a Paris-based autonomous intergovernmental organization established in the framework of the Organisation for Economic Co-operation and Development in 1974 in the wake of the 1973 oil crisis... - Kirit ParikhKirit ParikhKirit S. Parikh is Emeritus Professor and Founder Director of Indira Gandhi Institute of Development Research , Mumbai, India. He has also served as Senior Economic Advisor to United Nations Development Programme from October 1997 to September 1998...
, Member, Planning Commission, Government of IndiaIndiaIndia , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world... - Adair Turner, Former Director of UK Confederation of British IndustryConfederation of British IndustryThe Confederation of British Industry is a British not for profit organisation incorporated by Royal charter which promotes the interests of its members, some 200,000 British businesses, a figure which includes some 80% of FTSE 100 companies and around 50% of FTSE 350 companies.-Role:The CBI works...
and Economic Advisor to Sustainable Development CommissionSustainable Development CommissionThe Sustainable Development Commission was a non-departmental public body responsible for advising the UK Government, Scottish Government, Welsh Assembly Government, and Northern Ireland Executive on sustainable development.... - Sir Rod Eddington, Adviser to the UK Government on the long term links between transport and economic growth, and former Chief Executive of British AirwaysBritish AirwaysBritish Airways is the flag carrier airline of the United Kingdom, based in Waterside, near its main hub at London Heathrow Airport. British Airways is the largest airline in the UK based on fleet size, international flights and international destinations...
Several academic economists are also quoted praising the Review (see Response of economists).
Unfavorable critical response
The Stern Review has received various critical responses. Some economists have argued that the Review overestimates the present valuePresent value
Present value, also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk...
of the costs of climate change, and underestimates the costs of emission reduction. Other critics have argued that the economic cost of the proposals put forward by Stern would be severe, or that the scientific consensus view on global warming, on which Stern relied, is incorrect. By contrast, some argue that the Review emission reduction targets are too weak, and that the climate change damage estimates in the Review are too small.
General criticisms
In an article in the Daily Telegraph (2006), Ruth Lea, Director of the Centre for Policy StudiesCentre for Policy Studies
The Centre for Policy Studies is a British right wing policy think tank whose goal is to promote coherent and practical public policy, to roll back the state, reform public services, support communities, and challenge threats to Britain’s independence...
, questions the scientific consensus on climate change
Scientific opinion on climate change
The predominant scientific opinion on climate change is that the Earth is in an ongoing phase of global warming primarily caused by an enhanced greenhouse effect due to the anthropogenic release of carbon dioxide and other greenhouse gases...
on which the Stern Review is based. She says that "authorities on climate science say that the climate system is far too complex for modest reductions in one of the thousands of factors involved in climate change (i.e., carbon emissions) to have a predictable effect in magnitude, or even direction." Lea questions the long-term economic projections made in the Review, commenting that economic forecasts for just two or three years ahead are usually wrong. Lea goes on to describe the problem of drawing conclusions from combining scientific and economic models as "monumentally complex", and doubts whether the international cooperation on climate change, as argued for in the Review, is really possible. In conclusion, Lea says that the real motive behind the Review is to justify increased tax on fuels.
Yohe and Tol (2007) described Lea's article as a climate skeptics 'scattershot approach' aiming to confuse the public by questioning the causal role of CO2, by emphasising the complexity of making economic predictions and by attributing a motive for Stern's conclusions.
Miles Templeman
Miles Templeman
Miles Templeman was Director General of the Institute of Directors , the business organisation that represents and sets standards for company directors, between 2004 and 2011.-Career:...
, Director-General of the Institute of Directors
Institute of Directors
The Institute of Directors is a UK-based organisation, established in 1903 and incorporated by royal charter in 1906 to support, represent and set standards for company directors...
, said: "Without countries like the US, China or India, making decisive commitments, UK competitiveness will undoubtedly suffer if we act alone. This would be bad for business, bad for the economy and ultimately bad for our climate."
Prof. Bill McGuire of Benfield UCL
University College London
University College London is a public research university located in London, United Kingdom and the oldest and largest constituent college of the federal University of London...
Hazard Research Centre said that Stern may have greatly underestimated the effects of global warming
Effects of global warming
This article is about the effects of global warming and climate change. The effects, or impacts, of climate change may be physical, ecological, social or economic. Evidence of observed climate change includes the instrumental temperature record, rising sea levels, and decreased snow cover in the...
. David Brown and Leo Peskett of the Overseas Development Institute
Overseas Development Institute
The Overseas Development Institute is one of the leading independent think tanks on international development and humanitarian issues. Based in London, its mission is "to inspire and inform policy and practice which lead to the reduction of poverty, the alleviation of suffering and the achievement...
, a UK think-tank on international development, argued that the key proposals in relation to how to use forests to tackle climate change may prove difficult to implement:
Soon after publication of the Stern Review, former Chancellor of the Exchequer Nigel Lawson
Nigel Lawson
Nigel Lawson, Baron Lawson of Blaby, PC , is a British Conservative politician and journalist. He was a Member of Parliament representing the constituency of Blaby from 1974–92, and served as the Chancellor of the Exchequer in the government of Margaret Thatcher from June 1983 to October 1989...
gave a lecture at the Centre for Policy Studies
Centre for Policy Studies
The Centre for Policy Studies is a British right wing policy think tank whose goal is to promote coherent and practical public policy, to roll back the state, reform public services, support communities, and challenge threats to Britain’s independence...
, briefly criticising the Review and warning of what he called "eco-fundamentalism". In 2008, Lawson gave evidence before the House of Commons Treasury Select Committee, criticising the Review.
Environmental writer Bjørn Lomborg
Bjørn Lomborg
Bjørn Lomborg is a Danish author, academic, and environmental writer. He is an adjunct professor at the Copenhagen Business School, director of the Copenhagen Consensus Centre and a former director of the Environmental Assessment Institute in Copenhagen...
criticised the Stern Review in OpinionJournal:
Reason magazine's science correspondent Ronald Bailey
Ronald Bailey
Ronald Bailey is the science editor for Reason magazine. He was born in San Antonio, Texas and raised in Washington County, Virginia, and attended the University of Virginia, where he earned a B.A...
describes the "destructive character" of the Stern Review's policy proposals, saying that "Surely it is reasonable to argue that if one wants to help future generations deal with climate change, the best policies would be those that encouraged economic growth. This would endow future generations with the wealth and superior technologies that could be used to handle whatever comes at them including climate change. [...] So hurrying the process of switching from carbon-based fuels along by boosting energy costs means that humanity will have to delay buying other good things such as clean water, better sanitation, more and better food, and more education."
Commenting on the Review's suggested increases in environmental tax, the British Chambers of Commerce have pointed to the dangers to business of additional taxation.The Business, a British magazine, reported that cost estimates for reducing emissions in the Stern Review are wrong. This is based on a leaked United Nations report obtained by the magazine, which says that mitigating climate change could cost up to 5% of global gross domestic product. Journalist Fraser Nelson argues that “if the Intergovernmental Panel on Climate Change
Intergovernmental Panel on Climate Change
The Intergovernmental Panel on Climate Change is a scientific intergovernmental body which provides comprehensive assessments of current scientific, technical and socio-economic information worldwide about the risk of climate change caused by human activity, its potential environmental and...
figures are right, they open up the possibility that the British proposals would cost as much as they save, making them redundant.”
Jerry Taylor of the Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
, a US libertarian
Libertarianism
Libertarianism, in the strictest sense, is the political philosophy that holds individual liberty as the basic moral principle of society. In the broadest sense, it is any political philosophy which approximates this view...
think-tank, criticized Stern's conclusion, taking a calculation by himself:
In the BBC
BBC
The British Broadcasting Corporation is a British public service broadcaster. Its headquarters is at Broadcasting House in the City of Westminster, London. It is the largest broadcaster in the world, with about 23,000 staff...
radio programme The Investigation, a number of economists and scientists argued that Stern assumptions in the Review are far more pessimistic than those made by most experts in the field, and that the Review's conclusions are at odds with the mainstream view (Cox and Vadon, 2007).
In his paper on the Jevons' Paradox, which states that improvements in energy-efficiency of technologies can potentially increase greenhouse gas emission, Steve Sorrel concludes with "A prerequisite for all the above is a recognition that rebound effects matter and need to be taken seriously. Something is surely amiss when such in-depth and comprehensive studies as the Stern(2007) review overlook this topic altogether."
John Bellamy Foster
John Bellamy Foster
John Bellamy Foster is a professor of sociology at the University of Oregon and also editor of Monthly Review, an independent socialist magazine. His writings have focused on political economy, environmental sociology, and Marxist theory...
, Brett Clark and Richard York in "the Ecological Rift" (2010) give considerable attention to the Stern Review, noting that the targets of 550 ppm imply a global temperature increase of at least 3 degrees C "well beyond what climate science consider dangerous, and which would bring the earth's average global temperature to a height last seen in the middle Pliocene around 3 million years ago" (p. 154). They posit that the basis for such high targets is 'economics, pure and simple' (p. 155), that is, lower emissions cuts were seen by the Stern Review authors as "prohibitive, destabilizing capitalism itself" (p. 155). "All of this signals that any reduction in C02 equivalent emissions beyond around 1 percent per year would make it virtually impossible to maintain strong economic growth--the bottom line of the capitalism economy. Consequently, in order to keep the treadmill of accumulation going the world needs to risk environmental Armageddon" (p. 156).
Scientific consensus is incorrect or does not exist
A paper by Carter et al. (2006) sets out a scientific critique of the Review. Martin Livermore, of the Scientific AllianceScientific Alliance
The Scientific Alliance is a British industry-friendly organization that promotes biotechnology, genetically modified food, and climate change skepticism...
, has said that "climate is not driven primarily by human use of fossil fuels" and that the money to be spent is unlikely to have much effect: it would be better spent on the world's poor.
Stern report misused climate change study
According to the Sunday Times article "Climate change study was ‘misused’", the Stern report 'misused' disaster analysts research by Robert Muir-Wood, head of research at Risk Management Solutions, a US-based consultancy. The Stern report, citing Muir-Wood, said: “New analysis based on insurance industry data has shown that weather-related catastrophe losses have increased by 2% each year since the 1970s over and above changes in wealth, inflation and population growth/movement. […] If this trend continued or intensified with rising global temperatures, losses from extreme weather could reach 0.5%-1% of world GDP by the middle of the century.”. According to Muir-Wood "said his research showed no such thing and accused Stern of “going far beyond what was an acceptable extrapolation of the evidence”.".Discounting
One of the issues debated among economists was the discount rateDiscount rate
The discount rate can mean*an interest rate a central bank charges depository institutions that borrow reserves from it, for example for the use of the Federal Reserve's discount window....
used in the Review. Discounting is used by economists to compare economic impacts occurring at different times. Discounting was used by Stern in his calculation of the possible economic damages of future climate change. Marginal
Margin (economics)
In economics, a margin is a set of constraints conceptualised as a border. A marginal change is the change associated with a relaxation or tightening of constraints — either change of the constraints, or a change in response to this change of the constraints.- Extensive and intensive margins...
climate change damages were calculated for a "business-as-usual" greenhouse gas (GHG) emissions pathway. Residual climate change damages (at the margin) were also calculated for two other emissions pathways: one associated with a 450 ppm CO2e GHG concentration target, and the other at 550 ppm (Stern, 2006, p. 304).
There are four main reasons commonly proposed by economists for placing a lower value on consumption
Consumption (economics)
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
occurring in the future rather than in the present:
- future consumption should be discounted simply because it takes place in the future and people generally prefer the present to the future (inherent discounting)
- consumption levels will be higher in the future, so the marginal utilityMarginal utilityIn economics, the marginal utility of a good or service is the utility gained from an increase in the consumption of that good or service...
of additional consumption will be lower - future consumption levels are uncertain
- improved technology of the future will make it easier to address global warming concerns
Using a high discount rate decreases the assessed benefit of actions designed to reduce greenhouse gas emissions. The Stern Review's discount rate for climate change damages is approximately 1.4%, which, at the time of the Review, was lower than that used in most previous economic studies on climate change (Dietz, 2008, p. 11).
Inherent discounting
Debate over the Stern Review initially focused on the first of these points. In the Review, Stern used a social discount rateSocial discount rate
Social discount rate is a measure used to help guide choices about the value of diverting funds to social projects. It is defined as "the appropriate value of r to use in computing present discount value for social investments"...
based on the "Ramsey" formula, which includes a term for inherent discounting, also called the pure rate of time preference
Time preference
In economics, time preference pertains to how large a premium a consumer places on enjoyment nearer in time over more remote enjoyment....
(PTP-rate):
where s is the social discount rate, γ the PTP-rate, η the marginal elasticity
Elasticity (economics)
In economics, elasticity is the measurement of how changing one economic variable affects others. For example:* "If I lower the price of my product, how much more will I sell?"* "If I raise the price, how much less will I sell?"...
of utility, and g the rate of growth of per-capita
Per capita
Per capita is a Latin prepositional phrase: per and capita . The phrase thus means "by heads" or "for each head", i.e. per individual or per person...
consumption (Dietz, 2008, p. 10).
Stern accepts the case for discounting, but argues that applying a PTP-rate of anything much more than zero to social policy choice is ethically inappropriate. His view is supported by a number of economists, including Geoffrey Heal, Thomas Sterner,William Cline
William R. Cline
William R Cline is an American economist. He graduated from Princeton University in 1963 and received a PhD in 1969 from Yale.Cline was deputy director of development and trade research at the office of the assistant secretary for international affairs at the United States Department of the...
, and Brad DeLong. Cline wrote a book on global warming, published in 1992, where he made similar ethical choices to Stern for discounting. DeLong, echoing Frank Ramsey
Frank P. Ramsey
Frank Plumpton Ramsey was a British mathematician who, in addition to mathematics, made significant and precocious contributions in philosophy and economics before his death at the age of 26...
and Tjalling Koopmans
Tjalling Koopmans
Tjalling Charles Koopmans was the joint winner, with Leonid Kantorovich, of the 1975 Nobel Memorial Prize in Economic Sciences....
, wrote “My view--which I admit may well be wrong--of this knotty problem is that we are impatient in the sense of valuing the present and near-future much more than we value the distant future, but that we shouldn't do so.” Hal Varian
Hal Varian
Hal Ronald Varian is an economist specializing in microeconomics and information economics. He is the Chief Economist at Google and he holds the title of emeritus professor at the University of California, Berkeley where he was founding dean of the School of Information...
stated that the choice of discount rate was an inherently ethical judgement for which there was no definitive answer.
William Nordhaus
William Nordhaus
William Dawbney "Bill" Nordhaus is the Sterling Professor of Economics at Yale University. Nordhaus lives in New Haven, Connecticut, with his wife Barbara.-Career:...
, of Yale University
Yale University
Yale University is a private, Ivy League university located in New Haven, Connecticut, United States. Founded in 1701 in the Colony of Connecticut, the university is the third-oldest institution of higher education in the United States...
, who has done several studies on the economics of global warming
Economics of global warming
-Definitions:In this article, the phrase “climate change” is used to describe a change in the climate, measured in terms of its statistical properties, e.g., the global mean surface temperature. In this context, “climate” is taken to mean the average weather. Climate can change over period of time...
, criticised the Review for its use of a low discount rate:
The difference between Stern’s estimates and those of Nordhaus can largely (though not entirely) be explained by the difference in the PTP-rate. Previous studies by Nordhaus and others have adopted PTP-rates of up to 3 per cent, implying that (other things being equal) an environmental cost or benefit occurring 25 years in the future is worth about half as much as the same benefit today. Richard Tol argues that in estimating discounting rates and the consequent social cost of carbon, the assumptions that must be made about the remote future are so uncertain that they are essentially arbitrary. Consequently the assumptions made dominate the results and with a low discount rate the social cost of carbon is also arbitrary.
In an appearance before the House of Commons Treasury Select Committee (2008), Stern was asked about the discount rate used in the Review:
Stern: [...] We are in pretty good company here in that [the distinguished economists] Solow, Sen, Keynes, Ramsey and all kinds of people have adopted the approach to pure time discounting that we have adopted. It is not particularly unusual.
John Roemer
John Roemer
John E. Roemer is an American economist and political scientist. He is currently the Elizabeth S. and A. Varick Stout Professor of Political Science and Economics at Yale University. Prior to joining Yale, he was on the economics faculty at the University of California, Davis, and before entering...
(along with collaborators Humberto Llavador and Joaquim Silvestre) has argued that an analysis of the problem must consider both the ethical and economic issues associated with discounting. He has made the claim that high rates of discounting as the ones proposed by Nordhaus are only consistent with the infinitely-lived-representative-agent approach to economic modeling. Intergenerational justice would require more realistic assumption: one particular view is what Roemer calls the "sustainabilitarian" approach, which seeks to maximize present consumption subject to the constraint that future generations enjoy a quality of life at least as good as that enjoyed by the current generation. He supports the discount factors used in the Stern analysis, particularly the view that discounting should reflect only the probability that the world will end at a given future date, and not the "impatience" of an infinitely lived representative consumer.)
Treatment of uncertainty
Uncertainty about future consumption may be addressed either through adjustments to the discount rate or by replacing uncertain flows of consumption with certainty equivalent flows. Stern adopted the latter approach, but was criticised by Tol and Yohe (2006) for double counting, a claim rejected by the Stern Review team (Dietz et al., 2007, pp. 138–139). Whilst critical of Stern's discounting, Martin WeitzmanMartin Weitzman
Martin Lawrence "Marty" Weitzman is a well known-economist and a Professor of Economics at Harvard University. He is among the most influential economists in the world according to IDEAS/RePEc...
has argued that standard discounting procedures are inherently incapable of dealing with extreme, low-probability events, such as the risk of catastrophic climate change.
Future consumption will be higher
With increasing average consumption in future, the marginal utility of consumption will decline. The elasticity of the marginal utility of consumption (part of the social discount rate) may be interpreted as a measure of aversion to inequality. Partha DasguptaPartha Dasgupta
Professor Sir Partha Sarathi Dasgupta, FRS, FBA , is the Frank Ramsey Professor of Economics at the University of Cambridge, United Kingdom; Fellow of St John's College, Cambridge; Honorary Fellow of Trinity College, Cambridge; and Professor of Environmental and Development Economics at the...
has criticised the Stern Review for parametric choices that, he argues, are inadequately sensitive to inequality. In subsequent debate, Stern has conceded the case for a higher elasticity, but noted that this would call for much more extensive redistribution of income within the current generation (Dietz et al. 2007. pp. 135–137).
Improved technology
As far as discounting is concerned, the effects of improved technology work through increased consumption and do not need to be treated separately. However, specification of an optimal response to climate change will depend on assumptions about improvements in technology and the extent to which such improvements will be induced by policies that increase the cost of emissions.Market rates
Both supporters and opponents of Stern's discount rate have used comparisons with market rates of return on capital to justify their position.Robert MendelsohnRobert O. Mendelsohn
-General:Robert O. Mendelsohn is an American environmental economist. He is currently the Edwin Weyerhaeuser Davis Professor of the School of Forestry and Environmental Studies at Yale University, Professor of Economics in Economics Department at Yale University and Professor in the School of...
of Yale University is a critic of the Review, and has said:
[...] investments in mitigation that cannot even earn a positive rate of return will be worth far less to future generations than those same dollars invested in the market. Placing climate change before investments in other important nonmarket services such as conservation, health, education, security, and transportation also cannot be justified in the name of future generations. From the perspective of future generations, it is in their interest that all investments earn the same rate of return. The ethical justification for intentionally overspending on selective projects with low rates of return is weak indeed.
Nordhaus has been very critical of the Ramsey zero pure time preference on the basis of utilitarian ethical stance. He takes a strictly market based view of intergenerational projects arguing that the social rate of time preference reflects the rate of return observed in the marketplace. Nordhaus also raised his view that the present generation will have to for go a large amount of consumption now for the benefit of future generations who will be much richer than the present generation.
Dasgupta argues that there is some confusion in the Stern review about the underlying rationale for the selection of the Ramsey parameters. He states that the review mixes both market returns on investment with parameters selected on ethical grounds.
The discount rate chosen by Stern is close to the real interest rate
Real interest rate
The "real interest rate" is the rate of interest an investor expects to receive after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate...
for government bonds. The higher rates preferred by Stern's critics are closer to the weighted average cost of capital
Weighted average cost of capital
The weighted average cost of capital is the rate that a company is expected to pay on average to all its security holders to finance its assets....
for private investment; see the extensive review by Frederick et al. (2002) According to Quiggin, the difference between the two is determined by the equity premium
Equity premium puzzle
The equity premium puzzle is a term coined in 1985 by economists Rajnish Mehra and Edward C. Prescott. It is based on the observation that in order to reconcile the much higher returns of stocks compared to government bonds in the United States, individuals must have implausibly high risk aversion...
. Quiggin says that there is no generally accepted theory accounting for the observed magnitude of the equity premium and hence no easy way of determining which approach, if either, should be regarded as the appropriate market comparator.
General comments
HM Treasury have issued a document where several economists are quoted praising the Stern Review, includingRobert Solow, James MirrleesJames Mirrlees
Sir James Alexander Mirrlees is a Scottish economist and winner of the 1996 Nobel Memorial Prize in Economic Sciences. He was knighted in 1998....
, Amartya Sen
Amartya Sen
Amartya Sen, CH is an Indian economist who was awarded the 1998 Nobel Prize in Economic Sciences for his contributions to welfare economics and social choice theory, and for his interest in the problems of society's poorest members...
, Joseph Stiglitz, and Jeffrey Sachs. Sachs and Stiglitz have also written favourable articles on the Review.
Richard Tol
Richard Tol
Richard S. J. Tol is a Research Professor at the Economic and Social Research Institute, Dublin, Ireland, where he works in the research areas of energy economics and environmental economics...
, an environmental economist at the Economic and Social Research Institute
Economic and Social Research Institute
The Economic and Social Research Institute is a think tank in Dublin, Ireland. Its research focuses on Ireland's economic and social development in order to inform policy-making and societal understanding....
, is highly critical of the Stern Review, and has said that "If a student of mine were to hand in this report [the Stern Review] as a Masters thesis, perhaps if I were in a good mood I would give him a 'D' for diligence; but more likely I would give him an 'F' for fail (Cox and Vadon, 2007). There is a whole range of very basic economics mistakes that somebody who claims to be a Professor of Economics simply should not make. [...] Stern consistently picks the most pessimistic for every choice that one can make. He overestimates through cherry-picking, he double counts particularly the risks and he underestimates what development and adaptation will do to impacts." Tol has referred to the Stern Review as "populist science." In a paper published in 2008, Tol showed that the Stern Review's estimate of the social cost of carbon (SCC) along a "business-as-usual" emissions pathway was an outlier
Outlier
In statistics, an outlier is an observation that is numerically distant from the rest of the data. Grubbs defined an outlier as: An outlying observation, or outlier, is one that appears to deviate markedly from other members of the sample in which it occurs....
in the economics literature.
Harvard University
Harvard University is a private Ivy League university located in Cambridge, Massachusetts, United States, established in 1636 by the Massachusetts legislature. Harvard is the oldest institution of higher learning in the United States and the first corporation chartered in the country...
economist Martin Weitzman
Martin Weitzman
Martin Lawrence "Marty" Weitzman is a well known-economist and a Professor of Economics at Harvard University. He is among the most influential economists in the world according to IDEAS/RePEc...
has written a paper on the Stern Review (Weitzman, 2007). In this paper, Weitzman described himself as "skeptical" in regards to the discount rate used by Stern in the Review's formal (aggregated) assessment of climate change. One of Weitzman's conclusions was that Stern deserved credit for increasing public awareness on the dangers of climate change. However, Weitzman also commented that:
[...] in my opinion, Stern deserves a measure of discredit for giving readers an authoritative-looking impression that seemingly objective best-available-practice professional economic analysis robustly supports its conclusions, instead of more openly disclosing the full extent to which the Review’s radical policy recommendations depend upon controversial extreme assumptions and unconventional discount rates that most mainstream economists would consider much too low
According to a paper Yohe and Tol (2007), the Stern Review is "right for the wrong reasons."
At a seminar held in 2006, Cambridge economist Partha Dasgupta
Partha Dasgupta
Professor Sir Partha Sarathi Dasgupta, FRS, FBA , is the Frank Ramsey Professor of Economics at the University of Cambridge, United Kingdom; Fellow of St John's College, Cambridge; Honorary Fellow of Trinity College, Cambridge; and Professor of Environmental and Development Economics at the...
commented on the Stern Review.
Dasgupta (2006, p. 1) described the Review as "a long and impressive document," but felt that the authors had treated the issue of intergenerational equity
Intergenerational equity
Intergenerational equity in economic, psychological, and sociological contexts, is the concept or idea of fairness or justice in relationships between children, youth, adults and seniors, particularly in terms of treatment and interactions. It has been studied in environmental and sociological...
(via the social discount rate) "cavalierly". Dasgupta (2006, pp. 6–7) accepted the Review's argument for a PTP-rate of 0.1%, but did not accept Stern's choice of 1 for the elasticity of marginal utility. He argued this point by calculating a saving rate of 97.5% based on the Review's values for the PTP-rate and elasticity of marginal utility. Dasgupta stated that "[a] 97.5% savings rate is so patiently absurd that we must reject it out of hand." The calculation by Dasgupta was based on a model which had a deterministic economy, constant population, and no technological change.
Dasgupta's calculation was later cited by Berkeley
University of California, Berkeley
The University of California, Berkeley , is a teaching and research university established in 1868 and located in Berkeley, California, USA...
economist Hal Varian
Hal Varian
Hal Ronald Varian is an economist specializing in microeconomics and information economics. He is the Chief Economist at Google and he holds the title of emeritus professor at the University of California, Berkeley where he was founding dean of the School of Information...
.
Writing in the New York Times newspaper, Varian commented "Sir Partha’s stripped-down model leaves out uncertainty, technological change and population growth, but even so, such a high savings rate is totally implausible." Varian also questioned whether or not it was ethical for the current generation to transfer wealth to future generations (via investment in mitigation), who, given Stern's assumptions, would be much wealthier than we presently are.
Smith (2009) responded to Dasgupta's criticism of the Stern Review's implied savings rate.
She showed that the rates of PTP and risk aversion in the Stern Review are consistent with saving rates of 25-32% rather than 97.5% when a macroeconomic model with the production function actually used by Stern and Nordhaus is used.
According to Dietz (2008, pp. 10–11), Varian's analysis had apparently confused the PTP-rate with the social discount rate. The PTP-rate, if positive, discounts the welfare
Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it...
of future generations even if they poorer than the current generation. The social discount rate used by Stern, however, accounts for the possible increased wealth (consumption) of future generations through the product
Product (mathematics)
In mathematics, a product is the result of multiplying, or an expression that identifies factors to be multiplied. The order in which real or complex numbers are multiplied has no bearing on the product; this is known as the commutative law of multiplication...
ηg (see the formula cited in the section on inherent discounting).
Terry Barker
Terry Barker
Terry Barker is a British economist and Director of the Cambridge Centre for Climate Change Mitigation Research part of the Department of Land Economy, University of Cambridge...
of the Tyndall Centre Climate Change Research
Tyndall Centre
The Tyndall Centre for Climate Change Research is an organisation based in the United Kingdom that brings together scientists, economists, engineers and social scientists to 'research, assess and communicate from a distinct trans-disciplinary perspective, the options to mitigate, and the...
wrote a paper (Barker, 2008) supportive of the Review. Barker was critical of how some economists have applied cost-benefit analysis to climate change:
[...] the Stern Review considers cost-benefit analysis as a marginal analysis inappropriately applied to a non-marginal multi-disciplinary systemic problem (p. 50). Both Stern (p. 163) and the IPCC Reports after 1995 take a multi-criteria approach rather than a narrowly monetary one and question cost-benefit analysis. This is one reason for the intemperate response from some traditional economists to the Stern Review
Eric Neumeyer (2007) of the London School of Economics
London School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...
thought that the Review could have argued for emission reductions based on the non-substitutable loss of natural capital
Natural capital
Natural capital is the extension of the economic notion of capital to goods and services relating to the natural environment. Natural capital is thus the stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future...
. Neumayer argued that the real issue is the non substitutable loss of natural capital, that is to what extent climate change inflicts irreversible and non substitutable damage to and loss of natural capital. Economists define natural capital as the multiple and various services of nature from which human’s benefit- from natural resources to pollution absorption and environmental amenities.
Dieter Helm (2008) of Oxford University was critical of the Review's analysis but accepted its conclusion of the urgent need to reduce emissions. Helm justified this on the grounds that future damages to the environment would probably not be fully compensated for by increases in man-made capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
. The draft report of the Garnaut Climate Change Review
Garnaut Climate Change Review
The Garnaut Climate Change Review was a study by Professor Ross Garnaut, commissioned by then Opposition Leader, Kevin Rudd and by the Australian State and Territory Governments on 30 April 2007...
, a similar study conducted in Australia in 2008 by Ross Garnaut
Ross Garnaut
Ross Gregory Garnaut AO is a Distinguished Professor of Economics at the Australian National University and both a Vice-Chancellor's Fellow and Professorial Fellow of Economics at The University of Melbourne....
broadly endorsed the approach undertaken by Stern, but concluded, in the light of new information, that Stern had underestimated the severity of the problem and the extent of the cuts in emissions that were required to avoid dangerous climate change
Avoiding Dangerous Climate Change
The related terms "avoiding dangerous climate change" and "preventing dangerous anthropogenic interference with the climate system" date to 1995 and earlier, in the Second Assesment Report of the International Panel on Climate Change and previous science it cites.In 2002, the United Nations...
.
The Yale Symposium
In 2007, a symposium was held at Yale University on the Stern Review, with talks by several economists, including Nordhaus and Stern (Yale Symposium, 2007). Stern presented the basic conclusions of the Review, and commented on some of the criticisms of it made by other speakers. Chris Hope of Cambridge University explained how the damage estimates in the Review were calculated. Hope designed the PAGE2002 integrated assessment modelIntegrated assessment modelling
Integrated assessment modelling is a type of scientific modelling that is increasingly common in the environmental sciences and environmental policy analysis. The modelling is integrated because environmental problems do not respect the borders between academic disciplines. Integrated assessment...
that was used in the Review. Hope explained what would happen to the Stern Review's damage estimates if they were made using different assumptions, for example, a higher discount rate. Hope also pointed to the assumptions used in the model to do with adaptation.
In his talk, Nordhaus criticised the fact that the Stern Review had not been subject to a peer-review, and repeated earlier criticisms of the Review's discount rate. William Cline of the Peterson Institute supported the Review's general conclusions, but was uncomfortable about how most (greater than 90%) of the Review's monetised damages of climate change occur after 2200. Cline noted that the Review's large cost-benefit ratio for mitigation policy allows room for these long-term costs to be reduced substantially but still support aggressive action to reduce emissions.
Robert Mendelsohn was critical of the way the Stern justified his suggested mitigation policy in the Review. Mendelsohn said that rather than finding an optimal policy, the Review presented a choice of policy versus no-policy. Jeffrey Sachs of Columbia University
Columbia University
Columbia University in the City of New York is a private, Ivy League university in Manhattan, New York City. Columbia is the oldest institution of higher learning in the state of New York, the fifth oldest in the United States, and one of the country's nine Colonial Colleges founded before the...
questioned some of the assumptions used in Nordhaus's integrated assessment model (DICE) of climate change. Sachs was supportive of Stern's cost estimates of climate change mitigation.
In response to these talks, Stern accepted Cline's comment about the weighting of future damages, and said that the weighting of these damages could be reduced by the increasing the size of the elasticity of marginal utility in the social discount rate. With regards to criticisms of the discount rate, Stern accepted that differences of opinion could exist on his ethical choice for the PTP-rate (Yale Symposium, 2007, p. 118).
Other comments by Stern included what he viewed as confusion over what he had suggested as a possible level for a carbon tax
Carbon tax
A carbon tax is an environmental tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel and is released as carbon dioxide when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not...
. According to Stern, the tax will not necessarily be the same as the social cost of carbon due to distortions and uncertainties in the economy (p. 121). His suggested tax rate was in the range of 25 to 30 dollars per ton of carbon. Stern did not accept Mendelsohn's argument that the Review presented a choice of policy versus no policy. Stern commented that the arguments for his recommended stabilization range were included in Chapter 13 of the Review (pp. 124–125).
The costs of mitigation
Economists have different views over the cost estimates of climate change mitigation given in the Review. Paul EkinsPaul Ekins
Paul Ekins is a prominent British academic in the field of sustainable economics. He is a former member of the Green Party.-Political career:...
of King's College London
King's College London
King's College London is a public research university located in London, United Kingdom and a constituent college of the federal University of London. King's has a claim to being the third oldest university in England, having been founded by King George IV and the Duke of Wellington in 1829, and...
(Treasury Committee, 2008) has said that Stern's central mitigation cost estimate is "reasonable," but economists Robert Mendelsohn and Dieter Helm have commented that the estimate is probably too low. According to Mendelsohn, the Stern Review is far too optimistic about mitigation costs, stating that “[one] of the depressing things about the greenhouse gas problem is that the cost of eliminating it is quite high. We will actually have to sacrifice a great deal to cut emissions dramatically” (Mendelsohn, 2007).
Professor Emeritus of Economics at Pepperdine University
Pepperdine University
Pepperdine University is an independent, private, medium-sized university affiliated with the Churches of Christ. The university's campus overlooking the Pacific Ocean in unincorporated Los Angeles County, California, United States, near Malibu, is the location for Seaver College, the School of...
George Reisman
George Reisman
George Gerald Reisman is Professor Emeritus of Economics at Pepperdine University and author of Capitalism: A Treatise on Economics . He is also the author of an earlier book, The Government Against the Economy , which was praised by F.A...
has said that "Any serious consideration of the proposals made in the Stern Review for radically reducing carbon technology and the accompanying calls for immediacy in enacting them makes clear in a further way how utterly impractical the environmentalist program for controlling global warming actually is. The fundamental impracticality of the program, of course, lies in its utterly destructive character."
In a response to a paper by members of the Stern Review team, John Weyant of Stanford University
Stanford University
The Leland Stanford Junior University, commonly referred to as Stanford University or Stanford, is a private research university on an campus located near Palo Alto, California. It is situated in the northwestern Santa Clara Valley on the San Francisco Peninsula, approximately northwest of San...
commented on how the cost estimate of mitigation used in the Review was based on idealized models (Mendelsohn et al., 2008). Weyant wrote that his own high short-run cost projection for stabilization, of possibly 10% GDP, resulted "primarily from institutional pessimism rather than technological pessimism."
Comparison with climate damages
Nobel prize winner Kenneth ArrowKenneth Arrow
Kenneth Joseph Arrow is an American economist and joint winner of the Nobel Memorial Prize in Economics with John Hicks in 1972. To date, he is the youngest person to have received this award, at 51....
has commented on the Stern Review in the Economist's Voice (Arrow, 2007a) and for Project Syndicate (Arrow, 2007b):
Arrow analysed the Stern Review's conclusions by looking at the Review's central estimate of GHG stabilization costs of 1% GNP, and high-end climate damages of 20% GNP (Arrow, 2007a, pp. 4–5). As part of the Ramsay formula for the social discount rate, Arrow chose a value of 2 for the marginal elasticity of utility, while in the Review, Stern chose a value of 1. According to Arrow, Stern's recommended stabilization target passes a cost-benefit test even when considerably higher PTP-rate (up to around 8%) than Stern's (0.1%) is used. Arrow acknowledged that his argument depended on Stern's stabilization central cost estimate being correct.
Gary Yohe
Gary Yohe
Gary Wynn Yohe is the Woodhouse/Sysco Professor of economics at Wesleyan University, Middletown, Connecticut, and Director of the John E. Andrus Public Affairs Center at Wesleyan. He holds a PhD from Yale University....
of Wesleyan University
Wesleyan University
Wesleyan University is a private liberal arts college founded in 1831 and located in Middletown, Connecticut. According to the Carnegie Foundation for the Advancement of Teaching, Wesleyan is the only Baccalaureate College in the nation that emphasizes undergraduate instruction in the arts and...
noted that Stern's estimates of business-as-usual climate damages were given in terms of per capita consumption equivalents, but Stern's costs of mitigation were given in terms of a percentage reduction in gross world product. Yohe stated that the two different measures are "not really at all comparable." Yohe commented on how the Review gives the impression that all climate damages can be avoided through the investment of 1% of world GDP in mitigation. This, however, would still lead to global warming (as per the Review's 550 ppm CO2e mitigation target) of around 1.5 to 4.5 °C above pre-industrial temperatures. Significant portions of climate damages would therefore still persist with Stern's mitigation target. In order to measure the benefit of Stern's mitigation target, the residual climate damages from mitigation would need to be subtracted from Stern's business-as-usual climate damages.
Response to criticisms
The Stern Review team have responded to criticisms of the Review in a number of papers. In these papers, they reassert their view that early and strong action on climate change is necessary:The case for strong and urgent action set out in the Review is based, first, on the severe risks that the science now identifies (together with the additional uncertainties [...] that it points to but that are difficult to quantify) and, second, on the ethics of the responsibilities of existing generations in relation to succeeding generations. It is these two things that are crucial: risk and ethics. Different commentators may vary in their emphasis, but it is the two together that are crucial. Jettison either one and you will have a much reduced programme for action—and if you judge risks to be small and attach little significance to future generations you will not regard global warming as a problem. It is surprising that the earlier economic literature on climate change did not give risk and ethics the attention they so clearly deserve, and it is because we chose to make them central and explicit that we think we were right for the right reasons.
Members of the Stern Review team have also given several talks that have covered criticisms of the Review. A talk given by Dimitri Zenghelis at the Tyndall Centre looked at criticisms of the Review and presented an overview of its main findings. In an official letter (2008), Joan Ruddock
Joan Ruddock
Joan Mary Ruddock is a British Labour Party politician who has been the Member of Parliament for Lewisham Deptford since 1987. She is a feminist and is the wife of Frank Doran, the Labour MP for Aberdeen North...
MP of the UK Government, dismisses the criticisms of the Review made by several economists, which, in her view, show "a fundamental misunderstanding of the role of formal, highly aggregated economic modelling in evaluating a policy issue".
Stern's later comments
In April 2008 Stern said that the severity of his findings were vindicated by the 2007 IPCC reportIPCC Fourth Assessment Report
Climate Change 2007, the Fourth Assessment Report of the United Nations Intergovernmental Panel on Climate Change , is the fourth in a series of reports intended to assess scientific, technical and socio-economic information concerning climate change, its potential effects, and options for...
and admitted that in the Stern Review, "We underestimated the risks [...] we underestimated the damage associated with temperature increases [...] and we underestimated the probabilities of temperature increases”. In June 2008, Stern said that because climate change is happening faster than predicted, the cost to reduce carbon would be even higher, of about 2% of GDP instead of the 1% in the original report.
See also
- Avoiding Dangerous Climate ChangeAvoiding Dangerous Climate ChangeThe related terms "avoiding dangerous climate change" and "preventing dangerous anthropogenic interference with the climate system" date to 1995 and earlier, in the Second Assesment Report of the International Panel on Climate Change and previous science it cites.In 2002, the United Nations...
- Economics of global warmingEconomics of global warming-Definitions:In this article, the phrase “climate change” is used to describe a change in the climate, measured in terms of its statistical properties, e.g., the global mean surface temperature. In this context, “climate” is taken to mean the average weather. Climate can change over period of time...
- Garnaut Climate Change ReviewGarnaut Climate Change ReviewThe Garnaut Climate Change Review was a study by Professor Ross Garnaut, commissioned by then Opposition Leader, Kevin Rudd and by the Australian State and Territory Governments on 30 April 2007...
- Global warming controversyGlobal warming controversyGlobal warming controversy refers to a variety of disputes, significantly more pronounced in the popular media than in the scientific literature, regarding the nature, causes, and consequences of global warming...
- Green-collar job
- Politics of global warmingPolitics of global warmingThe politics of global warming have involved corporate lobbying, funding of special interest groups and public relations campaigns by the oil and coal industries which have affected policy decisions and legislation worldwide...
- World Energy OutlookWorld Energy OutlookThe annual World Energy Outlook is the International Energy Agency's flagship publication and it is widely recognised as the most authoritative energy source for global energy projections and analysis. It represents the leading source for medium to long-term energy market projections, extensive...
External links
- Full text of the Stern Review, from HM Treasury
- The UK Government's Treasury web pages about the Stern review
- The Economics of Climate Change - The Stern Review
- Economist.zoom: How to value a grandchild, 4 Dec 2006
- Summary of key findings from the report
- "The Stern gang", linked index of resources.
- Felix Ekardt, The Limits to Climate Economics, 2010
- Grantham Research Institute profile page of Nicholas Stern
- Centre for Climate Change Economics and Policy
- Videos:
- The RIBA Trust Annual Lecture: Lord Stern (part of the International Dialogues: Architecture and Climate Change talks series)
- The Economics of Climate Change: Risk, Ethics, and a Global Deal. Lecture given at Princeton UniversityPrinceton UniversityPrinceton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution....
by Nicholas Stern, 7 Jan 2008 - Climate Change: The Economics of and Prospects for a Global Deal. Lecture given at MIT by Nicholas Stern, 19 Nov 2007
- Yale Symposium on the Stern Review, February 2007. Figures used in the Symposium are available here
In the media
- 2 November 2006, The EconomistThe EconomistThe Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
: Stern warning - 6 November 2006, Der SpiegelDer SpiegelDer Spiegel is a German weekly news magazine published in Hamburg. It is one of Europe's largest publications of its kind, with a weekly circulation of more than one million.-Overview:...
: The Day the Climate Changed - 10 January 2007, BBCBBCThe British Broadcasting Corporation is a British public service broadcaster. Its headquarters is at Broadcasting House in the City of Westminster, London. It is the largest broadcaster in the world, with about 23,000 staff...
: Chrysler Boss says Stern Report is based on dubious economics - 9 June 2009, Allianz KnowledgeAllianzSE is a global financial services company headquartered in Munich, Germany. Its core business and focus is insurance. As of 2010, it was the world's 12th-largest financial services group and 23rd-largest company according to a composite measure by Forbes magazine.Its Allianz Global Investors...
: Stern Review Update An interview with Alex Bowen, senior economist on the Stern Review team