Stern Review Research Articles

Discounting Nordhaus

This paper evaluates Nordhaus's neoclassical complaints about the Stern Review from the vantage point of classical growth theory. Nordhaus criticizes the Stern Review because it uses a discount rate that is well below the market rate of return on capital. From the perspective of classical growth theory, Nordhaus's belief in choosing preference parameters for the social planner based on observed market rates of return is equivalent to assigning the preferences of the capitalist agents to the social planner. This equivalence is an implication of the Cambridge Theorem, which interprets the Ramsey equation as the saving function of the capitalist agents.

Policy challenges towards potential climate change impacts: in search of agro-climate stability.

This study focuses on climate-related vulnerability for Malaysian agriculture. We use an analysis of impacts based on observational records of inter-annual variability in precipitation and warming climatic factors. The assessment involved General Circulation Models (GCMs) together with the Stern Review study to represent a range of plausible climate scenarios and economic outcomes. This study investigates the major Malaysian agricultural sectors such as food crops (that is, rice) and cash or industrial crops (i.e. palm oil and rubber) under a climatic and economic perspective, quantifying the merits of the projected simulation and presenting an insight into the nature of the overall subject of suitability of adaptation options. These analyses signify the likely future changes to agriculture, potential strategies to reduce vulnerabilities and reveal adaptation requirements for agriculture. The findings of this study can be used for climate-related national policy on agriculture in Malaysia.

HOW RAPID SHOULD EMISSION REDUCTION BE? A GAME-THEORETIC APPROACH

In this paper, we search for multistage realization of international environmental agreements. To analyze countries' incentives and the results of their interactions, we mathematically represent players' strategic preferences and apply a game-theoretic approach to make predictions about their outcomes. The initial decision on emissions reduction is determined by the Stackelberg equilibrium concept. We generalize Barrett's static “emission” model to a dynamic framework and answer the question “how rapid should the emission reduction be?” It appears that sharper abatement is desirable in the early term, which is similar to the conclusion of the Stern review. Numerical example demonstrates that abatement dynamics of the coalition and the free-rider differ when discounting of the future payoffs increases. We show that without incentives from external organizations or governments, such pollution reduction path can actually lead to a decline in the agreement's membership size.

Strategic Appraisal of Environmental Risks: A Contrast Between the United Kingdom's Stern Review on the Economics of Climate Change and its Committee on Radioactive Waste Management

In this article, we compare two high-profile strategic policy reviews undertaken for the U.K. government on environmental risks: radioactive waste management and climate change. These reviews took very different forms, both in terms of analytic approach and deliberation strategy. The Stern Review on the Economics of Climate Change was largely an exercise in expert modeling, building, within a cost-benefit framework, an argument for immediate reductions in carbon emissions. The Committee on Radioactive Waste Management, on the other hand, followed a much more explicitly deliberative and participative process, using multicriteria decision analysis to bring together scientific evidence and stakeholder and public values. In this article, we ask why the two reviews were different, and whether the differences are justified. We conclude that the differences were mainly due to political context, rather than the underpinning science, and as a consequence that, while in our view "fit for purpose," they would both have been stronger had they been less different. Stern's grappling with ethical issues could have been strengthened by a greater degree of public and stakeholder engagement, and the Committee on Radioactive Waste Management's handling of issues of uncertainty could have been strengthened by the explicitly probabilistic framework of Stern.

Rape – myth and reality: no ordinary crime

Rape – myth and reality: no ordinary crime

Government failure, rent-seeking, and capture: the design of climate change policy

Climate change has been described as one of the biggest market failures. Less attention has been paid to the government failures associated with interventions, and the implications for the design of climate change policy. This paper sets out the main types of government failure, and shows how the processes of rent-seeking and capture help to explain both why the choice of targets and instruments has been so inefficient, and also why the resulting costs of carbon mitigation are likely to be considerably higher than the estimates provided by the Stern Review and other recent studies. Two examples are given: emissions trading and renewables policy. A number of generic conclusions are drawn about how taking account of government failures can help to improve policy design, and limit the impact of the climate change ‘pork barrel’ which existing policies have created.

Review Essay: Disagreeing About the Climate

This review article reflects on the current controversy concerning climate change. The article does so through a review of Hulme’s book Why We Disagree About Climate Change . The article also considers the implications of the Stern Report.

Fat tails, exponents, extreme uncertainty: Simulating catastrophe in DICE

The problem of low-probability, catastrophic risk is increasingly central to discussion of climate science and policy. But the integrated assessment models (IAMs) of climate economics rarely incorporate this possibility. What modifications are needed to analyze catastrophic economic risks in an IAM? We explore this question using DICE, a well-known IAM. We examine the implications of a fat-tailed probability distribution for the climate sensitivity parameter, a focus of recent work by Martin Weitzman, and the shape of the damage function, one of the issues raised by the Stern Review. Forecasts of disastrous economic outcomes in DICE can result from the interaction of these two innovations, but not from either one alone.

Accounting for the risk of extreme outcomes in an integrated assessment of climate change

The potential for climate catastrophes, represented by ‘fat-tailed’ distributions on consequences, has attracted much attention recently. To date, however, most integrated assessment models have either been largely deterministic or deterministic with ex-post sensitivity analysis. The conclusions of such analyses are likely to differ from those employing models that accurately characterize society’s joint preferences concerning time and risk, especially when distributions are fat-tailed. Using a dynamic stochastic general equilibrium model adapted from Nordhaus’s DICE model, we show that failing to accurately account for risk can lead to substantial underestimation of the net benefits of greenhouse gas abatement. A robust finding of our analysis is that a lenient ‘policy ramp’ emissions reduction strategy is preferable over a more aggressive strategy—such as that advocated by the Stern Review— only if the model does not account for uncertainty about the climate system, the carbon cycle and economic damages, and specifies a consumption discount rate that is counterfactually higher than the historical global weighted average cost of capital of 4.0%. In the debate over uncertainty and time discounting, our results imply that what matters most in climate change assessment is the inclusion and particular specification of uncertainty rather than the precise choice of discount rate.

A Critical Discussion of the Stern and IPCC Analyses of Carbon Emission Mitigation Possibilities and Costs

Like the Stern Review the IPCC Working Group 3 Reports have been taken as showing that the greenhouse gas emissions problem can be solved at negligible cost, primarily by development of alternative energy technologies. The lengthy Fourth Assessment Report summarises the findings of many studies, rather than present analyses that can be clearly assessed. The argument in this paper is that most and probably all of the studies drawing conclusions about the mitigation potential of alternatives are invalid because they do not consider the possible limitations to renewable energy sources, nuclear energy and geo-sequestration. They are economic modelling studies which take the cost of a unit of carbon mitigation and multiply this by the amount of mitigation required, without regard to the difficulties and limits affecting the extent to which these sources can be scaled up. If the greenhouse problem is to be solved by resort to these technologies then the magnitude of the scale-ability problem is huge. This paper argues that there are major reasons why the alternatives cannot be scaled up sufficiently, and that it is not possible to explain how the anticipated 2050 energy budget could be met without exceeding safe greenhouse limits. If this analysis is sound Stern and the IPCC have been seriously misleading and the greenhouse problem cannot be solved at any cost in a society that is committed to affluent living standards and economic growth. The discussion accepts the climate science in both sources, and does not dispute the desirability of moving to renewable energy.

Trapped Between the Falling Sky and the Rising Seas: The Imagined Terrors of the Impacts of Climate Change

Some advocates of drastic greenhouse gas controls claim that the costs of global warming are underestimated and that a proper accounting of the full costs raises the specter of economic and political instability, conflict and mass migration as weak governments in developing countries with low adaptive capacity are buffeted by floods, droughts, famine, and rising seas driven by global warming. No country, least of all the US, will be immune from the spillover effects. Accordingly, they argue, the costs to the US of a unilateral pursuit of GHG reductions would be justified by the benefits to the US itself. This chapter shows that the central pillar for this argument, namely, countries’, and specifically developing countries’, adaptive capacity will be low, is flawed. Specifically, it shows that under the IPCC’s warmest scenario, which projects a 1990–2085 warming of 4°C precisely because it assumes healthy economic growth worldwide, developing countries will in 2100 be twice as wealthy as the US is today, even after subtracting the costs of warming per the Stern Review’s overblown estimates. Industrialized countries will be thrice as wealthy. Moreover future societies will have superior technologies at their disposal. Accordingly, their adaptive capacities should be much higher than it is today, the costs of warming have been overestimated, and fears of economic and societal breakdown are precisely that — fears. Moreover, empirical trends suggest that warming is currently proceeding slower than the IPCC’s projections, nor is there any hint of any deterioration in climate‐sensitive indicators of human well‐being that might presage such breakdowns. Specifically, agricultural productivity has increased; hunger has declined; deaths from hunger, extreme weather events, malaria and other vector‐borne disease have dropped; and people are living longer and healthier. Regarding environmental well‐being, the Amazon and the Sahel are becoming greener, as is most of the world. Ironically, much of this improvement in human and environmental well‐being has been enabled, directly or indirectly, by technologies dependent on fossil fuels or economic surpluses generated by the use of fossil fuels and other GHG‐ generating activities.

Sensitivity analysis didn’t help. A practitioner’s critique of the Stern review

The subject of this note is (a) the “Technical Annex to postscript” of the Stern review, which presents a sensitivity analysis (SA) addressing the conclusions of Stern review itself as well as (b) the debate on Science between Nicholas Stern and William Nordhaus. The purpose of the Stern’s Annex is to defend with a SA a cost–benefit analysis (CBA) of climate change risk performed in the Stern review. The present note calls into question the SA performed by Stern. In fact when comparing existing SA practices with the work described in the Annex, it would appear that SA has been used improperly and that – had it been used properly – it would have falsified the analysis itself. The same conclusions apply to Nordhaus’ critique in that both authors pretend to describe the issue on terms of parameters and models which bear no tested relation to reality.

Economic Development and Climate Change - An Indian Perspective

Indian Economy is one of the fastest growing economies in the world. The five years spanning 2003-04 and 2007-08 was an outstanding period of rapid growth. In this relatively short span of five years, average GDP growth was 8.8 per cent and per capital GDP increased by 7.2 per cent annually . GDP originating from the manufacturing sector averaged a creditable growth of 9 per cent. The industrial sector (including mining, electricity and utilities and construction) grew even faster, by 9.5 per cent.However, as economies grow richer, they demand more power and also pollute more. Increase in pollution levels over a period of time have lead to serious environmental hazards such as global warming, droughts, floods, extinction of species etc. The countries expected to experience the fastest growth in emissions are also those who are expected to have the most economic growth. The Stern report on climate change explains that developing countries, especially in the tropical and sub-tropical regions are expected to suffer most and soonest from climate change.

Economic Development and Climate Change - An Indian Perspective

Indian Economy is one of the fastest growing economies in the world. The five years spanning 2003-04 and 2007-08 was an outstanding period of rapid growth. In this relatively short span of five years, average GDP growth was 8.8 per cent and per capital GDP increased by 7.2 per cent annually . GDP originating from the manufacturing sector averaged a creditable growth of 9 per cent. The industrial sector (including mining, electricity and utilities and construction) grew even faster, by 9.5 per cent.However, as economies grow richer, they demand more power and also pollute more. Increase in pollution levels over a period of time have lead to serious environmental hazards such as global warming, droughts, floods, extinction of species etc. The countries expected to experience the fastest growth in emissions are also those who are expected to have the most economic growth. The Stern report on climate change explains that developing countries, especially in the tropical and sub-tropical regions are expected to suffer most and soonest from climate change.

Stern, climate policy and saving rates

Dasgupta and Weitzman have argued that the saving rates implied by the Stern Review's values for the rate of pure time preference and the elasticity of the marginal utility of consumption are too high from either a normative (Dasgupta) or descriptive (Weitzman) perspective. Given the attention that this debate has received in the literature, there is a need for a rigorous presentation of the determinants of saving rates in the models actually used to evaluate climate change policy. This article provides the first detailed investigation of the implications of Stern's parameter choices for saving; firstly in standard neoclassical growth theory and then in a widely used climate policy model based on that theory, Nordhaus's DICE. In theory and practice, optimal saving rates in the presence of near-zero pure time preference are far from the near-100% values obtained from the simpler models used by several of the Review's critics. We show that in DICE, for the utility function used in the Stern Review, optimal saving rates do not exceed 32%, and that this falls to 26% when using a higher value for the elasticity of the marginal utility of consumption, as suggested by Stern in his post-Review work.

Attitudes towards CO2 taxation – is there an Al Gore effect?

Fuel taxes are one of the most powerful climate policies. Yet, these taxes have not been given very much attention in the global debate regarding climate policy, compared with other instruments, such as tradable emission permits. This article shows, however, that the immense media coverage during fall 2006 significantly affected people's attitudes towards the CO2 tax on gasoline. We conducted a survey where we asked for people's opinions about the CO2 tax in September and in December 2006, i.e. before and after the release of Al Gore's ‘An Inconvenient Truth’ and the Stern Review. We found that the attitude towards the level of the CO2 tax was significantly changed after these events; people became much more positive towards the tax. This signals that using the CO2 tax as an important climate policy becomes more politically feasible and legitimate when more attention is drawn to climate change problems.

Economics of climate change: risk and responsibility by world region

The impacts of predicted climate change will not be distributed evenly around the world. As post-Kyoto negotiations unfold, relating the geographical distribution of projected impacts to responsibility for emissions among world regions is essential for achieving an equitable path forward. This article surveys the current knowledge of regional climate consequences, and delves into the regional predictions of economic assessment models to date, examining how the uncertainties, assumptions and ethical dimensions influence the portrayal of risk at this scale. The few studies that quantitatively compared regional risk and responsibility are reviewed, and the analytical framework from one such study is applied to the 2006 Stern Review's projections to give the first regional comparison to take purchasing power and welfare considerations into account. Synthesizing burden and blame in this way is informative for policy makers; the world's most vulnerable communities—in Africa, the Indian subcontinent, Latin America, and small island states—accounted for less than 33% of global greenhouse gas emissions over the period 1961–2000, but may experience more than 75% of the ensuing climate damages this century. This analysis reinforces the call for industrialized nations to lead mitigation efforts, and to do so decisively and swiftly.

Global Warming Economics in the Long Run: A Conceptual Framework

Economic models of climate change typically analyze its short-run effects, for example, up to the year 2100 or for a doubling of atmospheric CO₂. This is a potentially serious shortcoming since under a business-as-usual scenario, atmospheric CO₂ concentrations could more than quadruple. We introduce a framework that endogenously accounts for long-run climate change and examine the implications of alternative mitigation strategies: one in which the rates of annual emissions are reduced, and one that places absolute limits on the total amount of carbon released. We discuss alternative valuation frameworks, drawing on the debate surrounding the <i>Stern Review. (JEL D61, D63)</i>

Learning from Europe on Climate Change

Click to increase image sizeClick to decrease image size Notes Stuart Wolpert, ‘Last Time Carbon Dioxide Levels Were This High: 15 Million Years Ago, Scientists Report’, ScienceDaily.com, 9 October 2009, http://www.sciencedaily.com/releases/2009/10/091008152242.htm. Intergovernmental Panel on Climate Change, Climate Change 2007: The Physical Science Basis, Working Group I Contribution to the Fourth Assessment Report (Cambridge: Cambridge University Press, 2007), Summary for Policymakers, pp. 2–3. For more on the precautionary principle and EU climate policy, see John R. Schmidt, ‘Why Europe Leads on Climate Change’, Survival: Global Politics and Strategy, vol. 50, no. 4, August–September 2008, pp. 83–96. Nicholas Stern, The Economics of Climate Change: The Stern Review (Cambridge: Cambridge University Press, 2006). ‘Europeans Attitudes Towards Climate Change’, Special Eurobarometer 313, July 2009, http://ec.europa.eu/public_opinion/archives/ebs/ebs_313_en.pdf. Pew Research Center for People and the Press, ‘Modest Support for “Cap and Trade” Policy: Fewer Americans See Solid Evidence of Global Warming’, 22 October 2009, http://people-press.org/reports/pdf/556.pdf. Treaty of Lisbon, Title XX: Energy, Article 176A (2), 2007/C 306/01, available at http://europa.eu/lisbon_treaty/full_text/index_en.htm. European Environment Agency, ‘EU Greenhouse Gas Emissions Fall for Third Consecutive Year’, Press release, 29 May 2009, http://www.eea.europa.eu/pressroom/newsreleases/2009-greenhouse-inventory-report. ‘National Inventory Report: Greenhouse Gases Sources and Sinks 1990–2007’, Submission by Greenhouse Gas Division, Environment Canada, to the United Nations Framework Convention on Climate Change, April 2009. Ben Furnas, ‘We Must Seize the Energy Opportunity or Slip Further Behind: A Primer on Global Competition in Green Technology Investments’, Center for American Progress, 20 April 2009. Additional informationNotes on contributorsAndrew HollandAndrew Holland is Programme Manager and Research Associate for the Transatlantic Dialogue on Climate Change and Security at the IISS.

Ethics and Climate Change Cost-Benefit Analysis: Stern and After

The Stern Review on the economics of climate change (hereafter ‘Stern’) has received much attention regarding its potential political impact (Stern 2007). It has also been extensively discussed amo...