Stern Review Research Articles

What is the economic cost of climate change

Much of the economic analysis of climate change revolves around two big questions: What is the economic cost associated with the impacts of climate change under alternative GHG emissions scenarios? What is the economic cost of reducing GHG emissions? The economic aspect of the policy debate intensified with the publication in the UK of the Stern Review of the Economics of Climate Change (Stern, 2006). Stern concluded that, if no mitigative action is taken, “the overall costs and risks of climate change will be equivalent to losing at least 5% of global Gross Domestic Product (GDP) each year, now and forever.” This conclusion has been criticized by many economists, particularly in the United States, where Professor William Nordhaus of Yale, the leading American expert on climate economics, concludes that the economically optimal policy involves only a modest rate of emission reduction in the near term, followed by larger reductions later (Nordhaus 2008). The disagreement between Stern and Nordhaus has aroused considerable interest. Much of the existing discussion focuses on the difference in the discount rate – Stern uses a consumption rate of discount average 1.4% per annum, while Nordhaus uses one averaging 4%. 1 However, I believe that another important factor is the difference in the raw assessment of undiscounted damages from climate change. Because of limited space, that difference is the focus of this chapter. 2

Stern’s Review and Adam’s fallacy

The Stern Review has played an enormous role in making the world of business aware of the challenge of long-term climate change. In order to make real progress on the basis of this awareness, it is important to pay attention to the difference between human suffering and losses of gross domestic product (GDP). The Review has compared climate change to experiences of suffering like World War I. That war, however, hardly affected global GDP. The long-term damages to be expected from business-as-usual greenhouse gas emissions include loss of the coastal cities of the world over the next millennia. This would be an act of unprecedented barbarism, regardless of whether it would slow down economic growth or perhaps even accelerate it. Business leaders worried about climate change need to pay attention to the tensions between ethical and economic concerns. Otherwise, a credibility crisis threatens global climate policy. An important step to establish the credibility needed for effective climate policy will be to gradually move towards a regime where emission permits are auctioned, not handed out as hidden subsidies. The revenues generated by permit auctions should be used to establish a global system of regional climate funds.

Analysing the costs and benefits of climate policy: Value judgements and scientific uncertainties

The Stern Review on the Economics of Climate Change compares costs and benefits of stringent climate policy and concludes that the benefits of stringent policy considerably outweigh the costs. Many other cost–benefit analyses have come up with less ambitious optimal emission reductions. In this study, we systematically explore the impacts of scientific uncertainties and value judgements on the suggested “optimal target” for international climate policy. In this context, we have varied the most important parameters using a range of values from several widely used Integrated Assessment Modes in one consistent framework. Our analysis shows that uncertainties about abatement and damage costs play an almost equally important role as the discount rate. Both stringent and moderate climate policy can be justified by using other parameter settings. Furthermore, for most parameter settings there is a wide range of concentration levels close to the optimal target, providing a much wider range for political choices than often suggested.

How sustainable are we?

Part of being human is our capacity to transform the natural world around us. Although we rightly rejoice in our scientific knowledge, we are increasingly aware of the damage that we are causing as our technological powers have gone beyond harnessing forces and resources locally, to controlling and redirecting on a massive scale. If all the peoples of the world consumed resources at the rate of the current richest nations, key systems of the planet could not sustain the burden—for example, the climate, fresh water and soil. No longer can we rely simply on our ability to rescue ourselves technologically from problems of our own creation. Our past greenhouse gas emissions have set in train climatic consequences that we cannot stop; the best we can do is to put in place countermeasures to reduce emissions by 60–80% by the year 2050, to keep the increase in global temperature within tolerable bounds. The UK Royal Commission on Environmental Pollution Report and the Stern Review indicate the large scale of the measures needed to achieve this (Royal Commission on Environmental Pollution, 2000; Stern, 2006). > No longer can we rely simply on our ability to rescue ourselves technologically from problems of our own creation One of the most urgent needs facing global civilization is to find models by which to use our powers sustainably and, in turn, the values that should underlie them. I would argue that, among the many religious and cultural understandings of the human condition, the ancient texts of the biblical book of Genesis offer an important clue. Its two parallel accounts of creation describe humans, contrastingly, both as apart from the rest of nature, endowed with a task to “subdue the earth and fill it” ( Genesis 1: 27–28), and yet also as a part of nature, set …

Emissions in the Platinum Age: the implications of rapid development for climate-change mitigation

Abstract Rapid global economic growth, centred in Asia but now spread across the world, is driving rapid greenhouse-gas emissions growth, making earlier projections unrealistic. This paper develops new, illustrative business-as-usual projections for carbon dioxide (CO2) from fossil fuels and other sources and for non-CO2 greenhouse gases. Making adjustments to 2007 World Energy Outlook projections to reflect more fully recent trends, we project annual emissions by 2030 to be almost double current volumes, 11 per cent higher than in the most pessimistic scenario developed by the Intergovernmental Panel on Climate Change (IPCC), and at a level reached only in 2050 in the business-as-usual scenario used by the Stern Review. This has major implications for the global approach to climate-change mitigation. The required effort is much larger than implicit in the IPCC data informing the current international climate negotiations. Large cuts in developed country emissions will be required, and significant deviations from baselines will be required in developing countries by 2020. It is hard to see how the required cuts could be achieved without all major developing as well as developed countries adopting economy-wide policies.

What Price Energy Transformation?

Click to increase image sizeClick to decrease image size Acknowledgements This essay is based on a three-part Strategy Seminar held January to April 2008 in Washington DC, Berlin and Brussels (see http://www.energy-transformation.org). The seminar was organised by Ecologic in cooperation with the German Marshall Fund of the United States and supported by the European Commission (DG Relex), the German Federal Foreign Office through the European Recovery Programme, the Heinrich Böll Foundation, the Royal Embassy of Denmark and the US Embassy in Berlin, and the German Embassy in Washington DC. The views expressed here are the author's and not necessarily those of the seminar participants, sponsors or supporters. Notes 1 Nicholas Stern, The Economics of Climate Change: The Stern Review (Cambridge: Cambridge University Press, 2006). 2 George Bush, Angela Merkel and José Manuel Barroso, Statement on Energy Security, Efficiency, and Climate Change, US-EU Summit, 30 April 2007, http://ec.europa.eu/external_relations/us/sum04_07/joint_statement_energy_securitypdf. 3 European Commission, Climate Change and International Security, paper from the High Representative and the European Commission to the European Council, http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressdata/EN/reports/99387.pdf. 4 ‘Security Council Holds First-ever Debate on Impact of Climate Change’, press release, United Nations Security Council, 17 April 2007, http://www.un.org/News/Press/docs/2007/sc9000.doc.htm; ‘"Energy, Security and Climate”: Security Council Open Debate: UK Concept Paper’, available at http://www.energy-transformation.org/download/recommendations_rak/UKpaper_UNSC_Climate.pdf; Center for Naval Analysis, National Security and the Threat of Climate Change (Washington DC: CNA Corporation, 2007), http://securityandclimate.cna.org; Center for Strategic and International Studies, The Age of Consequences: The Foreign Policy and National Security Implications of Global Climate Change (Washington DC: CSIS, 2007), http://www.csis.org/media/csis/pubs/071105_ageofconsequences.pdf. 5 John Creyts et al., Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost? (New York: McKinsey & Company, 2007), http://mckinsey.com/clientservice/ccsi/greenhousegas.asp. 6 It should be noted that in the seminars on which this essay is based the issue of expanding nuclear power was the most contentious, and one where no consensus was reached. Additional informationNotes on contributorsR. Andreas KraemerR. Andreas Kraemer is Director of the Ecologic Institute (www.ecologic.eu).

Climate-change policy: why has so little been achieved?

Abstract While the scientific evidence for climate change grows, the policy responses have so far had little or no impact on the build-up of emissions. Current trends in emissions are adverse. The paper considers why the disconnect between science and policy exists and, in particular, why the Kyoto Protocol has achieved so little. Some contributing factors considered are: the focus on carbon production rather than consumption in the architecture of Kyoto; the flaws in the analysis presented in the Stern Report (notably on the impacts of climate change on economic growth, on the costs of mitigation, and on discounting); and the political economy of the choice of policy instruments, the politics of the rents that arise, and the technology bias. The challenges facing the Copenhagen conference are noted, and it is concluded that, with a recasting of the economics of climate change, the prospects for closing the gap between the science and policy are grim.

Thinking the Unthinkable

Click to increase image sizeClick to decrease image size Notes 1 John Ashton, ‘Keynote Address’, RUSI conference on Climate Change: The Global Security Impact, London, 24 January 2007. 2 ‘Climate Change: Security Implications and Regional Impacts’, Strategic Survey 2007 (Abingdon: Routledge for the IISS, 2007), p. 49. 3 Kurt M. Campbell et al., The Age of Consequences: The Foreign Policy and National Security Implications of Global Climate Change (Washington DC: CSIS, 2007), p. 9. 4 Gill Ereaut and Nat Segnit, Warm Words: How are We Telling the Climate Story and Can We Tell it Better? (London: Institute for Public Policy Research, 2006), p. 7. 5 Nat Segnit and Gill Ereaut, Warm Words II: How the Climate Story is Evolving and the Lessons We can Learn for Encouraging Public Action (London: Institute for Public Policy Research, 2007), p. 6. 6 Jeremy Lovell, ‘Global Warming Impact Like “Nuclear War”: Report’, Reuters, http://www.reuters.com/article/envi-ronmentNews/idUSL1234809620070912?src=091207_1741_DOUBLEFEATURE_worlds_worst_polluters. 7 Http://www.freerepublic.com/focus/f-news/1895275/posts?page=25;q=1#25. 8 Darksyde, ‘Fire and Ice’, 23 September 2007, http://www.dailykos.com/storyonly/2007/9/23/72343/4341. 9 Richard Black, ‘Next Decade “May See No Warming”’, BBC online, http://news.bbc.co.uk/1/hi/sci/tech/7376301.stm; N.S. Keenlyside et al., ‘Advancing Decadal-scale Climate Prediction in the North Atlantic Sector’, Nature, vol. 453, 1 May 2008, pp. 84–8. 10 Nicholas Stern, The Economics of Climate Change: The Stern Report (Cambridge: Cambridge University Press, 2006), p. 239. Additional informationNotes on contributorsJeffrey MazoJeffrey Mazo is Managing Editor of Survival

Comments on Simon Dietz and Nicholas Stern's Why Economic Analysis Supports Strong Action on Climate Change: A Response to the Stern Review's Critics

The science of economics has made a number of important contributions to understanding greenhouse gases and their optimal control. From basic economic theory, economists have pointed out the need to minimize the sum of mitigation costs and climate damages (Nordhaus 1992). From this simple insight, society can derive an elegant solution to greenhouse gases. The optimal policy for society should balance marginal mitigation costs with marginal damages. Economics also provides an important perspective on time. Time is valuable and cannot be ignored. This is especially critical for a problem that has a very long time horizon. Costs borne in the present are more burdensome than costs born in the future. Finally, economics has much to offer in quantifying both the costs of mitigating greenhouse gas emissions (Weyant 2008) and the damages that climate change will cause to society (Pearce et al. 1996; Tol 2002; Mendelsohn et al. 2006). Stern (2007) and Dietz and Stern (2008) largely reject all of these contributions by economics. They argue that “minimizing the present value of costs of climate change and costs of abatement is both misleading and dangerous.” They argue that treating future costs as though they are worth less than current costs is “unethical.” They reject the empirical analysis of actual impacts arguing that the impacts are unknowable. They reject the economic estimates of mitigation costs in favor of the free-lunch estimates of technologists. Dietz and Stern argue that “strong and urgent action is in fact good economics.” To make this case, they assume that the discount rate is effectively zero, that climate change poses “severe risks” far beyond any we can measure, and that the mitigation costs will be lower than the most optimistic scenario. Even then, they suggest a formal weighing of costs and damages is unacceptable and that instead society should turn to ethical principles to guide greenhouse gas policy. They invoke an “ethics of responsibility of current generations for future generations.” This is climate advocacy, not good economics. What can the current generation do for future generations? By investing in capital, infrastructure, and technology, many generations since the industrial revolution have spurred economic growth, allowing future generations to enjoy a much higher standard of living. Dollars invested in capital and new technology grow at the interest rate, providing a reward

A new global deal on climate change

Abstract A global target of stabilizing greenhouse-gas concentrations at between 450 and 550 parts per million carbon-dioxide equivalent (ppm CO2e) has proven robust to recent developments in the science and economics of climate change. Retrospective analysis of the Stern Review (2007) suggests that the risks were underestimated, indicating a stabilization target closer to 450 ppm CO2e. Climate policy at the international level is now moving rapidly towards agreeing an emissions pathway, and distributing responsibilities between countries. A feasible framework can be constructed in which each country takes on its own responsibilities and targets, based on a shared understanding of the risks and the need for action and collaboration on climate change. The global deal should contain six key features: (i) a pathway to achieve the world target of 50 per cent reductions by 2050, where rich countries contribute at least 75 per cent of the reductions; (ii) global emissions trading to reduce costs; (iii) reform of the clean development mechanism to scale up emission reductions on a sectoral or benchmark level; (iv) scaling up of R&D funding for low-carbon energy; (v) an agreement on deforestation; and (vi) adaptation finance.

The Stern Review and the IPCC fourth assessment report: implications for interaction between policymakers and climate experts. An editorial essay

Within just 1 year, the combined impact of the Stern Review (Stern 2007), the Fourth Assessment Report of the UN Intergovernmental Panel on Climate Change (IPCC 2007a, b, c), Al Gore’s Oscar-awarded documentary climate film (Gore 2006), and the activities of innumerable nongovernment organizations (NGOs), business councils and citizen groups, have brought about a dramatic increase in the public and political awareness of the climate change problem. Today, the reality and widespread implications of anthropogenic climate change are no longer seriously disputed. Climate change has moved to the top of the political agenda. The question is no longer “Are we experiencing a human-made change in climate?” but “What must we do about it?” The credit for this sea change must go to a large part to the patient efforts of scientists over many decades, transmitted and amplified by IPCC and gifted communicators. It is therefore most appropriate that the 2007 Nobel Peace Prize has been awarded jointly to the IPCC, chaired by Rajendra Pachauri, and Al Gore. However, having contributed to the political acceptance of the urgency of the climate problem, climate experts (in the broad sense, including climatologists, economists, social-scientists, legal experts, etc.) now need to accept a major new

Stern and his critics on discounting and climate change: an editorial essay

The Stern Review of the economics of climate change (Stern 2007) has had a substantial impact on public debate over policy responses to climate change. This is in part a matter of timing. Although economists have analysed issues related to climate change for years, this discussion has been overshadowed by debate over scientific issues, initially among climate scientists and then, for much of the last decade, between scientists and political critics of climate science, primarily associated with US-based think tanks. Although disputes continue, serious debate about the reality of global warming has ended. The Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC 2007a) has indicated, with more than 90% probability, that human-caused emissions of carbon dioxide (CO2) and other greenhouse gases were primarily responsible for observed and projected global warming. The Stern Review was undertaken by Sir Nicholas Stern at the request of the Treasury of the UK. Stern’s report was released in November 2006, and subsequently published as Stern (2007). Stern changed the terms of the debate by presenting the issues in economic rather than scientific terms. The effects of global warming, previously discussed in qualitative terms, were argued by Stern to correspond to large losses in economic welfare. Some aspects of the Stern Review have been accepted with little controversy. Most significantly, the estimate (p. xvi) that stabilising global atmospheric CO2-equivalent concentrations in the range 500–550 parts per million (ppm) would reduce world consumption by around 1% has been generally accepted as reasonable, if somewhat optimistic. For comparison, the IPCC (2007b, p. 27) gives cost estimates ranging from slightly negative to 4% of global income to achieve stabilisation in a range of 535–590 CO2 equivalent ppm.

The Stern Review and the economics of climate change: an editorial essay

The Stern Review of the Economics of Climate Change (Stern et al. 2006a, b; Stern 2007)has been the catalyst of an enormous amount of discussion since its release in the fall of2006. Policy makers see it as an authoritative report that makes an economic case for rapidreduction of greenhouse gas emissions. Most economists have a different opinion of thequality of the analysis, even though there is a virtual consensus among economists thatclimate change is a serious externality which calls for the immediate implementation of acarbon tax or some other type of policy intervention. Economists who have glanced at theStern Review typically argue, for example, that its choice of ethical parameters (rate of puretime preference, rate of risk aversion) is peculiar, biased, and potentially misleading to bepoint of being counterproductive (Arrow 2007; Dasgupta 2007; Varian 2006; Yohe and Tol2007a, b). Analysts who took a closer look at the Stern Review tend to notice a range ofother assumptions that are questionable, and many have lamented what they perceive to beinadequate documentation (Jensen and Webster 2007; Mendelsohn 2006; Nordhaus 2007a;Pielke, 2007;Tol2006; Tol and Yohe 2006; Yohe 2006; Yohe and Tol 2007b). Some papersclaim that the Stern Review underestimated the impacts of climate change (Neumayer 2007;Spash 2007; Sterner and Persson 2007), while other papers argue that human-inducedclimate change is not real (Byatt et al. 2006; Carter et al. 2006). Neither position has anyempirical support. The Stern Review team has published a number of rebuttals to our

The economics of avoiding dangerous climate change. An editorial essay on The Stern Review

The problem of avoiding dangerous climate change requires analysis from many disciplines. Mainstream economic thinking about the problem has shifted with the Stern Review from a single-discipline focus on cost-benefit analysis to a new inter-disciplinary and multi-disciplinary risk analysis, already evident in the IPCC Third Assessment Report. This shift is more evidence of the failure of the traditional, equilibrium approach in general to provide an adequate understanding of observed behaviour, either at the micro or macro scale. The economics of the Stern Review has been accepted by governments and the public as mainstream economic thinking on climate change, when in some critical respects it represents a radical departure from the traditional treatment. The conclusions regarding economic policy for climate change have shifted from “do little, later” to “take strong action urgently, before it is too late”. This editorial sets out four issues of critical importance to the new conclusions about avoiding dangerous climate change, each of which have been either ignored by the traditional literature or treated in a misleading way that discounts the insights from other disciplines: the complexity of the global energy-economy system (including the poverty and sustainability aspects of development), the ethics of intergenerational equity, the understanding from engineering and history about path dependence and induced technological change, and finally the politics of climate policy.

A Proposal for a New Prescriptive Discounting Scheme: The Intergenerational Discount Rate

Summary Cost-benefit analyses require comparing costs and benefits that occur at different points in time. Doing so, however, creates conflicts between short-term considerations — a discounting scheme has to be consistent with observed behaviours — and long-term ethical issues — a discounting scheme must not favour the current generation over future ones. To overcome this conflict, the present article proposes a prescriptive consumption discounting scheme that applies different discount rates (i) for various incomes in the lifetime of a unique individual and (ii) for various incomes that affect different individuals. Practically, any income flux is first discounted to the birth date of all individuals using a discount rate with a non-zero pure preference for the present; then these individual discounted values are discounted to the present with a discount rate with no preference for the present and finally summed up. The aim of this prescriptive discount rate is to be consistent with observed individual behaviour (descriptive discount rate) without favouring current generations. Consequences are discussed and compared with the UK Green Book and the Stern Review discounting schemes.

Coping with Global Warming and Climate Change

The Intergovernmental Panel on Climate Change IPCC 2007, p. 9 has identified five key areas subject to impacts from increasing global average temperature: water, ecosystems, food, coasts, and health. A closer reading of the text of the IPCC report shows that many of the most serious impacts on the nonwater areas are, in fact, mediated via water. So, for instance, impacts on food are largely due to hydrological changes; in fact, aridity has major impacts on food, ecosystems, and human health. The pivotal role of water impacts, and hence water’s importance to adaptation, is also stressed in the Stern Report 2006 . Thinking about the relative issues involved in climate change, Mike Muller 2007 of the Global Water Partnership GWP said, “if it’s mitigation, then the focus is rightfully energy, and if it’s adaptation, it will be water resources!” By this he implied that the bulk of the mitigation strategies for climate change deal with handling the use of energy resources, while the adaptation strategies will be mostly driven by water concerns. Hence, we should focus on the water-adaptation strategies, bearing in mind that adaptation for other sectors may include many of the same, or similar, strategies.

Climate Change and UK Politics: From Brynle Williams to Sir Nicholas Stern

In 2000 the UK Labour government abandoned annual real fuel duty increases ‐ a policy it had inherited from the preceding Conservative administration ‐ in the face of direct action by farmers and hauliers. A short‐term Conservative lead in the polls opened up. In 2006, the same Chancellor, Gordon Brown, announced an increase in air passenger duty from February 2007 in the light of the newly published Stern Review. The opposition parties denounced this as too feeble.As Stern points out, all citizens in the world are in a global N‐person prisoners' dilemma. Everybody knows that a world without global warming is better than a world with it; but each actor is unconditionally better off from continuing to pollute than from restraining her polluting.Everybody expects somebody else to drive less. Now, however, all parties have committed themselves to tax and/or emission trading policies to mitigate global warming. The paper examines this transition.

Can Carbon Trading Save Vanishing Forests?

emissions target can buy carbon credits from other countries that either have no target (as is currently the case for developing nations) or that produce fewer emissions than allowed. Like any tradable commodity, the price of carbon credits is largely determined by supply and demand. In theory, everyone should win with REDD. Wealthy nations could pay to help slow deforestation as part of an overall effort to meet their emissions target. Protecting an imperiled forest in Peru, for instance, might lead to the same net reduction of carbon emissions—and be considerably cheaper—than retrofitting a coal-fired generating plant in Ohio. In a transaction like this, dangerous carbon emissions are reduced, a biologically rich forest is protected, and Peru gains direly needed foreign revenues. For such reasons several influential studies, such as the widely heralded Stern Report in the United Kingdom, have advocated REDD as a vital and cost-effective strategy for slowing global warming. In any effort to slow harmful climate change, tropical forests are the low-hanging fruit.

Climate modelling for policy-making: how to represent freedom of choice and concern for future generations?

When modelling is conceived as a means to illuminate policy-making in the field of climate change, modellers tend increasingly towards integrated assessment models to catch interactions between natural and economic systems on both sides. Ultimately models should elicit 'projected equilibrium', when achievements match expectations. Should we support this tendency, or should we set moral limits for the sake of freedom of choice of all generations? How should we view adaptation to climate change in the context of intergenerational ethics? Taking the Stern review as a background, this paper suggests that the use of fully integrated models for policy-making meets ethical difficulties and is caught up in paradoxes. The more we consider a long-term future, the more modelling should be disentangled and split into separate scenarios. It is also suggested that the focus of modelling should not be on maximisation of per capita consumption, but on how ecological capacities and human capabilities can be maintained or developed over time.

The Stern Review on the Economics of Climate Change: contents, insights and assessment of the critical debate

Sir Nicholas Stern, former Chief economist of the World Bank, was asked by the British government to lead a review on the economics of global climate change. The Stern Review was published in October 2006 and attracted a great deal of attention from various circles, from academic to NGOs and the media in Europe, but also worldwide. This article aims first to highlight the Review’s main points and to single out a selection of the most significant factual data and quantitative evaluations that make up the Review’s rich contribution to the subject, going beyond the well-publicised striking results in which the possible damages of climate change are compared to the impact of the two world wars of the 20th century, but lasting forever. The survey concludes with reflections on criticism of the Stern Review made by several economists, mostly in the US, regarding the integrated assessment modelling exercise included in the Review. The most consequential criticisms are related to the low discount rate used to tackle this very long-term issue and the treatment of adaptation of future generations to a new global climate. Paradoxically, the much-attacked choice of a low discount rate chosen to ensure an equal treatment of the utility of all generations is the best-grounded in the utilitarian philosophy that underpins the type of economics that both the Stern Review and most of its critics share.