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How Does the Stern Review Differ From Other Climate Change Analysis in Its Choice of a Discount Rate

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Stern Review on the Economics of Climate change
Presented 30 Oct 2006
Deputed by Government of the United Kingdom
Author(s) Nicholas Stern
Media type Report
Subject area Effect of global warming on the globe economy

The Stern Review on the Economic science of Climate change is a 700-page report released for the Government of the United Kingdom on thirty October 2006 by economist Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics (LSE) and also chair of the Center for Climate Change Economic science and Policy (CCCEP) at Leeds Academy and LSE. The study discusses the issue of global warming on the earth economy. Although non the first economic report on climate change, it is meaning as the largest and most widely known and discussed report of its kind.[1]

The Review states that climate change is the greatest and widest-ranging market failure always seen, presenting a unique challenge for economics.[2] The Review provides prescriptions including environmental taxes to minimise the economic and social disruptions. The Stern Review's main conclusion is that the benefits of stiff, early on action on climate alter far outweigh the costs of non acting.[3] The Review points to the potential impacts of climatic change on h2o resource, food production, health, and the environment[ clarification needed ]. Co-ordinate to the Review, without action, the overall costs of climate change will exist equivalent to losing at least v% of global gross domestic product (Gdp) each twelvemonth, now and forever. Including a wider range of risks and impacts could increment this to 20% of GDP or more, also indefinitely. Stern believes that five–half-dozen degrees of temperature increase is "a existent possibility."[4]

The Review proposes that one percent of global Gross domestic product per annum is required to be invested to avoid the worst effects of climate change. In June 2008, Stern increased the judge for the annual toll of achieving stabilisation betwixt 500 and 550 ppm CO2e to 2% of GDP to account for faster than expected climatic change.[v]

In that location has been a mixed reaction to the Stern Review from economists. Several economists have been critical of the Review,[6] [7] for example, a paper by Byatt et al. (2006) describes the Review as "deeply flawed".[8] Some economists (such as Brad DeLong[9] and John Quiggin)[ten] take supported the Review. Others accept criticised aspects of Review's analysis, but argued that some of its conclusions might still exist justified based on other grounds, e.g., see papers by Martin Weitzman (2007)[11] and Dieter Captain (2008).[12]

Summary of the Review's main conclusions [edit]

The executive summary[2] states:

  • 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 modify 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 product, wellness, and employ of land and the environs.
  • The impacts of climatic change are not evenly distributed – the poorest countries and people volition suffer earliest and almost. And if and when the damages announced it will exist besides late to contrary the process. Thus nosotros are forced to look a long style ahead.
  • Climate change may initially have small positive effects for a few developed countries, just it is likely to be very damaging for the much college temperature increases expected past mid-to-late century nether BAU scenarios.
  • Integrated assessment modelling provides a tool for estimating the total impact on the economy; our estimates advise that this is likely to exist higher than previously suggested.
  • Emissions have been, and go on to be, driven by economic growth; yet stabilisation of greenhouse gas concentration in the atmosphere is feasible and consistent with continued growth.
  • 'Cardinal estimates of the almanac costs of achieving stabilisation between 500 and 550ppm CO2e are effectually one% of global Gdp, if we kickoff to accept strong activeness at present. [...] Information technology would already be very difficult and costly to aim to stabilise at 450ppm CO2e. If we filibuster, the opportunity to stabilise at 500-550ppm COiieast may skid away.'[iii]
  • The transition to a depression-carbon economy will bring challenges for competitiveness just likewise opportunities for growth. Policies to support the development of a range of low-carbon and high-efficiency technologies are required urgently.
  • Establishing a carbon toll, through tax, trading or regulation, is an essential foundation for climate change policy. Creating a broadly similar carbon toll signal around the world, and using carbon finance to accelerate activeness in developing countries, are urgent priorities for international co-operation.
  • Accommodation policy is crucial for dealing with the unavoidable impacts of climate change, simply it has been under-emphasised in many countries.
  • An effective response to climate change volition depend on creating the conditions for international collective action.
  • There is still time to avoid the worst impacts of climate change if strong collective activeness starts now.

Background [edit]

On 19 July 2005 the Chancellor of the Exchequer, Gordon Chocolate-brown announced that he had asked Sir Nicholas Stern to lead a major review of the economics of climatic change, to understand more comprehensively the nature of the economic challenges and how they can be met, in the Uk and globally.[13] The Stern Review was prepared by a squad 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.[fourteen]

The Stern review was not released for regular peer-review, since the United kingdom of great britain and northern ireland Authorities doesn't undertake peer review on commissioned reviews.[fifteen] Papers were published and presentations held, that outlined the arroyo in the months preceding the release.[15]

Positive critical response [edit]

The Stern Review attracted positive attention from several sectors. Pia Hansen, a European Committee Spokeswoman, said doing zero is not an option, "we must act now".[16] Simon Retallack of the UK call back tank IPPR said "This [Review] removes the last refuge of the "do-null" approach on climate change, particularly in the United states of america."[xvi] Tom Delay of The Carbon Trust said "The Review offers a huge business opportunity."[sixteen] Richard Lambert, Director General of the Confederation of British Industry, said that a global system of carbon trading is "urgently needed".[xvi] Charlie Kronick of Greenpeace said "Now the government must human activity and, among other things, invest in efficient decentralised ability stations and tackle the growth of aviation."[xvi]

Asset managers F&C look to the business opportunities and say "this is an unprecedented opportunity to generate real value for our clients".[17] Brendan Barber, General Secretary of the Trades Marriage Congress, was optimistic about the opportunities for industry to meet demands created by investment in engineering to combat climate change.[xviii] The Prince of Wales' Corporate Leaders Grouping on Climate Change, formed past 14 of Britain'south leading companies shared this promise. Chairman of Shell United kingdom, James Smith, expressed the hope of the group that business and Government would discuss how Britain could obtain "beginning mover advantage" in what he described as "massive new global market".[19]

On 1 November 2006, and then Australian Prime Government minister, John Howard, responded past announcing that A$threescore million would exist allotted to projects to help cut greenhouse gas emissions[twenty] while reiterating that Australia would non ratify the Kyoto Protocol. Much of this funding was directed at the not-renewable coal manufacture.

British Prime number Government minister, Tony Blair, stated that the Review demonstrated that scientific evidence of global warming was "overwhelming" and its consequences "disastrous" if the earth failed to human activity.[21] The United kingdom of great britain and northern ireland Treasury, which commissioned the report, simultaneously published a document of favourable comments on the Review. Those quoted include:[22]

  • Paul Wolfowitz, former President of the Earth Banking concern
  • Claude Mandil, Executive Director of the International Energy Agency
  • Kirit Parikh, Member, Planning Committee, Government of Bharat
  • Adair Turner, Former Managing director of Great britain Confederation of British Manufacture and Economic Advisor to Sustainable Development Commission
  • Sir Rod Eddington, Adviser to the UK Regime on the long term links between transport and economic growth, and former main executive of British Airways

Several academic economists are besides quoted praising the Review (encounter Response of economists).

Negative critical response [edit]

The Stern Review has received various disquisitional responses. Some economists have argued that the Review overestimates the present value of the costs of climate change, and underestimates the costs of emission reduction. Other critics accept argued that the economic cost of the proposals put frontward by Stern would be astringent, or that the scientific consensus view on global warming, on which Stern relied, is wrong. By contrast, some argue that the Review emission reduction targets are too weak, and that the climate change damage estimates in the Review are also small-scale.

General criticisms [edit]

In an article in the Daily Telegraph (2006), Ruth Lea, Manager of the Centre for Policy Studies, questions the scientific consensus on climate change on which the Stern Review is based. She says that "regime on climate science say that the climate system is far likewise complex for modest reductions in 1 of the thousands of factors involved in climate change (i.due east., carbon emissions) to have a anticipated result in magnitude, or even direction." Lea questions the long-term economic projections fabricated in the Review, commenting that economic forecasts for just two or 3 years ahead are usually incorrect. Lea goes on to describe the problem of drawing conclusions from combining scientific and economic models as "monumentally complex", and doubts whether the international co-operation on climate change, as argued for in the Review, is actually possible. In conclusion, Lea says that the real motive behind the Review is to justify increased tax on fuels.[23]

Yohe and Tol (2007) described Lea'due south commodity equally a climate sceptics 'scattershot approach' aiming to confuse the public past questioning the causal role of COii, past emphasising the complexity of making economic predictions and by attributing a motive for Stern's conclusions.[24]

Miles Templeman, Managing director-General of the Institute of Directors, said: "Without countries like the Us, Communist china or India, making decisive commitments, United kingdom of great britain and northern ireland competitiveness will undoubtedly suffer if we human activity lone. This would be bad for business, bad for the economy and ultimately bad for our climate."[19]

Prof. Neb McGuire of Benfield UCL Hazard Research Centre said that Stern may take greatly underestimated the effects of global warming.[xvi] David Brown and Leo Peskett of the Overseas Evolution Institute, a United kingdom think-tank on international development, argued that the key proposals in relation to how to use forests to tackle climatic change may prove hard to implement:[25]

Radical ideas are needed non just at the level of understandings but too of forwards strategies. The Stern Review is much stronger on the sometime than the latter, and leaves a lot of questions unanswered on implementation, particularly the downstream practicalities of bringing avoided deforestation into climate mitigation efforts.

Shortly afterwards publication of the Stern Review, one-time Chancellor of the Exchequer Nigel Lawson gave a lecture at the Heart for Policy Studies, briefly criticising the Review and warning of what he called "eco-fundamentalism".[26] In 2008, Lawson gave bear witness before the House of Commons Treasury Select committee, criticising the Review.[27]

Ecology writer Bjørn Lomborg criticised the Stern Review in OpinionJournal:[28]

Mr. Stern's core argument that the price of inaction would be extraordinary and the cost of activity modest [...] falls apart when one actually reads the 700-folio tome. Despite using many good references, the Stern Review on the Economic science of Climate Change is selective and its decision flawed. Its fright-mongering arguments accept been sensationalized, which is ultimately just probable to brand the world worse off.

Reason magazine's scientific discipline correspondent Ronald Bailey describes the "destructive character" of the Stern Review's policy proposals, proverb that "Surely it is reasonable to argue that if one wants to assistance future generations deal with climate change, the all-time 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 volition have to filibuster buying other good things such as clean water, amend sanitation, more than and meliorate nutrient, and more than didactics."[29]

Commenting on the Review's suggested increases in ecology tax, the British Chambers of Commerce have pointed to the dangers to business of additional taxation.[xxx]

Jerry Taylor of the Cato Institute, a United states libertarian think-tank, criticised Stern's conclusion, taking a adding by himself:[31]

Stern's investment advice makes sense only if y'all think that warming will hammer GDP by x% a year. You don't gain much at all from emission cuts, nevertheless, if yous think GDP will only drop by 5% a year if we exercise nil. And if y'all think warming will only cost the global economic system 2% of GDP every twelvemonth, [...] so Stern'south investment advice is [sheer] lunacy.

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 fabricated by most experts in the field, and that the Review's conclusions are at odds with the mainstream view (Cox and Vadon, 2007).[32]

In his paper on the Jevons' Paradox, which states that improvements in free energy-efficiency of technologies can potentially increase greenhouse gas emission, Steve Sorrel concludes with "A prerequisite for all the higher up is a recognition that rebound furnishings 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 birthday."[33] This criticism was rejected by the authors. They noted that past recommending a comprehensive global carbon toll (run into Summary above) the Stern Review proposed the nearly powerful mechanism for staunching the rebound result. A carbon price imposes a wedge between the supply price received past producers and demand price paid by consumers thereby prompting substitution away from carbon-intensive activities. This insures that the exchange event offsets the income event.

In contrast to those who argued that the Stern Review was too pessimistic or 'alarmist', others argued that it did non make it enough. John Bellamy Foster, Brett Clark and Richard York in "the Ecological Rift" (2010)[34] requite considerable attention to the Stern Review, noting that the targets of 550 ppm imply a global temperature increase of at least 3 °C "well beyond what climate science consider unsafe, and which would bring the earth's boilerplate global temperature to a elevation concluding seen in the eye Pliocene around 3 million years ago" (p. 154). They posit that the basis for such high targets is 'economic science, pure and unproblematic' (p. 155), that is, stronger emissions cuts were seen by the Stern Review authors as "prohibitive, destabilizing commercialism itself" (p. 155). "All of this signals that whatsoever reduction in CO2 equivalent emissions beyond around 1 percent per year would brand information technology most impossible to maintain strong economical growth—the bottom line of the commercialism economic system. Consequently, in lodge to continue the treadmill of aggregating going the globe needs to risk environmental Armageddon" (p. 156).

Stern report misused climate change study [edit]

According to the Sunday Times article "Climate change study was 'misused'",[35] the Stern report 'misused' disaster analysts inquiry by Robert Muir-Woods, head of inquiry at Take chances Management Solutions, a US-based consultancy. The Stern written report, citing Muir-Wood, said: "New assay 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/motion. [...] If this tendency continued or intensified with rising global temperatures, losses from farthermost weather could achieve 0.v%–1% of world GDP by the middle of the century.". According to Muir-Woods "said his inquiry showed no such thing and defendant Stern of "going far beyond what was an acceptable extrapolation of the evidence".".[35]

Response of economists [edit]

Discounting [edit]

One of the issues debated amidst economists was the discount charge per unit used in the Review. Discounting is used by economists to compare economic impacts occurring at unlike times.[36] Discounting was used past Stern in his calculation of the possible economical damages of future climate change. Marginal climate alter amercement were calculated for a "business concern-every bit-usual" greenhouse gas (GHG) emissions pathway. Residual climate change damages (at the margin) were also calculated for other emissions pathways, peculiarly one peaking at 450 ppm COtwoeastward GHG concentration.[37]

There are four primary reasons commonly proposed past economists for placing a lower value on consumption occurring in the futurity rather than in the present:[10]

  • futurity consumption should be discounted simply because it takes identify in the futurity and people generally prefer the present to the future (inherent discounting)
  • consumption levels will be higher in the future, so the marginal utility of boosted consumption will be lower
  • time to come consumption levels are uncertain
  • improved technology of the time to come volition brand it easier to address global warming concerns

Using a loftier discount rate decreases the assessed benefit of actions designed to reduce greenhouse gas emissions. The Stern Review did not utilize a single disbelieve rate, merely applied a stochastic approach whereby the disbelieve rate varied with the expected outcomes, reflecting the interaction betwixt growth and the elasticity of marginal utility, in line with Frank Ramsey's growth model. The Stern Review'due south boilerplate discount charge per unit for climatic change damages is approximately 1.four%, which, at the time of the Review, was lower than that used in most previous economical studies on climate change. Accounting for risk in the stochastic framework, however, means the expected hateful or certainty equivalent discount rate will be below the discount rate for the hateful expected issue (Dietz, 2008, p. xi).[38] In other words, accounting for adventure means a greater weight is applied to worst example outcomes, as per the insurance marketplace.

Inherent discounting [edit]

Fence over the Stern Review initially focused on the start of these points. In the Review, Stern used a social disbelieve charge per unit based on the "Ramsey" formula, which includes a term for inherent discounting, likewise chosen the pure rate of time preference (PTP-rate):

s =γ +η thou

where southward is the social disbelieve rate, γ the PTP-rate, η the marginal elasticity of utility, and thousand the charge per unit of growth of per-capita consumption (Dietz, 2008, p. 10).[38] Stern accepts the example for discounting, simply argues that applying a PTP-rate of annihilation much more than zero to social policy selection is ethically inappropriate.[39] His view is supported by a number of economists, including Geoffrey Heal,[forty] Thomas Sterner,[38]William Cline,[41] and Brad DeLong.[9] 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 nosotros are impatient in the sense of valuing the present and near-hereafter much more than we value the distant future, but that nosotros shouldn't do so." Hal Varian stated that the choice of discount rate was an inherently upstanding judgement for which at that place was no definitive reply.[42]

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 charge per unit:[7]

The Review's unambiguous conclusions about the need for farthermost immediate activeness will not survive the substitution of assumptions that are more consistent with today's marketplace real interest rates and savings rates. Hence, the central questions nigh global-warming policy—how much, how fast, and how costly—remain open. The Review informs only does not respond these fundamental questions.

The divergence between Stern's estimates and those of Nordhaus can largely (though not entirely) be explained past the divergence in the PTP-rate.[43] Previous studies by Nordhaus and others have adopted PTP-rates of up to 3 per cent, implying that (other things being equal) an environmental toll or do good occurring 25 years in the future is worth about half as much equally the same do good today.[9] Richard Tol argues that in estimating discounting rates and the consistent social price of carbon, the assumptions that must exist fabricated virtually the remote future are and so uncertain that they are essentially arbitrary. Consequently, the assumptions made dominate the results and with a depression disbelieve rate the social cost of carbon is also arbitrary.[44]

In an appearance before the House of Commons Treasury Select Commission (2008), Stern was asked well-nigh the discount rate used in the Review:[45]

Stern: [...] We are in pretty skillful company hither in that [the distinguished economists] Solow, Sen, Keynes, Ramsey and all kinds of people have adopted the arroyo to pure fourth dimension discounting that nosotros have adopted. It is not particularly unusual.

John Roemer, Humberto Llavador and Joaquim Silvestre have argued that an analysis of the trouble must consider both the ethical and economic bug associated with discounting. They have fabricated 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 modelling. Intergenerational justice would crave more realistic assumption: one detail view is what they call the "sustainabilitarian" approach, which seeks to maximise present consumption subject to the constraint that future generations enjoy a quality of life at to the lowest degree as good as that enjoyed by the current generation. They support 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.)[46]

Treatment of dubiety [edit]

Uncertainty near time to come consumption may be addressed either through adjustments to the discount charge per unit or by replacing uncertain flows of consumption with certainty equivalent flows.[ citation needed ] Stern adopted the latter approach, simply 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).[47] Whilst disquisitional of Stern'southward discounting, Martin Weitzman has argued that standard discounting procedures are inherently incapable of dealing with extreme, low-probability events, such as the risk of catastrophic climate change.[eleven]

Future consumption will be higher [edit]

With increasing average consumption in future, the marginal utility of consumption will decline. The elasticity of the marginal utility of consumption (office of the social discount charge per unit) may exist interpreted as a measure of aversion to inequality. Partha Dasgupta has criticised the Stern Review for parametric choices that, he argues, are inadequately sensitive to inequality.[48] In subsequent debate, Stern has conceded the case for a higher elasticity, just noted that this would call for much more all-encompassing redistribution of income inside the electric current generation (Dietz et al. 2007. pp. 135–137).[47]

Improved technology [edit]

As far equally discounting is concerned, the effects of improved technology piece of work through increased consumption and do not need to exist treated separately. Yet, specification of an optimal response to climate modify will depend on assumptions about improvements in technology and the extent to which such improvements will be induced past policies that increase the price of emissions.

Marketplace rates [edit]

Both supporters and opponents of Stern's discount charge per unit have used comparisons with marketplace rates of return on capital to justify their position.[10] Robert Mendelsohn of Yale Academy is a critic of the Review and has said:[49]

[...] investments in mitigation that cannot even earn a positive rate of return will be worth far less to futurity generations than those aforementioned dollars invested in the market. Placing climate change before investments in other important nonmarket services such as conservation, health, instruction, security, and transportation too cannot exist justified in the name of future generations. From the perspective of future generations, information technology is in their involvement that all investments earn the same charge per unit of return. The upstanding justification for intentionally overspending on selective projects with low rates of return is weak indeed .

Nordhaus has been very critical of the Ramsey cypher pure time preference on the footing of utilitarian ethical stance. He takes a strictly market based view of intergenerational projects arguing that the social rate of fourth dimension preference reflects the rate of return observed in the market.[ commendation needed ] Nordhaus also raised his view that the present generation will have to forgo a big corporeality of consumption now for the benefit of future generations who will be much richer than the present generation.

Dasgupta argues that at that place is some confusion in the Stern review about the underlying rationale for the option of the Ramsey parameters.[ citation needed ] He states that the review mixes both market returns on investment with parameters selected on upstanding grounds.

The discount rate chosen by Stern is close to the real interest charge per unit for government bonds. The higher rates preferred past Stern'southward critics are closer to the weighted average price of capital for individual investment; come across the extensive review by Frederick et al. (2002)[50] According to Quiggin, the difference betwixt the two is determined past the equity premium.[10] Quiggin says that there is no generally accepted theory accounting for the observed magnitude of the equity premium and hence no piece of cake way of determining which approach, if either, should exist regarded as the appropriate market comparator.

[edit]

HM Treasury have issued a certificate where several economists are quoted praising the Stern Review, including[22]Robert Solow, James Mirrlees, Amartya Sen, Joseph Stiglitz, and Jeffrey Sachs. Sachs and Stiglitz have also written favourable manufactures on the Review.[51] [52]

Richard Tol, an ecology economist at the Economic and Social Enquiry Institute, is highly disquisitional of the Stern Review, and has said that "If a student of mine were to hand in this study [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).[32] In that location is a whole range of very basic economics mistakes that somebody who claims to be a Professor of Economic science simply should not make. [...] Stern consistently picks the virtually pessimistic for every option that one can make. He overestimates through scarlet-picking, he double counts particularly the risks and he underestimates what development and adaptation will practice to impacts." Tol has referred to the Stern Review as "populist science."[53] In a newspaper published in 2008, Tol showed that the Stern Review'south guess of the social price of carbon (SCC) forth a "business-every bit-usual" emissions pathway was an outlier in the economics literature.[54]

The Stern Review differed strongly from most other estimates of climate change costs in the economics literature in 2006[55]

Harvard economist Martin Weitzman has written a paper on the Stern Review (Weitzman, 2007).[11] In this paper, Weitzman described himself as "skeptical" in regards to the discount charge per unit used by Stern in the Review's formal (aggregated) assessment of climate change.[56] One of Weitzman's conclusions was that Stern deserved credit for increasing public awareness on the dangers of climate change.[57] Still, Weitzman besides commented that:

[...] in my opinion, Stern deserves a measure of discredit for giving readers an authoritative-looking impression that seemingly objective all-time-available-practice professional economic assay robustly supports its conclusions, instead of more openly disclosing the full extent to which the Review'south radical policy recommendations depend upon controversial extreme assumptions and unconventional discount rates that well-nigh mainstream economists would consider much likewise low

According to a paper Weitzman (2007), the Stern Review is "right for the wrong reasons."[58]

At a seminar held in 2006, Cambridge economist Partha Dasgupta commented on the Stern Review.[59] Dasgupta (2006, p. 1) described the Review every bit "a long and impressive certificate," but felt that the authors had treated the issue of intergenerational equity (via the social discount rate) "cavalierly". Dasgupta (2006, pp. half-dozen–7) accepted the Review'south argument for a PTP-rate of 0.one%, just did not accept Stern's option of 1 for the elasticity of marginal utility. He argued this betoken by computing a saving rate of 97.5% based on the Review'southward values for the PTP-rate and elasticity of marginal utility. Dasgupta stated that "[a] 97.5% savings rate is so evidently absurd that nosotros must refuse information technology 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 past Berkeley economist Hal Varian.[60] Writing in the New York Times newspaper, Varian commented "Sir Partha's stripped-downwards model leaves out uncertainty, technological modify and population growth, but even so, such a high savings charge per unit is totally implausible." Varian besides questioned whether or non it was ethical for the current generation to transfer wealth to time to come generations (via investment in mitigation), who, given Stern'due south assumptions, would be much wealthier than nosotros presently are.

Smith (2009) responded to Dasgupta's criticism of the Stern Review's implied savings charge per unit.[61] 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.v% when a macroeconomic model with the product part actually used past Stern and Nordhaus is used.

According to Dietz (2008, pp. 10–11), Varian's assay had apparently confused the PTP-charge per unit with the social disbelieve rate.[38] The PTP-rate, if positive, discounts the welfare of future generations fifty-fifty if they are poorer than the electric current generation. The social discount charge per unit used past Stern, however, accounts for the possible increased wealth (consumption) of future generations through the production ηg (see the formula cited in the department on inherent discounting).

Terry Barker of the Tyndall Middle Climatic 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:[62]

[...] the Stern Review considers cost-do good analysis as a marginal assay inappropriately applied to a non-marginal multi-disciplinary systemic problem (p. 50). Both Stern (p. 163) and the IPCC Reports later 1995 take a multi-criteria approach rather than a narrowly monetary i and question cost-benefit assay. This is one reason for the intemperate response from some traditional economists to the Stern Review

Eric Neumayer (2007) of the London School of Economic science thought that the Review could have argued for emission reductions based on the non-substitutable loss of natural capital.[63] Neumayer argued that the real result is the non-substitutable loss of natural capital, that is to what extent climatic change inflicts irreversible and non-substitutable damage to and loss of natural capital letter. Economists define natural capital every bit the multiple and diverse services of nature from which humans benefit- from natural resources to pollution absorption and ecology amenities.[ citation needed ]

Dieter Helm (2008) of Oxford University was critical of the Review'south analysis just accustomed its determination of the urgent need to reduce emissions. Captain justified this on the grounds that future amercement to the environment would probably not exist fully compensated for by increases in man-fabricated capital.[12] The typhoon study of the Garnaut Climate Alter Review, a similar written report conducted in Australia in 2008 by Ross Garnaut broadly endorsed the approach undertaken by Stern, but concluded, in the light of new data, that Stern had underestimated the severity of the trouble and the extent of the cuts in emissions that were required to avoid unsafe climate change.

The Yale Symposium [edit]

In 2007, a symposium was held at Yale University on the Stern Review, with talks past several economists, including Nordhaus and Stern (Yale Symposium, 2007).[39] 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 cess model that was used in the Review. Hope explained what would happen to the Stern Review's harm estimates if they were made using unlike assumptions, for example, a higher disbelieve charge per unit. Hope as well pointed to the assumptions used in the model to practise with adaptation.

In his talk, Nordhaus criticised the fact that the Stern Review had non 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'due south general conclusions, but was uncomfortable most how well-nigh (greater than 90%) of the Review'due south monetised damages of climatic change occur after 2200. Cline noted that the Review's big cost-benefit ratio for mitigation policy allows room for these long-term costs to exist reduced substantially just 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 climatic change. Sachs was supportive of Stern's cost estimates of climate change mitigation.

In response to these talks, Stern accustomed Cline's comment about the weighting of hereafter amercement, 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 disbelieve 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. Co-ordinate to Stern, the revenue enhancement volition not necessarily exist the same as the social price of carbon due to distortions and uncertainties in the economic system (p. 121). His suggested tax rate was in the range of 25 to 30 dollars per ton of carbon. Stern did non accept Mendelsohn's statement that the Review presented a pick of policy versus no policy. Stern commented that the arguments for his recommended stabilisation range were included in Chapter 13 of the Review (pp. 124–125).

The costs of mitigation [edit]

Economists take dissimilar views over the cost estimates of climate alter mitigation given in the Review. Paul Ekins of King's College London (Treasury Committee, 2008) has said that Stern's central mitigation price gauge is "reasonable,"[64] but economists Robert Mendelsohn[32] and Dieter Helm[12] have commented that the estimate is probably too low. Co-ordinate to Mendelsohn, the Stern Review is far also optimistic near mitigation costs, stating that "[one] of the depressing things nigh the greenhouse gas problem is that the cost of eliminating information technology is quite high. We will actually have to sacrifice a great deal to cut emissions dramatically" (Mendelsohn, 2007).[ citation needed ]

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 engineering 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 key impracticality of the program, of course, lies in its utterly subversive character."[65]

In a response to a newspaper by members of the Stern Review team, John Weyant of Stanford University commented on how the toll estimate of mitigation used in the Review was based on idealised models (Mendelsohn et al., 2008).[49] Weyant wrote that his own high short-run toll projection for stabilisation, of perchance ten% GDP, resulted "primarily from institutional pessimism rather than technological pessimism."

Comparison with climate damages [edit]

Nobel prize winner Kenneth Arrow has commented on the Stern Review in the Economist's Voice (Arrow, 2007a)[66] and for Project Syndicate (Pointer, 2007b):[67]

Critics of the Stern Review don't think serious activeness to limit CO2 emissions is justified, because there remains substantial uncertainty virtually the extent of the costs of global climate change, and because these costs will be incurred far in the future. However, I believe that Stern's fundamental conclusion is justified: we are much improve off reducing CO2 emissions substantially than risking the consequences of failing to human activity, even if, unlike Stern, ane heavily discounts uncertainty and the hereafter.

Arrow analysed the Stern Review's conclusions by looking at the Review's central estimate of GHG stabilisation costs of 1% GNP, and high-end climate damages of 20% GNP (Arrow, 2007a, pp. 4–5). As role of the Ramsay formula for the social discount charge per unit, Arrow chose a value of two for the marginal elasticity of utility, while in the Review, Stern chose a value of ane. According to Arrow, Stern'due south recommended stabilisation target passes a price-benefit exam even when considerably higher PTP-charge per unit (up to around 8%) than Stern's (0.ane%) is used. Arrow acknowledged that his argument depended on Stern's stabilisation central cost estimate existence correct.

Gary Yohe of Wesleyan Academy noted that Stern'due south estimates of business concern-as-usual climate damages were given in terms of per capita consumption equivalents, but Stern'due south costs of mitigation were given in terms of a percentage reduction in gross globe product.[68] Yohe stated that the two dissimilar 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 ane% of world Gross domestic product in mitigation. This, withal, would notwithstanding lead to global warming (every bit per the Review'south 550 ppm CO2eastward mitigation target) of around 1.5 to 4.five °C in a higher place pre-industrial temperatures. Significant portions of climate damages would therefore withal persist with Stern's mitigation target. To measure out the do good of Stern'southward mitigation target, the balance climate damages from mitigation would need to be subtracted from Stern'due south business concern-as-usual climate damages.

Ecological Economic Critique [edit]

The main criticisms cited above business the details of calculations and modelling choices within an orthodox economical framing of the world and mostly endeavor to debate against substantive greenhouse gas mitigation. Ecological economists take the need for serious action merely reject the reasoning of economic commensuration of costs and benefits, the probabilistic arroyo to uncertainty and the application of a utilitarian intergenerational calculus.[69] Their criticism applies equally to the likes of Nordhaus and Tol.[70] [71] [72] The orthodox economical argue is seen equally a distraction from the bones ethical problems east.g. discounting instead of justice.

A more fundamental criticism of the Stern report is that it raises a series of problems which it totally fails to address considering of its orthodox approach. It simultaneously ignores a range of disquisitional literature from ecological economics and ecology ideals which challenges such orthodox thinking.[70] [73] [74] [75] Stern as an orthodox economist squeezes all matters and concepts into a narrow mathematical formalism which heterodox economists, such as Tony Lawson, point out fails to address economic and social reality.[76]

In conventional toll-do good assay, biodiversity and ecosystem services that are non valued as losses are hard to quantify. Neumayer argues that the existent issue is not-substitutable loss of natural majuscule; to what extent climate change inflicts irreversible and non-substitutable damage to and loss of natural capital.[77] For case, it would be difficult to quantify the loss of coral reefs, biodiversity loss, or species extinction. Dietz points out that in many Integrated Cess Models (IAMs), health and ecosystem impacts are not included considering the monetary valuation of these impacts is "speculative and uncertain".[78] Dasgupta (2008) likewise points out virtually model exercise not consider natural capital.[79] Although recent studies on ecosystem services accept fabricated gains in monetising the value of ecosystems, more recent studies on ecosystem services [80] suggest the Stern Review underestimates the need for mitigation activeness every bit it is difficult for models to quantify the plummet of ecosystem services nether climatic change.

Thus, ecological economist Clive Spash has questioned whether the study is nothing more an practise in rhetoric.[81] Spash notes that a range of serious problems challenging economical analysis is raised or mentioned in the report including: strong doubtfulness, incommensurability, plural values, non-utilitarian ideals, rights, distributional inequity, poverty, and treatment of time to come generations. How so can this written report, acknowledging so many of those aspects of climate change that render orthodox economic analysis unsuitable for generating policy recommendations, go ahead to deport a global cost-benefit adding based on microeconomic theory and make that the foundation for its policy recommendations? Spash has argued that issues are suppressed and sidelined in a careful and methodical style, with the pretense they have been addressed past 'land of the art' solutions. Meanwhile, the authors maintain allegiance to an economical orthodoxy which perpetuates the dominant political myth that traditional economical growth tin can exist both sustained and reply all our problems.[82] Besides perpetuating myths, this diverts attention away from culling approaches, away from ethical debates over harming the innocent, the poor and future generations, and away from the fundamental changes needed to tackle the very real and serious problems electric current economic systems pose for environmental systems. In addition the policy recommendation of carbon trading is seen as deeply flawed for too failing to accept account of social, ecological and economic reality.[83]

Response to criticisms [edit]

The Stern Review team have responded to criticisms of the Review in a number of papers.[84] In these papers, they reassert their view that early and stiff activeness on climate change is necessary:

The case for strong and urgent activity set up out in the Review is based, first, on the severe risks that the science at present identifies (together with the additional uncertainties [...] that information technology points to but that are hard to quantify) and, 2d, on the ethics of the responsibilities of existing generations in relation to succeeding generations. It is these two things that are crucial: gamble and ideals. Different commentators may vary in their emphasis, but it is the ii together that are crucial. Jettison either i and you volition have a much reduced programme for action—and if y'all judge risks to exist small and attach little significance to hereafter generations you will non regard global warming as a problem. It is surprising that the before economic literature on climate change did not requite take a chance and ethics the attention they then clearly deserve, and information technology is because we chose to make them central and explicit that we think we were right for the right reasons.[85]

Members of the Stern Review squad have besides 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.[86] In an official letter (2008), Joan Ruddock MP of the UK Authorities, dismisses the criticisms of the Review made by several economists, which, in her view, show "a cardinal misunderstanding of the part of formal, highly aggregated economic modelling in evaluating a policy issue".[87]

[edit]

In April 2008 Stern said that the severity of his findings were vindicated by the 2007 IPCC written report 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".[88] [89] In June 2008, Stern said that because climatic change is happening faster than predicted, the cost to reduce carbon would be even higher, of well-nigh 2% of Gross domestic product instead of the 1% in the original study.[v]

In an interview at the 2013 World Economic Forum, Stern said "Looking back, I underestimated the risks. The planet and the atmosphere seem to be absorbing less carbon than we expected, and emissions are ascent pretty strongly. Some of the furnishings are coming through more quickly than we thought and so" in the 2006 Review. He now believes nosotros are "on track for something similar 4 degrees".[90]

Run across also [edit]

  • Climate change in the Great britain
  • Avoiding Dangerous Climate Change
  • Economics of global warming
  • Garnaut Climate Alter Review
  • Global warming controversy
  • Politics of global warming
  • World Free energy Outlook
  • Prosperity Without Growth

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Further reading [edit]

  • Barker, Terry (August 2008). "Special Topic: The Stern Review Debate". Climatic Change. 89 (3–4): 173–449. doi:x.1007/s10584-008-9433-x. ISSN 1573-1480. S2CID 54026931.
  • Howarth, R.B. (Apr 2009). "Policy Brief No. iii: Discounting, Uncertainty, and Climate change" (PDF). Economics for Equity and the Surround website. Retrieved xx May 2009.
  • Jensen, P.H. and E. Webster (2007), Australian Economic Review xl(2):421–431

External links [edit]

  • Full text of the Stern Review, from HM Treasury
    • Total text of the Stern Review, archived on Wayback Machine
  • The Economics of Climate change – The Stern Review
  • Economist.zoom: How to value a grandchild, 4 Dec 2006
  • Summary of central findings from the study
  • Gail Whiteman's findings of economic costs of chill methane release added to the Stern review
  • "The Stern gang", linked index of resources.
  • Grantham Research Constitute profile page of Nicholas Stern
  • Middle for Climate Alter Economics and Policy
  • Videos:
    • The RIBA Trust Annual Lecture: Lord Stern (function of the International Dialogues: Compages and Climatic change talks series)
    • The Economics of Climate change: Take a chance, Ethics, and a Global Deal. Lecture given at Princeton University by Nicholas Stern, 7 January 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, Feb 2007. Figures used in the Symposium are available here

In the media

  • two Nov 2006, The Economist: Stern alert
  • 6 November 2006, Der Spiegel: The Day the Climate Changed
  • 10 Jan 2007, BBC: Chrysler Dominate says Stern Study is based on dubious economics
  • 9 June 2009, Allianz Cognition: Stern Review Update An interview with Alex Bowen, senior economist on the Stern Review team

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Source: https://en.wikipedia.org/wiki/Stern_Review

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