Comments on the Stern Review David Maddison University of - - PowerPoint PPT Presentation

Comments on the Stern Review

David Maddison University of Birmingham

The Stern Review

• The 575 page Stern Review on the

Economics of Climate Change was published on the 30th October

• The Review was embraced by political

leaders of all the main parties but shortly afterwards criticised by several leading economists

What does it say?

• Impact of climate change equivalent to a

5-20% cut in consumption now and forever

• Recommends stabilising atmospheric

concentrations at 550ppm CO2 equivalent

• Marginal damage costs equal to $314/tC
• Emissions can be stabilised at 1% of GDP

Why the big difference?

• Did earlier economic analyses neglected

important aspects?

• Has the underlying scientific / economic

literature has moved on?

• Does the Stern Review contains errors /

points of contention?

For the avoidance of doubt

• My critique deals with chapters 4 to 13
• Some of my criticisms would point to

greater action than that recommended by Stern

• There have been several postscripts since

the Stern Review was released

• My own thinking on the Stern Review has

also evolved through time

Damage costs

• Uncertainty and risk aversion are at the

heart of Stern’s analysis and climate assumptions are updated

• The Review uses the PAGE2002

Integrated Assessment Model to calculate damage costs

• Use of the A2 emissions scenario is

unexplained

Damage costs

• Assumed damage cost estimates for

catastrophic impacts

• Damage cost estimates are all pre 2001
• The Review appears to favour the use of

equity weights without reminding the reader about arguments against their use

Potentially misleading?

• Stern says: “The most severe climate

impacts… reduce consumption to such low levels” and “Climate change causes a reduction in consumption of 5-20% now and forever” (italics added)

• The most severe climate impacts involve a

reduction in global GDP per capita of 35.2% by 2200 but according to Stern GDP per capita will still be 8 times higher

Abatement costs

• Abatement cost estimates based on

consensus estimates

• Have the external costs of renewable

energy been everywhere included?

• Argues in favour of energy efficiency as a

means to reduce emissions

• Assumes that halting tropical deforestation

entails an opportunity cost

Optimal control

• Stern acknowledges the role of benefit

cost analysis

• Does not locate the optimal control only a

strategy for which the benefits outweigh the costs

• Accounts for uncertainty but fails to

acknowledge the impact that future learning has on near term decisions

Discounting the future

• There are two reasons for discounting in

economics:

– Pure time impatience – Declining marginal utility combined with assumed economic growth

• Previous economic analyses assumed a

constant discount rate for evaluating projects to slow climate change

Discounting the future

• Stern ignores impatience resulting in a low

discount rate and treats economic growth as endogenous

• The chosen discount rate does not appear

to rationalise current economic behaviour

• Stern’s choice of a single discount rate

reduces what is essentially an ethical decision to a pure economic parameter

Conclusions

• The most important thing about the Stern

Review was that it was commissioned in the first place

• The Review would have benefited from

more extensive independent peer review

• It is possible to believe that climate

change is a serious threat and yet not wholly subscribe to the economics of the Stern Review