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A Review of the Stern Review See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/23725073 A Review of the Stern Review Article · February 2006 Source: RePEc CITATIONS READS 108 196 2 authors: Richard S.J. Tol Gary Yohe University of Sussex Wesleyan University 670 PUBLICATIONS 27,972 CITATIONS 194 PUBLICATIONS 13,590 CITATIONS SEE PROFILE SEE PROFILE Some of the authors of this publication are also working on these related projects: INTEGRATION View project Renewable Energy Costs View project All content following this page was uploaded by Richard S.J. Tol on 04 June 2014. The user has requested enhancement of the downloaded file. A Review of the Stern Review Richard S. J. Tol & Gary W. Yohe 1. Introduction The Stern Review on the Economics of Climate Change (Stern et al., 2006) was delivered to the Prime Minister and the Chancellor of the Exchequer of the United Kingdom in late October of 2006. A team of 23 people, led by Sir Nicholas Stern and supported by many consultants, worked for a little over a year to produce a report of some 575 pages on the economics of cli- mate change, and their work has certainly drawn substantial attention in the media. Across its 575 pages, the Stern Review says many things, and some of the points are supported more strongly and developed more com- pletely than others. Naturally, we agree with some of its conclusions, including the fundamental insight that there is an economic case for cli- mate policy now, and that the cost of any climate policy increases with delay; this is, of course, not really news. We do, though, disagree with some other points raised in the Stern Review; here, we raise six issues. First, the Stern Review does not present new estimates of either the impacts of climate change or the costs of greenhouse gas emission reduc- tion. Rather, the Stern Review reviews existing material. It is therefore sur- prising that the Stern Review produced numbers that are so far outside the range of the previous published literature. Second, the high valuation of climate change impacts reported in the Review can be explained by a very low discount rate, risk that is double- counted, and vulnerability that is assumed to be constant over very long periods of time (two or more centuries, to be exact). The latter two sources of exaggeration are products of substandard analysis. The use of a very low discount rate is, of course, debatable. Richard S. J. Tol is a Senior Research Officer at the Economic and Social Research Institute, Dublin. Gary W. Yohe is the Woodhouse/Sysco Professor of Economics at Wesleyan University. WORLD ECONOMICS • Vol. 7 • No. 4 • October–December 2006 233 Richard S. J. Tol & Gary W. Yohe Third, the low estimates for the cost of climate change policy can be explained by the Review’s truncating time horizon over which they are cal- culated, omitting the economic repercussions of dearer energy, and ignor- ing the capital invested in the energy sector. The first assumption is simply wrong, especially since the very low discount rates puts enormous weight on the other side of the calculus on impacts that might be felt after the year 2050. The latter two are misleading. Fourth, the cost and benefit estimates reported in the Stern Review do not match its policy conclusions. If the impacts of climate change are as dramatic as the Stern Review suggests, and if the costs of emission reduction are as small as reported, then a concentration target that is far more stringent than the one recommended in the Review should have been proposed. The Review, in fact, does not conduct a proper optimization exercise. Fifth, a strong case for emission reduction even in the near term can nonetheless be made without relying on suspect valuations and inappro- priate summing across the multiple sources of climate risk. A corollary of this observation is that doing nothing in the short term is not advisable even on economic grounds. Sixth, alarmism supported by dubious economics born of the Stern Review may further polarize the climate policy debate. It will certainly allow opponents of near-term climate policy to focus the world’s attention on the estimation errors and away from its more important messages: that climate risks are approaching more quickly that previously anticipated, that some sort of policy response will be required to diminish the likeli- hoods of the most serious of those risks, and that beginning now can be justified by economic arguments anchored on more reliable analysis. These six points are discussed in separate sections before we reach a conclusion. 2. No new estimates The Stern Review argues that “the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP1 each year, now and forever […] damage could rise to 20% of GDP or more.” These are “risks of major disruption to economic and social activity, on a scale similar to 1 On page 163 of the Review, 5% of GDP is in fact the mean for one particular scenario. The 5%ile may be as low as 0.3% of GDP. The 95%ile may be as high as 33%. 234 WORLD ECONOMICS • Vol. 7 • No. 4 • October–December 2006 A Review of the Stern Review those associated with the great wars and the economic depression of the first half of the 20th century”. It concludes that “the costs of […] reducing greenhouse gas emissions [to stabilize concentrations at 500–550 ppm 2 CO2eq] […] can be limited to around 1% of global GDP each year”. The authors of the Review hope that the implications of these estimates are intuitively clear: there is an overwhelming economic case outlined in the “Summary of Conclusions” for emission reduction because the reported benefit–cost ratio is between 5 and 20. If one looks at the full range of numbers in the report, however, the evidence to support this case is all over the map; indeed, the benefit–cost ratio ranges from 0.09 (0.3/3.5) to infinity (zero abatement costs or better). To anyone familiar with the economic literature on climate change, these numbers come as a surprise. Figure 1 shows clearly that estimates of the damages associated with the impacts of climate change have never been so high and that estimates of the cost of reducing emissions have never been so low. In the past, benefit–cost analyses have always advo- cated rather modest emission reduction; see, for example, Kelly and Kolstad (1999). Uncertainty is ubiquitous in our understanding of climate change, of course, so surprises should be expected; but the sources of surprise should be new science and/or new decision-analytic techniques. The Stern Review does not present new data, or even a new model. It is fundamentally a literature review supported by some new runs of existing Figure 1: Estimates of the damage costs of climate change (left panel) and the costs of emission reduction (right panel) according to the Stern Review and according to previous studies 5 Previous studies Stern Review 2 EMF21 Stern Review 0 0 –5 –2 –10 –4 Percent GDP Percent GDP –15 –20 –6 –25 –8 2 On page 211, there is a cost range from –1.0% to +3.5% GDP. Although climate change impacts are counted up to 2200, emission reduction costs estimates stop at 2050. WORLD ECONOMICS • Vol. 7 • No. 4 • October–December 2006 235 Richard S. J. Tol & Gary W. Yohe models. How can it be that such a survey unearths conclusions that are outside the usual range? We turn to that question in the next two sections. 3. The impacts of climate change The Stern Review includes many impacts of climate change in its economic analysis. The Review, for example, relies on Arnell (2004) for its treatment of water stress, even though it correctly observes that this work does “not include adaptation” and is therefore severely biased. Food is another highlighted impact. Climate change would hamper agricultural productivity in some parts of the world, particularly Africa, but is fundamentally a problem in today’s world. In all of the socio–economic scenarios used by the Stern Review, however, African economies would grow rapidly. This is inconsistent with widespread and persistent famine because middle-income countries would import food (global food produc- tion is not threatened by climate change) rather than starve. Furthermore, it is hard to imagine rapid economic growth without substantial improve- ments in agriculture productivity because, at present, African agriculture is particularly inefficient. For health, the Stern Review makes the same mistake by worrying about people dying of diarrhea and malaria, but these are diseases that can be controlled at little expense when a nation develops sufficiently. The Stern Review also extrapolates increases in damage due to weather- related natural disasters. It uses the estimates of Muir-Wood et al. (2006), ignoring the opposite (and peer-reviewed) conclusions by Pielke et al. (2005) and Pielke (2005).3 In sum, the Stern Review consistently selects the most pessimistic study in the literature for water, agriculture, health and insurance. For refugees, the Myers and Kent (1995) estimates are the highest, and the Stern Review duly highlights that “some estimates suggest that 150–200 million people may become permanently displaced”. Myers and Kent (1995) was not peer-reviewed,4 and Norman Myers is a known alarmist. 3 It is surprising that the Stern Review overlooked Pielke’s work on hurricane damages, as it was presented at the same meeting as Muir-Wood’s work, and Pielke alerted Stern to this (Pielke, personal communication, 2006).
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