A Review of the Stern Review on the Economics of Climate Change

Abstract

The Stern Review calls for immediate decisive action to stabilize greenhouse gases because “the benefits of strong, early action on climate change outweighs the costs.” The economic analysis supporting this conclusion consists mostly of two basic strands. The first strand is a formal aggregative model that relies for its conclusions primarily upon imposing a very low discount rate. Concerning this discount-rate aspect, I am skeptical of the Review's formal analysis, but this essay points out that we are actually a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged. The Review's second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertainties that are difficult to quantify. Concerning this uncertainty aspect, I argue that it might be recast into sound analytical reasoning that might justify some of the Review's conclusions. The basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consumption smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings.

Siblings, Not Triplets: Social Preferences for Risk, Inequality and Time in Discounting Climate Change

“…Furthermore, the worst-case scenarios imply very large damages on a global scale (e.g. Weitzman, 2007); 2. Time: the marginal impact of a tonne of greenhouse gas persists long after it has been emitted; 3.…”

“…By contrast, evidence from the actual distribution of income within countries might suggest a value of unity or less (Atkinson and Brandolini, 2007). Dasgupta (2007) and Weitzman (2007) take yet another approach, backing out the appropriate value of η from evidence on the appropriate consumption discount rate. This approach leads them to recommend that η be greater than unity.…”

“…η has often been set to unity (Fankhauser et al, 1997;Nordhaus and Boyer, 2000;Stern, 2007;Tol, 1997), which gives the particularly tractable case of equation (2) where utility is the natural logarithm of consumption. However, other economists, including Dasgupta (2007), Weitzman (2007) and Gollier (2006) have suggested this value is too low. Like the numerical estimates in the literature, these arguments are typically based on only one of the three dimensions of η, and it is not clear that they are equally valid to all three.…”

The double challenge of adapting to climate change while accelerating development in sub-Saharan Africa

“…Moreover, the major uncertainties about likely radical impacts on and shifts in ecosystems, such as nonlinear changes and irreversibilities, transmit a large degree of uncertainty about the nature and size of future costs and benefits, particularly over the very long time horizon of CC (Pindyk, 2006). Furthermore, accounting for high uncertainty about the future has important implications on what discount rates to use, which makes a substantial difference in evaluating net gains from immediate versus delayed climate action (Weitzman, 1998(Weitzman, , 2007Nordhaus, 1994Nordhaus, , 2007Dasgupta, 2007;Stern, 2008;World Bank, 2009). In general, high uncertainty implies low rates of discount on future cost-benefit flows, particularly if one considers probable catastrophic outcomes (Pindyk, 2006;Dasgupta, 2008;Yohe and Tol, 2008).…”

Post-2012 climate policy dilemmas: a review of proposals

“…Global direct losses from so-called great floods have increased by a factor of 10 between the 1960s and the 1990s, but this increase is generally attributed to increasing habitation of vulnerable areas and wealth increases rather than to climate change (e.g., (Changnon 2003)). Finally more controversial adaptation policies are related to geo engineering options that aim at directly influencing atmospheric processes (Weitzman 2007).…”