A Stern Review ofthe Stern Review

Richard S.J. TolEconomic and Social Research

InstituteHamburg, Vrije and Carnegie

Mellon Universities

Agreement• Climate change is real and caused by

humans• Climate change is a problem• Economics can shed light on climate policy• Greenhouse gas emission reduction should

start now• Greenhouse gas emission reduction is best

implement with market-based instruments

• Stern is commended for putting this on the public and political agenda

Disagreement• Estimates of the costs of climate change• Estimates of the costs of emission

reduction• Optimal targets for emission reduction

• Stern is right for the wrong reasons – is this the best way of starting a public debate on the economics of climate policy?

Consensus• Being alone does not make you wrong,

but it should make you think – David Pearce

• Stern has been praised by the admirably fast readers Solow, Mirrlees, Sen, Stiglitz

• Stern has been criticised by Connelly, Helm, Hulme, Maddison, Mendelsohn, Nordhaus, Yohe, and by Dasgupta, Henderson, Varian, Weitzman

• Stern’s response to the criticism has been particularly vague

The Stern Review• The Stern Review was commissioned by

Gordon Brown and Tony Blair, perhaps in response to the critique of the House of Lords on the lack of economic analysis on UK climate policy

• There are 23 authors on the Stern Review, 50 or more consultants supported the review, and numerous experts attended workshops

• About 15 months of preparation• 575 pages, 36 background papers• Costs in excess of £2 million (estimate,

no information on Treasury website)

The Stern Review -2• The Stern Review is badly documented,

impossible to reproduce• Some of this was repaired later, including

several postscripts that undermine the headline conclusions and occasionally add more confusion

• One peer has admitted to having reviewed the Stern Review, and noted that his comments were not taken on board

• The Stern Review was circulated among the press before shown to experts on the economics of climate change

• Doesn’t HM Treasury have quality-control?

The Stern Review -3• The Stern Review is a literature survey –

there are no new data, no new models, no new analysis

• Yet, the Stern Review is completely out of step with the literature – and does not even alert the reader to this

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Is the Stern Review an outlier?

A Reconstruction• Three regions: poor, middle, rich• Income convergence• Population grows from 6 to 9 billion• Warming (2100) 2.3 / 3.1 / 4.5 K

with probability 0.15 / 0.70 / 0.15• Impact 5.6 / 3.3 / 1.0 %GDP for 3K

warming for poor / middle / rich• Impact quadratic in temperature• Very similar to PAGE2002 / SRES

A2

Welfare measures• Certainty- and equity-equivalent annuity

• CEEA calibrated to 5.3%• BGE dominated by scenario, BGE = -179.4%• The postscript to the postscript to the Stern

Review says they compute ΔBGE • ΔBGE = CEEA iff log util, implies scenario

independence

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Summary• The Stern Review did not compute what

it said it did, and it used a particularly bad approximation

• A different set of ethical parameters – perhaps easier to defend, certainly more in line with the data – would have let to lower estimates

• Stern‘s benefit estimates were off by 30%

• Internally consistent scenario decreases estimates by 60%

Emission Reduction• Two papers support the Stern Review, but

the main report ignores Terry Barker‘s meta-analysis, and adopts Dennis Anderson‘s cost estimates instead

• Terry Barker gets the economics wrong, in subtle and complicated ways

• Dennis Anderson‘s work:– Stops at 2050– Suboptimal trajectory– No economic feedback– No capital stock turnover

Cost-Benefit Analysis• The Stern Review emphasizes the

uncertainties about climate change, but ignores those about emission reduction

• Inconsistent time horizons – recall that the impacts to 2050 are 1% of GDP, equal to the costs of abatement

• The Stern Review presents a cost-benefit analysis with two discrete alternatives:– Do nothing– Existing UK policy

• The range of policies is much wider

Cost-Benefit Analysis -2• Stern does a CBA with two alternatives:

– Do nothing– Existing UK policy

• Stern endorses the latter, even though his estimates of the costs of emission reduction are lower, and his estimates of the benefits are much higher than previous UK studies

• Stern resigned after UK climate policy did not change

• The EU has higher costs and lower benefits, but a stricter target

• I do not pretend to understand any of this

Conclusion• The Stern Review put the economics of

climate change on the public agenda• The Stern Review made a range of

procedural and technical errors• The Stern Review made peculiar ethical

assumptions• The quantitative results are fragile and

do not stand up to scrutiny, but the qualitative insights are robust – Stern was wrong but right

• HM Treasury hit a new low in quality• An economic case for emission

reduction now can be made – but the Stern Review missed the chance to make it

St Nicholas Rebuking the StormBicci di Lorenzo, 1433

Ashmolean Museum, Oxford