11 Feb 2008 – A view on the Stern Review on the Economics of Climate Change

Commentary on the Stern Review
Oliver Bettis
11th February 2008
IntroductionThe Stern Review on the economics of climate change moved the debate forward. It rightly placed ethics at the centre of the discussion. However, it has been criticised by some because it went too far in its conclusions and by others because it did not go far enough. I would tend to agree with the second category.

You can read a discussion of criticism of the Stern report in the document below.

I read the executive summary of the Stern report when it was published in late 2006. I re-read it in January 2008. On first reading, somehow the risks didn’t quite seem real and I didn’t see any contradictions between the information in the review and the conclusions. Now, after another year of more alarming science and data, and more time for the reality of the situation to sink in, I have a different impression. The degree of risk from severe and irreversible warming, which is clearly spelled out in the review, feels much less remote.

I get a strong impression from a lot of commentators that deep down on an emotional level they don’t believe that the worst case scenarios are credible or they are so far away that we don’t need to worry too much yet. I imagine that that’s probably the position I was in during late 2006, although I had already read a substantial amount about the subject by that time. I have wondered why this should be so. One possible reason is that our perceptions of risk are just not very good for this type of issue (the availability heuristic, discussed elsewhere).

On re-reading the Stern Review summary, I simply don’t think that any reasonable reading of the information in the review can justify the conclusions. Looking at the enormous risks which are quite clearly spelled out, it seems as if Stern had already decided at the outset that the rich world should not take a significant cut in wealth and rich world growth should continue to be unrestrained. I asked a colleague of mine who works on our company ICA to read the review. He also could not understand how Stern can recommend such a high stabilization target for CO2. By aiming for a stabilization target of 500-550 ppm CO2 equivalent we expose ourselves to enormous risk.

On first re-reading my reaction was anger; that was the motivation for writing this commentary. How could Stern presume to judge on our behalf how much we would be prepared to spend to reduce risk of catastrophic warming? Surely that is a political decision for us all? However, on reflection I think that Stern probably said as much as he could, given that he is an economist and was employed by the government to comment on the economics of climate change. He did a good job of spelling out the risks and he moved the debate along. It is incredible that even up to late 2006 the issue of whether it is worthwhile spending a significant amount of money to reduce the risk from the problem had not been settled. I believe that it is now up to others, probably not economists, to draw their own conclusions and quickly move the debate much further.

Stern’s speech in the Yale Symposium in February 2007 shows that he clearly understands the risks from severe climate change. At the bottom of this section I briefly look at the Yale Symposium and re-print a couple of extracts which I think show that these economists do not properly understand the risk. In my other blog I refer to the Harvard based economist Martin Weitzman who suggests that a traditional economic cost-benefit analysis is not the right way to view the problem. Rather a catastrophe insurance view of spending money to avert the worst outcome is more appropriate.

Commentary on specific sections within the Stern Review long executive summary

Page References are to the long executive summary. Text in blue are quotes from the document, the black text are my comments.

Page v
It’s worth showing Figure 2 in full, it is shown at the top of the blog. The bottom section “Risk of rapid climate change and major irreversible impacts” starts at 1.5 degrees of warming. This figure clearly shows that the risk of positive feedbacks and irreversible catastrophic change is well understood.

Page vii
Second line. “Higher temperatures will increase the chance of triggering abrupt and large-scale changes.”

Page x
Fourth paragraph down. The possibility of amplifying positive feedbacks is specifically referred to. However, the estimate of the potential effect of this increased responsiveness is “…based on modelling a limited increase in this responsiveness…”. Why limited?
“…potential scale of the climate response could increase the cost of climate change on the BAU path from 5% to 7% of global consumption, or from 11% to 14% if the non-market impacts described above are included.” Surely the risk from the business as usual path has to be more or less 100% of global consumption? There appears to be an implicit assumption running throughout the review that our global civilization could not collapse.

Fifth paragraph down.
“Third, a disproportionate share of the climate-change burden falls on poor regions of the world. If we weight this unequal burden appropriately, the estimated global cost of climate change at 5-6°C warming could be more than one-quarter higher than without such weights.” Is it really meaningful to talk about the cost of climate change at 5-6 degrees of warming? We would probably be talking about the shattered remnants of humanity.

Page xi
Emissions have been, and continue to be, driven by economic growth; yet stabilisation of greenhouse-gas concentrations in the atmosphere is feasible and consistent with continued growth.

CO2 emissions per head have been strongly correlated with GDP per head. As a result, since 1850, North America and Europe have produced around 70% of all the CO2 emissions due to energy production, while developing countries have accounted for less than one quarter. …

…Stabilisation – at whatever level – requires that annual emissions be brought down to the level that balances the Earth’s natural capacity to remove greenhouse gases from the atmosphere. The longer emissions remain above this level, the higher the final stabilisation level. In the long term, annual global emissions will need to be reduced to below 5 GtCO2e, the level that the earth can absorb without adding to the concentration of GHGs in the atmosphere. This is more than 80% below the absolute level of current annual emissions.

So Stern says that we need a global cut of more than 80% and that in the past and currently, emission growth is driven by economic growth. Is it reasonable to then conclude that we should continue to grow rich world economies without restriction?

This Review has focused on the feasibility and costs of stabilisation of greenhouse gas concentrations in the atmosphere in the range of 450-550ppm CO2e.

Stabilising at or below 550ppm CO2e would require global emissions to peak in the next 10 – 20 years, and then fall at a rate of at least 1 – 3% per year. The range of paths is illustrated in Figure 3. By 2050, global emissions would need to be around 25% below current levels. These cuts will have to be made in the context of a world economy in 2050 that may be 3 – 4 times larger than today – so emissions per unit of GDP would need to be just one quarter of current levels by 2050.

To stabilise at 450ppm CO2e, without overshooting, global emissions would need to peak in the next 10 years and then fall at more than 5% per year, reaching 70% below current levels by 2050.[Three paragraphs above the figure is an 80% reduction below current levels. Need to check the reason for the difference.]

The British government have semi-officially adopted the upper end of Stern’s suggested CO2 stabilization target. In fact, even the lower end of 450 ppm equivalent entails taking on enormous risk. A strong argument could easily be made for the rich world taking on considerable short term financial pain to aim for a low stabilization target. I believe that the longer that one focuses on this problem and thinks about the risks, the more real they appear and the more appealing is the lower emissions target.

Page xv
Stabilisation at 450ppm CO2e is already almost out of reach, given that we are likely to reach this level within ten years and that there are real difficulties of making the sharp reductions required with current and foreseeable technologies. Costs rise significantly as mitigation efforts become more ambitious or sudden. Efforts to reduce emissions rapidly are likely to be very costly.

An important corollary is that there is a high price to delay. Delay in taking action on climate change would make it necessary to accept both more climate change and, eventually, higher mitigation costs. Weak action in the next 10-20 years would put stabilisation even at 550ppm CO2e beyond reach – and this level is already associated with significant risks.

Stabilization at 450ppm CO2e is out of reach if current policies are maintained. If sacrifices are made and the political will is there, perhaps it is still possible to reach this target, if we think it is worth paying the price?

Finally I skip back to page ii, as this is where he places his conclusion:

Page ii
From all of these perspectives, the evidence gathered by the Review leads to a simple conclusion: the benefits of strong, early action considerably outweigh the costs.” [No argument with that and it was a great step forward to hear that conclusion at that time.]

“The evidence shows that ignoring climate change will eventually damage economic growth. Our actions over the coming few decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century. And it will be difficult or impossible to reverse these changes. Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries. The earlier effective action is taken, the less costly it will be.”

This conclusion is purely an economic point of view – which is of course is to be expected and what was asked for in the remit for the review. It is interesting that the first sentence of the conclusion says that climate change will “…eventually damage economic growth.”. I believe that the focus on economic growth shows how growth has become a fetish.

Economic growth in the developing world means enough food, sanitation, housing, universal schooling, universal healthcare. All of these problems have been more or less solved in the rich world. Yet we continue to believe that maximizing economic growth is the correct policy. Surely risk reduction must now rank as more important than maximizing growth? An example – a moratorium on new coal fired power stations in the rich world might cause power shortages in the short term and constrain growth. But surely this is a price worth paying if it reduces the risk of ruin over a time horizon of a few decades.

Of course, a change in growth assumptions would cause large disruptions, many parts of the economy rely on the assumption of increasing consumption (pension values would of course take a huge hit, pension contributions would have to increase, the economy would have to be carefully steered to avoid collapse). However, during WW2 I imagine that the government was not overly concerned with whether GDP growth was 0% or 2% per year, providing the economy did not collapse and citizens had enough to eat. I imagine that they were more concerned with beating the enemy and ensuring the survival of civilization. I believe that is a more appropriate mindset for the world as it is now.

I believe that an objective reading of the Stern review makes it impossible to reconcile the conclusions with the body of the report. It appears that Stern had at the outset already decided that unconstrained economic growth in both rich and poor countries is such an important objective that it justifies taking huge risks with the climate (perhaps he wanted to go further in his conclusions but at the time he said the maximum that he thought he could get away with without causing a political storm).

I would like to be offered a choice between reduced wealth and accepting the risk of living in a world that is turning into a disaster zone! I believe that in 20 years time, perhaps a lot sooner, people will look back at this time and ask – why didn’t they think it was worth spending more money?

Yale Symposium on the Stern Review
Yale Center for the Study of Globalization
February 2007

Stern was asked to present his findings at Yale in early 2007. He made an opening address which showed that he clearly understands the real risk of catastrophic warming. This was followed by commentary by a series of eminent economists. I give two extracts here:

William Nordhaus, Yale University
Page 73
“Take the extreme-extreme-extreme case of the high-climate scenario with catastrophic and non-market impacts. For this case, the mean losses are less than 1% of world output in 2050 and around 3% in 2100.”. Nordhaus is taking these figures from the Stern review. I have not checked this against the Stern review itself. He then goes on to argue that the present value cost is much less than Stern estimates as Stern uses a discount rate that is too low. He is implicitly accepting the scenario presented i.e. 1% of world output lost by 2050 in an extreme scenario. He finishes his commentary by saying that the case for urgent action is not yet proven. Surely after a close reading of the review the only way to reach that conclusion is to grossly misunderstand the scale of risk?

Commentary by William Cline, Peterson Institute for International Economics
Page 83
“I would argue that if the time horizon is to be extended to infinity, there should not only be more explicit attention to lower damages after 2300 because of partial reversal of global warming, but also that it is important to apply a somewhat higher elasticity of marginal utility than the value of unity used in the Review. All this being said, I would note that with the recent work by Meinshausen and others suggesting that even 2.5°C global warming would be likely to cause dissolution of the Greenland ice sheet and sea level rise of 7 meters on a time scale of 1,000 years, and in view of recent concerns that this melting could occur faster than previously thought, it may indeed make sense to extend the horizon to at least a few hundred years beyond my 300 year horizon – as long as this is done with a somewhat higher elasticity of marginal utility than used in the Stern Review in combination with the near zero rate of pure time preference.” [My emphasis].
When discussing a long term change that would result in sea level rise of 7 meters, I think that a discussion of “marginal utility” and “pure time preference” sounds somewhat ludicrous. The planet would be altered beyond recognition. Even if the world could adapt fully, quickly enough to save lives and maintain our standard of living, we would lose all coastal cities and many land areas. Are we prepared for that eventuality and would we accept it as a price worth paying to maintain our standard of living? I think that these sorts of changes are so beyond our imagination that on some deep level, we don’t really believe they could happen. The comment illustrates the extent to which the economists picture the debate purely in money terms. But of course there are many other aspects to the problem (e.g. loss of political stability, loss of heritage and history, destruction of the natural world). For those of us in the rich world, where our immediate economic needs are met, does it make any sense to put so much importance on increasing wealth?

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