Stern Review

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Stern Review

Introduction

The Stern Review on the Economics of Climate Change is a report commissioned by the government of the United Kingdom and written by British economist Nicholas Stern (1946–). The 700-page Stern Review was controversial since before its release in October 2006. It has been praised by many economists and climate experts as an authoritative review of the costs of climate change and mitigation, but attacked by others as exaggerated and politicized. Opinion among economists seems to have been roughly divided between approval and scorn.

The Stern Review predicts that climate change, if not mitigated, will eventually severely damage world economic growth, causing disruptions that by the end of the twenty-first century could be comparable to those of the world wars and Great Depression of the twentieth century. Criticism and support of the Stern Review have tended to be divided along political lines, with conservatives and libertarians attacking the report and liberals or progressives defending it. The report's critics and supporters include experts in economics, climate-change policy, and climate science.

Historical Background and Scientific Foundations

Nicholas Stern holds a PhD in economics from Oxford University. After a career as a university professor of

economics, he became chief economist and special counselor to the president of the European Bank for Reconstruction and Development from 1994 to 1999. From 2002 to 2003, he was chief economist of the World Bank. Starting in 2003, he was head of the Economic Service of the British Government. In July 2005, he was ordered to review the economic consequences of climate change, an assignment that resulted in the Stern Review

WORDS TO KNOW

CAP AND TRADE: The practice, in pollution-control or climate-mitigation schemes, of mandating an upper limit or cap for the total amount of some substance to be emitted (e.g., CO₂) and hen assigning allowances or credits to polluters that correspond to fixed shares of the total amount. These allowances or credits can then be bought and sold by polluters, in theory allowing emission cuts to be bought where they are most economically rational.

CARBON PRICING: Assignment of a market price to carbon credits on some emissions trading market, such as the Chicago Climate Exchange or European Union Emissions Trading Scheme.

CARBON SEQUESTRATION: The uptake and storage of carbon. Trees and plants, for example, absorb carbon dioxide, release the oxygen, and store the carbon. Fossil fuels were at one time biomass and continue to store the carbon until burned.

CARBON SINKS: Carbon reservoirs such as forests or oceans that take in and store more carbon (carbon sequestration) than they release. Carbon sinks can serve to partially offset greenhouse-gas emissions.

DEFORESTATION: Those practices or processes that result in the change of forested lands to non-forest uses. This is often cited as one of the major causes of the enhanced greenhouse effect for two reasons: 1) the burning or decomposition of the wood releases carbon dioxide; and 2) trees that once removed carbon dioxide from the atmosphere in the process of photosynthesis are no longer present and contributing to carbon storage.

DISCOUNTING: The practice, in economics, of assigning lower value to the well-being of future generations than to that of the present one. A controversial aspect of efforts to calculate the social cost of carbon.

ECONOMIC MODEL: Mathematical representation of economic processes. Computerized economic models may be used to simulate the response of an economy to various changes or perturbations (e.g., discovery or exhaustion of a primary energy source).

GREENHOUSE GASES: Gases that cause Earth to retain more thermal energy by absorbing infrared light emitted by Earth's surface. The most important greenhouse gases are water vapor, carbon dioxide, methane, nitrous oxide, and various artificial chemicals such as chlorofluorocarbons. All but the latter are naturally occurring, but human activity over the last several centuries has significantly increased the amounts of carbon dioxide, methane, and nitrous oxide in Earth's atmosphere, causing global warming and global climate change.

INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE (IPCC): Panel of scientists established by the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP) in 1988 to assess the science, technology, and socioeconomic information needed to understand the risk of human-induced climate change.

Based on scientific predictions of climate change and on techniques from the field of economics for forecasting economic growth, the Stern Review reaches a number of conclusions, including the following:

If a business-as-usual economic path is taken, with only slight efforts made to abate emissions of greenhouse gases, there will be severe and irreversible impacts from climate change. In a business-as-usual scenario, greenhouse-gas concentrations in the atmosphere could more than triple by 2100, making it likely that global warming over pre-industrial times would exceed 9°F(5°C). This, according to the Review, would “take humans into unknown territory.”
Damages from climate change will threaten the basic elements of human life worldwide, including food, water, and health; they will accelerate as climate change proceeds, rather than slowing down or leveling off; and they will fall most heavily on the poorer countries, where most of the world's people live. Besides lacking the money and technical resources to adapt to many of the projected effects of climate change, the world's developing countries are already at a geographic disadvantage, being located in warmer areas and having more variable rainfall.
In high-latitude countries such as Canada, Russia, and the Scandinavian nations, climate change up to 5.4°F(3°C) may lead to net economic benefits through higher agricultural output, lower heating costs, and fewer deaths due to cold. Effects from unabated climate change, namely 5.4–7.2°F(3–4°C) and higher, are likely to be negative, possibly severely so, even for these nations.
Analysis of the economics of climate change cannot be done on a purely technical, by-the-numbers basis. The possible effects of climate change are severe; we do not, Stern writes, “have the kind of information that would enable formally attaching numbers to all consequences, weighting them, and adding them all up with any plausibility.” Economists who ignore ethical considerations and rely on narrow numerical measures of income like gross domestic product (GDP) “throw away much that is of fundamental importance to a balanced judgment.” Defenders of the Stern Review have argued that most economic models assume that natural capital and money can be substituted for each other, but this assumption is invalid when critical natural capital, that is, natural systems essential to life such as air and water, are degraded or destroyed.
Growth in greenhouse-gas emissions has historically been driven by economic growth: the more economic activity there is, the more greenhouse gases are emitted. However, the Review argues that greenhouse-gas concentrations in the atmosphere could be stabilized without significantly slowing economic growth. In agreement with the 2007 Assessment Report of the United Nations' Inter-governmental Panel on Climate Change (IPCC), the Review accepts that stabilization will only occur when annual emissions are 80% below current (early 2000s) emissions. At this reduced emissions level, about 5.5 billion tons (5 billion metric tons) of CO₂ equivalent per year, Earth's carbon sinks would be able to absorb CO₂ as fast as human society produced it. To stabilize atmospheric CO₂ at no more than 450–550 parts per million, which would probably restrict global warming to no more than 5.4°F(3°C), would require that global emissions peak within the next 10 years and then fall at over 5% per year, reaching 70% below current levels by 2050.
Achieving such rapid cuts in emissions would cost at most about 1% of global GDP per year. This is the central claim of the Stern Review, its bottom line. Costs would be incurred by reducing demand for emissions-intensive goods and services, using lower-carbon energy technologies, and reducing non-energy emissions such as those from deforestation. Increasing efficiency would, to a large extent, both mitigate greenhouse emissions and save money, playing the role of a negative cost (as the IPCC has also emphasized).
Government policies to reduce greenhouse emissions should include carbon pricing. Carbon pricing is the imposition by government of a cost or tax for the emission of carbon dioxide (CO₂). For example, since 1991 the government of Norway has charged companies a tax of about US$50 for each metric ton of CO₂ emitted. The goal of carbon pricing is to make the social cost of carbon—the harm it does to people—visible in the marketplace as a monetary cost. Otherwise, the harm done by carbon, distributed around the world and postponed to the future, does not appear on company balance sheets and there is no monetary motive to reduce emissions. As a result of Norway's carbon tax, the large Norwegian oil company Statoil was motivated to build the world's largest carbon sequestration project to date, injecting 1.1 million tons (1 million metric tons) of CO₂ per year into water-saturated rock beneath the sea floor rather than releasing it to the atmosphere. Another form of carbon pricing is cap-and-trade schemes, where governments such as the European Union (EU), which has established an EU Emissions Trading Scheme, set a mandatory limit for total emissions and allots shares of that total to separate industries. Individual companies are allowed to buy and sell their shares of the total; as long as the cap is obeyed, such schemes do not try to control where the emissions occur. Alternatively, governments may simply regulate emissions above a certain level. Mileage requirements for automobiles are an example of direct regulation.
Government policies to reduce greenhouse emissions should include technology policies that support the deployment of low-carbon, high-efficiency technologies on an “urgent timescale.” Technology policy is the deliberate encouragement of certain technologies, bringing them to wide deployment earlier than market forces alone would do.
Government policies to reduce greenhouse emissions should include removing barriers to behavioral change. Such barriers include lack of reliable information (ignorance) and high up-front costs for technologies that save money and emissions in the long run. Information programs can address ignorance, and high up-front costs can be eased with government financing schemes.
There is still time, if we take strong, collective action starting now, to avoid the worst effects of climate change. Taking action will cost money, but these costs will be outweighed by the benefits. Failing to take action could reduce global GDP by 5% to 20% by 2100—a decrease that, especially with increased population, translates into increased misery and higher death rates for billions of people.

Impacts and Issues

The Stern Review has been widely praised and criticized. Two issues have been raised most frequently by its critics, namely: 1) the severity of climate-change predictions used in the Review's calculations; and 2) its choice of low discount rates. Critics charge that Stern selected the most alarming results from the range of scientific predictions of how climate change might affect society.

“For water, agriculture, health and insurance,” says economist Richard Tol of Princeton University, “the Stern Review consistently selects the most pessimistic study in the literature.”

Defenders of the report argue that given the global and irrevocable nature of the worst harms that climate science now points to as possible, it is ethically necessary to plan for a relatively extreme case. If we plan for what seems now like a most-likely case and the outcome turns out to be worse, there can be no going back and trying again.

Discount rates, the main sticking point with the Review's critics, are mathematical terms that allow economists to treat future economic transactions as less important than present ones. Discounting, that is, treating future transactions as less valuable, has an ethical dimension because it presumes that the well-being of future persons is less important or has less ethical weight than that of present-day persons. In Stern's words, “applying a 2% pure time discounting rate …gives half the ethical weight to someone born in 2008 relatively to someone born in 1973.”

Because it used low discount rates, Stern's analysis was tilted toward the conclusion that money should be spent in the near future to prevent later harms, since the long-term harms (measured in monetary terms) were set on more nearly equal terms against the near-term expenses.

The Stern Review's central claim that stabilizing atmospheric greenhouse gases below 550 parts per million CO₂ equivalent would cost 1% of global GDP per year can be compared to the conclusion of the IPCC. In a report released in early 2007, the IPCC said that stabilizing atmospheric greenhouse gases between 445 and 710 parts per million CO₂ equivalent would require the expenditure of at most 3% of the world's economic output or might even increase global GDP slightly. Stern's estimate falls within the range of uncertainty specified by the IPCC.

BIBLIOGRAPHY

Books

Metz, B., et al, eds. Climate Change 2007: Mitigation of Climate Change: Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press, 2007.

Weart, Spencer. The Discovery of Global Warming. Cambridge, MA: Harvard University Press, 2004.

Periodicals

Dietz, Simon, et al. “Some Economics of ‘Dangerous’ Climate Change: Reflections on the Stern Review.” Global Environmental Change 17 (2007): 311–325. Giles, Jim. “How Much Will It Cost to Save the World?” Nature 444 (2006): 6–7.

Nordhaus, William. “Critical Assumptions in the Stern Review on Climate Change.” Science 317 (2007): 201–202.

Stern, Nicholas, and Chris Taylor. “Climate Change: Risk, Ethics, and the Stern Review.” Science 317 (2007): 203–204.

Web Sites

Cox, Simon, and Richard Vadon. “Running the Rule Over Stern's Numbers.” BBC News, January 26, 2007. <http://news.bbc.co.uk/1/hi/sci/tech/6295021.stm> (accessed November 6, 2007).

Stern, Nicholas. “Stern Review on the Economics of Climate Change.” HM Treasury, October 2006. <http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/ stern_review_report.cfm> (accessed November 6, 2007)

Larry Gilman

Climate Change: In Context