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The Stern Review on the Economics of Climate Change.--

There is a new report on global warming done by the reputable economist Nicholas Stern. The Stern Review's conclusion (tip to Instapundit and TCS):

Using the results from formal economic models, the Review estimates that if we don't act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more.

In contrast, the costs of action — reducing greenhouse gas emissions to avoid the worst impacts of climate change — can be limited to around 1% of global GDP each year."

Bjorn Lomborg dissects the Stern Review at Opinion Journal (tip to Tim Blair):

The report on climate change by Nicholas Stern and the U.K. government has sparked publicity and scary headlines around the world. Much attention has been devoted to Mr. Stern's core argument that the price of inaction would be extraordinary and the cost of action modest.

Unfortunately, this claim falls apart when one actually reads the 700-page tome. Despite using many good references, the Stern Review on the Economics of Climate Change is selective and its conclusion flawed. Its fear-mongering arguments have been sensationalized, which is ultimately only likely to make the world worse off. . . .

Mr. Stern sees increasing hurricane damage in the U.S. as a powerful argument for carbon controls. However, hurricane damage is increasing predominantly because there are more people with more goods to be damaged, settling in ever more risky habitats. Even if global warming does significantly increase the power of hurricanes, it is estimated that 95% to 98% of the increased damage will be due to demographics. The review acknowledges that simple initiatives like bracing and securing roof trusses and walls can cheaply reduce damage by more than 80%; yet its policy recommendations on expensive carbon reductions promise to cut the damages by 1% to 2% at best. That is a bad deal. . . .

The most well-recognized climate economist in the world is probably Yale University's William Nordhaus, whose "approach is perhaps closest in spirit to ours," according to the Stern review. Mr. Nordhaus finds that the social cost of CO2 is $2.50 per ton. Mr. Stern, however, uses a figure of $85 per ton. Picking a rate even higher than the official U.K. estimates--that have themselves been criticized for being over the top--speaks volumes. . . .

But nowhere is the imbalance clearer than in Mr. Stern's central argument about the costs and benefits of action on climate change. The review tells us that we should make significant cuts in carbon emissions to stabilize the concentration of atmospheric carbon dioxide at 550 ppm (parts per million). Yet such a stark recommendation is not matched by an explicit explanation of what this would mean in terms of temperature.

The U.N. Climate Panel estimates that stabilizing at 550 ppm would mean an increase in temperature of about 2.3 degrees Celsius in the year 2100. This might be several degrees below what would otherwise happen, but it might also be higher. Mr. Nordhaus estimates that the stabilization policy would reduce the rise in temperature from 2.53 degrees Celsius to just 2.42 degrees Celsius. One can understand the reluctance of the Stern review to advertise such a puny effect.

Most economists were surprised by Mr. Stern's large economic estimates of damage from global warming. Mr. Nordhaus's model, for example, anticipates 3% will be wiped off global GDP if nothing is done over the coming century, taking into account the risk for catastrophes. The Stern review purports to show that the cost is "larger than many earlier studies suggested." . . .

Faced with such alarmist suggestions, spending just 1% of GDP or $450 billion each year to cut carbon emissions seems on the surface like a sound investment. In fact, it is one of the least attractive options. Spending just a fraction of this figure--$75 billion--the U.N. estimates that we could solve all the world's major basic problems. We could give everyone clean drinking water, sanitation, basic health care and education right now. Is that not better?

We know from economic models that dealing just with malaria could provide economic boosts to the order of 1% extra GDP growth per capita per year. Even making a very conservative estimate that solving all the major basic issues would induce just 2% extra growth, 100 years from now each individual in the developing world would be more than 700% richer. That truly trivializes Mr. Stern's 10% to 13% estimates for South Asia and Sub-Saharan Africa.

You should read both the executive summary of the Stern Report and Lomborg's review.

I did find one part of Lomborg's critique unrealistically sanguine. Lomborg accepts the UN's estimated cost of providing even the most "basic" health care to the world, $75 billion, which strikes me as awfully low: How could $12 a year per person per year pay for basic health care, education, and clean drinking water where it is not now provided?

Overall, I will never understand why the very real problem of global warming turns otherwise sensible people into fear-mongers.

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More on the "Stern Review":

The Stern Review is not getting favorable reviews from environmental economists. A sample:

  • John Whitehead of the Environmental Economics blog analyzes the report here, here, and here;

  • Prometheus has posted commentary by Richard Tol here; and

  • Roger Pielke Jr. notes the report cherry-picks data on hurricanes here.

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Nordhaus on the "Stern Review":

Publication of the Stern Review on the Economics of Climate Change appears to have had a significant impact on the climate policy debate. Yet there has been significant criticism of some of the report's assumptions and conclusions (as I noted here).

Among the more recent critiques is this assessment by Yale's William Nordhaus (link via Prometheus). Nordaus notes that the Stern Review reached significantly different conclusions from most prior economic assessments, particularly with regard to the optimal rate and timing of emission reductions. Nordhaus concludes in his "summary verdict" of the Review:

The radical revision of the economics of climate change proposed by the Review does not arise from any new economics, science, or modeling. Rather, it depends decisively on the assumption of a near-zero social discount rate. The Review’s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of discounting assumptions that are consistent with today’s market place. So the central questions about global-warming policy – how much, how fast, and how costly – remain open. The Review informs but does not answer these fundamental questions.
For a more sympathetic assessment of the Stern Review, see this CT post.

UPDATE: See also Richard Tol's comments on Nordhaus and Stern here.

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Taylor and Van Doren on Intergenerational Equity:

Responding to the Stern Review, Jerry Taylor and Peter Van Doren of the Cato Institute argue that adopting measures to stabilize greenhouse gas emissions is not (yet) a good deal for us or future generations.

Not to be flip about it, but why should the relatively poor (us) sacrifice for the relatively rich (our children and grandchildren)? The Stern Report argues that the emissions cuts necessary to stave off disaster will likely cost about 1 percent of global GDP every single year, or about $1,154 in current dollars per household in the United States. A small price to pay, we're told, when GDP losses will likely total 5-10 percent of global GDP every year if we do absolutely nothing.

But even with a 10% reduction in GDP relative to what it would have been, 100 years from now, people will still be extraordinarily well off by current standards. For example, since 1950 real U.S. GDP per capita has increased by about 2% a year. Given that growth rate, real GDP per capita one hundred years hence would be $321,684, or more than 7 times higher than it is at present ($44,403). If global warming cuts GDP by 10% a year beginning about 50 years from now, then GDP per capita will be $289,515 in 2106 rather than $321,684.

Would anyone, let alone liberals, ever propose a 1% tax on those who make $44,000 to create benefits for those who make $289,000? In short, paying now to head off warming is a regressive intergenerational tax that takes from the poor and gives to the rich.

Nobel laureate economist Thomas Schelling has often made a similar point, arguing that intergenerational equity need to account for the likelihood that future generations (particularly in the developing world) are likely to be significantly wealthier than current generations.

Meanwhile, the European Union's industry commissioner, Günter Verheugen, is warning his colleagues that the EU's "environmental leadership could significantly undermine the international competitiveness of part of Europe’s energy-intensive industries and worsen global environmental performance by redirecting production to parts of the world with lower environmental standards."

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"Worst of Both Worlds":

Robert Samuelson joins the ranks of those unimpressed with the analysis presented by the Stern Review.

Stern's headlined conclusions are intellectual fictions. They're essentially fabrications to justify an aggressive anti-global-warming agenda. The danger of that is we'd end up with the worst of both worlds: a program that harms the economy without much cutting of greenhouse gases.

Let me throw some messy realities onto Stern's tidy picture. In the global-warming debate, there's a big gap between public rhetoric (which verges on hysteria) and public behavior (which indicates indifference). People say they're worried but don't act that way.

Even many nations that signed on to binding targets under the Kyoto Protocol have failed to make signficiant progress in curtailing their emissions. Samuelson offers three reasons for this:

1) "With today's technologies, we don't know how to cut greenhouse gases in politically and economically acceptable ways."

2) "In rich democracies, policies that might curb greenhouse gases require politicians and the public to act in exceptionally "enlightened" (read: "unrealistic") ways."

3) "Even if rich countries cut emissions, it won't make much difference unless poor countries do likewise—and so far, they've refused because that might jeopardize their economic growth and poverty-reduction efforts."

What then are we to do? Samuelson calls for "more candor" and a greater focus on technology.

Unless we develop cost-effective technologies that break the link between carbon-dioxide emissions and energy use, we can't do much. Anyone serious about global warming must focus on technology—and not just assume it. Otherwise, our practical choices are all bad: costly mandates and controls that harm the economy; or costly mandates and controls that barely affect greenhouse gases. Or, possibly, both.

The problem of generating enough energy to meet the world's future energy needs in an environmentally acceptable manner is a real problem. And, as Ron Bailey points out, one that will not be easily solved. One thing we should resist, however, is a naive faith that government mandarins can guide our way to a "clean" energy future. The history of federal efforts to spur technological advance is totally uninspiring. As Bailey concludes:

history teaches us to scrap the Apollo Project model for technology R&D. Federal bureaucrats are simply not smart enough to pick winning energy technologies. Instead, eliminate all energy subsidies, set a price for carbon, and then let tens of thousands of energy researchers and entrepreneurs develop and test various new technologies in the market. No one knows now how humanity will fuel the 21st century, but Apollo and Manhattan Project-style Federal energy research projects will prove to be a huge waste of time, money and talent.

The problem with this, however, is that there are sizable constituencies for Apollo-style federal spending programs, and a much smaller constituency for sound public policy.

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BBC Finds Stern Report Wanting:

BBC Radio 4 conducted an investigation of the Stern Review on the Economics of Climate Change, and came away unimpressed. While the Stern Review received signficiant press attention, it did not receive serious journalistic scrutiny. As the BBC report summarizes:

The report may have been loved by the politicians and headline writers but when climate scientists and environmental economists read the 670-page review, many said there were serious flaws.

These critics are not climate change sceptics, but researchers with years of experience who believe that human-induced climate change is real and that we need to act now.

Among those who are unimpressed is noted Carnegie Mellon environmental economist Richard Tol, whose work is cited extensively within the Stern Review:

"If a student of mine were to hand in this report as a Masters thesis, perhaps if I were in a good mood I would give him a 'D' for diligence; but more likely I would give him an 'F' for fail.

"There is a whole range of very basic economics mistakes that somebody who claims to be a Professor of Economics simply should not make," he told The Investigation on BBC Radio 4. . . .

"Stern consistently picks the most pessimistic for every choice that one can make. He overestimates through cherry-picking, he double counts particularly the risks and he underestimates what development and adaptation will do to impacts," he said.

Another critic of the Stern Review cited by the BBC is Yale's Robert Mendelsohn, who has written a brief yet fairly thorough critique of the report available here. While much of the debate over the Stern Review has focused on Stern's approach to disconting, Mendelsohn (like Tol) shows that the report's failings are much deeper. Among other things, Stern makes embeds many unrealistic or unfounded assumptions into his analysis that skew his results. The BBC story also reports that many of Stern's premises and claims are not supported by the work of the Intergovernmental Panel on Climate Change (IPCC).

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