Download David Maddison - University of Birmingham

Comments on the
Stern Review
David Maddison
University of Birmingham
The Stern Review
• The 575 page Stern Review on the
Economics of Climate Change was
published on the 30th October
• The Review was embraced by political
leaders of all the main parties but shortly
afterwards criticised by several leading
economists
What does it say?
• Impact of climate change equivalent to a
5-20% cut in consumption now and forever
• Recommends stabilising atmospheric
concentrations at 550ppm CO2 equivalent
• Marginal damage costs equal to $314/tC
• Emissions can be stabilised at 1% of GDP
Why the big difference?
• Did earlier economic analyses neglected
important aspects?
• Has the underlying scientific / economic
literature has moved on?
• Does the Stern Review contains errors /
points of contention?
For the avoidance of doubt
• My critique deals with chapters 4 to 13
• Some of my criticisms would point to
greater action than that recommended by
Stern
• There have been several postscripts since
the Stern Review was released
• My own thinking on the Stern Review has
also evolved through time
Damage costs
• Uncertainty and risk aversion are at the
heart of Stern’s analysis and climate
assumptions are updated
• The Review uses the PAGE2002
Integrated Assessment Model to calculate
damage costs
• Use of the A2 emissions scenario is
unexplained
Damage costs
• Assumed damage cost estimates for
catastrophic impacts
• Damage cost estimates are all pre 2001
• The Review appears to favour the use of
equity weights without reminding the
reader about arguments against their use
Potentially misleading?
• Stern says: “The most severe climate
impacts… reduce consumption to such
low levels” and “Climate change causes a
reduction in consumption of 5-20% now
and forever” (italics added)
• The most severe climate impacts involve a
reduction in global GDP per capita of
35.2% by 2200 but according to Stern
GDP per capita will still be 8 times higher
Abatement costs
• Abatement cost estimates based on
consensus estimates
• Have the external costs of renewable
energy been everywhere included?
• Argues in favour of energy efficiency as a
means to reduce emissions
• Assumes that halting tropical deforestation
entails an opportunity cost
Optimal control
• Stern acknowledges the role of benefit
cost analysis
• Does not locate the optimal control only a
strategy for which the benefits outweigh
the costs
• Accounts for uncertainty but fails to
acknowledge the impact that future
learning has on near term decisions
Discounting the future
• There are two reasons for discounting in
economics:
– Pure time impatience
– Declining marginal utility combined with
assumed economic growth
• Previous economic analyses assumed a
constant discount rate for evaluating
projects to slow climate change
Discounting the future
• Stern ignores impatience resulting in a low
discount rate and treats economic growth
as endogenous
• The chosen discount rate does not appear
to rationalise current economic behaviour
• Stern’s choice of a single discount rate
reduces what is essentially an ethical
decision to a pure economic parameter
Conclusions
• The most important thing about the Stern
Review was that it was commissioned in
the first place
• The Review would have benefited from
more extensive independent peer review
• It is possible to believe that climate
change is a serious threat and yet not
wholly subscribe to the economics of the
Stern Review