Download TOL/Yohe

The criticism of the
Stern Review
Disagree with some issue
Hannu Vehniäinen
Michael Schmidthaler
The Economics of Climate Change
Table of Contents
• Introduction
• Tol/Yohe article
– Agreement
– Disagreement
• Nordhaus article
– Agreement
– Disagreement
• Other opinions
• Personal thoughts
• Conclusion
Summer 2008
Economics of Climate Change
2
Agreement with the Review
Tol/Yohe
Summer 2008
• There is an economic case for climate policy
• The cost of any climate policy increases
with delay
• The prospects of large costs in the future
justify actions now
Economics of Climate Change
3
Disagreement with the Review
Tol/Yohe
Summer 2008
• No new estimates of impacts and costs
• Very low discount rate
• Low estimates for the cost of climate
change policy
• The cost and benefit estimates do not match
Stern’s policy conclusions.
• No need for suspect valuations
• Credibility problem
Economics of Climate Change
4
No new estimates
Tol/Yohe
Summer 2008
• Stern Review reviews existing material.
• Why are numbers so far outside the range of
the previous published literature?
• Range of benefit-cost estimates from 0,09
(0.3%of GDP/3,5%of GDP) to infinity (Zero
abatement costs)
• Impacts are counted up to 2200, but cost
estimates stop in 2050
Economics of Climate Change
5
No new estimates
Tol/Yohe
• The figures of the Stern review rely on previous
studies, yet yield different expectations on costs
and benefits
Source: TOL, R.,S.,J; YOHE, G.,W., 2006
Summer 2008
Economics of Climate Change
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High valuation of climate change
impacts is due to 3 factors
Tol/Yohe
Summer 2008
• Low discount rate
• Double counted risk
• Vulnerability constant over very long periods
of time
Economics of Climate Change
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Low discount rate
Tol/Yohe
Summer 2008
• High valuation of climate change impacts
• Low discount rates produce high discounted
damages
• In this case it is chosen so low that 40% to
50% of calculated damages come from the
“residual”, i.e. costs that occur beyond the
modeled timeframe of 200 years.
Economics of Climate Change
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Tol/Yohe
Low estimates for the cost of
climate change policy
• Shortened time horizon over which they are
calculated
• Omission of the economic repercussions of
dearer energy,
• Ignoring the capital invested in the energy
sector.
Summer 2008
Economics of Climate Change
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Low estimates for the cost of
climate change policy
Tol/Yohe
• Stern underplays the uncertainty in
emission reduction costs
• Stern also emphasizes uncertainties
concerning the damages of climate change
• Using Dennis Anderson‘s result is far more
optimistic than most of the other studies
•  1%GDP loss (Stern) vs. 2,2% (EMF21)
Summer 2008
Economics of Climate Change
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Tol/Yohe
Low estimates for the cost of
climate change policy
• Anderson‘s Analysis lacks the possible
effects of higher energy prices, which will
reduce energy demand w/o climate policies.
(overestimating the costs)
• Does not include the impacts on economic
growth (underestimating)
• Not include impacts on capital stock turnover
(major factor in emission reduction)
Summer 2008
Economics of Climate Change
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Tol/Yohe
Cost-benefit estimates do not match
the review‘s policy conclusions
• Stern does not conduct a proper optimization
exercise
• If the impacts of climate change are as
dramatic and if the costs of emission
reduction are as small as reported, then a
more stringent concentration target should
have been proposed.
Summer 2008
Economics of Climate Change
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Tol/Yohe
Cost-benefit estimates do not match
the review‘s policy conclusions
• Stern overestimates the impacts of climate
change real benefits of reduction are lower
• Stern sets reductions goals to low (550ppm
CO2e)
• Previous studies/policies have higher
standards
• UK has already set a 550ppm policy in 2000
Summer 2008
Economics of Climate Change
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Tol/Yohe
Cost-benefit estimates do not match
the review‘s policy conclusions
• The review does not conduct a solid benefitcost analysis, but comparse C-B only for one
specific target (the all-present 550ppm level)
• Stern should compare MC to MB, rather than
Total Costs to Total Benefits
• Anderson‘s falling MAC are contrary to most of
the EMF21 findings (Stern: sub-optimal)
• MDC are very hight in comparison to other
studies
Summer 2008
Economics of Climate Change
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Tol/Yohe
Cost-benefit estimates do not match
the review‘s policy conclusions
• MDC are very high in comparison to other
studies
Source: TOL, R.,S.,J; YOHE, G.,W., 2006
Summer 2008
Economics of Climate Change
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Tol/Yohe
Cost-benefit estimates do not match
the review‘s policy conclusions
• Reasons why Stern did not recommend a more
stringend policy (inconsistency):
– sub-optimal benefit cost analysis
– questionable decline in MAC
– rising of MDC
Summer 2008
Economics of Climate Change
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No need for suspect valuations
Tol/Yohe
• A strong case for emission reduction even
in the near term can be made without relying
on suspect valuations and inappropriate
summing across the multiple sources of
climate risk.
• Doing nothing in the short term is not
advisable even on economic grounds.
Summer 2008
Economics of Climate Change
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Credibility problem
Tol/Yohe
Summer 2008
• Alarmism supported by dubious economics
born of the Stern Review may further
polarize the climate policy debate.
• Economic estimates are vulnerable to
criticism, but climate risks are evident
• More chaos generated instead of focusing
on the review‘s core messages
Economics of Climate Change
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Additional flaws of the report
Tol/Yohe
Summer 2008
• The impacts of climate change on
agricultural productivity (esp. Africa)
• Economic development is estimated to high.
E.g. Africa shows only minor signs of
convergence. (Agriculture has to increase)
• Diseases as consequence of climate change
are no problem in developed countries.
(which Stern predicts)
Economics of Climate Change
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Additional flaws of the report
Tol/Yohe
Summer 2008
• Estimates of catastrophic events are
extrapolated from other studies without
recognizing the outcomes of less
pessimistic studies
• Poverty projections ignore differences in
spatial and income classes
• Generally: Stern uses the most pessimistic
study in the literature for water, agriculture
and health
Economics of Climate Change
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Criticism of the used methodology
Tol/Yohe
Summer 2008
• The PAGE2002 IAM model is not sufficient to
provide robustness and diversity
• The model assumes no connection b/w
vulnerability and economic development.
• Reproducibility of the underlying
calculations and assumptions is not
provided. (crucial for any scientific
standard)
Economics of Climate Change
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Criticism of the used methodology
Tol/Yohe
Summer 2008
• Double counting of certain parameters leads
to higher estimates of the impacts
• Model implies “no-learning” behavior
(neither about the climate system itself nor
about impacts of climate change)
Economics of Climate Change
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Action now?
Tol/Yohe
Summer 2008
• Stern (as well as others): proves the need for
action in order to limit the likelihood of
crossing a certain temperature threshold
• Policy problem: applying a scarcity rent to the
current emissions
• Delay CANNOT BE a least cost approach
Economics of Climate Change
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Action now?
Tol/Yohe
• Little debate on the necessity of action, but
on the way of conducting emission
reductions
• Various studies propose different actions
– Immediate emission reductions
– R&D on carbon-neutral technology
– Institutional development
Summer 2008
Economics of Climate Change
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Policy implication of the Review
Tol/Yohe
Summer 2008
• Stern‘s problem of rather confusing, instead of
convincing arguments
• Should focus on the schematic portrait of
climate risks instead of economic estimates
• Credibility problem is caused by contradictory
messages accross the review
Economics of Climate Change
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Tol‘s integrated approach
Costless mitigation with a global welfare function
Source: David Anthoff1, Richard S.J. Tol
Summer 2008
Economics of Climate Change
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Tol‘s integrated approach
Costless mitigation with a regional welfare function
Source: David Anthoff1, Richard S.J. Tol
Summer 2008
Economics of Climate Change
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Conclusions TOL/YOHE
Tol/Yohe
Summer 2008
• Stopping or slowing climate change require
deep emission cuts everywhere
• Time horizon: 50-100+ years
• Stern‘s review misses an opportunity of
having greater impact in order to mitigate
climate change
Economics of Climate Change
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Nordhaus article
• The author of the article, William Nordhaus,
is the Sterling Professor of Economics at
Yale University
• This article is the most well-known criticism
against Stern review
• How much and how fast should we react to
the threat of global warming?
Summer 2008
Economics of Climate Change
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Background
Nordhaus
article
Summer 2008
• Stern Review is ordered by British
Government
• Stern Review is above all political document
• results of Stern Review are dramatically
different comparing to earlier economic
models that use the same basic data and
analytical structure
Economics of Climate Change
30
Agreement
Nordhaus
article
Summer 2008
• Nordhaus admits that climate change is a
major issue
• Something have to be done
• Stern review links both economic and
environmental issues
Economics of Climate Change
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Disagreement
• Discount rate
• Uncertainity of future
• political of scientific report?
Summer 2008
Economics of Climate Change
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Discount rate
• Stern assumes the economic growth rate of
1,3 %
• discount rate of 0,1 %
• the real interest rate is 1,4 %
• Consumption elasticity γ = 1
• discount rate have a large impact when
counting net present values
• Nordhaus uses term ”near-zero discount
rate”
Summer 2008
Economics of Climate Change
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Discount rate
• the social reasoning for discount rate is
largely irrelevant
• are the generations equivalent with each
other?
• Review does not consider alternative
approaches to critical reasoning of discount
rate
Summer 2008
Economics of Climate Change
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Example of discount rate
• present value of €1000 after 100 years with
variable interest rates
Summer 2008
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Discount rate
• Stern motivates the discount rate of 0,1 %,
cause there are no reason for set different
generations to different situation
• How willing we are to make sacrifices for
future’s generations?
Summer 2008
Economics of Climate Change
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Discount rate
• consumption per capita is now
approximately $10 000
• in the year 2200 the amount is $130 000 (by
1,3 % growth of output)
• how much we should reduce your
consumption?
Summer 2008
Economics of Climate Change
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Example
Summer 2008
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Discount rate
• Stern says that with the 1 % sacrifice from
GDP we will avoid the 5 % damage in GDP
• In that example with Stern’s numbers it’s
cool
• but if the interest rate is bigger?
• that’s the main point in criticism of Stern
review
Summer 2008
Economics of Climate Change
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Discount rate
• this is a cost-benefit issue
• the criticism does not critize the policy
against climate change but the the timeline
of the acts
Summer 2008
Economics of Climate Change
40
Discount rate
• Nordhaus suggest different policy against
climate change
– first we should invest in technology and human
capital
– later deeper emission cuts
• ”Stern review’s approach is inefficient,
because it invests too much in low yield
abatement strategies too early.”
Summer 2008
Economics of Climate Change
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Uncertainity of future
• Nordhaus does not recommend sharp
sacrifices now, cause the future is uncertain
– think about the world 200 years ago
• as said he emphasize investing in
technology
Summer 2008
Economics of Climate Change
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Nordhaus’ DICE-model
• Dynamic Integrated model of Climate and
Economy
• Nordhaus try to find optimal climate policy
• DICE calculate capital investment and GHGreductions that maximize a social welfare
function
– discount rate 1,5 %
– consumption elasticity 2
Summer 2008
Economics of Climate Change
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DICE-model
• analytical structure is similar to that in the
Stern Review
• Nordhaus makes three runs to find the
optimal policy
– DICE-2007 model
– Stern review (near-zero discount rate)
– near-zero discount and recalibrated consumption
elasticity
Summer 2008
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Results
• Run 1
– optimal carbon price
• in the year 2015 $35 per ton C
• in 2050 $85 per ton C
• in 2100 $206 per ton C
– social cost of carbon
• in 2015 also $35 per ton C
– optimal rate of emission cuts
• 14 % in the year 2015
• 25 % in 2050
• 43 % in 2100
– this leads to 2.3 degrees temperature increase
from 1900 to 2100
Summer 2008
Economics of Climate Change
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Results
• Nordhaus counted run 2 with the same
assumptions, but different discount rate
• Review estimates that the current social
cost of carbon is $350 per ton C
– optimal carbon price
• in the year 2015 $360 per ton C
– optimal rate of emission cuts
• 53 % in the year 2015
• real returns are too low and savings rates
too high compared to market data
Summer 2008
Economics of Climate Change
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Results
• Run 3
– optimal carbon price
• in the year 2015 $36 per ton C
– why it looks so similar even though discount rate
is so small?
– Ramsey’s rule
Summer 2008
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Results
Summer 2008
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Conclusion about the results
• there are many perspectives to view the
future costs and benefits policies to slow
global warming
• these figures illustrate that it is not only the
discount rate which determines the carbon
tax
– but the combination of the discount rate and
consumtion elasticity work through the rate of
return on capital
Summer 2008
Economics of Climate Change
49
Political of scientific report?
• Gordon Brown ”ordered” the report about
the economical effects of climate change
• there are no rules about government reports
produced by scientists
• review is not a standard academic analysis
• it was published without peer review
• written pretty rapidly
Summer 2008
Economics of Climate Change
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Conclusion
• Harry Truman: ”Economists would always
say, on the one hand this and on the other
hand that.”
• Stern review really gives clear answers
• Nordhaus find that the conclusions of the
Stern review will not survive with more
consistent assumptions
Summer 2008
Economics of Climate Change
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Other Opinions
• Most economists (Solow, Stiglitz, Wolfowitz,
et.al) support the conduct and findings of
the Stern Review
• Especially after the 4th Assessment report
of the IPCC was published, scientific
evidence is clearly favoring Stern‘s
conclusions
• Some methodological drawbacks are
challenged by various economists
Summer 2008
Economics of Climate Change
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Other Opinions
“When the history of the world's response to
climate change is written, the Stern Review will
be recognized as a turning point.
Sir Nicholas and his team have provided important
intellectual leadership as humanity engages
with its greatest challenge.
While the details will be debated, the main thrust
of the report is clear and compelling — the
expected benefits of tackling climate change far
outweigh the expected costs.”
• Cameron Hepburn Oxford University
Summer 2008
Economics of Climate Change
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Personal Opinion
• Stern provides a well-written state-of-the-art
review on the most pressing issues
• Disagreement of means of approach, ethics
and conduct, rather than methodological
flaws
– The global distribution of temperature increase
which is not considered appropriately (“equity
weight”)
– Ethic concerns: distant from real-worldconsequences and sterile (political, social and
human consequences)
Summer 2008
Economics of Climate Change
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Questions
1. Which are the main flaws of the Stern review
that Nordhaus mentions?
Summer 2008
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Questions
2. How does Nordhaus argue in favour of his
opinion of the optimal GHG emission cut
policy?
Summer 2008
Economics of Climate Change
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Questions
3. What's the politic/science dilemma of the
Stern Review?
Summer 2008
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57
Questions
4. Does the critic diminish the conclusions of
Stern Review? (your personal opinion?)
Summer 2008
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Questions
5. What kind of other critic have you heard
from the media? Is that critic
valid? (Not only concerning the Stern
Review but the entire Climate Change
debate)
Summer 2008
Economics of Climate Change
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Questions
6. Tol and Yohe mention the credibility problem
that is caused by using biased parameters
in Stern’s calculations of impacts and costs.
What are these? Can you propose other
possibilities?
Summer 2008
Economics of Climate Change
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Questions
7. How is it possible that Stern apparently
suggests a less stringent policy mix than
other studies using some of the same
research results? Is there an advantage to
that (i.e. not having too ambiguous goals
that are possible to reach)?
Summer 2008
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Questions
8. What do you think about the review in
general? Is the critique appropriate? Do you
have any thoughts about that issue? - meant
to be a question for all of you who have
a) strong arguments PRO or CON
b) not been heard sufficiently throughout the
class
c) not been awarded enough grade points
during this class…. and who want some!
Summer 2008
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