The Stern Review on Climate Change: Inconvenient Sensitivities

Abstract

Nicholas Stern's Review of “The Economics of Climate Change” (2007) triggered considerable discussion, essentially by condensing a complex problem – the question of how to act in the face of global warming – into juxtaposing two numbers, the cost of mitigation and the cost of climate change. The Review concludes that mitigation today is economically superior to adaptation tomorrow. The review was widely criticized for the assumption of a pure rate of time preference of almost zero, on which its conclusions seemed to depend. In this paper we argue first, that this assumption discriminates against current in favour of future generations. Second, we perform a sensitivity analysis to test for the extent to which the conclusions of the Review are indeed based on the assumption of a rate of time preference of almost zero. We demonstrate that the conclusions of the Review are no longer valid as soon as parameter values are used which are standard in economic analysis. Combined, these results raise a bigger question: how wise is it to base crucial policy choices on a model so dependent on a single, deeply subjective, judgement call?

Keywords

Climate Change Stern Review Sensitivity Analysis

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14.

And not, as stated in the Summary of Conclusions “at least 5% of global GDP” (Stern 2007, p. xv) – an endless source of errors in news reports about the Review.

15.

The mitigation cost calculation is incomplete. It shows how to cut emissions by 25% from 2005 to 2050. It does not show how to cut emissions by 50% by 2100, as required by the emission trajectory targeted in the Review.

16.

The Review uses a discount rate of 0.1, to allow for the minute probability of a catastrophic event, leading to extinction of the human race.

17.

The second key variable, the cost of mitigation, is calculated on a year-by-year basis and therefore is not affected by changes in the discount rate. Moreover, as discussed in footnote 4, the Review does not provide sufficient information to scrutinize this variable, because it does not provide sufficient information to sum its values over time.

18.

Recall that the only reason the Review allows for time discounting at all, i.e. for a rate larger than zero, is to capture the probability of a “meteorite colliding with the planet”, i.e. of a catastrophic event ( Stern 2007, p.53, and 2009, p.83)

19.

A point also made by Dasgupta (2006), see below.

20.

The decision not to estimate economic damages 200 years from now does in itself reveal preferences with regard to the appropriate rate of time preference. At a rate of time preference as low as 0.1%, consumption of generations 200 years from now would still provide substantial utility today – with a weight of approximately 80%!

21.

Unfortunately, the analysis in the Review does not extend to the values of rate of time preference of 3–4%, which are standard in economics. The Review's analysis stops at.

22.

Stern (2007) p. 262 Table 9.3 footnote (a)

23.

Stern (2007) p.184

24.

Stern (2007) p. 183 footnote 36

25.

Stern (2007) p. 183 Box 6.3