Stern Review Not Fit to Guide U.K. Climate Policy, Report Finds

by Marlo Lewis on September 4, 2012

in Features

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The Global Warming Policy Foundation (GWPF) has just published The Failings of the Stern Review of the Economics of Climate Change. The  2006 Stern Review — named for Sir Nicholas Stern, head of the UK Government’s Economic Service under Prime Minister Tony Blair — is arguably the most pessimistic official assessment ever of the economic damages of global warming. The Stern Review famously argued that the “costs of inaction” on climate change hugely outweigh the costs of greenhouse gas mitigation, claiming 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.”

Influenced by the Stern Review, the UK Government adopted a set of climate policies that cost £17,000 per household, according to the GWPF report, prepared by the Rt. Hon. Peter Lilley MP. Since the UK’s total annual carbon dioxide (CO2) emissions are less than the increase in China’s CO2 emissions in a single year, the UK Government’s climate program is all pain for no gain. It is time for the UK Government to review the Stern Review, Lilley contends.

The GWPF report is 100 pages long, but there is a helpful executive summary and a hard-hitting foreword by leading climate economist Richard Toll. The following excerpts from Toll’s contribution should be sufficient to entice even the most jaded climate wonk to read the report:

The publication of the Stern Review of the Economics of Climate Change was a PR exercise that was unprecedented in economics. Sir Nicholas, now Lord Stern, was portrayed as an expert even though he had never published before on the economics of energy, environment or climate.

Honest policy analysts show results for a range of alternative discount rates. The Stern Review uses a single discount rate. It corresponds to an extreme position in the literature and it deviates from the official discount rate of HM Treasury. Nick Stern is, of course, free to use whatever discount rate he wants in his private life. Professor Sir Partha Dasgupta of Cambridge University has found that Stern should save 97.5% of his income, were Stern to follow the advice in the Stern Review. Taking such an extreme position in public policy is odd.

Most economic studies conclude that it is best to start with modest emission reduction, and accelerate the stringency of climate policy over time. For that, public policy will need to pull into the same direction over 20 or more electoral cycles. If the case for climate policy is exaggerated, the backlash will come, sooner or later. The Stern Review was a tactical masterstroke, but it will likely prove to be a strategic blunder. Its academic value is zero.

In a related post, Lilley provides a condensed summary of his report. “Stern,” he writes, “reaches conclusions far removed from those of most environmental economists by combining statistical sophistry and verbal virtuosity. For example:”

  • Comparing a part with the whole. Stern compares the benefit of preventing global warming entirely with the cost of avoiding part of potential global warming by preventing carbon emissions exceeding twice their pre-industrial level.
  • Describing future centuries as “now”. Stern claims global warming will cut GDP by least 5 per cent “now and forever”. Yet even on his worst projection, the cumulative losses from global warming over this century are below the costs of mitigation.
  • Inconsistent discounting of costs and benefits. Stern discounts benefits of curbing emissions at an ultra-low rate (not revealed in his 700-page report). But he effectively uses the normal market rate to discount the cost of decarbonising the economy — the return forgone on alternative investments. So his estimated cost of avoiding climate change is understated relative to the benefits by between 2 1/2 and five times.
  • Strange ethics. Stern condemns those who reject his low discount rate as “unethical” and “lacking concern for future generations” as if global warming threatens humanity with extinction or immiseration. Such a fate is an implausible consequence of a few degrees of warming, costly though that could be, given that mankind flourishes in latitudes whose average temperatures differ by 20C and seasonal extremes vary by 80C. Even in Stern’s worst case, people in 2200 will be seven times richer than today if we do nothing to curb emissions. Why should our generation, not least developing countries (the main source of emissions growth), make sacrifices to make future generations richer still?
  • Cherry-picking unreliable studies. A World Bank study shows that Stern’s forecasts of storm damage to infrastructure, based on non-peer-reviewed and alarmist literature, are up to 100 times too large.
  • Ignoring adaptation. He cites a study showing a 4C rise could cut yields of one crop variety by 70 per cent but assumes farmers will not switch to another variety whose yields would actually increase — a fact he withholds.
  • In short, Stern selected and manipulated evidence to back a policy — creating policy-based evidence when what we need is evidence-based policy.

 

Manicbeancounter September 9, 2012 at 11:00 am

The problem I find with the report, is the same as many found with Keynes’s General Theory. It is too complex and obscure. (Also many economists were in the same position as – to disagree then meant you were against stopping unemployment, whereas to disagree with Stern in 2006 meant you were against saving the planet)

In an unfinished project, I have tried to simplify Stern’s basic idea into a simple diagram along the lines of Alfred Marshall’s supply and demand curves. I replace the P & Q axis with “cost” and “temperature change”. I replace the S & D curves with “Climate change costs” and “Policy Costs” curve. The optimum response is to minimize the combined costs. According to Stern, this lay at constraining CO2 to around 550ppm.

http://manicbeancounter.com/2011/02/11/climate-change-policy-in-perspective-%E2%80%93-part-1-of-4/
Like with most of these diagrams in economics, you can consider various different scenarios, and look at the consequences of allowing for uncertainties, discount rates, speed of climate change, along with new information. On the policy costs, the impact of a small country acting alone, or globally having ineffective policies can be demonstrated.

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