Stern Review

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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:” [click to continue…]