A Stern Review of the Stern Review Richard S.J. Tol Economic and - PowerPoint PPT Presentation

A Stern Review of the Stern Review Richard S.J. Tol Economic and Social Research Institute Hamburg, Vrije and Carnegie Mellon Universities

Agreement • Climate change is real and caused by humans • Climate change is a problem • Economics can shed light on climate policy • Greenhouse gas emission reduction should start now • Greenhouse gas emission reduction is best implement with market-based instruments • Stern is commended for putting this on the public and political agenda

Disagreement • Estimates of the costs of climate change • Estimates of the costs of emission reduction • Optimal targets for emission reduction • Stern is right for the wrong reasons – is this the best way of starting a public debate on the economics of climate policy?

Consensus • Being alone does not make you wrong, but it should make you think – David Pearce • Stern has been praised by the admirably fast readers Solow, Mirrlees, Sen, Stiglitz • Stern has been criticised by Connelly, Helm, Hulme, Maddison, Mendelsohn, Nordhaus, Yohe, and by Dasgupta, Henderson, Varian, Weitzman • Stern’s response to the criticism has been particularly vague

The Stern Review • The Stern Review was commissioned by Gordon Brown and Tony Blair, perhaps in response to the critique of the House of Lords on the lack of economic analysis on UK climate policy • There are 23 authors on the Stern Review, 50 or more consultants supported the review, and numerous experts attended workshops • About 15 months of preparation • 575 pages, 36 background papers • Costs in excess of £2 million (estimate, no information on Treasury website)

The Stern Review -2 • The Stern Review is badly documented, impossible to reproduce • Some of this was repaired later, including several postscripts that undermine the headline conclusions and occasionally add more confusion • One peer has admitted to having reviewed the Stern Review, and noted that his comments were not taken on board • The Stern Review was circulated among the press before shown to experts on the economics of climate change • Doesn’t HM Treasury have quality -control?

The Stern Review -3 • The Stern Review is a literature survey – there are no new data, no new models, no new analysis • Yet, the Stern Review is completely out of step with the literature – and does not even alert the reader to this

Is the Stern Review an outlier? 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 0 50 100 150 200 250 300 350 400 dollar per tonne of carbon

A Reconstruction • Three regions: poor, middle, rich • Income convergence • Population grows from 6 to 9 billion • Warming (2100) 2.3 / 3.1 / 4.5 K with probability 0.15 / 0.70 / 0.15 • Impact 5.6 / 3.3 / 1.0 %GDP for 3K warming for poor / middle / rich • Impact quadratic in temperature • Very similar to PAGE2002 / SRES A2

Welfare measures • Certainty- and equity-equivalent annuity 2200     ln (1 ) (1 ) y t       i t , i p m r t , , 2000   2200      ln y (1 ) (1 ) t       j i t , i t j , , j l m h , , i p m r t , , 2000    • CEEA calibrated to 5.3% • BGE dominated by scenario, BGE = -179.4% • The postscript to the postscript to the Stern Review says they compute Δ BGE • Δ BGE = CEEA iff log util, implies scenario independence

6 50 45 5 40 35 CEEA (% GDP) CEEA (% GDP) 4 30 25 3 20 2 15 10 1 5 0 0 2050 2100 2200 2300 2400 2500 3000 5000 12000 7 0.01 0.1 1 3 6 6 Horizon (yr) PRTP (%/yr) 5 5 CEEA (% GDP) CEEA (% GDP) 4 4 3 3 2 2 1 1 0 0 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 957 750 700 650 600 550 500 450 400 6 6 CRRA (-) Ambient CO2 in 2200 (ppmv) 5 5 CEEA (% GDP) CEEA (% GDP) 4 4 3 3 2 2 1 1 0 0 0.0 0.5 1.0 1.5 2.0 Constant Falling Inequity aversion (-) Vulnerability (% GDP/3K)

Summary • The Stern Review did not compute what it said it did, and it used a particularly bad approximation • A different set of ethical parameters – perhaps easier to defend, certainly more in line with the data – would have let to lower estimates • Stern‘s benefit estimates were off by 30% • Internally consistent scenario decreases estimates by 60%

Emission Reduction • Two papers support the Stern Review, but the main report ignores Terry Barker‘s meta-analysis, and adopts Dennis Anderson‘s cost estimates instead • Terry Barker gets the economics wrong, in subtle and complicated ways • Dennis Anderson‘s work: – Stops at 2050 – Suboptimal trajectory – No economic feedback – No capital stock turnover

Cost-Benefit Analysis • The Stern Review emphasizes the uncertainties about climate change, but ignores those about emission reduction • Inconsistent time horizons – recall that the impacts to 2050 are 1% of GDP, equal to the costs of abatement • The Stern Review presents a cost-benefit analysis with two discrete alternatives: – Do nothing – Existing UK policy • The range of policies is much wider

Cost-Benefit Analysis -2 • Stern does a CBA with two alternatives: – Do nothing – Existing UK policy • Stern endorses the latter, even though his estimates of the costs of emission reduction are lower, and his estimates of the benefits are much higher than previous UK studies • Stern resigned after UK climate policy did not change • The EU has higher costs and lower benefits, but a stricter target • I do not pretend to understand any of this

Conclusion • The Stern Review put the economics of climate change on the public agenda • The Stern Review made a range of procedural and technical errors • The Stern Review made peculiar ethical assumptions • The quantitative results are fragile and do not stand up to scrutiny, but the qualitative insights are robust – Stern was wrong but right • HM Treasury hit a new low in quality • An economic case for emission reduction now can be made – but the Stern Review missed the chance to make it

St Nicholas Rebuking the Storm Bicci di Lorenzo, 1433 Ashmolean Museum, Oxford