Stern fights back against critics

The government’s chief economist, Sir Nicholas Stern, has been forced to defend his review of the economics of climate change against scientific and economic criticisms.

On its release in October, the Stern review made headlines around the world. It was endorsed by four Nobel prize winning economists and Prime Minister Tony Blair described it as the most important report his government had published (ENDS Report 382, pp 34-36 ).

But in the weeks that followed, the review came under attack, and not just by the usual climate change deniers: some respected climate economists and scientists also joined in.

The main criticisms boil down to the view that Sir Nicholas presented an overly pessimistic assessment of the impacts of climate change and inflated the costs of inaction while underestimating the costs of mitigation.

In February, he published three draft papers addressing these points,1,2,3 as well as appearing before two House of Commons select committees to defend his work.

A key point, said Sir Nicholas, is that his review used far more recent information on climate change than earlier studies.

It is notable that since the review’s publication, the Intergovernmental Panel on Climate Change’s scientific assessment has produced broadly similar conclusions on forecast temperature increases, impacts on precipitation and extreme events (see p 7 ).

One criticism was that the review included an assessment of the possible impacts of a 5°C temperature rise, a far higher increase than earlier studies considered. But three of the six IPCC scenarios, said Sir Nicholas, suggest at least a small chance that temperatures will rise to this level, while the highest emissions scenario projects a central rise of 4°C within a range of 2.4-6.4°C.

More importantly, these IPCC scenarios only stretch to 2100, while the Stern review looks at temperature for the next 200 years.

"I think it is extremely important we look beyond 2100 and ask what the eventual temperatures will be," he told the Treasury Committee.

Moreover, his review uses pre-industrial temperature levels as a baseline, so his forecast increases are automatically 0.7°C higher than the IPCC’s.

Another difference from previous studies is that the review focuses on the economics of risk and explicitly considered the possibility of rapid and catastrophic changes. However, "the economics of risk are not concerned just with the middle range, but with the risks we run from the higher ends of it," said Sir Nicholas. Other policy areas like defence, he pointed out, routinely spend large sums of money to protect against risks with low likelihoods but very damaging consequences.

Sir Nicholas’s use of a very low discount rate to value future impacts also came in for much criticism. But he insisted this was valid because climate change’s worst impacts will be felt many years in the future. "Pure time discounting, if you are talking about the future prospects and existence of the planet, is something that should be small," he told the Environmental Audit Committee.

Using a higher rate would effectively value a future life lower than one today. A discount rate of 3% would give people alive at the end of the century just one tenth of the ethical weight of those alive today. The review used a discount rate of 0.1%.

He also highlighted new research that, while employing a different economic model to the one used in his review, comes up with similar results for the costs of inaction.

He also defended the costs of mitigation included in the review, which estimated it would cost just 1% of GDP to keep atmospheric concentrations below 550ppm.

Some critics had argued that the true costs would be much higher and that Sir Nicholas was too optimistic about the rate of technological change.

But the 1% estimate was only a mid-point and the review made clear that actual costs could be 3% higher or lower than this. At the higher end, these are comparable with the figures touted by some of the more extreme critics.

But even so, Sir Nicholas stood by his original estimate. He pointed to new research from the International Energy Agency, published after the review, that closely matches his figures.

He also pointed out that energy costs amount to only about 3-4% of GDP so they would have to increase by at least 25% to reduce GDP by more than 1%. This is unlikely, he said, because energy efficiency and technology switches will keep costs far lower.

One area where he conceded ground was regarding claims that his estimates were based on assumptions that changes occur efficiently. Climate economist Richard Tol made the point that in the real world uncoordinated or poorly implementation of policies would dramatically increase costs.

Sir Nicholas accepted this point, but said it did not undermine his position. Instead, he said, it made a strong case for governments to put in place policy frameworks, like long-term price signals and research and development, to smooth the transition to a low-carbon economy.

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