Transcript Richard Tol

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
dollar per tonne of carbon
300
350
400
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
 
i  p ,m ,r t 2000

j l ,m ,h
j
ln  yi ,t (1   )  (1   ) t 
2200
  
i  p ,m ,r t 2000

ln yi ,t (1  i ,t , j ) (1   ) t
• CEEA calibrated to 5.3%
• BGE dominated by scenario, BGE = -179.4%
• The postscript to the postscript to the
Stern Review says they compute ΔBGE
• ΔBGE = CEEA iff log util, implies scenario
independence
6
CEEA (% GDP)
CEEA (% GDP)
5
4
3
2
1
0
0.01
7
0.1
6
PRTP (%/yr)
4
3
2
0
1.25
1.50
1.75
2.00
2.25
2.50
6
CRRA (-)
5
CEEA (% GDP)
5
4
3
2
0
Inequity aversion (-)
1.5
2.0
700
650
600
550
500
Ambient CO2 in 2200 (ppmv)
2
0
1.0
750
3
1
0.5
957
4
1
0.0
Horizon (yr)
2
0
1.00
2200 2300 2400 2500 3000 5000 12000
3
1
0.75
2100
4
1
0.50
2050
5
5
6
CEEA (% GDP)
3
CEEA (% GDP)
CEEA (% GDP)
6
1
50
45
40
35
30
25
20
15
10
5
0
Constant
Vulnerability (% GDP/3K)
Falling
450
400
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