Stern Review


The Stern Review on the Economics of Climate Change is a 700-page independent review released for the Government of the United Kingdom on 30 October 2006 by economist Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and also chair of the Centre for Climate Change Economics and Policy at Leeds University and LSE. The report discusses the effect of global warming on the world economy. Although not the first economic report on climate change, it is significant as the largest and most widely known and discussed report of its kind.
The Review states that climate change is the greatest and widest-ranging market failure ever seen, presenting a unique challenge for economics. The Review provides prescriptions including environmental taxes to minimise the economic and social disruptions. The Stern Review's main conclusion is that the benefits of strong, early action on climate change far outweigh the costs of not acting. The Review points to the potential impacts of climate change on water resources, food production, health, and the environment. According to the Review, without action, the overall costs of climate change will be equivalent to losing at least 5% of global gross domestic product each year, now and forever. Including a wider range of risks and impacts could increase this to 20% of GDP or more, also indefinitely. Stern believes that 5–6 degrees of temperature increase is "a real possibility".
The Review proposes that one per cent of global GDP per annum is required to be invested to avoid the worst effects of climate change. In June 2008, Stern increased the estimate for the annual cost of achieving stabilisation between 500 and 550 ppm CO2e to 2% of GDP to account for faster than expected climate change.
There has been a mixed reaction to the Stern Review from economists. Several economists have been critical of the Review, for example, a paper by Byatt et al. describes the Review as "deeply flawed".
Some economists have supported the Review. Others have criticised aspects of Review's analysis, but argued that some of its conclusions might still be justified based on other grounds, e.g., see papers by Martin Weitzman and Dieter Helm.

Summary of the Review's main conclusions

The executive summary states:
  • The benefits of strong, early action on climate change outweigh the costs.
  • The scientific evidence points to increasing risks of serious, irreversible impacts from climate change associated with business-as-usual paths for emissions.
  • Climate change threatens the basic elements of life for people around the world—access to water, food production, health, and use of land and the environment.
  • The impacts of climate change are not evenly distributed—the poorest countries and people will suffer earliest and most. And if and when the damages appear it will be too late to reverse the process. Thus we are forced to look a long way ahead.
  • Climate change may initially have small positive effects for a few developed countries, but it is likely to be very damaging for the much higher temperature increases expected by mid-to-late century under BAU scenarios.
  • Integrated assessment modelling provides a tool for estimating the total impact on the economy; our estimates suggest that this is likely to be higher than previously suggested.
  • Emissions have been, and continue to be, driven by economic growth; yet stabilisation of greenhouse gas concentration in the atmosphere is feasible and consistent with continued growth.
  • "Central estimates of the annual costs of achieving stabilisation between 500 and 550ppm CO2e are around 1% of global GDP, if we start to take strong action now. It would already be very difficult and costly to aim to stabilise at 450ppm CO2e. If we delay, the opportunity to stabilise at 500–550ppm CO2e may slip away."
  • The transition to a low-carbon economy will bring challenges for competitiveness but also opportunities for growth. Policies to support the development of a range of low-carbon and high-efficiency technologies are required urgently.
  • Establishing a carbon price, through tax, trading or regulation, is an essential foundation for climate change policy. Creating a broadly similar carbon price signal around the world, and using carbon finance to accelerate action in developing countries, are urgent priorities for international co-operation.
  • Adaptation policy is crucial for dealing with the unavoidable impacts of climate change, but it has been under-emphasised in many countries.
  • An effective response to climate change will depend on creating the conditions for international collective action.
  • There is still time to avoid the worst impacts of climate change if strong collective action starts now.

    Background

On 19 July 2005 the Chancellor of the Exchequer, Gordon Brown announced that he had asked Sir Nicholas Stern to lead a major review of the economics of climate change, to understand more comprehensively the nature of the economic challenges and how they can be met, in the UK and globally. The Stern Review was prepared by a team of economists at HM Treasury; independent academics were involved as consultants only. The scientific content of the Review was reviewed by experts from the Walker Institute.
The Stern review was not released for regular peer-review, since the UK Government doesn't undertake peer review on commissioned reviews. Papers were published and presentations held, that outlined the approach in the months preceding the release.

Positive critical response

The Stern Review attracted positive attention from several sectors. Pia Hansen, a European Commission Spokeswoman, said doing nothing is not an option, "we must act now". Simon Retallack of the UK think tank IPPR said "This removes the last refuge of the 'do-nothing' approach on climate change, particularly in the US." Tom Delay of The Carbon Trust said "The Review offers a huge business opportunity." Richard Lambert, Director General of the Confederation of British Industry, said that a global system of carbon trading is "urgently needed". Charlie Kronick of Greenpeace said "Now the government must act and, among other things, invest in efficient decentralised power stations and tackle the growth of aviation."
Asset managers F&C look to the business opportunities and say "this is an unprecedented opportunity to generate real value for our clients". Brendan Barber, General Secretary of the Trades Union Congress, was optimistic about the opportunities for industry to meet demands created by investment in technology to combat climate change. The Prince of Wales' Corporate Leaders Group on Climate Change, formed by 14 of UK's leading companies shared this hope. Chairman of Shell UK, James Smith, expressed the hope of the group that business and Government would discuss how Britain could obtain "first mover advantage" in what he described as "massive new global market".
On 1 November 2006, Australian Prime Minister John Howard responded by announcing that A$60 million would be allotted to projects to help cut greenhouse gas emissions while reiterating that Australia would not ratify the Kyoto Protocol. Much of this funding was directed at the non-renewable coal industry.
British Prime Minister, Tony Blair, stated that the Review demonstrated that scientific evidence of global warming was "overwhelming" and its consequences "disastrous" if the world failed to act. The UK Treasury, which commissioned the report, simultaneously published a document of favourable comments on the Review. Those quoted include:
Several academic economists are also quoted praising the Review.

Negative critical response

The Stern Review has received various critical responses. Some economists have argued that the Review overestimates the present value of the costs of climate change, and underestimates the costs of emission reduction. Other critics have argued that the economic cost of the proposals put forward by Stern would be severe, or that the scientific consensus view on global warming, on which Stern relied, is incorrect. By contrast, some argue that the Review emission reduction targets are too weak, and that the climate change damage estimates in the Review are too small.

General criticisms

In an article in the Daily Telegraph, Ruth Lea, Director of the Centre for Policy Studies, questions the scientific consensus on climate change on which the Stern Review is based. She says that "authorities on climate science say that the climate system is far too complex for modest reductions in one of the thousands of factors involved in climate change to have a predictable effect in magnitude, or even direction." Lea questions the long-term economic projections made in the Review, commenting that economic forecasts for just two or three years ahead are usually wrong. Lea goes on to describe the problem of drawing conclusions from combining scientific and economic models as "monumentally complex", and doubts whether the international co-operation on climate change, as argued for in the Review, is really possible. In conclusion, Lea says that the real motive behind the Review is to justify increased tax on fuels.
Yohe and Tol described Lea's article as a climate sceptics "scattershot approach" aiming to confuse the public by questioning the causal role of, by emphasising the complexity of making economic predictions and by attributing a motive for Stern's conclusions.
Miles Templeman, Director-General of the Institute of Directors, said: "Without countries like the US, China or India, making decisive commitments, UK competitiveness will undoubtedly suffer if we act alone. This would be bad for business, bad for the economy and ultimately bad for our climate."
Prof. Bill McGuire of Benfield UCL Hazard Research Centre said that Stern may have greatly underestimated the effects of global warming. David Brown and Leo Peskett of the Overseas Development Institute, a UK think-tank on international development, argued that the key proposals in relation to how to use forests to tackle climate change may prove difficult to implement:
Soon after publication of the Stern Review, former Chancellor of the Exchequer Nigel Lawson gave a lecture at the Centre for Policy Studies, briefly criticising the Review and warning of what he called "eco-fundamentalism". In 2008, Lawson gave evidence before the House of Commons Treasury Select committee, criticising the Review.
Environmental writer Bjørn Lomborg criticised the Stern Review in OpinionJournal:
Reason magazine's science correspondent Ronald Bailey describes the "destructive character" of the Stern Review's policy proposals, saying that "Surely it is reasonable to argue that if one wants to help future generations deal with climate change, the best policies would be those that encouraged economic growth. This would endow future generations with the wealth and superior technologies that could be used to handle whatever comes at them including climate change. So hurrying the process of switching from carbon-based fuels along by boosting energy costs means that humanity will have to delay buying other good things such as clean water, better sanitation, more and better food, and more education."
Commenting on the Review's suggested increases in environmental tax, the British Chambers of Commerce have pointed to the dangers to business of additional taxation.
Jerry Taylor of the Cato Institute, a United States libertarian think-tank, criticised Stern's conclusion, taking a calculation by himself:
In the BBC radio programme The Investigation, a number of economists and scientists argued that Stern assumptions in the Review are far more pessimistic than those made by most experts in the field, and that the Review's conclusions are at odds with the mainstream view.
In his paper on the Jevons' Paradox, which states that improvements in energy-efficiency of technologies can potentially increase greenhouse gas emission, Steve Sorrel concludes with "A prerequisite for all the above is a recognition that rebound effects matter and need to be taken seriously. Something is surely amiss when such in-depth and comprehensive studies as the Stern review overlook this topic altogether." This criticism was rejected by the authors. They noted that by recommending a comprehensive global carbon price the Stern Review proposed the most powerful mechanism for staunching the rebound effect. A carbon price imposes a wedge between the supply price received by producers and demand price paid by consumers thereby prompting substitution away from carbon-intensive activities. This insures that the substitution effect offsets the income effect.
In contrast to those who argued that the Stern Review was too pessimistic or , others argued that it did not go far enough. John Bellamy Foster, Brett Clark and Richard York in The Ecological Rift'' give considerable attention to the Stern Review, noting that the targets of 550 ppm imply a global temperature increase of at least 3 °C "well beyond what climate science consider dangerous, and which would bring the earth's average global temperature to a height last seen in the middle Pliocene around 3 million years ago". They posit that the basis for such high targets is "economics, pure and simple", that is, stronger emissions cuts were seen by the Stern Review authors as "prohibitive, destabilizing capitalism itself". "All of this signals that any reduction in CO2 equivalent emissions beyond around 1 per cent per year would make it virtually impossible to maintain strong economic growth—the bottom line of the capitalism economy. Consequently, in order to keep the treadmill of accumulation going the world needs to risk environmental Armageddon".