A Review of the Stern Review on the Economics of Climate Change

“Brad DeLong, in a short blog entry (DeLong 2006), points out this flaw in the DasguptaNordhaus position and argues that technical progress would greatly reduce the optimal savings rate.”

“8For example, Stern (2006), Weitzman (2007, 2008), Dasgupta (2007, 2008), Nordhaus (2007), von Below and Persson (2008), Mendelsohn (2007), and Tol and Yohe (2006).”

“Alternative views of intergenerational discounting are provided in, for example, Dasgupta (2007), Nordhaus (2007), and Weitzman (2007b).”

“nd Nordhaus (2007).”

“…as climate change are truly ‘non-marginal’ in the sense that this problem could end up shifting the global development path, say with ‘business as usual’ emissions of greenhouse gases possibly leading to considerably lower future consumption levels than now (Weitzman, 2007; Hoel and Sterner, 2007).”

“Discussions about discounting involve unresolved issues of intergenerational fairness, aversion to inequality, and projections about future technological change and population growth as well as the appropriateness of the utilitarian framework used in the Ramsey model (5, 28, 29).”

“…the climate science embodied in the report or its assessment of the costs and benefits of climate change mitigation, but on the low discount rate used in the analysis and how this drives the central results of the Review (see, for example, Dasgupta 2006; Yohe 2006; Nordhaus 2007; Weitzman 2007a).”

“…at a regional level are translated into regional utility changes via an appropriate ‘‘damages function’’; compounded by big 10For more on this, see Weitzman (2007). uncertainties about how future regional utility changes are aggregated into a worldwide utility function and what its overall…”

“However, the most positive verdict in the economic literature on the Stern Review is that it was right for the wrong reasons (Arrow 2007; Weitzman 2007a ).”

“The coefficient of relative risk aversion θc is set to equal 2 (Stern 2008, Weitzman 2007).”

“7 Discounting has three components (see e.g. Weitzman, 2007).”

“Those results were from the ‘PAGE’ IAM (Hope, 2006), but we know from other work that this is also true of DICE (Nordhaus, 2007) A more elaborate analysis would permit households to choose their optimal savings rate in equilibrium with (cid:28)rms’ private marginal product of capital (in response…”

“Public policy tradeoffs between present and future costs are strongly affected by the rate at which future costs and benefits are discounted (Weitzman, 2007), and the choice of discount rate is in large part an ethical judgment.”

“Theoretical and empirical work over the last decades made progress in quantifying the social cost of capital, though substantial disagreement on the appropriate choice of parameters remains (cf. e.g. Arrow et al., 2014; Dietz et al., 2018; Weitzman, 2007).”

“It seemed to me that the questionnaire had restricted economic possibilities in an unacceptable way.32 Weitzman (2007a) has revisited his earlier work and has altered the motivation behind his study.”

“Nordhaus (11), however, has argued that the discount rates used by Stern (8) are too low and that the costs of abatement in the near term should be somewhat lower.”

“The literature generally adopts values forZ in the range of 0.5 to 3, with a clustering around 2 (Arrow 2007; Dasgupta 2007, 2008; Hall and Jones 2007; Nordhaus 2009; Szpiro 1986; Weitzman 2007, 2009).”

“An additional argument for using a low discount rate is that there is a probability that future generations may be much poorer than us (Weitzman, 2007). increase consumption of the current, relatively poor, generation.”

“To put this in context, used by the IPCC (1995) and advocated by Nordhaus (2007) gross global product today.”

“This objective avoids the debate as to the true cost of the externalities caused by emissions (e.g., Cline 1992, Shelling 1992, Stern 2007, Arrow 2007, Weitzman 2007) by merely acting as if that cost is quite large.”

“Consequently, from the environmental policy and economic perspective, firms are not always motivated to engage in eco-innovation due to its double externality (Baumol and Oates, 1976; Rennings, 2000), greater uncertainty and market failure (Horbach et al., 2012; Weitzman, 2007).”

“{{ In his critique of the Stern Review, Weitzman (4) disparages Stern’s normative assumptions but claims that the urgency of the Review’s conclusions is warranted on account of the uncertain distribution of damage.”

“This is unsettling because the growth rate of the economy strongly influences the discount rate, which has been shown to be a major driver of climate policy recommendations, as reflected in the debate between Stern and the critics of his 2006 report (Nordhaus 2007; Weitzman 2007).”

“…to calculate expected utility, is deeply problematic in the presence of catastrophic risks whose probability and magnitude are both unknown, as is the treatment of risk aversion and ambiguity aversion (Ingham and Ulph, 2005; Weitzman, 2007, 2009, 2011; Millnar et al., 2013; Ackerman, 2017).”

“Some of these views have softened subsequently (Nordhaus, 2007; Tol, 2012), but aggregate damages still remain relatively small for most temperature ranges.”

“The issue became heated again when the Stern Review on the economics of climate change argued for a low discount rate [69] and immediately was opposed by mainstream economists (Nordhaus [70]; Yohe and Tol [71]; Dasgupta [72]).”

“…matter for global survival is whether the relatively small chance of a very high level of warming can be dealt with (the ‘fat-tail’ problem discussed by Weitzmann, 2007), both governments and communicators face a challenge in motivating people to deal with climate change and make mitigation a…”

“In line with a long line of economists (Ramsey 1928, Harrod 1948, Solow 1974), Stern (2007) argues on ethical grounds for a near-zero PRTP, while others dismiss this and argue that it is inconsistent with actual individual behaviour (Nordhaus 2007, Weitzman 2007a).”

“(Weitzman 2007, p. 712; italics original) Similar concerns are raised by William Nordhaus in his evaluation of the Stern Review.”

“Weitzman (2007) leads this critique.”

“(Weitzman, 2007: 716).12 In the face of such worst case risks, it is misleading to look only at the most likely range of conditions.”

“…relationship between temperature change and the growth rate of GDP as opposed to the level of GDP. 1An exception is the Stern Review (2007), but as Nordhaus (2007), Weitzman (2007), Mendelsohn (2008) and others point out, that study makes assumptions about temperature change, economic impact,…”

“Moreover, with δ = 1.5 and σ = 2, as suggested by Nordhaus (2007) as the baseline discount rate in his DICE-2007 model, the implied discount rate increases, but only slightly, to 0.6 per cent per year.”

“For the claim that much work in climate change economics fails to address the second sort of risk adequately, see Weitzman (2007).”

“Martin Weitzman (2007, 2009) has argued that the economic analysis of climate change is dominated by the problem of intrinsically limited information about potentially unbounded risks.”

“…at this issue from the perspective of ambiguity theory, the theory of choice in the face of incomplete probability distributions (see also Henry 2007), and Weitzman (2007) has looked at it from the perspective of learning about unknown parameters, including those of the probability distribution.”

“Indeed, triggered by the Stern (2006) review of climate change, the social discount rate has been hotly debated, notably in contributions by Nordhaus (2007), Weitzman (2007), and Dasgupta (2008).”

“For example, the debate that has ensued since the Stern Review (e.g. Weitzman, 2007; Dietz and Stern, 2008) has thrown new light on the choice of the social discount rate in the context of climate change.”

“See also Nordhaus (2011), Tol (2003), Tol and Yohe (2006, 2007) and Weitzman (2007, 2009a).”

“46 There was a lively debate (Dasgupta, 2007; Nordhaus, 2007; Weitzman, 2007) after the publication of the Stern Review in 2006 of the relative importance of these two elements.”

“Moreover, I use a discount rate of 2 percent; while lower than what is commonly chosen, this level can be rigorously justified by appealing to observed returns on risk-free investment (Weitzman 2007).”

“Climate change market-based mitigation policies are sensitive to the value chosen for the social time discount rate used for mitigation investments, a choice generating well-known debates [32,33].”

“We do not take a specific stance here on the correct social discount rate to apply, but use a sensitivity range in the Monte Carlo analysis that covers the range of values normally applied as social discount rates, from the lower value of 1.5% per year suggested by Stern et al. 35 , to the upper bound of 6% suggested b…”

“rate of pure time preference that discounts utility, while r is the much more familiar interest rate used to discount consumption [69].”

“Since the publication of the Stern review on the economics of climate change [63], economists have been heatedly debating the appropriate welfare framework for evaluating climate change policy [66,50,13,64,16,31].”

“Debate continues over the speed of global warming and thus the timing available for action to address it (Stern, 2009; Nordhaus, 2007).”

“In particular, the laws governing human behavior and decision making are largely Terra Incognita and related parameters are the subject of vivid debates, e.g. see the discussion following the Stern review (Stern, 2007; Nordhaus, 2007; Tol, 2006; Weitzman, 2007).”

“The main message from the cost benefit literature is that by putting a higher weight on future generations, a lower discount rate implies more short term abatement efforts and lower global temperature increases (Stern 2006, Nordhaus 2007,Weitzman 2007).”

“Three decades of research on this financial puzzle suggests that the model-based CCAPM approach fails to capture many dimensions of the real world, in particular the existence of structural uncertainties and fat tails (Weitzman, 2007b).”

“…calculation is a discount rate, i.e., how 30 much less we value the future payments in comparison to the present payments of the same size, and there are different views on what the appropriate rate is for climate policy (see, for example, Nordhaus (2007) for a discussion about a discount rate).”

“Among the community of American economists (Nordhaus, 2007; Weitzman, 2007), Stern has been criticized because in his modeling, he fails to incorporate discounting for the future; in other words, for me to save for the future requires incentives in the form of interest rates.”

“Moreover, as in Nordhaus (2007), a proportion DY of the remaining output is damaged beyond repair by global warming and lost.”