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

“What value should be adopted is highly controversial (Stern, 2007; Nordhaus, 2007), and the issue is largely considered ethical (Millner, 2020).”

“…discount rates are neither ethical primitives nor observable market returns but should be derived from economic forecasts and from a conception of distributive justice; the controversy between the Stern Review and its critics shows how much rides on that conception (Nordhaus, 2007; Stern, 2007).”

“0, a commonly used value in quantitative macroeconomic models (Stern, 2008; Weitzman, 2007).”

“For example, on the basis of a near-zero discount rate, Stern (2007) advocates for urgent and immediate actions on climate change, while Nordhaus (2007) argues against this advocation using a market interest rate.”

“Such disagreements were evident in a dispute between Nordhaus (2007), who used the value ρ = 0.03, and Stern (2006), who used ρ = 0.”

“In Nordhaus [13], he uses the DICE model and RICE model to effectively predict the optimal carbon tax rate that can fit this problem, which lets the government, society, and firms to reach incentive compatibility, and derives a mild path for environment protection as well as economic growth in Nordhaus [12].”

“Our estimates are at the midpoint of the range of existing estimates of 0.1% by Stern (2008) and 1.5% by Nordhaus (2007).”

“As Weitzman (2007) put it, very large global temperature increases put us “in the terra incognita of what any honest economic modeler would have to admit is a planet Earth reconfigured as science fiction, since such high temperatures have not existed for some tens of millions of years.””

“The Stern Review (Stern 2007), and the following discussion about appropriate social discount rates in cost-benefit analysis, indicates that the social discount rate may be below capital market interest rates, at least in the case of climate change (Weitzman 2007; Tol and Yohe 2006).”

“Nordhaus (2007) for example disagreed with the use of the near zero rate of pure time preference used in the Stern Review that implies that future generations are accounted for just as present generations are.”

“Therefore, we consider the average of values for SIDS given in the Pennsylvania World Table (PWT) (Feenstra et al. (2015)), (1− α) = 0.55.23 The choice of the value of ρ, the rate of pure time preference, has led to an intense debate in the literature (Tol (2006), Nordhaus (2007), Dasgupta (2008)).”

“In recent years, the rapid growth of the population and the utilization of large quantities of traditional fossil fuels have led to a shortage of traditional energy and global environmental warming (Nordhaus 2007).”

“The ‘right’ rate to apply for public policies is also controversial (Arrow et al., 1996, 2013), especially in the climate change debate (Stern, 2007; Nordhaus, 2007; Heal, 2009; Drupp et al., 2018).”

“This feature of the ethical approach was pointed out by Nordhaus in his criticism of the Stern Review [13], which he calls “Government House Utilitarianism,” illustrating his argument with the following numerical example.”

“It is efficient to invest on more intensive emissions reductions since climate damages are estimated to increase relative to output in the coming decade(William D. Nordhaus, 2007).”

“1See also Nordhaus (2007), Giglio et al. (2014), and Giglio et al. (2015).”

“The first is the social discount rate, where figures between about 1% and 5% have been proposed (e.g. Nordhaus, 2007).”

“…change in being a single internally consistent Arrow-Debreu type model in which welfare analysis can be 3 See also the discussion of discounting and climate change policy in Weitzman (2007) and Dasgupta (2008), and the key role discounting plays in the conclusions of the Stern (2006) report.”

“The Stern Review has been reviewed trenchantly by eminent economists such as NORDHAUS (2007) and WEITZMAN (2007).”

“The discount rate may be the most important factor: in his widely cited critique of the Stern Review, Nordhaus emphasized Stern’s use of a much lower discount rate as the root cause of their disagreement (Nordhaus, 2007).”

“First, whether an ‘energy efficiency gap’ exists and whether it can be attributed to consumers discounting too high (compare Nordhaus’ (2007) review of Stern (2007)).”

“World Bank modelling found climate change is expected to increase damages and losses from an average 10-year return period cyclone in 2050 by $4,560m, nearly doubling the loss and damages compared to the no-climate change scenario (see Dasgupta et al., 2010).”

“resource accumulation and technological progress of economy, andη are value judgments [6].”

“The Stern Review has provoked a debate (Weitzman, 2008; Nordhaus, 2008) with a focus on the selected discount rate and the valuation of future climate impacts.”

“Nordhaus (2007) suggests immediate reductions in carbon emissions will cost more than their expected benefits, an argument supported by Lomborg (2001).”

“It is one of the most pivotal, but controversial policy decision in climate policies, which dominates the economic and political discourse on the appropriate mitigation strategy (‘Stern - Weitzman debate’) (Stern, 2007; Nordhaus, 2007; Beckerman and Hepburn, 2009; Hepburn, 2006).”

“Gollier (2011) assumed that coefficient of relative risk aversion χ is 2, in line with Arrow et al. (2004), Weitzman (2007b), and Nordhaus (2008).”

“How to value the anticipated damage from climate change under uncertainty is debated in the literature (Stern, 2007, Nordhaus, 2007, Weitzman, 2007).”

“A similar approach to model precaution has been taken by Nordhaus (2007) who conducts alternative runs with DICE that include three CO2 concentration constraints of 420, 560 and 700 ppm, and four constraints in which temperature increase is limited to 1.5, 2, 2.5 and 3 ◦C from 1990 levels.”

“This target is consistent with that suggested by previous research, such as the Stern Review of Climate Change [Stern, 2007], who calls for extensive and immediate interventions in order to cut global emissions by 60 percent to 80 percent by 2050; Nordhaus [2007], who proposes a modest control in the short run followe…”

“For a backstop price set at $1, 200 /tCO2 in 2005, 4Comments following the Stern (2006) Review (Dasgupta, 2007; Nordhaus, 2007; Weitzman, 2007; Yohe and Tol, 2007) have mainly emphazised the impact of the so-called unusually low rate of pure time preference of 0.1% (which makes the discount rate used in Stern’s runs a…”

“Rather, economists widely condemned it as “the greatest application of subjective uncertainty the world has ever seen” (Weitzman 2007 , p.718), and an analysis that is not based on “solid science and economics” (Mendelsohn 2006 , p.46) and that “can therefore be dismissed as alarmist and…”

“…for using low interest rates in valuing climate change, the position of Nicholas Stern (2007), than are our American contemporaries, like Bill Nordhaus (2007), who are fundamentally convinced that a time preference rate of “6 or 10 percent per annum” is the “law of Moses and the Prophets”.”

“q H = pH (s (1 k) v) + spLk 2c pH s+ pH pL (1 k) v 2 (s 2v) c ; (19) q L = 2cspL + s pH + pL 2 c k + pH (1 k) + 2c pH pL (1 k) v 2 (s 2v) c ; (20) where the superscript OL stands for open-loop.”

“The risk is then the value of insuring against the consequences (Weitzman 2007).”

“Stern was similarly criticised (Nordhaus, 2007 is the best example).”

“The famous Stern-Nordhaus debate revolves exactly around this point.”

“Other interdisciplinary and multi-faced models used to study the economyclimate nexus include integrated assessment models (IAMs), which usually combine natural science and socio-economic components to enlighten the cli-125 mate policy debate in general (Nordhaus, 1993a, 2007, 1993b).”

“The characteristics of negative externality of climate change are linked with the following characteristics of problems (Nordhaus 2007; Stern 2008): • Climate change is a global phenomenon and has a global cause and effect relationship.”

“In any case, the risks identified by the IPCC represent a major threat to future human wellbeing on a global scale, which raises its own ethical challenges (Gardiner 2004; Nordhaus 2007; The Global Community and Diplomatic Capital 160 Weitzman 2007; Stern 2008).”

“참고로 경제학자들 사 이에서 일반적으로 받아들여지는 시간 선호율 값은 0.02~0.04 정도이다(Weitzman, 2007).”

“(2006) are criticized by Nordhaus (2007) to hinge on a low intertemporal discount rate. Sterner and Persson (2008) vindicate the original report and reproduce the same conclusion considering relative price effects.”

“What Weitzman (2007) clearly points out is that the question of the level of risk aversion to take on in the urgent issue of global climate change is a matter of choice.”