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

“The RICE model was first developed in 1996 by economists William Nordhaus and Zili Yang.”

“Weitzman (2007) argues that Stern (2007) got things right but for the wrong reason.”

“22 Beyond the pending debate between the normative low rate (Stern 2006) and a rate consistent with observed behaviors (Nordhaus 2007), we remind the reader that in integrated assessment models the discounting is in fact dominated by key parameters of economic scenarios and assumptions about damage (Weitzman 2009); St…”

“Others (e.g., Nordhaus 2007) view market discounting as essential for meaningful policy analysis (i.e., to avoid perverse policy implications in other contexts).”

“Notably, DICE models a single global region.”

“…(Editorial, 2016). p These low-probability, high-damage impacts have frequently been discussed in earlier climate change economics literature (Weitzman, 2007, 2009, 2013; Nordhaus, 2011) and are very important due to the huge magnitude of the potential damage from them (Pindyck, 2011). o…”

“Among economists and the informed public, discussion of response to catastrophic prospects was intensified by the Stern-Nordhaus debates on climate change in the mid-2000s 19 (Stern 2007, Nordhaus 2007).”

“Many argued that these were so far in the future as to be incommensurable with the present costs of preventing it: in the future human societies would be richer (because of economic growth) and would develop the technologies to adapt to or otherwise prevent warming (Nordhaus 2007).”

“Different views exist on what constitutes the best discounting method, if any, for intergenerational cost-benefit analyses such as climate change policy (Hoel and Sterner 2007; Howarth 2003; Nordhaus 2007; Stern 2006; UK Treasury 2003; Weitzman 2001, 2007).”

“That is half the average 8 The climate change analysis by Stern et al. (2007) is the subject of detailed commentaries by Nordhaus (2007) and Weitzman (2007).”

“It has also been argued that spending money now to slow down global warming should be conceptualised primarily as an issue about how much insurance to buy to offset the small chance of a ruinous catastrophe (Weitzman, 2007).”

“For example, in analysing the efficient and inefficient approaches to slowing global warming, the approach of Nordhaus (2007) is to use the estimated market return on capital as the discount rate.”

“Weitzman (2007) argues that the outcome obtained by the Stern review heavily depends on the low discount rate that is resorted to in the latter report.”

“…approaches: integrated modeling (i.e., External Costs of Energy (ExternE); New Energy Externalities Development for Sustainability (NEEDS, 2006); Weitzman 2007; Tol 2008) or weighting in LCA (i.e., Environmental Priority Strategies (EPS)(Steen, 1999); Life Cycle Impact Assessment Method based…”

“The Stern review on the economics of climate change Stern (2006) has been heatedly debated on this ground (Nordhaus, 2007a,b; Weitzman, 2007; Dasgupta, 2008; Heal, 2007).”

“Changes of less then 28C are generally considered to be a level to which human and natural systems can adjust, while changes of more than 48C are predicted to be catastrophic (Nordhaus, 2007).”

“…(Carleton and Hsiang, 2016; Graff Zivin and Neidell, 2013; Intergovernmental Panel on Climate Change, 2022; Isen, Rossin-Slater and Walker, 2017; Park, Behrer and Goodman, 2021), with monetized impacts estimated to be as large as 20% of annual global GDP within a generation (Nordhaus, 2007).”

“Although computing the carbon social cost is controversial and complex (Nordhaus 2007b), Nordhaus (2007a) and Stern (2007) estimated such a cost to be from $9.”

“This landmark agreement comes in the wake of mounting evidence about the dangers of global warming and climate change (Beckerman and Hepburn, 2007; Bonfils et al., 2008; JRC, 2013; Nordhaus, 2007; Weitzman, 2007).”

“These SDRs can go as low as 1–2%, as seen for example in the Stern Review (Stern 2007), although such low values have been controversial (see Nordhaus 2007; Weitzman 2007; Scarborough 2011; Caney 2014).”

“4The interested reader is referred to Karp and Rezai (2011) and Weitzman (2007) and the references therein. her investments do not contribute to the problem.”

“Nordhaus (2007) and Weitzman (2007) in particular questioned the use of a normative discount rate that would not reflect the real behaviour of agents.”

“…ignited a new round of debate about efficient climate change policy, particularly the degree and the timing of emissions reductions (e.g., Dasgupta 2007, Mendelsohn 2007, Nordhaus 2007a and 2007b, Stern 2008, Stern and Taylor 2007, Tol and Yohe 2006, Weitzman 2007, Yohe et al. 2007, Garnaut 2008).”

“Even though the report was criticised for a number of reasons (e.g. Byatt et al. 2006; Weitzman 2007; Helm 2008), it was significant due to its impact on the growing social acceptance of the idea that economics needs to take its impact on the natural environment seriously.”

“Nordhaus (2007) ignores this second issue when arguing that the details of the ILA specification as well as individual households’ preferences can be neglected as long as the interest rates in the observed decentralized OLG and in the ILA economy coincide.”

“Finally more controversial measures are related to geo engineering options that aim at directly influencing atmospheric processes (Weitzman, 2007).”

“…or Weitzman (2007) for some discussion on the interpretation of η and normative arguments for its magnitude; or Stern (2006), Becker et al. (2010), or Nordhaus (2007) for similar discussions on δ. Generally, curvature in the utility function with respect to consumption, income or wealth relates to…”

“If one adds a rate of pure preference for the present between 0 and 2% per year, we obtain the most standard recommendation about the level of the discount rate that exists in the literature (Arrow (1999), Weitzman (2007b), Nordhaus (2008)).”

“…this debate have variously accused each other of ignorance of the body of work on public economics (see Stern, 2008), ‘subconsciously’ undertaking analysis to confirm the policy position of the UK Government (see Weitzman, 2007), and even trying to rekindle the British Empire (see Nordhaus, 2007c).”

“In the same spirit Thomas Sterner and Martin Persson (2007) have showed that letting prices to be adjusted to the increasing scarcity of natural, non producible assets would lead to results at least equivalent and presumably significantly more stringent than those of the Stern Review17.”

“…im at e se ns iti vi ty ,d is co un t ra te (V on B el ow an d P er ss on 20 08 ) W IT C H ✓ S ce na ri o an al ys is (2 00 5 ve rs io n) M on te C ar lo an al ys is (2 00 8 ve rs io n) A ba te m en t co st s (B os et ti et al .2 00 8) 22 A. Nikas et al. (e.g. Nordhaus 2007; Ackerman et al. 2010).”

“For some key countries, the net benefits from cutting GHGs are negative, especially when present value considerations are taken into account, since costs are immediate and benefits are in the distant future (Nordhaus, 2007).”

“However, this assumption is false with irreversible loss of natural capital suggesting that discounting may not be suitable for some types of risks that exhibit thresholds and tipping points [106,107].”

“A view along these lines, exemplified by Nordhaus (2007) and Arrow (1995a), is that the pure rate of time preference should be determined by the preferences of current people.12 The current generation does of course care about future generations, as is evident in the fact of its willingness to…”

“There is a consensus that the choice of discount rate is a major determinant of optimal policy (e.g., Stern 2007 and Nordhaus 2007).”

“2The virulent reactions (Dasgupta, 2007; Maddison, 2007; Nordhaus, 2007; Weitzman, 2007; Tol and Yohe, 2007; Yohe, 2006) to the Stern Review (Stern, 2006) reinforce this pessimistic diagnosis.”

“[42], [43], [44] and [30].”

“While a policy consensus has emerged on climate change, some research questions remain, see Weitzman (2007), Stern (2008) and Pindyck (2021).”

“Such rational calculation-based approaches will not likely succeed, however, in bringing about sustainable growth, since almost all of the potential benefits and some of the costs of different behavioral options lie well into the future, with the result that the relative expected utility of different options depends c…”

“Moreover, to be consistent with the saving rates, the elasticity of the marginal utility of consumption should be higher (Nordhaus, 2007; Weitzman, 2007; Dasgupta, 2007 and 2008).”

“With a sufficiently high discount rate, even catastrophic losses that substantially reduce gross world product at the time of their occurrence will appear small in present value terms if the corresponding impacts occur far in the future (Weitzman, 2007; Stern, 2008; NRC 2010; IPCC, 2014).”

“4 C temperature increase; others suggest a 650 ppm CO2-equivalent (Nordhaus 2007; Tol 2002).”

“†Department of Agricultural and Resource Economics, University of California, Berkeley, email: karp@berkeley.edu”

“The majority of researchers, however, finds the Protocol cost-effective for mitigation but insufficiently stringent (126).”

“In the context of climate policy, there has been an intense debate about this concept following the contributions of Stern (2007) and Nordhaus (2008); see Weitzman (2007) for example.”

“…to the discussion and analysis on discounting following the Stern Review on the Economics of Climate Change (Stern, 2007; Beckerman & Hepburn, 2007; Weitzman, 2007; Nordhaus, 2007; Dasgupta, 2008; Heal, 2009). some reflections on the normative and policy recommendations flowing from our…”

“Therefore, the optimal social discount rate given by the Ramsey formula (Weitzman, 2007) in developing countries is larger than that for developed countries.”

“It is a widely held believe in the integrated assessment community that it does not matter how we calibrate the constituents of the consumption discount rate, as long as pure time preference and the growth-based component add up to the same overall consumption discount rate (Nordhaus 2007).”

“Weitzman (2007) argues that the Stern estimates undervalue these contributions because the tails of the distributions of our understanding of the climate impacts are so “thick”; in other words, the triangular representations of uncertainty (with their fixed limits) upon which the underlying…”

“The most important point is that CT can continue to serve emission reduction activities (Nordhaus 2007; AviYonah and Uhlmann 2009; Ojha et al. 2020), generating potential promoting value.”