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

“…Yang (2003) and the model assumption of Tol (2004) is that dual-rate discounting is required for modelling environmental concerns according to Yang‘s assumption, while modelling it according _________________________ 1Among the critics are Nordhaus (2007), Yohe and Tol (2007), and Weitzman (2007).”

“In addition, there is also evidence that the world would experience major geophysical changes in the coming decades as a consequence of human activity, which threatens the longrun sustainability of human civilization (Nordhaus 2007, 2008; Tol 2003; Weitzman 2007).”

“We have chosen a high and low discount rate of 5 and 3% [following Nordhaus (2007) and Riahi et al. (2017)].”

“Indeed, additivity implies possible compensations between distant generations, and discounting can lead to myopic decisions [21, 22].”

“Nothing seems to have been more controversial in the environmental policy literature than the discussion on the appropriate social discount rates: how to weigh present versus future costs and returns, in the face of climate change (Stern, 2007; Nordhaus 2007; Weitzman, 2007), and this paper is hardly the place to exam…”

“As a benchmark for income growth, economists (e.g. Arrow et al. 2004; Weitzman 2007) generally use future worldwide income growth rates of 1.5 percent to 2 percent.”

“This point emerged in discussion of the Stern Review (Stern 2007) While a number of economists disagreed with Stern's treatment of issues such as discounting, they endorsed his conclusion on the need for action to stabilize climate (Weitzman 2007).”

“We further assume a value of 1 for ρ , which is chosen as a central value between 0, i.e. no preference for current or future generations, and 2, which is the value attributed by Weitzman in is review of the Stern Review (Weitzman, 2007).”

“The SRTP approach involves a number of assumptions and value judgements, particularly in relation to the choice of variables in the Ramsey equation. These value judgements need to be made as explicit as possible. Many commentators attempt to set the values of r and u by reference to observed individual behaviour. Howe…”

“There is no consensus regarding methodology for defining likely interest rates regarding environmental benefits that may accrue far in the future (e.g. Nordhaus 2007; Weitzman 2010).”

“Considering the current controversy over the discount rate, we set 0.001 and 0.015 (Nordhaus 2007; Stern 2008), respectively, for the discount rate ρ. Figure 7 shows the change rate of the cumulative Ramsey utility function with the above two discount rates during 2025–2100.”

“…temperature caused by the increasing consumption of fossil fuels, and the appropriate policy responses. e debate is still unse led as some researchers call for major and immediate actions (Stern, 2007), whereas others suggest limited and gradual policy interventions (see e.g. Nordhaus, 2007).”

“For example, in the case of assessing the economic burden of climate change, this debate has highlighted fundamental differences between those economists who see a role for the practitioner to make, or reflect, explicit moral judgements about intergenerational equity and those who argue for a more objective approach b…”

“As Weitzman (2007) pointed out “it is not an exaggeration to say that the biggest uncertainty of all in the economics of climate change is the uncertainty about which interest rate to use for discounting” The idea of using low social discount rates for natural resource management is not new and has…”

“(Weitzman, 2007, p. 712) Wetizman’s own approach holds that the rate at which the value of well-being declines through time ought to be determined by prevailing market interest rates.”

“Calculating this economic value is relatively straightforward ( Chapter 7 ), but settling on the values for some of the parameters is fraught with controversy ( Nordhaus 2007 ; Weitzman 2007 ).”

“There is a difference between a cost analysis that is used to determine the value of mitigation (e.g., Nordhaus 2007b) and the study here.”

“Weitzman (2007) correctly mentions that, in dealing with global warming, the expected growth rate should have ‘a thick left tail’ (p. 718), but acknowledges that ‘we lack a usable economic framework for dealing with these kinds of thick-tailed extreme disasters’ (p. 723).4 The next section attempts…”

“If the possible values are δ i , for i = 1 , ..., D , and they have associated probabilities of p i , Weitzman (2007) showed that the e ff ective consumption discount rate, δ 0 t , applying to period t is obtained not as a simple weighted average of the δ i s but of the discount factors.”

“It proposes a relatively high carbon price of 85 USD per tonne of CO2, which has been criticized due to its use of a near-zero discount rate that is inconsistent with discount rates estimated from market-based returns (Nordhaus, 2007).”

“The Ramsey rule is still the reference equation in macroeconomics and it was revisited by numerous economists, such as Gollier (2010, 2012) and Weitzman (1998, 2007).”

“One of the most famous (climate) economists making such an argument is Harvard ’ s Martin L. Weitzman (see, e.g., Weitzman 2007, 2009; Wagner and Weitzman 2015).”

“…damages (which are discounted at rates above the pure rate of time preference), does not include some foreseeable impacts, such as large-scale climate migration (Watkiss et al., 2005), and only makes a probably inadequate first approximation of others, such as climate catastrophes (Weitzman, 2007).”

“Weitzman (2007) suggests a value of 2, whereas, according to Dasgupta (2008), values between 1.5 and 3 are more reasonable.”

“…unsolved issues related to SCC, see Belfiori’s (2017) demonstration on the discrepancy between optimal C tax and SCC, Nordhaus and Boyer (2003), Weitzman (2007), and Stern (2008) for the applied discount rate in assessing and Ricke et al. (2018) for heterogenous geography of climate damage…”

“…of natural resources and the strong and positive correlation between ecological growth and economic growth (Gosselin et al. 2011), the Stern Review and numerous studies recommend the use of a low discount rate of 1.5% (Weitzman 1998; Stern 2006; Weitzman 2007; Gollier 2010; Freeman and Groom 2013).”

“Before we tend to this in the next section, we will push the theoretical results on the Aggregation Dilemma somewhat further in order to show issues that are similar to those raised by the Dismal Theorem (Weitzman 2014).”

“A number of prominent economists and philosophers have reacted to the ‘Stern Review’, and in particular, the economists invested in the debate have focused on the use of time discounting in the recommendations of the review (most prominently Dasgupta 2006; Tol 2006; Weitzman 2007; Nordhaus 2007).”

“Weitzman (2007)#TAB##R# sees#TAB##R# the#TAB##R# biggest#TAB##R# uncertainty#TAB##R# of#TAB##R# all,#TAB##R# in#TAB##R# the#TAB##R# economics#TAB##R# of#TAB##R# climate#TAB##R# change,#TAB##R# as#TAB##R# the uncertainty#TAB##R# about#TAB##R# which#TAB##R# interest#TAB##R# rate#TAB##R# to#TAB##R# use#TAB##R# for#TAB##R…”

“𝑪⁄ Stern (2007) 1.4 0.1 1 1.3 Nordhaus (2007) 5.5 1.5 2 5.5 Weitzman (2007) 6.0 2.0 2 2.0 Arrow (2007) 2-6 0 2-3 1-2 Gollier (2006) 2.6-5.2 0 2-4 1-3 HM Treasury (2003) 3.5 1.5 1 2.0 Harrison (2010) 0.24-11 0 2-4 1.3 Dasgupta (2006) 2-8 0 2-4 1-2 Collier et al. (2010) Fast growing economy 10 If 1…”

“We have not attempted to represent this through a discount factor, a long-standing subject of debate (see, e.g. Nordhaus, 1997; Hasselmann, 1999, and the more recent controversy, Tol and Yohe, 2006; Nordhaus, 2007, over the low discount factor used in the Stern (2007) review).”

“Although several studies have been made on the opportunities and adaptations required meeting climate change challenges [4,5], however, the question remains whether the rates of change caused by climate-change led impacts will be constant or accelerating.”

“(8)Alternatively, as (19) and (20) indicate, the decline in the equity premium could be attributed to the decline in the volatility of the consumption growth rates, although the volatility is assumed to be constantly equal to σ in our model.”

“While Government commissioned reports by Stern (2006) and Garnaut (2008) recommend the use of low social discount rates, their arguments have been criticised by various authors (Dasgupta, 2007; Weitzman, 2007; Nordhaus, 2008).”

“Even though many experts did not agree with all the assumptions and conclusions made in the report (see [35], [50] and [51] for an overview), the Stern Review has contributed considerably to raise awareness of global warming.”

“Based on the Stern review on the economics of climate change projects, a discount rate of I = 4% is applied in financial assessment [79].”

“The emission of greenhouse gases damages constitutes a negative externality for society, which challenges standard economic theories because of its long-term horizon and intrinsic uncertainties [3,4].”

“…carbon taxes can have distributional consequences that policymakers may be concerned about and want to ameliorate.3 This arises largely because certain groups – especially lowerincome households – spend a disproportionate share of their incomes on carbon- 1 See Nordhaus (2007) and Stern (2006).”

“La publication du rapport Stern en 2006 a suscité de nombreux débats sur les grands paramètres du calcul coûts‑avantages (Weitzman, 2007 ; Nordhaus, 2007 ; Sterner & Petersson, 2008) Mais les modèles d’évaluation intégrée faisant foi au niveau international se comptent « sur les doigts d’une main »…”

“…the Conservationists and the Preservationists, between Lord Nicholas Stern and William Nordhaus over the social cost of climate change (Stern 2006; Nordhaus 2007), and around the ethics of ecosystem service valuation were frequently represented, with at least half of the classes exploring one…”

“This has been highlighted by the long-standing debate about the appropriate rate of time preference for the evaluation of climate change policy (Nordhaus, 2008; Stern, 2007; Weitzman, 2007).”

“unusually low discount rate to compare the future benefits of emissions reductions with their present costs (18, 68-71).”

“Weitzman (2007) and Nordhaus (2006), among others, criticized Stern’s claim for being based on an extreme assumption about time preference, thus amplifying the benefits of deep emissions cuts of greenhouse gases.”

“As underlined by e.g. Nordhaus (2007) or Weitzman (2007), there is an important distinction between the social discount rate and the social discount rate.”

“21For a general discussion of ethical approaches to intergenerational justice see Page (2007) and Fleurbaey and Blanchet (2013).”

“( Weitzman 2007, p. 712) According to Weitzman, Nordhaus(cid:146)s "careful pragmatic modeling throughout his DICE series of IAMs has long set the standard in this area" (p. 713).”

“The striking difference between $6 and $1.6 billion reveals why “the biggest uncertainty of all in the economics of climate change is the uncertainty about which interest rate to use for discounting” (Weitzman, 2007, p. 705).”

“Nordhaus (2007) argues that because both ρ and β discount future consumption the choice of values for these parameters should be considered jointly for any given value of A g .”

“While the exact value of this elasticity is arbitrary and empirical evidence on people’s preferences shows substantial variation [51], an elasticity of about two is generally regarded as reasonable [52] and is used in economic studies of such things as investment behavior [53,54] and spending on medical care [55].”

“As noted by some economists (e.g. Nordhaus (2007) and Weitzman (2007)), this argument supports the conclusion in the Stern Review if one weighs future consumption almost the same as current consumption, by assuming a fairly low social discount rate.”

“The various contributions to the social discount rate have been considered and discussed extensively in the recent debate, among others, by Nordhaus (2007), Weitzman (2007), Weitzman (2009), and Dasgupta (2009).”

“Rather, we allow firms to put a lower weight on future payoffs than society (Nordhaus 2007; Stern 2008; Heinzel and Winkler 2011; Barrage 2018).”

“%) and somewhat closer to average capital rates in the market (Nordhaus, 2007).”