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

“Despite some skepticism about the benefits of CER [4], Margolis and Walsh [5] and Orlitzky et al.”

“3 In an Irish context, recognition of this dates back to at least Scott (1992) and O’Donoghue (1997).”

“For example, the influential review by Stern [48] and the reply by Nordhaus [40] used discount rates of 0.014 and 0.055, respectively.”

“It is easy to find staunch supporters of parameter descriptivism among (climate) economists (e.g., Nordhaus, 2007a,b; Weitzman, 2007a).”

“(2)See also Nordhaus [7] and Weitzman [8].”

“The discussion on the rate of pure time preference has been voluminous (Nordhaus 2007;Pearce et al. 2003;Stern 2008), but the rate of risk aversion attracted less attention in the context of climate change (Anthoff et al. 2009b;Anthoff et al. 2009c;Weitzman 2007).”

“To explore this, consider conditions (26)-(27) defining generation 2 policy functions g(I) and h(I) for capital k3 and public investment q, respectively.”

“6The specific assumptions about the discount rate have indeed been one of the major points in the public discussion about the conclusions in the Stern Review (Stern, 2006); see, e.g., Nordhaus (2006), Dasgupta (2007) and Weitzman (2007).”

“5%) [25] to achieve “Our Common Future” [26].”

“If we move to say 5 degrees climate change, we are creating a scenario as different as the last ice age and to choose and plan to do this voluntarily, in the service of a mainstream economy, (Weitzman, 2007; Heal, 2007; Dasgupta, 2006) is clearly complete folly.”

“…is of crucial importance in any valuation study or for policy making (see e.g. Stern and Stern (2007); Nordhaus (2007), Gollier (2002); Weitzman (2007); Dasgupta (2008); Heal (2009); Groom et al. (2005); Hepburn and Koundouri (2007); Groom et al. (2007); Gollier et al. (2008); Hepburn…”

“, (2008), “The economics of climate change”, American Economic Review: Papers & Proceedings, 98(2), 1–37; and Nordhaus, W.D. (2007), “A review of the Stern Review on the Economics of Climate Change”, Journal of Economic Literature, 45, 686–702.”

“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).”

“Higher values for this parameter can be found in Weitzman (2007) and Nordhaus (1993) (first column entries of : the effective discount factor.”

“Like the cost of climate change mitigation, the distant time frame in which its effects are expected has been seen as a barrier to action (Nordhaus, 2007: 690–1; Pidgeon and Fischhoff, 2011: 37).”

“A potential loss for current generations could therefore be substantially reduced and may even disappear, if an efficient BAU path is used. controversial for many years, see for instance, the Stern Review (Stern, 2007), and the subsequent discussion in e.g., Nordhaus (2007) and Weitzman (2007).”

“7 The choice of interest rate is often decisive when evaluating long-term environmental investments, with a lower rate tending to favour measures with long lags (Nordhaus 2007).”

“Weitzman (2007) argues an insurance perspective rather than the usual one in savings and investment models to render mitigation benefits sufficient weight.”

“Weitzman (2007) estimates that the difference in costs of global warming between Stern’s and other models is two orders of magnitude.”

“…than using resources to reduce emissions, but over time the rising cost of emissions shifts this balance towards emissions reductions, implying a rising carbon price (Nordhaus, 2007a opposite pattern to the Medium scenario – a lower support ratio initially and a higher support ratio subsequently.”

“M. Weitzman (2008b, 2007a), an environmental economist and Harvard colleague of Barro, points out the possibility of bias toward private investment, in contrast with public investment, because the very reliance upon discounting to present value dictates profitability over a limited time span.”

“Another inherent factor is the evolution of IAMs over time in terms of improved cost of climate damage function, global climate cycles, and climate change mitigation technology pricing (Rao and Mustapa 2021; Weitzman 2007; Wong et al. 2015).”

“Just think of integrated assessment models in the context of climate change and their reliance on GDP (see Weitzman, 2007; Nordhaus, 2018).”

“My main aim in this article is to assess those arguments, especially those found in his 2007 paper ‘A Review of the Stern Review on the Economics of Climate Change’ (Nordhaus, 2007), and to show that they exemplify, to a large extent, what not to do when dealing with philosophical questions in economics, and with the…”

“For example, the choice of discount rate is often the most fundamental source of disagreement in long-term climate change economic risk assessments (Stern 2006; Nordhaus 2007; Stern & Taylor 2007).”

“…to climate economics in his review of the Stern Review, “When countries weigh their self-interest in international bargains about emissions reductions and burden sharing, they will look at the actual gains from bargains, and the returns on these relative to other investments” (Nordhaus 2007, 692).”

“Although we cannot hope to summarize this large and multi-disciplinary literature, it is useful to consider a few points made by Nordhaus (2007) and by Weitzman (2007) in their separate reviews of the Stern Review (2007).”

“For those who have interest in the referenced discount rate debate we point the readers to Stern (2007), Weitzman (2007), and Nordhaus (2007), to start.”

“It is pertinent to point out that there is a link between investment and climate change (Mayo, 2007).”

“…Busch, 2010; Doda, Gennaoli, Gouldson, Grover, & Sullivan, 2016), carbon footprint (Delmas & Nairnbrich, 2011; Goldhammer, Busse, & Busch, 2016), carbon supply chain management (Nishitani, Kokubu, & Kajiwara, 2016; Elhedhli & Merrick, 2012), and carbon emission with climate change (Nordhaus, 2007).”

“Nordhaus (2007), finds a SCC of 11,5 $/tCO2 for 2015 while more recently, with similar calibration for the rate of pure time preference, Traeger (2015) and Golosov et al.”

“As for the transversality condition (9), we note that equation (11) holds along the path generated by the proposed equilibrium, which implies that”

“…impacts Energy Tourism SLR River Floods Agriculture Forestry Health Used this study Nordhaus (2007) Used this study Nordhaus (2007) Used this study Nordhaus (2007) Used this study Nordhaus (2007) Used this study Nordhaus (2007) Used this study Nordhaus (2007) Used this study Nordhaus…”

“It has been further discussed by numerous economists such as Gollier [Gol10, Gol12] and Weitzman [Wei98, Wei07].”

“The utility discount rate was taken to be 2% per year, a relatively smaller value than the mean value of 2.5% generally found among existing studies (e.g. Portney & Weyant 1999; Stern 2006; Dasgupta 2007; Nordhaus 2007).”

“The assumptions and methodology of the Stern Review have been criticised (e.g. Weitzman, 2007): in particular, the use of a low discount rate (reduction in future costs of taking action).”

“It is well known that in the debate about environmental policy intervention either an immediate government action is prescribed (Stern, 2007) or a more gradualist approach is suggested (Nordhaus, 2007) to contrast and control emissions and climate change.”

“…widely used to explain behaviors such as risk aversion (Nicholson, 1995), plays a fundamental role in the intergenerational discount rate (Ramsey, 1928; Nordhaus, 2007), and is the basis for an array of social welfare functions (e.g., Sen, 1973; Blackorby and Donaldson, 1978; Bossert et al., 2009).”

“The review has been criticized for its economic assumptions and in particular for the low discount rates applied, which substantially increase the weight assigned to costs of climate change occurring in the future (e.g., Tol & Yohe, 2006; Nordhaus, 2007).”

“The proposition of valuating the effects of climate change by using very low or even negative discount rates, as suggested in the ‘Stern Report’, met firm opposition among economists (Stern et al., 2007; Nordhaus, 2007).”

“Nordhaus (2007) argues that discount rate should be consistent with the observed rate of return on capital, and Mendelsohn (2008) argues that low discount rates are equitable because that makes each generation equally worse off, as each generation is burdened by the following generations.”

“The third discount rate, proposed by Martin Weitzman, is an average of the two (Weitzman 2007).”

“We identify least-cost pathways in this large ensemble that are common to different mitigation cost function [5, 13] and that do not rely on the choices of objective functions to minimize [14, 15].”

“The choice of discount rate is part of current economic debates on the urgency of the response to global warming (see [2–10]).”

“They have used it to pull future benefits and costs of climate change back to the present (Nordhaus, 2007) or to evaluate health-care programs (Drummond et al, 2005).”

“In The Stern Review on the Economics of Climate Change, Weitzman (2007) [35] reported that though the Stern Review called for “immediate decisive action to stabilize greenhouse gases because the benefits of strong early action on climate change outweighs the costs” by adopting a very low discount rate for investments…”

“The SRTP formula can also be extended by considering uncertainty in the consumption growth rate (Gollier 2002; Howarth 2003; Cochrane 2005; Weitzman 2007; Ackerman et al. 2009; Liu 2012).”

“Thus, according to the parametrisation set by Weitzman (2007) on the integrated assessment model (IAM) and in line with the policy view adopted in the Stern Review, a saving rate climate-friendly saving rate has to be s 100%.”

“Disagreements about social time preferences are at the heart of the extensive debate about optimal climate policy that followed the publication of the Stern review on the economics of climate change (Nordhaus 2007;Weitzman 2007; Dasgupta 2008; Stern 2008).”