The Stern Review on the Economic Effects of Climate Change


Abstract

In a study of the economics of climate change commissioned by the British government, released on 30 October, the former World Bank chief economist Sir Nicholas Stern presents a vigorously argued case for early curtailment of greenhouse gas emissions and proposes mitigation strategies that appear to offer highly favorable benefit-cost ratios. An excerpt from the Executive Summary of the Stern Review, concerned with the nature and magnitude of the deleterious economic consequences of anticipated climate change, is printed below.

The principal scientific reviews of knowledge of climate change, its consequences, and mitigation strategies are the (roughly) quinquennial reports of the Intergovernmental Panel on Climate Change (IPCC)—the work of hundreds of lead authors, subjected in turn to elaborate peer review and line-by-line scrutiny by interested governments. They represent a broad, though not total, expert consensus. The third IPCC assessment was issued in 2001; the fourth, already in draft, will be released next year. The Stern Review draws heavily on this scientific underpinning, but goes further than the IPCC exercise in computing economic values for the projected changes and costing out remedial policy responses. More forthright in style and emphatic in its conclusions, it reads as a resounding call to international action.

The Review explores the implications of atmospheric concentrations of carbon dioxide and other greenhouse gases being capped at 550ppm (parts per million), double the preindustrial level, an objective it argues is feasible. That concentration would be reached by 2050 at current emission rates, or by 2035 if emissions rise as expected. The resulting warming, it believes, would be 2-5°C, roughly in accord with the IPCC's third-assessment estimates (see the Documents section of PDR 27, no. 1 for the IPCC projections). The positive feedbacks identified in some recent studies, generated by processes such as release of methane from permafrost, could lead to still higher temperatures.

The forecast effects described are by now familiar, though no less grim for being so: species extinctions, expanding disease zones, reductions in surface water availability, coastal flooding, ocean acidification, and so on. The Review translates these effects into economic losses, adjusting for risk, using Monte Carlo simulation applied to an integrated assessment model (the so-called PAGE 2002 model). The exercise, requiring many heroic—and often contestable—assumptions, produces the most quoted figures in the report: that climate change “will reduce welfare by an amount equivalent to a reduction in consumption per head of between 5 and 20%”—now and into the future.

The absolute magnitude of those projected economic losses is made arbitrarily large by their permanence. Typical benefit-cost calculations applied to appraisal of development projects convert such long-term trajectories into a present value using a discount rate comparable to a market interest rate or some (lower) assumed rate of time preference. The Stern Review, however, argues that any discounting is ethically inappropriate for this global issue: “if a future generation will be present, we suppose that it has the same claim on our ethical attention as the current one” (p. 31). The only exception is an allowance for the possibility that future generations are not present—through human extinction—which is held to justify a minuscule discount rate of 0.1 percent per annum (p. 161).

The percentage economic losses from climate change appear less daunting if set against the recent pace of expansion in the world economy. Real per capita income growth since 1990 has averaged about 1.5 percent per year worldwide, and about 3 percent in developing countries. In such a regime, a 5 percent one-time drop to a lower expansion path is no more than a two- or three-year delay in attaining a given income level. For China and India, whose economies are doubling in size each decade, even a 20 percent reduction in income would be a mere hiccough on the path to affluence—hardly enough to motivate major shifts in lifestyle ambitions. The dire repercussions on global environments of a greenhouse warming at the upper end of the forecast range are poorly captured by those percentages.

Demography has a marginal place in the Review. The underlying IPCC emission scenarios incorporate expected population growth, using the UN medium projections. Many of the climate-change effects incur costs that are similarly magnified by population growth. One-sixth of the world's population is “threatened” by water scarcities; 1 in 20 people may be displaced by a rising sea level; mortality may increase from vector-borne diseases and from malnutrition linked to income losses.

The later part of the Review is concerned with mitigation and adaptation strategies. It lays out an ambitious set of policies for transition to a low-carbon economy that could stabilize greenhouse gas concentrations over the next several decades. By 2050, emissions would have to be 25 percent below today's and emissions per unit of GDP 75 percent below. In perhaps the most problematic part of the exercise the Review asserts that such cuts could be achieved at a cost of only around 1 percent of annual global GDP—implying that investment in mitigation should be strongly favored on straightforward economic grounds. (This figure, like others in the Review, is acknowledged to lie within a substantial envelope of uncertainty—here a range of −1.0 percent to +3.5 percent of global GDP (p. 212), or, drawing on a wider range of models, −4 percent to +15 percent (p. 241).) In the decades before the investment pays off, adverse consequences of the warming trends already underway must be dealt with by adaptation, such as through better disaster preparedness, lessening the vulnerability of infrastructure, and risk-pooling measures.

The excerpt is from pp. iii–iv and vi–xi. The full Stern Review (579 pages), the executive summary, and the commissioned background papers are available online at «http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm». A hard copy of the Review will be issued by Cambridge University Press.

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