The Stern Review: A deconstruction
AbstractUsing a simple model designed for transparency but nonetheless calibrated to support the much-quoted damage estimates of the Stern Review of the Economics of Climate Change, we demonstrate significant sensitivity of those results to assumptions about the pure rate of time preference, the time horizon, and the rates of risk and equity aversion used to compute certainty- and equity-equivalent annuities. Most importantly, we demonstrate enormous sensitivity to presumed constant regional vulnerability and underlying assumptions about adaptive capacity. Manipulation of any of these parameters one at a time across reasonable ranges can diminish damage estimates by as much as 84% or, in the case of extending the time horizon with the Review's low discount rate, increase damage estimates by 900%. We also confirm the usual result that limiting atmospheric concentrations to specific benchmarks above 400Â ppm cannot eliminate all damages. Nonetheless, we applaud the Stern Review author team for reconfirming that the climate problem can be approached productively as an economic problem whose solutions can be explored with the tools of decision analysis.
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Bibliographic InfoArticle provided by Elsevier in its journal Energy Policy.
Volume (Year): 37 (2009)
Issue (Month): 3 (March)
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Web page: http://www.elsevier.com/locate/enpol
Economics of climate change Certainty- and equity-equivalent annuity Optimal climate policy;
Other versions of this item:
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
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- William D. Nordhaus, 2006. "The "Stern Review" on the Economics of Climate Change," NBER Working Papers 12741, National Bureau of Economic Research, Inc.
- Mirrlees, J. A. & Stern, N. H., 1972. "Fairly good plans," Journal of Economic Theory, Elsevier, vol. 4(2), pages 268-288, April.
- Raj Chetty, 2003.
"A New Method of Estimating Risk Aversion,"
NBER Working Papers
9988, National Bureau of Economic Research, Inc.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- What to do about climate change: looking beyond the discount rate controversy
by Economic Logician in Economic Logic on 2012-11-29 14:53:00
- Tanaka, Kenta & Managi, Shunsuke & Kondo, Katsunobu & Masuda, Kiyotaka & Yamamoto, Yasutaka, 2012.
"Potential climate effects on Japanese rice productivity,"
35823, University Library of Munich, Germany.
- Kenta Tanaka & Shunsuke Managi & Katsunobu Kondo & Kiyotaka Masuda & Yasutaka Yamamoto, 2011. "Potential Climate Effect On Japanese Rice Productivity," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 2(03), pages 237-255.
- Dritan Osmani, . "A note on optimal transfer schemes, stable coalition for environmental protection and joint maximization assumption," Working Papers FNU-176, Research unit Sustainability and Global Change, Hamburg University.
- Stern Review in Wikipedia (English)
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