The Stern Review: A deconstruction
Using 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.
References listed on IDEAS
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- Mirrlees, J. A. & Stern, N. H., 1972. "Fairly good plans," Journal of Economic Theory, Elsevier, vol. 4(2), pages 268-288, April.
- William D. Nordhaus, 2006. "The "Stern Review" on the Economics of Climate Change," NBER Working Papers 12741, National Bureau of Economic Research, Inc.
- Raj Chetty, 2006.
"A New Method of Estimating Risk Aversion,"
American Economic Review,
American Economic Association, vol. 96(5), pages 1821-1834, December.
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