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The Stern Review: A deconstruction

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  • Tol, Richard S.J.
  • Yohe, Gary W.

Abstract

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.

Suggested Citation

  • Tol, Richard S.J. & Yohe, Gary W., 2009. "The Stern Review: A deconstruction," Energy Policy, Elsevier, vol. 37(3), pages 1032-1040, March.
  • Handle: RePEc:eee:enepol:v:37:y:2009:i:3:p:1032-1040
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    Cited by:

    1. Aline Chiabai & Ibon Galarraga & Anil Markandya & Unai Pascual, 2013. "The Equivalency Principle for Discounting the Value of Natural Assets: An Application to an Investment Project in the Basque Coast," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 56(4), pages 535-550, December.
    2. -, 2010. "The economics of climate change in Central America: summary 2010," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 35229, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    3. 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.
    4. Dritan Osmani, "undated". "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.
    5. Andy Reisinger, 2011. "Interdisciplinarity: are we there yet?," Climatic Change, Springer, vol. 108(1), pages 23-30, September.

    More about this item

    Keywords

    Economics of climate change Certainty- and equity-equivalent annuity Optimal climate policy;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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