The Stern Review: an assessment of its methodology

The Productivity Commission today released a staff working paper titled The Stern Review: an assessment of its methodology. This technical paper contains a detailed examination of key elements of the Review’s analytical approach. Originally prepared as an internal research memorandum following release of the Stern Review’s report, the paper is being made more widely available given its ongoing relevance in light of Australia’s Garnaut Review. The staff paper finds that the Stern Review made some important analytical advances. The Review sought to move beyond analysis based on the mean expected outcome to one that incorporates low probability, but potentially catastrophic, events at the tail of probability distributions. The Review also attempted a more comprehensive coverage of damage costs than most previous studies. The paper also finds that value judgements and ethical perspectives in key parts of the Stern Review’s analysis led to estimates of future economic damages being substantially higher, and abatement costs lower, than most previous studies. The paper notes that the report could usefully have included more sensitivity analysis to highlight to decision-makers the consequences of alternative assumptions or judgements. The views expressed in this paper are those of the staff involved and do not necessarily reflect those of the Productivity Commission.