1. A Stern Review of the Stern Review Richard S.J. Tol Economic and Social Research Institute Hamburg, Vrije and Carnegie Mellon Universities

2. Agreement Climate change is real and caused by humans Climate change is a problem Economics can shed light on climate policy Greenhouse gas emission reduction should start now Greenhouse gas emission reduction is best implement with market-based instruments Stern is commended for putting this on the public and political agenda

3. Disagreement Estimates of the costs of climate change Estimates of the costs of emission reduction Optimal targets for emission reduction Stern is right for the wrong reasons – is this the best way of starting a public debate on the economics of climate policy?

4. Consensus Being alone does not make you wrong, but it should make you think – David Pearce Stern has been praised by the admirably fast readers Solow, Mirrlees, Sen, Stiglitz Stern has been criticised by Connelly, Helm, Hulme, Maddison, Mendelsohn, Nordhaus, Yohe, and by Dasgupta, Henderson, Varian, Weitzman Stern’s response to the criticism has been particularly vague

5. The Stern Review The Stern Review was commissioned by Gordon Brown and Tony Blair, perhaps in response to the critique of the House of Lords on the lack of economic analysis on UK climate policy There are 23 authors on the Stern Review, 50 or more consultants supported the review, and numerous experts attended workshops About 15 months of preparation 575 pages, 36 background papers Costs in excess of £2 million (estimate, no information on Treasury website)

6. The Stern Review -2 The Stern Review is badly documented, impossible to reproduce Some of this was repaired later, including several postscripts that undermine the headline conclusions and occasionally add more confusion One peer has admitted to having reviewed the Stern Review, and noted that his comments were not taken on board The Stern Review was circulated among the press before shown to experts on the economics of climate change Doesn’t HM Treasury have quality-control?

7. The Stern Review -3 The Stern Review is a literature survey – there are no new data, no new models, no new analysis Yet, the Stern Review is completely out of step with the literature – and does not even alert the reader to this

8. Is the Stern Review an outlier?

9. A Reconstruction Three regions: poor, middle, rich Income convergence Population grows from 6 to 9 billion Warming (2100) 2.3 / 3.1 / 4.5 K with probability 0.15 / 0.70 / 0.15 Impact 5.6 / 3.3 / 1.0 %GDP for 3K warming for poor / middle / rich Impact quadratic in temperature Very similar to PAGE2002 / SRES A2

10. Welfare measures Certainty- and equity-equivalent annuity CEEA calibrated to 5.3% BGE dominated by scenario, BGE = -179.4% The postscript to the postscript to the Stern Review says they compute ΔBGE ΔBGE = CEEA iff log util, implies scenario independence

12. Summary The Stern Review did not compute what it said it did, and it used a particularly bad approximation A different set of ethical parameters – perhaps easier to defend, certainly more in line with the data – would have let to lower estimates Stern‘s benefit estimates were off by 30% Internally consistent scenario decreases estimates by 60%

13. Emission Reduction Two papers support the Stern Review, but the main report ignores Terry Barker‘s meta-analysis, and adopts Dennis Anderson‘s cost estimates instead Terry Barker gets the economics wrong, in subtle and complicated ways Dennis Anderson‘s work: –Stops at 2050 –Suboptimal trajectory –No economic feedback –No capital stock turnover

15. Cost-Benefit Analysis The Stern Review emphasizes the uncertainties about climate change, but ignores those about emission reduction Inconsistent time horizons – recall that the impacts to 2050 are 1% of GDP, equal to the costs of abatement The Stern Review presents a cost-benefit analysis with two discrete alternatives: –Do nothing –Existing UK policy The range of policies is much wider

16. Cost-Benefit Analysis -2 Stern does a CBA with two alternatives: –Do nothing –Existing UK policy Stern endorses the latter, even though his estimates of the costs of emission reduction are lower, and his estimates of the benefits are much higher than previous UK studies Stern resigned after UK climate policy did not change The EU has higher costs and lower benefits, but a stricter target I do not pretend to understand any of this

17. Conclusion The Stern Review put the economics of climate change on the public agenda The Stern Review made a range of procedural and technical errors The Stern Review made peculiar ethical assumptions The quantitative results are fragile and do not stand up to scrutiny, but the qualitative insights are robust – Stern was wrong but right HM Treasury hit a new low in quality An economic case for emission reduction now can be made – but the Stern Review missed the chance to make it

18. St Nicholas Rebuking the Storm Bicci di Lorenzo, 1433 Ashmolean Museum, Oxford