Monday, September 10, 2012

The economics of Climate Change, or What happened to the Stern review?

It is about time Klimazwiebel readers get up to speed with the latest development on Nicolas Stern's famous report, commissioned by the UK Chancellor five years ago. In it, Stern famously called climate change the biggest market failure in history, suggesting carbon pricing (and carbon markets) as remedy. This report has been used as authoritative source in many quarters, above all by people endorsing stringent climate mitigation policies. It informed attempts to justify drastic and costly emission cuts, a strategy which seems to lose momentum. A firm focus on economic growth has become more important and citizen opposition to many renewable projects have stalled ambitious plans.

Ever since its publication, the Stern review has been discussed critically. Last week a conservative MP, Peter Lilley, has published a highly critical report "What is wrong with Stern?
The Failings of the Stern Review of the Economics of Climate Change" on the website of the Global Warming Policy Foundation. Richard Tol has written a foreword from which I quote two paragraphs:

The publication of the Stern Review of the Economics of Climate Change  was a PR exercise that was unprecedented in economics. Sir Nicholas, now  Lord Stern, was portrayed as an expert even though he had never published  before on the economics of energy, environment or climate. Nick Stern was  presented as independent, although he was a senior Treasury official and  had been a civil servant, first with international organisations, and latterly in  the UK, for 12 years and was supported by a team of civil servants. The Stern  Review was claimed to be the first ever economic analysis of and justification for climate policy, although similar studies had been published since the  1980s.
Overly ambitious emission reduction in the short run, as embraced by the European Union and the United Kingdom, is needlessly expensive. It is also divisive, particularly when based on flawed analysis like that in the Stern Review. It will take a century to solve the climate problem. Most economic studies conclude that it is best to start with modest emission reduction, and accelerate the stringency of climate policy over time. For that, public policy will need to pull into the same direction over 20 or more electoral cycles. If the case for climate policy is exaggerated, the backlash will come, sooner or later. The Stern Review was a tactical masterstroke, but it will likely prove to be a strategic blunder. Its academic value is zero.

This is not an appeal to authority but to the merit of arguments. But in case you did not know it is perhaps worth pointing out that Richard Tol is one of the most important climate economists, judging by the number of peer reviewed papers and their impact. His endorsement of Lilley's is therefore quite significant.


Roddy said...

'It informed attempts to justify drastic and costly emission cuts, a strategy which seems to lose momentum.' - the two areas I know most about are the UK and the EU.

In both 'legal' obligations to pursue drastic emission cuts still exist, with the EU policy seemingly based upon CCS wishful thinking and near-zero mention of nuclear, and in both the pursuit of more expensive renewable options over gas will continue to lead to job exports and fuel poverty from F-i-Ts.

The Stern legacy is still used to claim that these are cost-effective and indeed mandatory policies, despite the (I agree) total lack of momentum in USA, Chindia, and everywhere else except Australia.

@ReinerGrundmann said...

The Guardian reports today that the
Global carbon trading system has 'essentially collapsed'

Roddy said...

Gosh I thought the CDM was long dead - that was a total scam. I had companies wanting to float coming to see me to raise money etc, a gravy train of Western charlatans in bed with emerging market clever-dicks all looking to sell the credits (CO2 savings measured against a non-existent hypothetical counterfactual and 'validated' by yet more dodgy agencies) into the ETS.

Yes, the ETS and CDM are failing to provide a quasi-market solution, which was part of EU targets I guess.

It's all a shambles, but the targets, in UK case 'legally binding', still exist.

See also EU biofuels collapse -

hvw said...

Finally some good news (for me, Alarmist)!

Roddy hits the nail on the head in his first paragraph. Although just one of many. Cap and Trade is obviously (to some at least) so wrong, yet is implemented on such a high level, that it has provoked some excellent critique, ranging form animation movies over an entertaining analysis in terms of fetishism to an intellectually inspiring paper that provides a Polanyian analysis.

In that light, it is also clear why analyses such as the Stern Report were and are bunk. Bluntly, economics, at least this kind of economics is useless to tackle the problem. That doesn't excuse the apparently major problem with his method, and someone should be slapped for it, for pedagogical reasons. But hopefully it doesn't distract from the fact that current mainstream economics is not applicable to inform politics about mitigation or adaption strategies.

Lets hope that politics and society at large will move towards realizing the underlying misconceptions that lead us to these wrong tracks in the first place.

Roddy said...

hvw - thanks.

I'm not so down on economics, but Stern is ridiculous in its ambition and as Tol says deficient in its methodology.

It's 'fairly' easy to measure the cost of carbon reduction - you need to make assumptions re coal and gas prices, and use some kind of discount rate for very long projects like nuclear, but it's not rocket science.

Where it gets tricky is cost of impacts of ACC (as opposed to CC and weather). My inclination is to look at stuff like which takes one 'easy' aspect, sea level rise (and shows that unless you're a small island adaptation dominates).

I've been re-reading Future Babble at night, which does put one off any kind of forecasting anyway.

hvw said...


It's 'fairly' easy to measure the cost of carbon reduction...

Maybe, if you restrict yourself to a number of unrealistic assumptions. Coal, gas, oil prices: Predict international political constellations and wars for a century? Predict frequency and magnitude of incidents such as Deepwater Horizon? Nuclear energy: How much severe accidents do you factor in, in the next 100 years, where do they happen, and what is the cost? Would the cost of a failed-or-not search for a long-term waste repository make a dent in the overall cost (think Yucca Mountain, x * 10^11 $)? Predict technological/scientific breakthroughs that ameliorate all of the above, or make it totally irrelevant? Just image you are in 1912 and are supposed to predict anything important in 2012.

On top of the prediction problem, there is no objective way to express all cost in terms of $. Economists like (need) to do this, but once you assign a price to something you can't buy, there is always a normative step involved, which economists mostly try to hide or just don't realize what they are doing.

Concerning the cost of GW-impact, it's the same, just much worse.

But I agree that, like in the paper you mention, for some relatively small, well delineated problems, were you can establish a reasonable investment-cost relationship, such economic considerations are an important input. It is still surprisingly difficult in such cases to come up with defendable numbers though, but it's a sane approach.

[Future Babble] sounds like a nice read. I've been reading the Black Swan at night, which coveys a similar message, I guess.

ThomasV said...

Australia is an excellent study case.
PM Gillard leading a minority government with the green support introduced this year a carbon tax.
She suffered crushing state defeats and her government has an approval rate of 30%. The highly unpopular carbon tax is not the only reason but it is an important reason.

The opposition leader has already stated publicly that the very first act of his government will be to abolish the carbon tax.
There is a very high probability that he will be elected and, obviously, his clear statement about the carbon tax doesn't alienate the voters. On the contrary.

This case should be meditated, especially by members of academia who are generally out of touch with the real world and foremost with the world where elections and voters shape the decisions.
In his debate with Obama, Romney said "Scientists may inform the politics but they don't DO the politics".
This is another way to express the fact that decision taking in the political world must take in account many more constraints that the scientists not only ignore but often consider irrelevant.

Symmetrically a politician who is legitimated by a popular vote, may and will listen to a scientist as long as he only describes scientific facts or what he holds for such and then decide a politics which is opposite to the politics that the scientist deems appropriate.

The Stern report, if it is considered at least marginally scientific, may therefore be read by the politician who then decides not to follow all or any recommendations.
As my personnal relations with the political world have taught me, most (good) politicians are acutely almost "sensually" aware of which decisions are consistent with the ensemble of constraints and which aren't.

The principal constraint being of course that it is the voter who always has the last word.

Roddy said...

hvw - fair enough, I only meant, as you saw, that tackling the different dollar costs of wind v nuclear v coal v gas etc etc is at least a tractable problem, with visible and clear parameters (ok, not Fukushima), and from a UK context we at least have past costs to look at for all generation options, not that anything will stay the same - we used to be hugely dependent on coal, then on gas, and so on, that price risk is always around.

I like your technology change point - we wasted a lot of money on canals, then some bastard went and invented railways! :)

Reading through Lilley, and some commentary eg on Judith Curry's blog, coupled with Future Babble - I just don't know what people are doing forecasting 100 years hence on anything, but with ACC you have to try I guess, just don't assume it's all CACC, and don't ignore adaptation - I think Lilley has a nice point when he says the Dutch, when they built their dykes, were far poorer than the Bangladeshis today, and suggestions that they can't adapt are essentially racist.

SREX also covers the fact that impacts are disproportionate in badly run countries and minimal in well-run ones, same as for earthquakes.

Black Swan - he is a smug git, but it's a good read, there's a footnote when he realises that even captains of industry have no special foresight within their sector, then comforts himself with the thought that the market will sort them out later.

Pip pip

hvw said...

thanks for your thoughts.
I like your technology change point - we wasted a lot of money on canals, then some bastard went and invented railways! :)

But still, the UK canal network is a very nice feature of the country, even though superfluous, in retrospect, from a purely transport-economic point of view.

So you made me grep through Lilley's piece for keywords and I learned that a bit of warming can't be that bad because we all like hot holiday destinations, that agricultural impacts are overstated because CO2 is a plant nutrient, after all, that water-stress is a non-issue because those countries would have to do something about it anyways, and that "Modellers deny that their models are based on ‘curve fitting’ or ‘tuning’." So it's thinly disguised denialist propaganda to me. Even if it attacks something that might be without substance as well. Note to self: Re-calibrate appraisal of the academic capability of people who endorse this piece.

Of course, the capacity for adaption in, say African countries, is way below that of the developed countries of the North, but global warming still hits particularly hard there for pure climatic and geographical reasons. Enabling those countries to adapt better, make them into "well-run" countries, has been on the agenda since quite a while, without much effect. And I fear that the reason for this is that the North, in reality, is not particularly interested in this goal. Come to think of it, there seem to be quite some parallels between the politics of international CO2 emission reduction targets and Millenium Development Goals.

Back to the original topic, I think that economic predictions that are so uncertain as to border fantasy with attached cargo science narrative, as the basis of political decisions, should be replaced with a different kind of reasoning, which might be more sophisticated than "if x>y then do A else do B".