RFF must-read: The Stern Report got it right

Climate change mitigation costs less than doing nothing about the problem

Posted by Joseph Romm (Guest Contributor) at 4:51 PM on 20 Aug 2007

Read more about: climate | climate change mitigation

I have argued previously that the landmark Stern Report got the big picture right -- strong action now to reduce greenhouse-gas emissions is economically justified, since the cost of action (i.e., mitigation), perhaps 1 percent of GDP, is far less than the cost of inaction (i.e., climate change impacts), which Stern estimates as at least 5 percent of GDP and possibly as high as 20 percent.

In particular, I (and others) argued that Stern's much-criticized choice of a low discount rate, 1.4 percent, was in fact justified -- see here and here for a good discussion.

Now perhaps the most mainstream economic policy think tank in the country -- Resources for the Future (RFF) -- has written a major report, "An Even Sterner Review" (PDF), with two key conclusions.

First, "we find no strong objections to the discounting assumptions adopted in the Stern Review."

Second:

[T]he conclusions reached in the review can be justified on other grounds than by using a low discount rate. We argue that nonmarket damages from climate change are probably underestimated and that future scarcities that will be induced by the changing composition of the economy and climate change should lead to rising relative prices for certain goods and services, raising the estimated damage of climate change and counteracting the effect of discounting.

What does RFF mean by "rising relative prices"?

Our main point in this paper is that results similar to those in the Stern Review can be obtained by taking into account the neglected but important fact that relative price change is an inherent aspect of economic growth -- that is, stringent greenhouse gas emission cuts can be economically justified without making the assumptions about the discount rate for which Stern has been criticized. Because the rate of growth is uneven across the sectors of the economy, the composition of economic output will inevitably change over time. If output of some material goods (e.g., mobile phones) increases while access to environmental goods and services (e.g., clean water, rainfed agricultural production, or biodiversity) declines, then the relative price of these environmental amenities would be expected to rise over time. The result of these uneven growth rates in the economy would be increased economic damages stemming from climate change and, subsequently, higher levels of climate change mitigation would be warranted today.

The report then points out:

If we were to combine the low discount rates in the Stern Review with rising relative prices, the conclusions would favor even higher levels of abatement. This would in fact lead us to consider some of the levels of carbon content that Stern deems unrealistic, that is, aiming for a target of less than 450 ppm CO2 equivalents.

This is a stunning conclusion for a mainstream (center-right?) organization normally known for splitting the baby with the most moderate economic policy recommendations.

And this is a stunning vindication for the Stern review. Kudos to RFF for this original and important contribution to the climate debate.

This post was created for ClimateProgress.org, a project of the Center for American Progress Action Fund.

For story: RFF must-read: The Stern Report got it right
2 Comments | Post a Comment

Who is this think tank?

Can you tell us more about this think tank? I'm not familiar with them at all.

by Kit Stolz at 10:59 PM on 20 Aug 2007

Discount Rate

Stern never used a discount rate as low as 1 or 1.4. He used a standard eta, and a low delta - which ended up with a discount rate in the neighborhood of 4.6% which was slightly above the rate of the U.S. ten year long bond at the time. If you don't mind, I will link to a Quiggin blog post which is much less technical than the two Quiggin pieces you quoted, but explains the confusion:

Given eta = 1, the discount rate is equal to the rate of growth of consumption per person, plus 0.1. A reasonable estimate for the growth rate is 2 per cent, so Stern would have a real discount rate of 2.1 per cent. Allowing for 2.5 per cent inflation, that's equal to a nominal rate of 4.6 per cent. The US 10-year bond rate, probably the most directly comparable market rate, is currently 4.44 per cent; a bit above its long-run average in real terms. So, Stern's approach produces a discount rate a little above the real bond rate.

Your larger point about Stern undervaluing the damage from climate chaos is quite right.

by Gar Lipow at 11:13 PM on 20 Aug 2007

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