Stern Review on the Economics of Climate Change

Stern Review on the Economics of Climate Change
Title	Stern Review on the Economics of Climate Change
Author	Nicholas Stern
Year	2006
Published by	Her Majesty's Treasury
Country	United Kingdom
Pages	700

Stern Review on the Economics of Climate Change The Stern Review on the Economics of Climate Change was a 2006 report led by Nicholas Stern for Her Majesty's Treasury assessing the economic risks of climate change and the costs of mitigation. It presented integrated analysis linking physical science assessed by Intergovernmental Panel on Climate Change findings to macroeconomic modelling used by institutions such as the International Monetary Fund, World Bank, and Organisation for Economic Co-operation and Development. The Review catalysed policy debates in forums including the G8 and the United Nations Framework Convention on Climate Change.

Background and Commissioning

Commissioned by Gordon Brown as Chancellor of the Exchequer and produced under the authority of Her Majesty's Treasury, the Review assembled an advisory team including figures from London School of Economics, University of Cambridge, Imperial College London, and contributors linked to Hadley Centre for Climate Prediction and Research and the Tyndall Centre for Climate Change Research. Its remit drew on precedents such as the Brundtland Report and the work of Paul Ehrlich and William Nordhaus on environmental economics, while engaging with policy debates influenced by leaders like Tony Blair and negotiators at the Kyoto Protocol sessions. The appointment of Nicholas Stern reflected his prior roles at World Bank and as Permanent Secretary to HM Treasury.

Key Findings and Conclusions

The Review concluded that unmitigated climate change posed risks comparable to major economic shocks such as those from Great Depression, Global Financial Crisis of 2007–2008, and long-term damage akin to outcomes from historic events like Dust Bowl. It estimated that without action, climate change could reduce global gross domestic product by a level comparable to losing at least 5–20% of global GDP, and possibly much more in extreme scenarios noted by Intergovernmental Panel on Climate Change assessments. Conversely, the Review argued that strong, early action to reduce greenhouse gas emissions would cost around 1% of global GDP annually, citing mitigation pathways compatible with limiting warming to levels discussed in negotiations at the United Nations Framework Convention on Climate Change and echoes of ambitions later revisited at Paris Agreement (2015) talks. The Review emphasized equity and development dimensions, referencing impacts on regions including Sub-Saharan Africa, South Asia, and small island states such as Maldives.

Economic Analysis and Methodology

The Review combined integrated assessment modelling approaches influenced by work from William Nordhaus, Martin Weitzman, and others, employing discounting frameworks that generated debate akin to disputes involving Frank Ramsey's and John Rawls's philosophical positions. It used macroeconomic projections comparable to scenarios in reports by the International Energy Agency and incorporated climate sensitivity estimates reported by the Intergovernmental Panel on Climate Change. The Review adopted a low pure time preference rate and placed significant weight on future welfare, aligning conceptually with ethics advanced by Amartya Sen and Joseph Stiglitz. Models referenced included elements from computable general equilibrium frameworks used by OECD analysts and incorporated damage functions that critics compared to those used by Nordhaus in his DICE model. The Review’s approach to uncertainty drew on risk literature including work by Kenneth Arrow and Leonard Savage.

Policy Recommendations and Impacts

Stern recommended a mix of market-based instruments such as carbon pricing implemented via emissions trading systems similar to the European Union Emissions Trading System and carbon taxes discussed in policy circles in Sweden and British Columbia. It advocated large-scale investment in low-carbon technologies promoted by institutions like European Investment Bank and Asian Development Bank, and called for research funding for options including carbon capture and storage developed at centres such as NETL and Imperial College London. The Review urged industrialised countries to lead mitigation while providing finance and technology transfer to developing countries via mechanisms reminiscent of proposals at Bali Climate Change Conference and later operationalised under the Green Climate Fund. It influenced policy deliberations within cabinets of leaders like Gordon Brown and Angela Merkel and featured in discussions at G8 and G20 summits.

Criticisms and Academic Response

Academic responses ranged from support by scholars sympathetic to precautionary approaches such as Nicholas Stern’s contemporaries to critiques from economists including William Nordhaus, Richard Tol, and others who questioned the Review’s discount rate choices, damage function assumptions, and cost estimates. Debates referenced methodological disputes familiar from exchanges among Robert Solow, Kenneth Arrow, and Martin Weitzman on treatment of catastrophic risk and tail probabilities. Critiques appeared in journals frequented by contributors associated with National Bureau of Economic Research, Journal of Economic Perspectives, and university departments at Harvard University, Yale University, and University of Chicago. Some policy analysts argued the Review underestimated adaptation costs in vulnerable regions such as Bangladesh and overestimated near-term mitigation feasibility absent political constraints seen in institutions like United States Congress and European Commission.

Implementation, Reception, and Legacy

The Review shaped discourse in international forums including the United Nations Framework Convention on Climate Change negotiations and domestic policy in United Kingdom and beyond, contributing to adoption of carbon pricing mechanisms and accelerated renewable energy deployment in markets across Germany, China, India, and United States. Its emphasis on economic risks and ethical commitments influenced later international agreements culminating at Paris Agreement (2015), and informed fiscal instruments endorsed by World Bank and International Monetary Fund. The Review’s legacy persists in academic curricula at institutions like London School of Economics and policy units within ministries in countries including France and Japan, while ongoing critiques continue to refine modelling of risk, discounting, and technological pathways in climate economics scholarship associated with scholars at Stanford University, Massachusetts Institute of Technology, and University of Oxford.

Category:Climate change economics