10 Years on, Climate Economists Reflect on Stern Review

By Brian Kahn

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Climate change is ultimately a problem of dollars and cents across generations. That’s because the actions society takes today to address climate change — namely cutting carbon pollution — won’t provide immediate benefits. Instead, those benefits will be reaped in the coming years and decades and even centuries in the form of fewer people dying from heat waves, cities not being submerged by rising seas, farmers dealing with reduced risk of megadroughts.

Weighing all these costs and benefits in terms that governments can create policies around and businesses can prepare for is no small task. Yet 10 years ago, that’s the Stern Review, a 700-page behemoth of a report, did.

The world's economy will need to shift from one based on fossil fuels to one based on low carbon technologies.
Credit: dru/flickr

Commissioned by the British government and led by economist Nicholas Stern, the massive report was the first of its kind to quantify the costs to address climate change and its impact on the global economy vs. what would happen if the world continued emitting carbon pollution unchecked.

It found that cutting carbon emissions so that carbon dioxide peaked in the range of 450-550 parts per million would cost 1 percent of the GDP annually, but ignoring climate change could cause economic damage on the order of up to 20 percent of the GDP. Translated into real world numbers, the Stern Review put a price of about $85 per ton of carbon pollution emitted today, well above the current rate used by the U.S. of $40 per ton.

It’s a stark finding — though one that has yet to inspire major action — that was both heralded as a breakthrough and hotly debated in the intervening decade.

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Since the Stern Review’s publication, other economists have made estimates of what it would cost to address climate change, but the Stern Review still stands out as a seminal document similar to the Intergovernmental Panel on Climate Change reports on science.

With the 10-year anniversary coming up at the end of October, Climate Central reached out to a group of leading and up-and-coming climate economists dealing with the challenge of valuing climate action now and into the future. Their answers are below, lightly edited for clarity and brevity.

What’s the legacy of the Stern Review?
How have its conclusions held up over time?

Andrew Steer, president of the World Resources Institute: The legacy is exceedingly important. Until then, economists didn’t really focus adequately on issues of climate change or at least they had a relatively naive review of things. What the Stern Review did is by careful way of marshalling evidence of costs and benefits, it provided a massive leap forward in our understanding of the economics of climate change.

The conclusions have stayed correct but the messages would be much stronger if it were written today than they were then. The case for action is much more clear today than it was back then. That’s partly because technology has changed, making the transition to a low carbon future much more cost-effective. Second, because we’re 10 years on, the problem has become more obvious. Essentially, the costs of inaction have gone up and costs of action have come down a lot.

Kate Gordon, vice chair of climate and sustainable urbanization at the Paulson Institute: The Stern Review was critically important in moving the climate issue from one of science to one of economics. It has inspired a huge amount of work afterward, including the Risky Business Project, which in its pilot phase was actually known as “the Stern Review for the U.S.” So its legacy is one of opening the door to a sober economic conversation about the implications of climate change, which is critically important. Its specific conclusions may be less useful as we move from climate diplomacy to the operational phase of climate mitigation, as those economic and workforce development strategies are profoundly local and must be done at a far more granular level than the Stern Review used.

Amir Jina, postdoctoral researcher at the University of Chicago: Two main contributions stand out to me. First, maybe more than any other single publication, the Stern Review helped to reframe climate change as an economic issue, not just a scientific one. Second, it provided the research community with a strong motivation to discuss some of the thornier questions about climate change economics — the debate about how we value the future being perhaps the most obvious one. There's a downside to the latter, in that it maybe made us focus too much in the past decade on issues that were in the review rather than all the evidence that wasn't in there.

What’s the biggest leap that climate economics
has made in the 10 years since the Stern Review?

Andrew Steer:The Global Commission on the Economy and Climate put out a report (two years ago) that has shown that the tradeoffs identified 10 years ago don’t exist anymore. In other words, the Stern Review of today would emphasize that climate change actions will lead to more dynamism in the economy. It will lead to more technology and better competitiveness around the world. With smart policies, you can move directly toward an efficient, low carbon economy. That’s a big shift from 10 years ago.

Delavane Diaz, senior technical lead and economist at the Electric Power Research Institute: The last decade has seen a major shift in the research community toward interdisciplinary collaborations that bring together experts in the physical sciences, climate impacts and adaptation, and greenhouse gas mitigation. This means that researchers who have typically identified as belonging to Working Groups 1, 2, or 3 of the Intergovernmental Panel on Climate Change (IPCC) are now collaborating across those boundaries to better understand the coupled human-earth system. A few examples of these efforts include the Integrated Assessment Modeling Consortium, the Inter-Sectoral Model Inter-comparison Project, and the Climate Impact Lab.

Gernot Wagner, economist at the Harvard John A. Paulson School of Engineering and Applied Sciences: A recognition of how much we don't yet know, in particular about the full impact of climate damages. Sadly, most everything we know about what we don't know — or can't yet quantify — would push the correct carbon price higher still, pushing the $40 'consensus' number ever closer to the original Stern number and perhaps well above. It's those unknowns and perhaps unknowables that put the “shock” into my book “Climate Shock.” It's one thing to quantify what we know. It's another to insure ourselves against the unknowns and unknowables.

An offshore wind project near Wales.
Credit: Aaron Crowe/flickr

Are you hopeful the world will address
climate change in a cost effective, equitable way?

Kate Gordon:Yes. It’s impossible to do this work without having some level of optimism. I see businesses and investors, in particular, moving from skeptical observation to concrete action. But we need a strong policy framework to undergird that.

Delavane Diaz: Recent international achievements like the Paris Agreement, the Montreal Protocol HFC amendment, and the aviation emissions deal are promising signs. However, there is still far to go — very stringent mitigation efforts and effective adaptation will require substantial investments and changes in the economy and energy system, with different opportunities and pathways for different countries. While there will be considerable costs involved, taking action is not optional — addressing climate change is a societal and environmental imperative.

Gernot Wagner:It's too late to be pessimistic. Sadly, it's also too late to be able to say that there won't already be a lot of climate hurt baked in. Economists like to insist on the cost-effective solution, but beggars can't be choosers. Bottom line: we need to do much more than we are currently doing. Globally, we are still subsidizing carbon emissions rather than pricing them properly. In the end, we also need to realize that climate policy demands a portfolio approach. That includes mitigation and adaptation. It also includes carbon dioxide removal, which has very similar properties to mitigation in the first place. Lastly, it includes research into solar geoengineering, clearly not as a substitute but as a complement to the first three.

Does stabilizing the climate at 450-550 ppm still seem
feasible from an economic and/or scientific perspective?

Kate Gordon: It’s technically feasible, but it’s daunting. We need a major shift in our economic planning from geographically-based extraction and production activities to a much more distributed and low-carbon system that looks different in every location. As the Stern Report made clear, not doing this is unaffordable — so doing it is by definition economically necessary. But that doesn’t mean it’s going to be politically easy.

Amir Jina: I think it's possible from both perspectives, but maybe not from a policy one. I'm skeptical of threshold values as targets. Putting emphasis on 350 ppm, 400 ppm, or 2°C can be alarmist and can be demotivating when we pass one of those thresholds without the world ending. The question that I want to know the answer to is: “What does stabilization at 450 ppm look like in terms of economic damage and how much will it cost us to get there?” We really need some rational discussion of the costs and benefits in order to push the policy needle.

Gernot Wagner: Could we get there — technically and economically? Yes. Will we? That's a different question. 450-550 ppm, of course, is a big range. Technically, 1.5°C might be achievable. Politically, it is not. So, aim for 1.5°C, but prepare for 2°-3°C or worse.

What are the big questions the world still needs a clearer
answer on when it comes to the economics of climate change?

Andrew Steer: The really difficult issues now are given that even though we now know it’s in nations interests economically to move toward a low carbon economy, that doesn’t mean everybody can. We have a lot of vested interests that would suffer. The really tough questions are of a political economy nature and how we compensate the losers. They may be poor people, they may be coal miners, they may be entire swaths of countries that were manufacturing goods in a high carbon way.

The nature of the question has changed a bit from not “what should we do” because we know what we should do to “how do we build coalitions so we can actually do it.” In economics, there is a phrase called path dependency. That means you embark on a path — for example, everyone is going to travel to work in automobile. So you build roads. It turns out 100 years into that, you realize this isn’t the smartest way to get into work. Now that we’re on that path, it’s very difficult to switch from one path to another. You’ve got locked in capital but you’ve got vested interests — automakers, gas producers, road engineers and so on. So if you want to get out of a path dependent system, you need to disrupt the system. The field of economics needs to focus on some of those issues, which involve thinking about how we retrain coal miners or how we make sure the Rust Belt doesn’t all vote for Donald Trump because they feel globalization has left them behind.

Delavane Diaz:1) Adaptation to climate impacts: How humans plan for and respond to climate change will play a major role in the resulting economics of climate change, yet our understanding of both the rate and effectiveness of adaptation is extremely limited. Adaptation will incur its own costs, and may be subject to policy and institutional barriers or market failures.

2) Potential threshold responses and tipping elements in the Earth system: Examples include a disruption of the oceanic thermohaline circulation, sudden methane releases from the oceans or permafrost, or disintegrations of the Greenland or Antarctic ice sheets. The geological record shows evidence of such threshold responses in the Earth system, but the mechanisms, dynamics, and sensitivities are deeply uncertain.

3) Interactions and feedbacks between geographical regions and economic sectors: Impact assessments often focus on a single sector or region, and thus fail to capture possible interactions that could either exacerbate or alleviate the damage to society. Mechanisms can be both direct (migration in response to flooding or drought) and indirect (higher global food prices from declining agricultural yields in a given region). An extreme scenario could include cascading effects triggered by interdependencies between climatic, ecological, and human systems.

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