William Nordhaus on The Stern Report
November 22nd, 2006Posted by: Roger Pielke, Jr.
Here is a link to Willian Norhaus’ review of the The Stern Report (PDF). It is worth reading in full. Prof. Nordhaus provides the following “summary verdict.”
How much and how fast should the globe reduce greenhouse-gas emissions? How should nations balance the costs of the reductions against the damages and dangers of climate change? The Stern Review answers these questions clearly and unambiguously: we need urgent, sharp, and immediate reductions in greenhouse-gas emissions.
I am reminded here of President Harry Truman’s complaint that his economists would always say, on the one hand this and on the other hand that. He wanted a one-handed economist. The Stern Review is a Prime Minister’s dream come true. It provides decisive and compelling answers instead of the dreaded conjectures, contingencies, and qualifications.
However, a closer look reveals that there is indeed another hand to these answers. The radical revision of the economics of climate change proposed by the Review does not arise from any new economics, science, or modeling. Rather, it depends decisively on the assumption of a near-zero social discount rate. The Review’s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of discounting assumptions that are consistent with today’s market place. So the central questions about global-warming policy – how much, how fast, and how costly – remain open. The Review informs but does not answer these fundamental questions.
November 22nd, 2006 at 11:10 pm
If I understood correctly Mr Nordhaus comes to the same conclusion as Dr Tol (i.e. that Stern has cherry-picked studies and that a low social discount rate of 0,1 isn’t the right way to go.)
I question myself:
Did Stern expected that the world would jump in and take action or if he wanted to stall action from happening?
I can be categorise has a skeptics in this debate. Although I recognize that GW exist, and that human can be responsible for some of it, I don’t believe that it will be catastrophic in nature (at least not more so than the last 150years have been). Even though I’m a skeptic I do support that some action have to be taken. Not has much for solving climate change than local pollution.
When I read something like the Stern review, I’m more inclined to reject proposed action more than support it (And I know I’m not the only one). An example of what I mean is how people get scared by a task, yet if they don’t try to do everything at once and instead impose more attainable goals the unsurmountable task gets done.
So when I read comment like Mr Nordhaus I don’t see the task as unsurmountable. I see common sense actions that can be good for both the economy and the local environment. If it is good locally it can’t be bad globally.
I think that people like Mr Stern and Mr Gore try to stall the debate and action. If they weren’t, they would not give others so much opportunity to those who don’t wish any action to prove them wrong.
November 23rd, 2006 at 5:42 am
So, William Nordhaus predicts that the Stern Review won’t survive peer review. It will therefore be interesting to see how the IPCC is going to handle Stern’s “radical revision of the economics of climate change.” Given Richard Tol’s pessimism about the non-existence of much economic expertise within the IPCC, we shouldn’t expect too much enlightenment on the fundamental questions that Nordhaus, Tol and others have raised.
Anyway, here is an interesting note from a recent article by Viscount Monckton of Brenchley that throws some light on Stern and the IPCC:
“Sir Nicholas Stern’s report on climate-change economics says the world must spend 1 per cent of GDP from now on to avert disaster. The current draft of the UN’s 2007 report says up to 5 per cent. Sir Nick’s team tell me: ‘We are confident that the UN will publish a range for costs next year in which ours will be centrally placed.’ So some quiet high-level co-ordination is going on….”
http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2006/11/12/nclim12.xml
November 23rd, 2006 at 9:17 am
I have a question for Dr Yulsman?
Is it ok that many media played the Stern review in first page and yet none of its critics, although founded, merit the same mediatic treatment. Where I live people just stopped refering to the report without explaining either the reason or the criticism of it.
November 23rd, 2006 at 12:29 pm
“The Stern Review answers these questions clearly and unambiguously: we need urgent, sharp, and immediate reductions in greenhouse-gas emissions.”
Meanwhile, back in the real world, no Government can achieve sharp and immediate GHG reductions. Furthermore, CO2 stays in the atmosphere for decades or longer.
For the objectivity that Stern lacked:
The House of Lords, select committee on economic affairs, ‘The Economics of Climate Change’
http://www.publications.parliament.uk/pa/ld200506/ldselect/ldeconaf/12/12i.pdf
November 24th, 2006 at 2:30 am
I think more and more the whole Stern report was to do with British politics. Establishing a lead over David Cameron, the new Conservative leader, and preparing the British public for a range of new taxes… I had really high hopes on this one and the report has turned out to be very very dissapointing…
November 24th, 2006 at 5:23 am
Roger, upon review of Nordhaus I would say that while his criticism of Stern’s use of a near-zero social discount rate might be fair, in the big picture Nordhaus strongly agrees with Stern that climate change merits the investment in policy action, in the US and around the world, especially with Stern’s emphasis on the need for
increasing the price of carbon emissions.
Nordhaus quotes with approval Stern’s summary that “Creating a transparent and comparable carbon
price signal around the world is an urgent challenge for international collective action,” in the form of “a harmonized carbon tax or similar regulatory device both to provide incentives to individual firms and households and to stimulate research and development in low-carbon technologies. Carbon prices must be raised to transmit the social costs of GHG emissions to the everyday decisions of billions of firms and people.”
It is interesting to note that while Nordhaus points out that Stern uses a zero discount rate to increasing the present value of future costs, and criticizes him for that piece of opacity, it seems that Nordahus himself acknowledges that the costs of climate change, especially the risk of “dangerous interference with the climate system”, may be understated. Nordhaus comments that Stern’s choice of a zero discount rate “may have been a roundabout way to slow climate change sharply. In effect, we are using a low social discount rate to “prevent dangerous interference with the climate system” (in the language of the Framework Convention on Climate Change). If that is the reason, why not impose the limit directly? Instead of using the near-zero social discount rate as an analytic subterfuge to slow climate change, why not simply adopt policies that will directly keep climate change below the dangerous threshold?” In effect, Nordhaus is saying that Stern may be right, but should come to this conclusion directly.
Puzzlingly, Nordhaus fails to speculate on the a likely motivation for the “dramatic” clarity that the Stern report tries to provide – that the Stern report is intended by the UK government to assist with the political purpose of influencing domestic and international policies on climate change.
Many of the difficulties with reaching a meaningful international agreement are clearly laid out in the Stern report. These difficulties are absent from Nordhaus’s closing, where he states that “So the central questions about global-warming policy – how much, how fast, and how costly – remain open.” Thirty years ago, Nordhaus made the same observation, but specifically pointed to the problem of reaching international agreements:
““The central question for economists, climatologists, and other scientists remains: How costly are the projected changes (or the uncertainties about) the climate likely to be, and therefore to what level of control should we aspire? And for students of politics, the question is: How can we reasonably hope to negotiate an international control strategy among the several nations with widely divergent interests?””
William D. Nordhaus, Strategies for the Control of Carbon Dioxide January 6, 1977, p.70:
http://cowles.econ.yale.edu/P/cd/d04a/d0443.pdf
I think that the Stern report is in part intended to be an answer to Nordhaus’s thirty-year old question.
I imagine that you may noted that Joe Stiglitz has written in support of the Stern report; here are some choice quotes:
- “the study may actually significantly underestimate the costs”
- “To an economist, the problem is obvious: polluters are not paying the full costs of the damage they cause. Pollution is a global externality of enormous proportions. The advanced countries might mean Bangladesh and the disappearing island states no harm, but no war could be more devastating.
- “A global externality can best be dealt with by a globally agreed tax rate. This does not mean an increase in overall taxation, but simply a substitution in each country of a pollution (carbon) tax for some current taxes. It makes much more sense to tax things that are bad, like pollution, than things that are good, like savings and work.”
Paul Biggs suggests that the House of Lords report may be more objective than Stern; I would note that the House of Lords views the matter very seriously, and may have itself have asked exactly for a report like Stern’s when it said:
“We are not convinced that there is sufficient public awareness of the economics of climate change. Any public misperception on these issues could threaten the political feasibility of getting plans of action put into effect. If climate change is as serious as most scientists claim, and as the Government accepts, then it is important to convey the complementary message that the action to tackle it will also have to be serious and potentially life-changing.”
Some comments on the politics behind the Stern report have been noted here: http://economistsview.typepad.com/economistsview/2006/11/the_politics_be.html
Regards,
Tom
November 24th, 2006 at 8:38 am
TokyoTom:
I cannot speak for Nordhaus, but I have known him for many years and carefully read all his papers on climate change.
Nordhaus indeed favours climate policy, specifically greenhouse gas emission reduction. The House of Lords report also seems to favour climate policy — its main author, David Pearce, was a strong advocate for sure. Indeed, any economist I know who seriously studied climate change, has come out in favour of emission reduction.
That does not imply that there is agreement with Stern.
Nordhaus and others have berated Stern for a number of technical errors and wild exageration. Qualitatively, Stern may be correct — but quantitatively, Stern is very wrong.
There are several problems with that. Firstly, a supposedly eminent economist made a fool of himself in the public eye. This increases the general distrust of the public. Secondly, anyone who dislikes climate policy can quote Stern to demonstrate what fools climate policy advocates are.
Stern did not provide an argument for climate policy, but ammunition for the skeptics.
Besides, he has forced people like Nordhaus to waste precious time on refuting a silly argument. To the general public, the message of people like Nordhaus must be very confusing: Stern is wrong but right nonetheless.
Really, climate policy would have been in a better place without Nick Stern.