Reviewing the Stern Review

by John Q on November 14, 2006

The release of the Stern review on the economics of climate change has had a huge impact on the climate change debate in Australia. There had already been signs of movement, but the government was still adamant in rejecting both the Kyoto protocol and any form of emissions trading. And, although the offical position did not dispute the science of climate change, many of the government’s supporters in the media, and even some ministers, were pushing the denialist line.

That was only a few weeks ago. Now the Australian government has endorsed emissions trading (in principle at least) and is calling for a ‘new Kyoto’. Ratifying the old Kyoto is still a step too far for a government that has never disagreed with George Bush on anything, but it’s hard to see how long this position can last.

Given the impact of the Stern review, it’s important to see if it stands up to scrutiny, and I’ve done a series of posts on parts of the report at my blog. My main conclusions:

(i) Stern’s estimates of the cost of stabilising CO2 levels (1 per cent of GDP by 2050) are optimistic, but in the right ballpark
(ii) Stern’s treatment of discounting is correct (More to come on this, I hope)
(iii) Stern underestimates the costs of Business As Usual, particularly in relation to environmental damage
(iv) Headline reporting of Stern overstates the risks of worst-case outcomes in the long tail, but critics are wrong to suggest that low-probability extreme outcomes should be ignored.

Overall, my conclusion is that the Stern review gets the basic economics and the policy recommendation right, even if the presentation is inevitably political.