Stern Review and Economics of Climate Change

On February 14, Resources for the Future hosted a special seminar on the economics of climate change featuring a discussion on the recently released Stern Review: The Economics of Climate Change. Compiled by Sir Nicholas Stern, head of the United Kingdom's Government Economics Service and adviser to the U.K. government on the economics of climate change and development, the Stern Review is the first major government-sponsored benefit-cost analysis of climate change.

The Stern Review concludes that "the benefits of strong, early action on climate change outweigh the costs." The report's central finding is that unmitigated climate change could cost an equivalent of 5-20 percent of per capita consumption over the long term, but the world would only have to bear a cost equal to about 1 percent of GDP annually to stabilize atmospheric concentrations of greenhouse gases at approximately 550 parts per million carbon equivalent. To achieve the emissions abatement necessary to meet this ambitious concentration goal, the report calls for the implementation of policies to put a price on greenhouse gas emissions (for example, through an emissions tax or cap-and-trade program), stimulate the development of new climate-friendly technologies, and remove barriers to behavioral change. This effort would likely require global greenhouse gas emissions to peak over the next 10-20 years and then decline up to 3 percent per year thereafter.

The main finding of the analysis has drawn considerable attention to this report. U.K. Prime Minister Tony Blair stated that it "will be seen as a landmark in the struggle against climate change." U.S. policymakers have also paid close attention to the report, as evidenced by the recent hearing on the Stern Review held by the Senate Committee on Energy and Natural Resources. Academic economists, many of whom have previously undertaken their own economic analyses of climate change, have weighed in with comments on the Stern team's methods and assumptions. Some have applauded the effort; others have leveled strong criticisms.

The seminar hosted by RFF provided a rare public opportunity in the United States for members of the Stern team and outside experts to discuss and answer questions about the methods and conclusions of the Stern Review and the economic analysis of climate change more generally. Alex Bowen, senior economic adviser to the Stern Review, provided an overview of the benefit-cost analysis undertaken in the report. Jake Jacoby, professor at the Massachusetts Institute of Technology's Sloan School of Management and co-director of the Joint Program on the Science and Policy of Global Change, and Joe Aldy, fellow at RFF, commented on the Stern Review, discussing the application of benefit-cost analysis in this report and the use of such analysis to inform policy design and implementation. The seminar closed with a panel discussion guided by audience questions.

Phil Sharp|  
President
Resources for the Future

Billy Pizer is widely recognized for his research into the design of policies to address climate change risks caused by manmade emissions of greenhouse gases. His work assesses how various features of environmental policy in an economic context can influence a policy’s efficacy under different circumstances. These circumstances include uncertainty, technical advances, and changing costs of environmental regulation. In addition to his work at RFF, he is a senior economist at the National Commission on Energy Policy, where he provides analysis and expertise on environmental and energy security issues. A fellow at RFF since 1996, Pizer also has served as a senior economist at the Council of Economic Advisers in 2001–2002, where he worked on energy, environment, and climate change issues; been a visiting scholar at Stanford University’s Center for Environmental Science and Policy in 2000–2001; and taught at Johns Hopkins University from 1997 to 1999. He holds a B.A. in physics from University of North Carolina–Chapel Hill and an M.A. and Ph.D. in economics from Harvard University.

Alex Bowen |
Senior Economic Adviser
The Stern Review