Marvin Shaffer’s review of Nicholas Stern, The Global Deal: Climate Change and the Creation of a New Era of Progress and Prosperity (London: The Bodley Head; New York: Public Affairs, 2009) appeared in Inroads 26 (Winter/Spring 2010).

Nicholas Stern, Baron Stern of Brentford, has enjoyed an illustrious career as professor at Oxford, London School of Economics and Collège de France. As adviser to Chancellor Gordon Brown in the U.K. Treasury, he led a team that published a high-profile 2006 Report on the Economics of Climate Change. That was followed three years later by the publication of his book The Global Deal, a more accessible version of the report. Stern called for dramatic action on climate change, including ambitious carbon taxation and pricing policies, and delivered grave warnings about the inordinate costs of climate change should the world fail to take such action quickly. Critics jibed about Stern having produced an unduly “stern” report.

To Stern, the scientific, economic and moral imperative was clear. Failing to act would result in severe damage, dislocation, desperate migration and conflict, disproportionately affecting the poorer, developing countries of the world – those least responsible for the growing concentration of carbon in the atmosphere and least able to manage the consequences. Efficient reductions in carbon emissions, on the other hand, could be accomplished at a relatively low cost, far less than the costs of climate change. The emission reduction measures could be undertaken in an affordable and equitable manner, with the richer, developed countries assuming primary responsibility for what had to be done.

Stern was not the first to make the economic, let alone moral, case for action on climate change. William Nordhaus’s seminal integrated assessment modelling of annual greenhouse gas emissions, impact on global mean temperatures and consequent impact on economic output and growth has become “industry standard.” In it, Nordhaus concluded in the early 1990s that emission reductions would improve social welfare – the economic benefits would exceed the costs. What set Stern apart was the urgency and extent of the measures that he called for. Nordhaus’s analysis indicated that relatively modest carbon taxes or equivalent measures would be socially optimal. Stern argued that much stronger measures were justified and required.

Initially, the Stern-versus-Nordhaus debate centred on the seemingly technical but nonetheless critically important question of what discount rate to apply to calculate the present value of future damage costs. In the tradition of classical British economists like Arthur Cecil Pigou and others, Stern took the position that we should place the same value on future impacts on social welfare as on impacts today – there should be no discounting for pure time preference. It would be immoral, in his view, to do anything else – discriminating against future generations.

Nordhaus, however, took the conventional position in social benefit-cost analysis that the discount rate should reflect people’s preferences, and the fact is that people do discount future benefits or costs. People attach exponentially less weight to benefits or costs expected in the future compared to the same benefits or costs occurring today, not least because of the uncertainty about our needs and opportunities in future years. With climate change impacts expected to be most severe decades or even centuries away, discounting greatly reduces the estimated present value of forecast future damage costs. Correspondingly, this reduces the extent and urgency of the measures that should be taken today.

The question of whether to discount distant costs and what discount rate to apply is without doubt an important issue. But as a number of economists subsequently pointed out, even if one were to accept conventional discounting, there is a case for urgent and dramatic measures to reduce greenhouse gas emissions – much more than Nordhaus and even Stern concluded in their initial work.

In a 2015 paper, Stern and his co-author Simon Dietz pointed to three interrelated factors that point to the need for much stronger action:

• The adverse impacts of climate change on long-term growth in productivity;
• The likelihood of tipping points – discontinuities or sharp increases in damage costs as concentrations of carbon in the atmosphere exceed certain levels;
• The explicit recognition and valuation of low-probability extremely severe outcomes that we would want to invest
  heavily to insure against.¹

Without delving into the technical arguments, the bottom line is that, whereas Stern was calling for a carbon tax or equivalent measures costing some $35 to $50 per tonne, and Nordhaus much less, these factors, even with the conventional discounting of future costs, call for carbon taxes or equivalent measures costing $130 to $450 per tonne by 2025 and much more in future years.

In retrospect, the question of whether Stern was too extreme in his call for urgent action – exaggerating the present value of future damage costs with his classically British position that it would be immoral to discount future costs regardless of how distant in the future they are forecast to occur – is moot. The latest analyses and circumstances suggest not only that Stern was closer to the mark than Nordhaus, but that Stern himself was too conservative. For reasons different from Stern’s original call for action, the damage costs of unmitigated climate change are now estimated to be much greater than what they both estimated.

Critics of Stern’s original analysis – myself included in my review of Stern’s Global Deal in Inroads – have to acknowledge that whatever discounting or other technical issues his analysis raised, his work has greatly enhanced and confirmed our understanding of the economic case for urgent, strong action.

Of course, making an economic case for action and seeing it materialize are two very different matters. And it is still the case that Stern’s work did not lay the groundwork for the best ways forward in a complex national and international context. Stern’s 2009 Global Deal did not present an achievable deal. Rather, it laid out Stern’s plan that addressed not only the severe costs of unmitigated climate change but also his interests and position on international development and moral responsibility.

It is challenging enough for major economies to take the domestic steps needed to meet emission reduction targets that, with great fanfare, leaders regularly promise and to date consistently fail to achieve. Stern made the political hurdles in high-income countries even greater by proposing massive transfers of emission-sheltered industrial development opportunities for developing countries, with the concentration of emission reduction responsibilities placed on developed countries. “America Firsters” – and Europeans too – are not going to accept dislocations and the decline of traditional industries for the sake of emission reductions if carbon-intensive industrial activity is not similarly constrained elsewhere.

There is and always has been a case for major support for poorer developing countries. But to link that to a moral argument about global responsibilities for emissions reductions, as Stern did, won’t advance international aid and certainly won’t advance the achievement of the major reductions in emissions needed to mitigate climate change.

Stern’s Global Deal also failed to provide a practical way forward in another important respect. His analysis of the damage costs of climate change, like that of many who followed, failed to consider what measures could and should be undertaken to adapt to warmer mean temperatures and more volatile climatic conditions. He failed to consider what the minimum necessary damage costs of climate change could be.

Stern considered investment in adaptation “reckless and foolish.” But the issue, especially today with the effects of climate change already being felt, is not emission reduction versus adaptation. Optimal climate policy clearly requires both. Well-considered adaptation measures implemented now can provide immediate relief from the climate change we are already experiencing and cannot avoid. As well, it can mitigate the costs of the increasingly severe climate change we can expect in coming years. At the same time, as the costs of adaptation to more extreme climate change become manifestly, prohibitively high, they will strengthen the case for more aggressive emission reduction.

A socially optimal plan, maximizing benefits in relation to costs, almost certainly requires a fully integrated adaptation and emission reduction plan. A carbon tax policy that is driven as much by the need to fund efficient adaptation investments as by the need to reduce carbon emissions is one way to fashion such an integrated plan. There may be others. But Stern’s Global Deal didn’t address and indeed
dismissed the need to consider this critically important issue.

Looking back, Stern was clearly right in the case he made for urgent action on climate change. What he failed to consider, and in important ways even set back, is consideration of how best it can be done.

Note

¹ Simon Dietz and Nicholas Stern, “Endogenous Growth, Convexity of Damage and Climate Risk: How Nordhaus’ Framework Supports Deep Cuts in Carbon Emissions,” Economic Journal, Vol. 125, Issue 583 (March 2015), pp. 574–620.