Statistical sleight of hand, verbal virtuosity
The U.K. government relies on the Stern review to justify its policies to combat global warming — possibly the most costly program since the welfare state. But the Stern review was not fit for that purpose.
The review’s conclusions were way outside the consensus of economic studies it supposedly reviewed and have been roundly criticized by many leading economists. Indeed, Stern’s conclusions, that the costs of a crash program to reduce emissions are far outweighed by the benefits, contradict even the Intergovernmental Panel on Climate Change (IPCC), which said: “Costs and benefits are broadly comparable in magnitude,” so it could not establish “an emissions pathway or stabilization level where benefits exceed costs.”
These criticisms were ignored when Stern’s report was published since political parties, media and environmentalists welcomed its conclusions as incontrovertible truth.
However, the mood has changed since the recession, as the costs of climate subsidies hit homes and businesses and the Climategate emails provoke skepticism.
It is time to look anew at the economics of tackling climate change (while taking as given the IPCC’s assessment of the science — in order to focus exclusively on the economics of climate change policy).
Stern’s headline conclusions were that: “If we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year now and forever,” whereas: “The costs of action — reducing greenhouse gas emissions to avoid the worst impacts of climate change — can be limited to around 1% of GDP each year.”
They succeeded in giving the clear impression that we face huge losses now which could be averted at a fifth of their cost. But this is achieved by verbal virtuosity combined with statistical sleight of hand. In fact, even on Stern’s figures, the cumulative costs of reducing greenhouse gases will exceed the cumulative benefits until beyond 2100. Stern’s misleading headlines rely on comparing apples and pears, as well as conflating predictions centuries hence with the present.
Stern compares the cost of limiting the amount of global warming with the benefit of eliminating it entirely. The benefit of preventing it entirely would, on his figures, be at least 5% of GDP — but to do so would require not just stopping all further carbon emissions but removing all those accumulated since the Industrial Revolution. The action he proposes to reduce the worst impacts of global warming by stabilizing the atmospheric concentration of greenhouse gases at 550 parts per million would, using Stern’s methodology, save some 3.1% of GDP — not 5%. The review headlines put the cost of meeting his emissions target at 1% of GDP, though Stern has since doubled that and, in the body of his report, the cost was put at up to 4% of GDP.
The larger the damage that will still occur if emissions are stabilized at Stern’s target, the more misleading the comparison Stern makes between the cost of reducing damage and the benefits of eliminating emissions entirely. The smaller the residual climate change damage if emissions are stabilized, the less compelling the case for stabilizing at that level.
The government should cease to rely on the flawed Stern review to justify policy and should commission a new, independent review.
Peter Lilley, an economist, is a U.K. MP and a former secretary of state for trade and industry. Excerpted from “What Is Wrong With Stern?,” released this week by the Global Warming Policy Foundation.