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2009-09-30 | Peer Reviewed

An even Sterner Review, Introducing Relative Prices into the Discounting Debate

Sterner, Thomas and Martin Persson. 2008. “An even Sterner Review, Introducing Relative Prices into the Discounting Debate.” Review of Environmental Economics and Policy 2:1: 61-76.
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The Stern Review (2006) has come to symbolize something of a dividing line in the evolution of the common appreciation of the climate problem. It is fair to say that during the last decade there has been a gradual but uneven increase in the perceived gravity of anthropogenic climate change, both among scientists and, with some time lag, the general public.

However, save the United Nations Intergovernmental Panel on Climate Change (IPCC) assessments, the Stern Review is the first major, official report to give climate change a really prominent place among global problems. The political backing of the Stern Review in the UK is impressive. At its first presentation Sir Nicholas Stern was flanked by both Prime Minister Blair and Gordon Brown.

However, the Stern Review has been criticized on a number of accounts. The criticism has regarded both the manner in which the results are presented and the methodology underlying them, especially when it comes to the economics of discounting the future benefits and costs of climate change. For instance Nordhaus has a model DICE (Dynamic Integrated model of Climate and the Economy) which produces results suggesting climate change is not so serious and that relatively little abatement is needed. Nordhaus (2006) shows that DICE gives similar conclusions to those of the Stern Review if the rate of discounting is low suggesting that the only reason for the Stern results is the assumed discount rate which Nordhaus considers too low.

In this paper we show that results similar to those in the Stern Review can be obtained even without making the criticized assumptions concerning the discount rate. We do this by taking into account a neglected but important fact that relative price change is an inherent aspect of economic growth. As the rate of growth is uneven across the sectors of the economy - the composition of economic output will inevitably change over time. Output of mobile telephones may grow fast while glaciers and coral reefs decline and therefore relative prices will change.

We show that this has important implications for the efficient level of climate change mitigation. We present the results of some simulations using the same standard climate model,DICE in order to illustrate the impact that changes in relative prices can have on calculations of future climate-change damages. We conclude by arguing that greenhouse gas stabilization scenarios that are even more stringent than those discussed or suggested in the Stern Review could be justified.

Co-author:

U. Martin Persson