Stern review

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The Stern review on the economics of climate change was conducted by Sir Nicholas Stern and presented to the United Kingdom Government in October 2006. It was the most comprehensive review ever carried out on the economics of climate change.

Stern came to the following conclusions:
  • There is still time to avoid the worst impacts of climate change, if we take strong action now. The scientific evidence is now overwhelming—climate change is a serious global threat, and it demands an urgent global response. This Review has assessed a wide range of evidence on the impacts of climate change and on the economic costs, and has used a number of different techniques to assess costs and risks. From all of these perspectives, the evidence gathered by the Review leads to a simple conclusion—the benefits of strong and early action far outweigh the economic costs of not acting.
  • Climate change could have very serious impacts on growth and development.
  • The costs of stabilising the climate are significant but manageable; delay would be dangerous and much more costly.
  • Action on climate change is required across all countries, and it need not cap the aspirations for growth of rich or poor countries.
  • A range of options exists to cut emissions; strong, deliberate policy action is required to motivate their take-up.
  • Climate change demands an international response, based on a shared understanding of long-term goals and agreement on frameworks for action.

Source: Stern review on the economics of climate change, short executive summary, http://www.hm-treasury.gov.uk/d/CLOSED_SHORT_executive_summary.pdf.

Among the review's conclusions was that the cost of climate change—assuming a business-as-usual approach—would be considerable in terms of reduced global gross domestic product (GDP) of between five and 20 per cent each year, but that the cost of avoiding such outcomes (the abatement cost) is relatively small at about one per cent of GDP annually. The review's conclusions differ from those of other models which concluded that the cost in terms of GDP forgone was smaller and the cost of abatement higher.

Analyses of the Stern review have concluded that the main reason the review's conclusions differ from those of other models is its use of a low discount rate. The review’s conclusion about the loss of GDP is based on discount rates of around 1.4 per cent per annum. Adding one percentage point to the discount rate reduces the damage cost estimates by more than half.

The Australian Greenhouse Office (now part of the Department of Climate Change) defined the discount rate in its paper titled Economic issues relevant to costing climate change impacts, which also illustrates how changing assumptions can yield quite different results.


15 July 2010
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