Chapter 6 - Did the Stern Review Underestimate US and Global Climate Change?

Summary

The Stern Review received widespread attention for its innovative approach to the economics of climate change when it appeared in 2006, and generated controversies that have continued to this day. One key controversy concerns the magnitude of the expected impacts of climate change. Stern's estimates, based on results from the PAGE2002 model, sounded substantially greater than those produced by many other models, leading several critics to suggest that Stern had inflated his damage figures. We reached the opposite conclusion in a recent application of PAGE2002 in a study of the costs to the US economy of inaction on climate change. This chapter describes our revisions to the PAGE estimates, and explains our conclusion that the model runs used in the Stern Review may well underestimate US and global damages. Stern's estimates from PAGE2002 implied that mean business-as-usual damages in 2100 would represent just 0.4 percent of GDP for the United States and 2.2 percent of GDP for the world. Our revisions and reinterpretation of the PAGE model imply that climate damages in 2100 could reach 2.6 percent of GDP for the United States and 10.8 percent for the world.

Introduction

The Stern Review received widespread attention for its innovative approach to the economics of climate change when it appeared in 2006. It represented a break with conventional analyses in several respects, generating debates about climate economics that have continued to this day. One of the foundations of the Stern analysis was the use of the PAGE2002 model (Alberth and Hope 2007; Hope 2006a; Wahba and Hope 2006) to estimate the damages that would be expected under business-as-usual conditions (i.e., in the absence of effective new climate policies). Based on PAGE, Stern estimated that the present welfare cost of climate damages through 2200 could amount to 5 percent of world output under a relatively narrow definition of damages, up to as much as 20 percent under the broadest definition. These estimates were substantially greater than those produced by many other models, leading several critics to suggest that Stern had inflated his damage figures (Byatt et al. 2006; Lomborg 2006; Mendelsohn 2006; Nordhaus 2007c; Tol and Yohe 2006).