The stern review on climate change: Inconvenient sensitivities

Abstract

Nicholas Stern's Review of "The Economics of Climate Change" (2007) triggered considerable discussion, essentially by condensing a complex problem - the question of how to act in the face of global warming - into juxtaposing two numbers, the cost of mitigation and the cost of climate change. The Review concludes that mitigation today is economically superior to adaptation tomorrow. The review was widely criticized for the assumption of a pure rate of time preference of almost zero, on which its conclusions seemed to depend. In this paper we argue first, that this assumption discriminates against current in favour of future generations. Second, we perform a sensitivity analysis to test for the extent to which the conclusions of the Review are indeed based on the assumption of a rate of time preference of almost zero. We demonstrate that the conclusions of the Review are no longer valid as soon as parameter values are used which are standard in economic analysis. Combined, these results raise a bigger question: how wise is it to base crucial policy choices on a model so dependent on a single, deeply subjective, judgement call?