Critical Assumptions in the stern

 In November 2006, the British government presented a comprehensive study on the economics of climate change , the Stem Review. It painted a dark picture for the globe: 'III we don't act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP [gross domestic product] each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more." The Stem Review recommended urgent, immediate, and sharp reductions in greenhouse-gas emissions. These findings differ markedly from economic models that calculate least cost emissions paths to stabilize concentrations or paths that balance the costs and benefits of emissions reductions. Mainstream economic models definitely find it economically beneficial to take steps today to slow warming, but efficient policies generally involve modest rates of emissions reductions in the near term, followed by sharp reductions in the medium and long term (2-5). A standard way of showing the stringency of policies is to calculate the ''carbon tax," or penalty on carbon emissions. A recent study by the author estimates an optimal carbon tax for ions of about $30 per ton carbon in today's prices, rising to $85 by the mid-21st century and further increasing after that (5). A similar carbon price has been found in studies that estimate the least-cost path to stabilize carbon dioxide concentrations at two times protein dust rial levels (2). The sharply rising carbon tax reflects initially low, but rising, emissions reduction rates. We call this the climate-policy ramp, in which policies to slow global warming increasingly tighten or ramp up over time. A $30 carbon

 Comparing the optimal carbon tax under alternative discounting assumptions. Integrated model of clinical trials news. Climate and the Economy (DICE model) (5) integrates the economic cods and benefits of greenhouse gases (Gig) reductions with a simple dynamo representation of the scientific and economic links of output, emissions, concentrations, and clip' mate change. The DICE model is designed to choose levels of investment in tangible capital and in Gallic re:Inchon% that maximize economic welfare. It calculates the optimal carbon tax as the price of carbon emissions that will balance the incremental of abating carbon emissions with the incremental benefits of lower future damages from climate change. Using the DICE model to optimize climate policy leads to an optimal carbon tax in boos of around Ssh per ton carbon (shown here as 'DICE baseline). If we substitute the Stern Review-s assumptions about tune astounding and the consumption elasticity into the DICE model, the calculated optimal carbon tax is much higher and rises much more rapidly (shown as 'Stern assumption:). tat may- appear to he a modest target. but it is at least to times the current globally averaged carbon tar implicit in the Kyoto Protocol (shown as Stern assumptions). What in the logic of the ramp? In a world when- capital la productive and damages are far in the fun in (see chart affirm). the highest. return investments today are primarily in Ian. gable, nontechnical. and human capital. In the inning decade.. damages are predicted to rise relative to output. As that occurs. rt becomes efficient to shift investment toward more intensive emissions reductions and the IRK COM paying higher carbon taxes. The exact time  of emissions reductions depends on details of emit. damages, learning, and the extent In which climate change and damages are nonlinear and semitrailer. The Stern Review proposes to rime Ill to inn table for emissions reductions slur . forward. It suggests global emulsions reductions of between yo% and 70%  the neat two decades. °bin-Me consistent with a carbon tat of about  per ton today. or about to times the level mg. Rested by standard economic models. Green that the Stern Review embraces . traditional economic techniques such as those described in it-t). how does 0 get such differ.  results and strangles, Flaying analyzed the Stern Review in (6) 'which also contains a list of recent analyses). I find that the difference sterns ah nowt emirs-Is-from Its technique for cal. cabling disgusting rates and only marginally on new science or economics. The reasoning has questionable foundations in terms of its ethical assumptions and also leads to economic results that are inconsistent with market data. Some background on growth economics and discounting concepts I. necessary to under-stand the debate. monogramming alternative trajectories for emissions reductions. the key  variable is the real return on capital. which measures the net yield on investments in capital. education. and technology. In principle. this is observable in the marketplace. For rumple. the real pretax return on U.S. snipe rate capital over the last four decades has aver-aged about 0.07 per year. Estimated real returns on human capital range from 0.06 to > 0.20 per year, depending on the country and time period (7). The return on capital is the "discount rate" that enters into the determination of the efficient balance between the cost of emissions reductions today and the benefit of reduced climate damages in the future. A high return on capital tilts the kids science magazines balance toward emissions reductions in the future, whereas a low return tilts reductions toward the present. The Stern Review's economic analysis recommended immediate emissions reductions because its assumptions led to very low assumed real returns on capital. Where does the return on capital come from? The Stern Review and other analyses of climate economics base the analysis of real returns on the optimal economic growth theory (8, 9). In this framework, the real return on capital is an economic variable that is determined by two normative parameters. The first parameter is the time discount rate, denoted by p, which refers to the discount on future utility or wel-fare (not on future goods, like the return on capital). It measures the relative importance in societal decisions of the welfare of future generations relative to that of the current generation. A zero discount rate means that all generations into the indefinite future are treated the same; a positive discount rate means that the welfare of future generations is reduced or "discounted" compared with nearer generations. Analyses are sometimes divided between the ''descriptive approach," in which assumed discount rates should conform to actual political and economic decisions and prices, and the "prescriptive approach," where discount rates should conform to an ethical ideal, sometimes taken to be very low or even zero. Philosophers and economists have conducted vigorous debates about how to apply discount rates in areas as diverse as economic growth, climate change, energy, nuclear waste, major infrastructure programs, hurricane levees, and reparations for slavery. The Stern Review takes the prescriptive approach in the extreme, arguing that it is indefensible to make long-term decisions with a positive time discount rate. The actual time discount rate used in the Stern Review is 00.01 per year, which is vaguely justified by estimates of the probability of the extinction of the human race.