THE STERN REVIEW: A DECONSTRUCTION

No FNU-125, Working Papers from Research unit Sustainability and Global Change, Hamburg University

Abstract: Using a simple model designed for transparency but nonetheless calibrated to support the much-quoted damage estimates of the Stern Review of the Economics of Climate Change, we demonstrate significant sensitivity of those results to assumptions about the pure rate of time preference, the discounting time horizon, rates of risk and equity aversion used to compute certainty- and equity equivalent annuities, and presumed static regional vulnerability. Manipulation of any of these parameters one at a time across reasonable ranges can diminish damage estimates by as much as 84% or, in the case of extending the time horizon, increase damage estimates by 900%. We also confirm the usual result that limiting atmospheric concentrations to specific benchmarks above 400 ppm cannot eliminate damages. Nonetheless, we applaud the Stern Review author team for reconfirming that the climate problem can productively be approached as an economic problem whose solutions can be explored with the tools of decision analysis.

Keywords: economics of climate change; certainty equivalent and equity equivalent annuity; relative risk aversion; equity aversion; pure rate of time preference (search for similar items in EconPapers)
JEL-codes: Q54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-upt
Date: Written 2007-02
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