Another Critique of Stern Report

“Regardless of the merits of the estimates of costs and damages made in the Stern Report, the analysis makes a serious logical error. The report compares the effects of never regulating greenhouse gases to the abatement costs of stabilizing concentrations at 550 ppm. The analysis ignores the continuum of choices between the two policies. That is, it does not examine whether the net benefits would be higher if concentrations were stabilized at 650 ppm, 750 ppm, or some other level.

Economic theory suggests that one should check whether making small changes in a plan could improve the result. For example, let us add one ton of emissions to the 550 ppm stabilization plan. The catastrophic damages associated with the no-regulation scenario would not occur because the added ton of carbon would not cause temperatures to climb high enough to impose such damages. The marginal damage of that one ton of emissions would effectively be near zero because there are hardly any damages associated with a 2ºC increase in temperature. However, if the marginal damages of emissions are near zero, it no longer makes sense to have high marginal costs of abatement. The marginal analysis suggests that more emissions should be allowed; the stabilization plan target is too low. The stabilization plan promoted in the Stern Report is clearly not the best choice available to society.

If this marginal logic (central to economics) encourages society to abandon the 550 ppm stabilization plan suggested in the report, does it necessarily take the world to dangerous levels of climate change? As was stated in the introduction, the seminal economic analysis of climate change did allow greenhouse gases to accumulate for this century. However, earlier analyses did not examine what would happen as the climate system approached a dangerous level. An efficient marginal analysis would always consider future damages. As dangerous levels of climate change approach, the present value of marginal damages would increase dramatically. Regulations would tighten, reducing emissions and avoiding the dangerous level of climate before it comes to pass.”

-Robert O. Mendelsohn in the Regulation magazine