Saturday, January 12, 2008

Is Stern Correct?

December edition of Australian Economic Review has a policy forum on the economics of climate change-excerpt from one paper below.

Is Stern Correct? Does Climate Change Require Policy Intervention?
Paul H. Jensen, Melbourne Institute of Applied Economic and Social Research
and Elizabeth Webster
At face value, many of the criticisms of the Stern Review have merit—it is clearly not without its flaws. In particular, it lacks transparency, fails to provide sensitivity analyses and there are discrepancies between sections. However, these concerns should be made in light of the fact that it is a government report tackling a very complex issue. As in any modeling exercise, assumptions need to be made about these parametric values in order to make the model tractable and Stern has made a valiant attempt to do so. Although it is not an academic publication (nor does it purport to be), the Stern Review does a sound job at quantifying the costs of climate change—the assumptions made are well founded in economic utilitarian principles. And the idea that governments should provide their citizenry with some insurance against the possibility that catastrophic climate change may occur sometime in the future is not quite as ludicrous as many people seem to argue. After all, the underlying principle is quite similar to that of the provision of a national defence force, which is essentially a very costly insurance policy against the (small but highly uncertain) probability that a country will be invaded.

It also seems unfortunate that many of the economist critics of Stern have focused on the choice of discounting factors to the almost complete exclusion of what are probably more serious concerns—the environmental irreversibilities. These concerns include the melting of the permafrost, changes in deep ocean currents and the permanent destruction of the barrier reef and ecosystems, to name just a few (Neumayer 2007 is an exception). Typical economic cost–benefit tools are not equipped to make clear and sensible decisions when irreversible investments are involved—they implicitly assume that ‘goods’ today and ‘goods’ tomorrow are perfect supply-side substitutes. What we are hearing from the scientific community is that it is quite probable that this is not the case. However, we simply do not know how likely such irreversible events are.

Stern review discussions in World Economics journal

Regulating Carbon Emissions with Differentiated Taxation

Time to Change U.S. Climate Policy
Carbon taxes are not likely to be politically feasible in the U.S. for addressing climate change in the short term, according to Robert Hahn and Peter Passell. The time is now ripe for the U.S. to consider adopting a cap and trade approach to reducing greenhouse gas emissions.

The Stern gang

Recalculating the Costs of Global Climate Change
- Hal Varian

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