It was also about politics. As Bagehot in the Economist noted, thanks to the Conservatives’ new leader David Cameron putting green issues at the heart of his attempt to re-brand the Conservative party, ‘Stern has acquired a significance for British politics that Mr Brown would almost certainly not have predicted.’[5]
Blair’s spin won.
‘Blair: World needs to act on climate change now,’ read the headline in the next day’s Daily Mail. Stern’s calculation of spending one per cent of GDP to save potential costs of five to twenty per cent of GDP were ‘certainly compelling’, The Times said in its leader.[6] Given the risk of ‘something really catastrophic’, like the melting of the Greenland ice sheet, ‘the costs are not huge. The dangers are’, the Economist concluded.[7]
To the Daily Telegraph, Stern’s pinning a price tag on global warming was ‘invaluable’.[8] According to the Financial Times, the economic benefits of action would eventually far outweigh the costs by as much as $2.5 trillion a year, although the paper didn’t say when that might be. How convincingly had the review made its case, asked the FT’s lead economic commentator Martin Wolf? ‘Sufficiently so,’ he wrote, putting his finger on the issue of the discount rate. ‘The review argues, sensibly, that there is no reason why the welfare of our generations should be intrinsically more important than those of our grandchildren,’ Wolf thought.[9]
There was some isolated dissent. To economist and energy expert Dieter Helm, the one per cent cost of action seemed a ‘terribly low’ estimate and hard to square with the ‘substantial lifestyle changes that many environmentalists argue are necessary and the scale of the taxes that appear necessary’.[10]
Most scathing was the Daily Mail. Even if Stern was right, on its own, Britain could do precious little about it. ‘But never fear – Superman is here, in the shape of our posturing prime minister,’ the paper said. Calling him deluded, ‘anyone listening to him yesterday would think he could save the world single-handedly’.[11] To Nigel Lawson, the near universal and credulous acceptance of the Stern Review was the result of two things coming together: ‘The ever-present media appetite for alarmism and the uncritical respect accorded by the innumerate majority to anything with numbers in it, however dubious.’[12]
The real target was overseas. The Review would be used as ‘a vehicle to take on the doubters internationally’ and enable Tony Blair to persuade a sceptical George Bush, a Whitehall source told the Financial Times.[13]
There was a great deal more scepticism and suspicion on the other side of the Atlantic. The Washington Post’s economic commentator Robert Samuelson dismissed the review as ‘a masterpiece of misleading public relations’.[14] Stern’s headlined conclusions were ‘intellectual fictions’ fabricated to justify an aggressive anti-global warming agenda, Samuelson argued. ‘Anyone serious about global warming must focus on technological progress – and not just assume it,’ as Stern had done. ‘Otherwise, our practical choices are all bad: costly mandates and controls that harm the economy, or costly mandates and controls that barely affect greenhouse gases. Or, possibly, both,’ Samuelson concluded.[15]
The widespread acceptance of the Stern Review revealed a paradox. The politics of the moment demanded a call for action which collectively the governments of the world wouldn’t sign up to and politicians were not capable of delivering. On the other hand, most mainstream economic analysis pointed to an optimal path of a gradually tightening of greenhouse gas emissions, a more achievable goal, but one that did not satisfy the apocalyptic temper of the times. William Nordhaus’s DICE model suggested a social cost of carbon of $35 a ton in 2015 rising to $206 a ton at the end of the century.[16] By contrast, the Stern Review estimate of the current social cost of carbon at $350 a ton was ten times higher.[17]
The snow lay thick on the ground when Stern met his economist peers at Yale in February 2007. The Yale symposium on the Stern Review was a ‘really serious occasion’, Chris Hope recalled. The US was engaging with Stern intellectually rather than politically and had rolled out its big guns. With several hundred people in the hall, it was the first time in fifteen years Hope felt the need to rehearse a presentation word for word.[18]
Chaired by Ernesto Zedillo, the former president of Mexico, symposium participants included Jeffrey Sachs, Scott Barrett, Robert Mendelsohn, William Cline and Nordhaus. Each offered penetrating comments. Of them, Sachs, Cline and Barrett were most sympathetic to Stern’s conclusions. Sachs went furthest. By 2010, the world would have agreed a post-Kyoto target to stabilise atmospheric carbon dioxide at 500 ppm. ‘It will take two years to ratify, and go into effect January 1st 2013,’ Sachs predicted.[19]
Although Cline thought the Review ‘very much on the right track’, he laid bare the questionable mechanics of how Stern had arrived at his conclusions.[20] Stern had to modify his zero cost of time assumption by factoring in a small allowance for mankind’s self-implosion, otherwise the Review’s use of an infinite time horizon ‘simply explodes’.[21] Putting Stern’s welfare equation into a spreadsheet would show that ninety-three per cent of all future welfare occurs after 2200. In Cline’s view, Stern probably should not have extrapolated the damage rate into the infinite future.[22] ‘The combination of near-zero pure time preference with an infinite horizon probably balloons the value of damage avoided unreasonably,’ Cline told the symposium.[23]
Welcoming the decisive role of ethics in Stern’s analysis, Barrett disagreed with Stern’s conclusion that the case for ‘strong, early action’ was clear cut. ‘I am not saying his conclusions are wrong; I am saying that other conclusions can be supported.’[24]
Others were more critical. Mendelsohn said the review was not an economic analysis. It had merely asserted that 550 ppm was the least cost option without comparing it against alternatives other than doing nothing at all. It was like saying: ‘I have a great policy for educating children and look, it is better than closing all schools.’
Stern had ignored the environmental damage implied by his proposals; one plan involved a combination of two million windmills, ten million hectares (24.7 million acres) of solar cells and five hundred million hectares of biofuel (1.2 billion acres) – more than ten times the surface area of California and more than forty times California’s 2007 farm acreage.[25] Taking away that amount of cropland for renewable energy would very likely have a much larger impact on agriculture than climate change, Mendelsohn suggested. ‘One can look at the Stern Review as a fairly complete argument why aggressive near term abatement does not make sense.’[26]
Nordhaus was particularly critical of Stern’s central assertion that the cost of climate change was the equivalent of a twenty per cent cut in per capita consumption ‘now and forever’. Stern’s formulation inflicted ‘cruel and unusual punishment’ on the English language because the Review’s ‘now’ didn’t mean ‘today’. A ‘distant rumble’ of a three per cent consumption loss in 2100 on Stern’s extreme-extreme-extreme case was exaggerated by a factor of one thousand per cent, not because of the estimates of the damages, but primarily through discounting.[27]
When it came to his response, Stern made a partial concession. Although the ‘now and forever’ language was accurate, ‘Perhaps it wasn’t particularly felicitous, and on reflection, we might have used some other wording.’[28] Grudging, perhaps. Belated, certainly. But collectively, economists acquitted themselves far better than had the natural scientists with their cover-up of the Hockey Stick. And, unlike the author of the Hockey Stick, Stern on this occasion was prepared to reason and debate with his critics.
In a subsequently published postscript to the Review, Stern gave further ground. ‘Ethical positions cannot be dictated by policy analysts,’ he wrote.[29] For the first time, Stern provided numbers that demonstrated the huge sensitivity of his conclusions to the discount rates assumed – an increase in the discount rate from 1.4 per cent to 3.5 per cent would reduce the estimates of the
economic cost of greenhouse gas emissions from five per cent to 1.4 per cent of world GDP.[30] At this higher, but still modest discount rate, Stern’s clarion call for immediate and drastic action simply evaporated.
Stern’s methods had not withstood scrutiny, but his call to action based on catastrophist assessments remained fashionable. In a July 2008 paper, Harvard economist Martin Weitzman argued that Stern was right, but for the wrong reasons. Stern’s cost benefit analysis was completely flawed. Moreover, the use of cost benefit analysis was inappropriate for an issue such as climate change.
Based on a survey of twenty-two studies on the climate sensitivity of carbon dioxide, Weitzman focused on the fifteen per cent of cases in which temperature increases substantially greater than 4.5oC ‘cannot be excluded’. Weitzman super-imposed ‘the non-zero probability’ of greenhouse gas self-amplification, such as methane-out-gassing precipitating a cataclysmic runaway-positive feedback warming. If temperatures rose by around 10–20oC, there could exist ‘truly terrifying’ consequences such as the disintegration of the Greenland and at least part of the Western Antarctic ice sheets – ‘horrifying examples of climate-change mega-disasters [that] are incontrovertibly possible on a time scale of centuries’, Weitzman wrote.[31]
From small probabilities of huge climate impacts occurring at some indefinite point in the remote future, Weitzman conjured up ‘fat tails’ – low probability, high impact events – conjoining with fat tails begetting yet fatter tails.[32] Unlike traditional ‘thin-tailed’ cost benefit analysis, Weitzman acknowledged that it was ‘much more frustrating and much more subjective – and it looks much less conclusive – because it requires some form of speculation (masquerading as an “assessment”)’.[33]
Weitzman’s analysis gained extra currency following the bankruptcy of Lehman Brothers and the near collapse of the West’s banking system. All of a sudden, risks which financial models suggested were extremely remote became fat-tailed risk events. Even before the banking crisis struck, Martin Wolf in the Financial Times was strongly influenced by the fat-tail analysis: ‘Above all,’ Wolf wrote, ‘I find persuasive the argument of Professor Martin Weitzman of Harvard University that it is worth paying a great deal to eliminate the risk of catastrophe.’[34]
The trouble was no amount of money could completely eliminate the risk of climate catastrophe. If climatic ‘tipping points’ exist, no one can be sure at what point they tip. Even if emissions fell to zero, past emissions would mean that the world is ‘committed’ to many decades of further warming.
Weitzman himself drew a different conclusion. The existence of fat-tailed potential catastrophes meant paying more attention to how fat the bad tail might be. If thought to be fat, it meant being much more open to drastic action, including ‘serious mitigation’ (emissions cuts) and possibly using geo-engineering technology to slim down the fat tail fast.[35]
Lawson for one believes Weitzman’s position to be absurd.
In a world of inevitably finite resources, we cannot possibly spend large sums on guarding against any and every possible eventuality … The fact that a theoretical future danger might be devastating is not enough to justify substantial expenditure of resources here and now, particularly since there are many other such dangers wholly unconnected with global warming.[36]
Weitzman’s fat-tails mark an important milestone in the development – or more accurately, the disintegration – of the idea of global warming and its call to cut carbon dioxide emissions. The assumption that there is some kind of stable, quantifiable relationship relating the amount of carbon dioxide in the atmosphere to global temperatures and thence the impacts on societies and the environment provides a quantified rationale for preventative action.
Under the fat-tail analysis, there is no level of emissions reduction that can completely remove the risk of catastrophe over the indefinite future. Even in its own terms, a policy of doing nothing becomes a rational response, as it is no longer possible to quantify the avoided costs and risks that emission cuts are meant to be buying.
Catastrophic events occur. As readers of Asterix and Obelix know, the only thing the Gauls feared was the sky falling on their heads. And it seems that it did – a massive comet struck Southern Bavaria sometime in the third and fourth centuries BC, scarring the culture of the Celts. To live life under the shadow of the possibility of another such event suggests a somewhat morbid sensibility. You only live once, as they say.
The optimal economic response points in the direction of abandoning policies that retard economic growth, specifically those purportedly designed to slow down or arrest global warming. What constitutes a natural catastrophe to one society might be a minor inconvenience to a richer one. Bert Bolin wrote in 2007 that the IPCC was not yet able to tell from climate models which countries would be most affected. ‘The issue could thus not then be resolved adequately beyond the obvious conclusions that poor countries were more vulnerable than rich ones and less able to protect themselves.’[37] Bolin had stumbled on the insight that Frédéric Bastiat had derived when he asked why mid nineteenth-century Europe no longer suffered from famines. The answer? Rising prosperity.
No one knows what the climate of the future will be. Still less can we have any idea how societies of the future will respond to these unknown changes. But history shows that wealth insulates societies from nature and that wealthier societies are better equipped to overcome natural disasters than poor ones.
Whether the cause is natural, man-made or some combination of the two – the answer is the same. Economic growth.
[1] David Henderson, The Role of Business in the Modern World (2004), p. 82.
[2] Royal Society, ‘Stern Review on the Economics of Climate Change’ 30th October 2006, http://royalsociety.tv/rsPlayer.aspx?presentationid=114
[3] ibid.
[4] ibid.
[5] ‘We’re all green now. Up to a point’ in the Economist, 2nd November 2006.
[6] ‘Stern Warning’ in The Times, 31st October 2006.
[7] ‘Stern Warning, Economics of climate change’ in the Economist, 4th November 2006.
[8] ‘Why governments can’t save the planet’ in the Daily Telegraph, 31st October 2006.
[9] Martin Wolf, ‘A compelling case for action to avoid a climatic catastrophe’ in the Financial Times, 1st November 2006.
[10] Scheherazade Daneshku, ‘Change that is costing the Earth’ in the Financial Times, 31st October 2006.
[11] ‘What planet are they on?’ in the Daily Mail, 31st October 2006.
[12] Nigel Lawson email to author, 2nd January 2012.
[13] Christopher Adams, ‘Warning of climate change catastrophe’ in the Financial Times, 23rd October 2006.
[14] Robert J. Samuelson, ‘Greenhouse Guessing’ in the Washington Post, 10th November 2006.
[15] ibid.
[16] William Nordhaus, The Stern Review on the Economics of Climate Change (2007), http://nordhaus.econ.yale.edu/stern_050307.pdf, p. 30.
[17] ibid.
[18] Chris Hope interview with author, 27th October 2011.
[19] Yale Center for the Study of Globalization, Yale Symposium on the Stern Review (2007), http://www.ycsg.yale.edu/climate/forms/FullText.pdf, p. 116.
[20] ibid., p. 86.
[21] ibid., p. 81.
[22] ibid., p. 82.
[23] ibid., p. 83.
[24] ibid., p. 104.
[25] According to the US Department of Agriculture, California’s total land area is 99,689,515 acres and its total farmland in 2007 was 25,364,695 acres http://www.ers.usda.gov/statefacts/ca.htm#FC
[26] Yale Symposium on the Stern Review (2007), p. 100.
[28] ibid., p. 124.
[29] Nicholas Stern, The Economics of Climate Change: The Stern Review (2007), p. 664.
[30] ibid., Table PA. 3.
[31] Martin Weitzman, ‘On Modelling and Interpreting the Economics of Catastrophic Climate Change’ in The Review of Economics and Statistics, Vol. XCI, No. 1 (2009), p. 5.
[32] ibid., p. 4.
[33] ibid., p. 18.
[34] Martin Wolf, ‘Why obstacles to a deal on climate are mountainous’ in the Financial Times, 8th July 2008.
[35] Weitzman, ‘On Modelling and Interpreting the Economics of Catastrophic Climate Change’ in The Review of Economics and Statistics, Vol. XCI, No. 1 (2009), p. 18.
[36] Nigel Lawson, An Appeal to Reason: A Cool Look at Global Warming (2008), p. 90.
[37] Bert Bolin, A History of the Science and Politics of Climate Change: The Role of the Intergovernmental Panel on Climate Change (2007), p. 96.
The Age of Global Warming: A History Page 42