A Review of the Stern Review on the Economics of Climate Change
Weitzman, Martin L. 2007. "A Review of the Stern Review on the Economics of Climate Change."
Journal of Economic Literature,
The Stern Review calls for immediate decisive action to stabilize greenhouse gases
because "the benefits of strong, early action on climate change outweighs the costs."
The economic analysis supporting this conclusion consists mostly of two basic strands.
The first strand is a formal aggregative model that relies for its conclusions primarily
upon imposing a very low discount rate. Concerning this discount-rate aspect, I am
skeptical of the Review's formal analysis, but this essay points out that we are actually
a lot less sure about what interest rate should be used for discounting climate
change than is commonly acknowledged. The Review's second basic strand is a more
intuitive argument that it might be very important to avoid possibly large uncertainties
that are difficult to quantify. Concerning this uncertainty aspect, I argue that it
might be recast into sound analytical reasoning that might justify some of the
Review's conclusions. The basic issue here is that spending money to slow global
warming should perhaps not be conceptualized primarily as being about consumption
smoothing as much as being about how much insurance to buy to offset the small
change of a ruinous catastrophe that is difficult to compensate by ordinary savings.
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Weitzman, Martin L.