Stern scare blunted by the figures

The report on climate change by Nicholas Stern and the British Government has sparked publicity and scary headlines across the world. Much attention has been devoted to Stern's core argument that the price of inaction would be extraordinary and the cost of action modest.

Unfortunately, this claim falls apart when one reads the 700-page tome. Despite using many good references, the Stern Review on the Economics of Climate Change is selective and its conclusion flawed. Its fear-mongering arguments have been sensationalised, which is ultimately only likely to make the world worse off.

The review correctly points out that climate change is a real problem and that it is caused by human greenhouse-gas emissions. Little else is right, however, and the report seems hastily put together, with many sloppy errors. As an example, the cost of hurricanes in the US is said to be both 0.13 per cent of US gross domestic product and 10 times that figure.

The review is also one-sided, focusing almost exclusively on carbon-emission cuts as the solution to the problem of climate change. Stern sees increasing hurricane damage in the US as a powerful argument for carbon controls. However, hurricane damage is increasing predominantly because there are more people with more goods to be damaged, settling in more risky habitats.

Even if global warming does significantly increase the power of hurricanes, it is estimated that 95 per cent to 98 per cent of the increased damage will be due to demographics. The review acknowledges that simple initiatives such as bracing and securing roof trusses and walls can cheaply reduce damage by more than 80 per cent; yet its policy recommendations on expensive carbon reductions promise to cut the damage by 1 per cent to 2 per cent at best. That is a bad deal.

Stern is also selective, often seeming to cherry-pick statistics to fit an argument. This is demonstrated most clearly in the review's examination of the social damage costs of CO2, essentially the environmental cost of emitting each extra tonne of CO2.

The most well-recognised climate economist in the world is probably Yale University's William Nordhaus, whose "approach is perhaps closest in spirit to ours", according to the Stern review. Nordhaus finds that the social cost of CO2 is $2.50 per tonne. Stern, however, uses a figure of $85 per tonne. Picking a rate even higher than the official British estimates - which have been criticised for being over the top - speaks volumes.

Stern tells us that the cost of flooding in Britain will quadruple to 0.4 per cent from 0.1 per cent of GDP because of climate change. However, we are not told that these alarming figures only hold true if one assumes that Britain will take no additional measures, essentially doing absolutely nothing and allowing itself to get flooded, perhaps time and again.

In contrast, the British Government's assumptions take into account a modest increase in flood prevention, finding that the cost will decline sharply to 0.04 per cent of GDP, in spite of climate change. Why does Stern not share that information?

But nowhere is the imbalance clearer than in Stern's central argument about the costs and benefits of action on climate change. The review tells us that we should make significant cuts in carbon emissions to stabilise the concentration of atmospheric CO2 at 550 parts per million. Yet such a stark recommendation is not matched by an explicit explanation of what this would mean in terms of temperature.

The UN climate panel estimates that stabilising at 550ppm would mean an increase in temperature of about 2.3C by the year 2100. This might be several degrees below what would otherwise happen, but it might also be higher. Nordhaus estimates that the stabilisation policy would reduce the rise from 2.53C to 2.42C. One can understand the reluctance of the Stern review to advertise such a puny effect.

Most economists were surprised by Stern's large economic estimates of damage from global warming. Nordhaus's model, for example, anticipates 3 per cent will be wiped off global GDP if nothing is done over the coming century, taking into account the risk for catastrophes. The Stern review purports to show that the cost is "larger than many earlier studies suggested".