Peter Lilley: Costly Decarbonisation Of The Economy Is Based On Flawed Stern Review

  • Date: 04/09/12

Britain embarked on a hugely ambitious policy to decarbonise its economy with virtually no scrutiny of the costs. Now those costs are starting to hit families and firms.

When challenged, the government bases its claim that the benefits to the world exceed the costs to British taxpayers on the Stern review on The Economics of Climate Change — on which Australia’s Garnaut review was modelled.

Yet the Stern review has now been shown to be fundamentally flawed — leaving all three parties that have defended this policy with a huge dilemma.

Their defence of climate change policy rests on two pillars — scientific and economic.

The UN Intergovernmental Panel on Climate Change “settled the science”. It is a slightly shaky pillar since the Council of National Science Academies criticised the IPCC “for emphasising the negative impacts of climate change, reporting high confidence in some statements for which there is little evidence”.

Nonetheless, the science has a solid basis. Having studied physics at Cambridge, I accept that without greenhouse gases this planet would be a frozen barren rock. The direct effect of doubling the concentration of carbon dioxide will be to raise the global temperature by 1C — amplified by feedbacks about whose size and even direction there is more uncertainty.

I take the IPCC assessment of the science as given so as to focus on my main concern, which has always been about the equally crucial economic questions: how much is it worth, and how much will it cost, to restrict carbon dioxide emissions and temperature increases?

The economic pillar was always far flimsier since it relied on Stern — a government economist, commissioned by the government, who produced the answer the government needed. Moreover, Stern’s key conclusion — that the benefits of reducing emissions would be five to 20 times the cost — flatly contradicts the IPCC, which concluded: “costs and benefits are broadly comparable in magnitude” so it could not establish “an emissions pathway or stabilisation level where benefits exceed costs”. Most environmental economists whose work Stern supposedly reviewed reached conclusions closer to the IPCC.

Nonetheless, Labour ministers and their Conservative/Lib Dem successors cling with increasing desperation to Stern: albeit like the proverbial drunk — more for support than illumination.

To provide that illumination I have undertaken a detailed study — What is Wrong with Stern? The Failings of the Stern Review — published today by the Global Warming Policy Foundation.

Stern reaches conclusions far removed from those of most environmental economists by combining statistical sophistry and verbal virtuosity. For example:

  • Comparing a part with the whole. Stern compares the benefit of preventing global warming entirely with the cost of avoiding part of potential global warming by preventing carbon emissions exceeding twice their pre-industrial level.
  • Describing future centuries as “now”. Stern claims global warming will cut GDP by least 5 per cent “now and forever”. Yet even on his worst projection, the cumulative losses from global warming over this century are below the costs of mitigation.
  • Inconsistent discounting of costs and benefits. Stern discounts benefits of curbing emissions at an ultra-low rate (not revealed in his 700-page report). But he effectively uses the normal market rate to discount the cost of decarbonising the economy — the return forgone on alternative investments. So his estimated cost of avoiding climate change is understated relative to the benefits by between 2 1/2 and five times.
  • Strange ethics. Stern condemns those who reject his low discount rate as “unethical” and “lacking concern for future generations” as if global warming threatens humanity with extinction or immiseration. Such a fate is an implausible consequence of a few degrees of warming, costly though that could be, given that mankind flourishes in latitudes whose average temperatures differ by 20C and seasonal extremes vary by 80C. Even in Stern’s worst case, people in 2200 will be seven times richer than today if we do nothing to curb emissions. Why should our generation, not least developing countries (the main source of emissions growth), make sacrifices to make future generations richer still?
  • Cherry-picking unreliable studies. A World Bank study shows that Stern’s forecasts of storm damage to infrastructure, based on non-peer-reviewed and alarmist literature, are up to 100 times too large.
  • Ignoring adaptation. He cites a study showing a 4C rise could cut yields of one crop variety by 70 per cent but assumes farmers will not switch to another variety whose yields would actually increase — a fact he withholds.

In short, Stern selected and manipulated evidence to back a policy — creating policy-based evidence when what we need is evidence-based policy.

Government economists privately recognise that Stern’s economics are no longer defensible. They fall back on Harvard economist Martin Weitzman’s suggestion that “Stern may be right for the wrong reasons”. Weitzman says: if there is a finite possibility, however small, of an infinitely bad outcome (human extinction) then virtually any cost is justified to prevent it. Paradoxically, using this thesis to rescue Stern’s conclusions means abandoning their scientific pillar — the IPCC’s claim (shared by Stern) that “the science is certain” and climate sensitivity can be derived from known “laws of physics and chemistry”. Instead, Weitzman assumes that neither scientific laws nor empirical studies can set any upper limit on the size of the greenhouse effect.

However, if climate sensitivity is as high as Weitzman’s theory requires to put mankind’s survival at risk, its impact must have been largely concealed by natural variations even before the pause in warming this century. So it should soon become obvious as those fluctuations revert to the mean, giving plenty of time to respond.

There may be a case for a modest, gradual approach to climate change rather than Stern’s crash program. But ministers can no longer rely on the discredited Stern review to defend an unaffordable policy.

Peter Lilley is a British Conservative Party MP.

The Australian, 4 September 2012