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Editor: Benny Peiser Faculty
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Climate Change Issues and the Stern
Review
David Henderson
The attached text formed the basis for talks given
in February and March 2007 in
15 March 2007
Introduction
I am not a climate scientist. I am an economist, and I became involved
with these issues, more by accident than design, just over four years ago, when
I responded to a call for action from an Australian mate of mine, Ian Castles,
a former Head of the Australian Bureau of Statistics. My initial main involvement was with some
economic and statistical aspects. Over time my interests and concerns have
broadened, though I do not at all claim to have all-round knowledge of this
vast array of topics. Increasingly –
and this is my chief message today - I have become critical of the way in which
issues relating to climate change are viewed and treated by governments across
the world, including yours and mine.
Climate change issues
are especially topical right now, because of the publication of two
large-scale, officially-commissioned and potentially very influential reports
that bear on them. Mainly thanks to these reports, 2007 will be a year of
intensified debate, and possibly of new policy initiatives, national and
international.
The larger of the two publications,
scheduled to appear in full in the course of this year, is the IPCC’s AR4 – in
other words, the Fourth Assessment Report of the Intergovernmental Panel on
Climate Change. All told, the whole set of documents making up AR4 may well run
to 3,000 pages of text, and some
2,500 experts from around the world have been involved in its preparation.
Like its predecessors, this new IPCC report mainly comprises three large
volumes from each of the Panel's three Working Groups. The first of these, on
scientific aspects, is close to being issued in final form, and its associated
Summary for Policymakers is already published. The two companion volumes, one
on possible impacts of climate change and the other on ‘options for adaptation
and mitigation’, are due to be finalised and published later in the year.
The second major
officially-commissioned report to appear on the scene is already in the
public domain. It is the Stern Review on The Economics of Climate Change. The
Review was set in motion by the British Chancellor of the Exchequer in
July 2005. A text was posted,
with a launching ceremony, at the end of October last year, and this has
now been published in book form, with some extra material added.
The Stern Review is not on the titanic scale of AR4. All the same, it is
a weighty document. The main text comprises some 550 pages, and covers a very
wide range of issues including both ethical and scientific aspects. It reflects
the work of a team of more than 20 British officials, working under the
direction of Sir Nicholas Stern, and backed by a number of commissioned reports
and studies from research institutions and consultants.
Besides these two major officially-sponsored reports, a third
contribution is also worth noting. In July 2005, the month in which the Stern
Review was commissioned, the
House of Lords Select Committee on Economic Affairs issued a report on
precisely the same subject as that of the Review: it too is entitled ‘The
Economics of Climate Change’. The Select Committee was a notably high-powered
body. It included four former Cabinet ministers, two of them Chancellors of the
Exchequer; two other members with ministerial experience; a former Governor of
the Bank of England; two former prominent CEOs; a leading professor at the
London School of Economics; and the author of the award-winning biography of
John Maynard Keynes. Its Special Adviser was the leading British environmental
economist. The Committee took written and oral evidence – I was one of those
who gave both – and its report was unanimous.
So much by way of introduction. The rest of my remarks fall under three
headings:
·
First,
I comment briefly on the Stern Review
and the debate that it has given rise to.
·
Second, I place these comments in the wider context
of the IPCC’s AR4. In doing so, I will raise questions about the role of the
Panel and the credibility of the IPCC process.
·
Third, I draw some brief conclusions for policy,
focusing chiefly on the role of governments but referring also to business
leaders and business organisations.
The Stern Review: a debate has opened
The Stern Review paints a dark and dramatic picture of the risks and
threats that could arise, over the next two centuries and after, if
anthropogenic emissions of (so-called) ‘greenhouse gases’ are not brought under
control in the near future and then progressively and substantially reduced.
The Executive Summary begins with the statement that
‘The scientific evidence is now overwhelming: climate change presents
very serious global risks and it demands an urgent global response’.
In a much-quoted conclusion, the Review asserts that the prospective
damage to the world economy that could arise from global warming might amount
to 20 per cent of world GDP, while the costs of taking action to limit and
reduce emissions, so as to avert the worst dangers, can be put at around 1 per
cent of world GDP. Hence it concludes that there is a clear economic case for
‘an urgent global response’.
The Review has been
widely hailed, across the world, as an authoritative guide to thinking and
policy. At the launch of the document in October, our Prime Minister voiced
some thoughts, taken from the Review, which many other British commentators
have echoed:
‘… what is not in doubt is that the scientific evidence
of global warming caused by greenhouse gas emissions is now overwhelming… [and]
… that if the science is right, the consequences for our planet are literally
disastrous… what the Stern Review shows is how the economic
benefits of strong early action easily outweigh any costs.’
Her Majesty’s Opposition have reacted in
precisely the same way. In a list of ‘environmental heroes and zeros for 2006’,
issued by the Tory Central Office, Sir Nicholas features prominently among the
heroes: he is commended ‘for authoritatively placing an economic cost on the
threat of climate change and for asserting the need for action in the clearest
terms’.
The accepted British cross-party view is that
‘the science’ was settled already, well before the appearance of the Stern
Review, and that now, thanks to Stern, ‘the economics’ is also settled: the
basis for immediate and far-reaching action has thus been firmly established.
The
only reactions to the Stern Review from the British business world that I have
seen have been uncritically favourable.
Further, and unusually for a document prepared
under official auspices, the Review incorporates in the text a number of high
level outside endorsements. Among these, three come from Nobel prizewinners in
economics, one from the Head of the International Energy Agency, and another
from the President of the World Bank.
However, there are dissenting voices. I am one of
an international group of dissenters, and we are by no means alone.
Well before the Review saw the light of day, it seemed to
a number of us, including both scientists and economists, that we would find
much to query in its arguments and conclusions; and when the text appeared, our
expectation was fully borne out. I conceived the idea of a dual critique: we
would combine to prepare twin review articles, one authored by a group of
scientists (actually, in the event, two of them are engineers), and the other
by a team of economists, each covering its own set of issues but linked
together. I managed to sell this project to a journal editor, and the result was
published last month. Volume 7 Number 4 of World
Economics carries both of our texts: counting references and trimmings,
these papers take up 68 pages.[1].
Our main verdict on the Review, in a word, is that it is
a biased, a heavily biased, exercise in speculative alarmism. This overall
judgement, as also specific criticisms that we make, have found support in a
number of approving emails that have come my way, while already other
economists have independently voiced dissenting opinions of their own in published
pieces. Debate has been joined.
Both the bias and the alarmism appear in particular at
three principal stages of the argument of the Review.
Stage 1 is the treatment of climate science and the possible
extent of global warming unless prompt action is taken to limit and reduce
emissions. Our scientists say that the Review ‘fails to take proper account of
the profound uncertainties and major gaps in knowledge’, and that ‘it is
misleading of [it] to draw so predominantly from the upper end of risk
distributions and then present these as representative of the range of credible
outcomes’.
Stage 2 relates to the possible biophysical impacts of
projected global warming, over a period of two centuries or more. Here our
scientists end their survey by saying that ‘the Review’s analysis… is
consistently biased and selective – and heavily tilted toward unwarranted
alarm’.
In Stage 3,
the possible biophysical impacts are translated into money values so as to
derive estimates of the net costs of global warming to the world economy: this
process yields the 20 per cent of world GDP that I referred to already. The economist members of our team, drawing on
the scientists’ analysis of impacts, argue that the Review systematically overstates projected costs of
climate change, and we also think that it underestimates the likely cost of the
drastic global mitigation programme that it calls for. Other economists have
made a similar case.
Since the Stern Review considers possible
outcomes over a period of more than two centuries, it has to consider how
prospective future costs and benefits arising at different times should be
compared: in reckoning present values, and in weighing possible courses of
action that are designed to have very long-term results, a lot depends of
course on the rate of interest that is used for discounting the future. The
conclusions for policy that the Review arrives at partly reflect its choice of
a strikingly low rate, so that distant costs are written down less than they
otherwise would be. Although no specific figure was mentioned in the Review, it
has since emerged that the rates chosen were 2.1 per cent per annum for this
century, 1.9 per cent for the following century, and 1.4 per cent for the
century after that. These are low figures, and have been widely queried as
such, by us among others.
In our critique, we argue that the Review
‘proposes worldwide adoption of a specially low rate of interest for
discounting the costs and benefits of mitigation, on the basis of inadequate
analysis and without regard for the problems and risks that would result’.
When we put together these twin articles, we
knew, and said in our introduction, that this was not a balanced treatment. We
were presenting a case for the prosecution, rather than a full account of pros
and cons. But I do not consider that
overall, as counsel for the prosecution, we were unjust or too severe. Indeed,
I think there are other points of criticism that we could have made, and some
that we could have emphasised more strongly.
The
shadow of AR4
A surprising feature of the Stern Review is that it
seems to pay little attention to the argument and evidence presented in AR4.
Although the final IPCC text is yet to appear, successive complete draft texts
were made available to member governments and participants in the IPCC process
from about the time that the Stern Review was commissioned. It now appears that
the Review did not draw systematically on this material, and just recently sharp-eyed
journalists in
· Its projections for increases in global average temperature by the end of the century fall well short of the counterpart figures suggested in the Review.
· It gives a higher figure for the prospective costs of mitigation, referring to an average of 5 per cent of world GDP as opposed to the 1 per cent which the Review suggests.
Does this latest IPCC report, given these apparent
differences from the Review, nonetheless support the case for ‘an urgent global
response’? A clear positive answer to that question
has recently been given, in the context of the report of Working Group I, by a
number of high level official participants in the debate:
·
Dr Pachauri, the
Chairman of the IPCC, said to Reuters (26 January): I hope this report will
shock [people [and ] governments into taking more serious action’.
· Achim Steiner, the Director-General of the UNEP, has said that ‘in the light of the report’s findings, it would be “irresponsible” to resist or seek to delay actions on mandatory emissions cuts’.[2]
· Yvo de Boer, Secretary-General of the UNFCCC, said that ‘the findings … leave no doubt as to the dangers that mankind is facing and must be acted on without delay’.
· Stavros Dimas, the EU’s Commissioner for the environment, called the WGI text ‘a grim report’.
It should however be noted that in none of these four statements is the wording directly drawn from the Report. These eminent persons were not actually quoting AR4 text: they were putting their own personal gloss on it, and giving their own views as to its implications for policy, as they were fully entitled to do.
Even aside from such high-level assessments, however, it could well be argued – I might have made the argument myself, had I not been drawn into these issues - that just how much weight should be placed on the Stern Review is a minor matter. It could be said that even if the Review represents an extreme position – which is of course debatable – and even if economists continue to wage their own private wars, the case for immediate and far-reaching global action to contain emissions has been made, independently and authoritatively, in the past and current work of the IPCC. Let me therefore tell you why I am personally not convinced by this very reasonable-sounding argument, because of the doubts that I have come to hold in relation to the IPCC process.
The wider context: the IPCC
and the problem of unwarranted trust
Since its creation in 1988, the IPCC has come a long
way, and has achieved a great deal. As a result, it has established itself, in the
eyes of most if not all its member governments, as their sole authoritative and continuing source of information,
evidence, analysis, interpretation and advice on the whole range of issues
relating to climate change, including economic issues. It has acquired what is
effectively a monopoly position.
While recognising its achievements, I believe that
there are good reasons to query the claims to authority and representative
status that are made by and on behalf of the Panel, and hence to question the effective
monopoly that it now holds.
To begin with, the principle of creating a single
would-be authoritative fount of wisdom is itself open to doubt. Even if the
IPCC process were indisputably and consistently rigorous, objective and
professionally watertight, it is imprudent for governments to place virtually
exclusive reliance, in matters of extraordinary complexity where huge
uncertainties prevail, on a single source of analysis and advice and a single
process of inquiry. Viewed in this light, the very notion of setting consensus
as an aim appears as questionable if not ill-judged.
In any case, the
ideal conditions have not been realised. In my opinion, the IPCC process is far
from being a model of rigour, inclusiveness and impartiality. In this connection,
there are several related aspects that I would emphasise.
·
Its treatment of economic issues has been flawed. Writings that feature in the Third
Assessment Report contain what many economists and economic statisticians would
regard as basic errors, showing a lack of awareness of relevant published
sources; and the same is true of more recent IPCC-related writings, as also of
material published by the UNEP. In this area, the IPCC milieu is neither fully
competent nor adequately representative.[3]
·
The Panel’s emphasis on peer-reviewed published
work, though understandable, takes too much for granted. Standard peer-reviewing processes do not
necessarily serve as a guarantee of quality and reliability,
·
In peer-reviewed work that the IPCC has drawn on,
the authors concerned have failed to make due disclosure of data, sources and
procedures, and the IPCC has not required them to do so.
·
The response of the IPCC milieu to informed
criticism has typically been inadequate or dismissive.
·
Both the Panel’s directing circle and the IPCC
milieu more generally have an endemic bias towards alarmist assessments and
conclusions. Note that I refer here, not to the 2,500 or so experts who have
contributed to the preparation of AR4, but to a more restricted, higher-level
and more influential set of participants.
In this connection, let me bring in the
report of the House of Lords Select Committee on Economic Affairs. The report deals with many subjects, but for me
its most striking feature, and a welcome one, was the concerns that it
expressed about the IPCC. Given the credibility which the IPCC has
acquired, it is truly remarkable that a group of eminent, experienced and
responsible persons, drawn from a national legislative body and spanning the
political spectrum, with the help of an internationally recognised expert
adviser, and after taking and weighing evidence, should have published a
considered and unanimous report in which the work and role of the Panel are put
in question.[4]
How
(you may ask) has the Stern Review treated the questions raised about the IPCC
process by various writers and by the Select Committee in particular? The
answer is surprising. Although the Review is long and wide-ranging, the text
makes no mention of any of the criticisms that have been directed towards the
IPCC process. Moreover, although the
Review lists around 1,100 papers and studies as references, that list does not include the report from the Select Committee. There are
other significant omissions in the list, but this one is the most striking and
the least excusable.
To sum up under this heading, I believe that
there is a problem of unwarranted trust in the IPCC process and in the role of
the Panel itself, a problem which the Stern Review shows no awareness of.
Improving
the policy process
Finally, I offer some conclusions which bear
on the policy process.
The first of these is simple. Policymakers,
officials and commentators should not join our Prime Minister, Her Majesty’s Opposition
and leading British business firms and organisations, by endorsing,
uncritically and without qualification, the arguments, findings and
recommendations of the Stern Review.
Contrary to what many of my compatriots have presumed, the Review does not
‘show’ what is the case, and the debate on the economics of climate change
remains open and unsettled.
My main conclusion, which is more
fundamental, is this. In relation to climate change, the overriding present
need is to build up a
The main initiative here rests with
governments. Official action is called for on two fronts: first, to improve the
IPCC process by making it more professionally watertight; and second, to bring
to an end the Panel’s monopoly status by providing for other sources of
information and ideas. On both fronts, a prerequisite for effective action is
that the central economic departments of state – treasuries, ministries of
finance or economics, and agencies such as the US Council of Economic Advisers
– should become more fully, more continuously and more effectively involved.
The business world could also make a
positive contribution of its own. More attention to the IPCC process on the
part of leading firms and business organisations, and closer and more informed
involvement in it, could help to promote the kinds of improvement that are
called for. At the same time, though more controversially, businesses and
business organisations could help to ensure that independent sources of
information and ideas are built up.
Last under this heading, I would like to
mention two specific possibilities for timely action.
Two
specific proposals
Collective official action:
bringing in the OECD
My first proposal is for joint
action on the part of an international group of central economic departments of
state from the.30 member countries of the OECD. These various departments and
agencies could become involved in the policy review process collectively, to
good effect and without delay.
The mechanism for this is the
OECD itself. A distinctive feature of the Organisation is that it is the only international agency in which
ministers and officials from these central economic departments and agencies
are able, if they so wish, to review systematically issues across the whole
spectrum of microeconomic and 'structural' policies. They can do so, with
Secretariat back-up from the OECD’s Economics Department, in and through the
Organisation’s Economic Policy Committee (EPC) which is their committee.
In that connection, I
first put forward three and a half years ago, to no effect so far, a concrete
proposal which could still be taken up, the sooner the better. It is that the
EPC delegates should place these IPCC-related economic issues on the
Committee’s agenda.
A timely
independent review of AR4
My second proposal is that funds
should now be made available to commission, prepare and publish a full
independent review of AR4. The review would cover the whole range of issues and
topics, economic and procedural as well as scientific, and policy-related as
well as analytical. Its preparation would be entrusted to an international team
of authors, reporting to a suitably constituted steering group. Funding might
come from either official or private sources, or even perhaps some combination
of the two.
Final
word
Last, a brief
personal word.
I am well aware
that the arguments I have just put before you are not widely supported: mine is
very much a minority view. Had I not become personally involved with the
issues, largely as I have said by accident, I might well have been disposed to
side with the majority. In that case I might have been less unfriendly towards
the Stern Review – though I would still have found it unconvincing; and more
important, I would not have questioned the generally received worldwide opinion
that the IPCC process is thorough, objective and professionally watertight. It
is only closer acquaintance with the issues, the process and the history that
has led me to think that governments across the world, including yours and
mine, are mishandling issues of climate change. That is the possibility that I
would ask you to reflect on. I would like to thank you for giving me the
opportunity today to make my case.
David Henderson was formerly
Head of the Economics and Statistics Department of the OECD, and is currently a
Visiting Professor at the
[1]
One of the science team is an Australian (Bob Carter, from
[2] This and the following quotation are
than from a report (3 February) in the Financial
Times.
[3] Ian Castles and I have jointly put forward a critique of some leading aspects of the IPCC’s economic work, while authors involved in that work have contested our criticisms. The debate was reviewed and carried further in a recent article of mine entitled ‘SRES, IPCC, and the Treatment of Economic Issues: What Has Emerged?’ (Energy and Environment, Volume 16 No. 3 & 4, 2005). It is too early to rate the treatment of economic issues in AR4, but we were critical of the decision to use the SRES – i.e., the Special Report on Emissions Scenarios, published in 2000 - as the point of departure for it.
[4] After a long interval, Her Majesty’s Government, through the agency of the responsible department (DEFRA), published a dismissive official response to the Select Committee report, in which the IPCC and its proceedings were duly commended without reserve. In commenting on this document, I said that it illustrated precisely those features of the IPCC process and milieu which prompted the Select Committee’s concerns My comments were made in an article entitled ‘Report, Response and Review’, published in Energy and Environment, Vol 17, No 1, 2006.