Economics of Climate Change - Assignment Example

Review of the Stern’s Report on Economics of Climate Change Name: Course: Instructor: Institution: Date of Submission Question 1: Review of the Stern’s Report on Economics of Climate Change (i) Summary of the Main Conclusions of the Report On the economics of stabilizing greenhouse gases, the Stern Review notes that if early actions are taken on climate change, the benefits will outweigh costs.There are overwhelming scientific evidences showing that the increasing risks can be irreversible taking into account that many of the world’s entities would like to continue with business-as-usual paths for emission of gases. The report mentions that currently, the stock of greenhouse gases is about 430 ppm, which is almost double, compared to the 280 ppm before Europe started industrializing. This has considerably caused the world to warm, causing severe effects such as flooding, which can be avoided as per the proposal (Godard, 2008; Ward, 2012)The proposal also indicates that climatic changes can hinder the basic requirementds of life, for instance food, water, health and the environment in general. Taking into account that the climatic effects will not be equally distributed, poorest nations will suffer the most, if the situation cannot be changed now Weyant, J.P. (2008), Apart from being geographically disadvantaged by being in warmer regions and suffering from high rainfall variability, they lack resources to mitigate adverse climatic effects. However, the economists also argue that even though climate changes may have a small positive impact on developed nation in earlier stages, especially those in high latitudes such as Russia, Canada and Scandinavia by benefiting from increased tourism and agricultural yield due to increased temperatures, they will experience damaging infrastructures, rapid warming rates and deteriorating local livelihoods, human health and biodiversity (Stern Review, 2006). By using integrated assessment models, the paper strives to estimate the total impacts of climate change on the economy, which Stern suggests to be higher than those of previous researches. This involves modeling the overall impact of climatic changes in monetary terms so that they can be quantified. Although previous research had considered 2-3 degree Celsius as the trend, that may be exceeded at the end of this century; this study used 5-6 degree Celsius noting that nations are likely to incur excess costs of 10% on their GDPs (Stern Review, 2006). In their model, they are also certain that greenhouse-gas concentrations are driven by economic growth. To achieve the emission cuts, nations should be prepared to incur some costs: stabilizing 500-550 ppm of the greenhouse gases will require 1% of the GDP, a trend that should go on until 2050. Additionally, the GDP of participating countries will be grown in a range of +5% to -2%, which will be influenced by various factors such as efficiency of policies and technological changes. Therefore, although transitioning to a low carbon economy may bring challenges as far as competitiveness of some businesses is concerned, it may also bring opportunities for their growth. For instance, reducing hydrocarbon energy will make nations to diversify into other forms of energy which will ensure higher energy security. This strategy is feasible, and countries should enact emission reduction policy that espouses three elements: technology policy, carbon pricing and removal of policy implementation barriers Stewart, H. & Elliot, L. (2013), Therefore, establishing carbon tax and trading regulation should be an essential element of this policy. Importantly, after removing all obstacles, the policies required for this should be on time scale. The policies should be enhanced through international cooperation and understanding, with rich nations leading this initiative to reduce carbon emission. Taking into account that there is still time for everything, through international cooperation, the rich nations should support poor nations in implementing the policies to reduce carbon emissions such as avoiding deforestation (Saltelli & D'Hombres, 2010; Stern Review, 2006). (ii) Economic Criticisms of the Stern’s Review (a) On Estimates of Damages Were damage estimates, larger in stern’s report? Most economists were amazed with the Stern’s larger estimates of damages caused by global warming. According to economist Nordhause (2007), only 3% of the Global GDP will be wiped off if nothing is done to curb the current carbon emission. However, as for the Stern’s review, without any action to curb the growing global warming, the world should be prepared to lose at least 5% of its GDP, each year, from now and forever (Peacock et al. 2014). It goes ahead to state that when all accompanying impacts and risks are included, the world can lose an increase of 20% of its GDP, or even more (Stern, 2007). Instead of the world’s per capita income growing at the expected 3 %, the study has assumed that it is growing at only 1.3%. The report also estimates that even if the current economic growth continues at 2%, the population growth will continue to slow down, as vulnerable communities in rural areas shrink in population (Godard, 2008; Ward, 2012). The primary reason(s) for this disparity and the reasoning underlying the choices The Stern Review used estimations from PAGE2002, and thus, while other economist believed that the world will be warmer by 2-3 degree Celsius in the next century, Stern believes that being by 5 degrees Celsius is a real possibility. This is in contrast with the estimates provided by the U.N. Climate Panel that puts that an increase of 550 ppm will cause a rise in temperature by 2.3 degrees Celsius (Stern, 2007). Therefore, from this illustration, as per the differences in the two estimates, there will be radical transformations of the geographic composition of the earth which will pose very dangerous implication on total human life. The Review also assumes that nations could do nothing like predicting and averting catastrophes, to curb related costs (Ward, 2012). Related to this is that Stern assumed that entities will continue to pump out carbon gases into the 22nd century, ignoring the fact that prices of alternative fuels are now falling prettily and the population would prefer them(Stern, 2007). Nonetheless, his review picked a very low capital cost, between 0% and 3% as being relevant in 2100, which makes the current cost look inflated.The discounting technique gives rise to a discount rate of 1.4% for damages caused by climate changes. At the time the review was being published the discount rate was lower than those in previously published studies on climate change (Stern, 2007). As already noted, although his substantive damage on the world GDP is 5%, if no solution is taken, Stern notes that it must be increased to espouse expected externalities that may happen; In this regard, risks or uncertainties associated with climate and extreme weather, poverty in developing countries, among other reasons. This makes him to inflate the expected damage on GDP due to global warming from 5% to 15%, and even further to 20% (Ward, 2012). The 20% is the figure that has been rocketing around the world, although the most accepted cost rate is 3% of GDP, in 2100, as the most reasonable. The other reason for the increased damage costs is that Stern argues that currently, it is more costly to control global warming than economists earlier thought. For him, it is demanding that nations use 1% of their GDP to cut down the emission costs. This should be accompanied with the enhancement of energy resources that are able to be recycled moreso use of technologies as solar, wind and bio-fuels (Weitzman, 2007). (b) Review and summary of the main arguments that criticized the Stern Review Firstly, there have been general criticisms against the long term economic projections of Review, saying that, as from experience, economic forecasts made for more than three years ahead are usually not correct. Moreover, others note that combining economic and scientific models can be monumentally complex (Lilley, 2012). Stern’s Review’s version of employing the PAGE 2002 may have caused the report to understate potential costs of global warming in some countries like the US (Cox & Vadon, 2007). Ackerman et al. (2008) argue that from their analysis of various data, the projected annual damage on US GDP will be about 1.8% by the year 2100. However, they have complimented Stern’s report by noting that relatively usual catastrophes such as water supply costs, hurricane damages, and energy sector costs are projected to be business-as-usual. According to Ackerman (2007), while advancing his criticisms of the review, noted that the Stern’s economics raised three principle points: the rate of discount is considered to be too low, the treatment of uncertainty and risks is inappropriate and their calculations and comparisons of benefits and costs are incorrect. On discount rate, Tol argues that by estimating the consequent social cost of carbon and discounting rate, as it is the case in the Stern Review, it cannot be successful in the future that is too much remote to predict. In this regard, one will always be attempted, to make assumptions that are so uncertain and arbitrary. Economist Ackerman et a. (2008) also criticize the Stern’s preferred discount rate of 1.4%, as being much lower compared to traditional rates used in economic models. As Nordhaous (2007) has noted, this makes an economic situation to have the future which looks more important than the present (Weyant, 2008) Economists have also criticized the review regarding its treatment of the climate uncertainties and risks in economics. His innovation in the analysis and treatment of risks and uncertainties connected to climate changes is not able to describe time and the severity of the climate impacts. Some of the climate and environmental risks and uncertainties addressed by him cannot reflect any linear predictability of systems such as that of the earth (Weyant, 2008). Secondly the review bases its estimate data on the PAGE model which has been disputed very much by many economists because it gives larger values that lead to larger and unreasonable damage values to the environment (Stewart & Elliot, 2013). The other part of critics are directed towards Stern’s treatment of the expected damage to the environment and its mitigation costs thereof. Most analysts believe that Stern must have exaggerated damage costs. Mendelsohn adds that several economists have been overestimating effects that emanate from bad weather; as for him, he cannot see any change in environment that is associated with just a change of 2 degree Celsius (2014). As Lomborg (2007) claims, his figures are also inflated by the fact that he assumes that entities will continue pumping out carbon in the atmosphere in the 22nd century without realizing that the costs of alternative fuels are decreasing. On the costs of mitigation, economists such Tol believe that Stern must have underestimated them. The 1% GDP proposed by him to mitigate this effect will not be successful. The reason for such underestimations emanates from his reliance on one model and few sources, some of them, which academics in economic term as just “alarmists” (Trainer, 2008). Conclusion With so many debates surrounding the issue, it seems a long way to understand the economics of climate change. Most economists pose difficulties on how discount rate, damage and mitigation costs of environment can be estimated. However, the review is less erroneous than its predecessors, and therefore it adds more insights into the best way of ascertaining economics of climate change. References Ackerman, F. (2007). Debating Climate Economics: The Stern Review vs. Its Critics. Medford MA: Tufts University. Ackerman, F. et. al. (2008).Did The Stern Review Underestimate U.S. and Global Climate Damages?.Stockholm: SEI. Cox, S. & Vadon, R. (2007). Running the rule over Stern's numbers. BBC News. Retrieved on 27 September 2014 from http://news.bDid The Stern Review Underestimate U.S. and Global Climate bc.co.uk/2/hi/science/nature/6295021.stm Godard, O. (2008).The Stern Review on the Economics of Climate Change: contents, insights and assessment of the critical debate. Sapiens, 1(1). Lilley, P. (2012). What Is Wrong With Stern?. The Global Warming Policy Foundation. Stern Review. (2006). “Executive Summary”. The Economics of Climate Change. Lomborg, B. (2007).Stern Review Biokemisk Forening. Retrieved on 27 September 2014 from http://www.biokemi.org/biozoom/issues/515/articles/2294 Mendelsohn, R.O.A. (2014). Critique of the Stern Report. Environment. Retrieved on 27 September 2014 from http://object.cato.org/sites/cato.org/files/serials/files/regulation/2006/12/v29n4-5.pdf Nordhaus, W.D. (2007). A review of the stern review on the economics of climate change. Journal of Economic Literature, XLV, pp. 686-702. Peacock A. et al. (2014). The Stern Review: A Dual Critique. World Economics. Saltelli, A. & D'Hombres, B. (2010). Sensitivity analysis didn’t help: A practitioner’s critique of the Stern review. Science Direct, 20 (2), pp. 298-302. Stern, N. (2007).The Economics of Climate Change. Cambridge: Cambridge University Press. Stewart, H. & Elliot, L. (2013).Nicholas Stern: 'I got it wrong on climate change – it's far, far worse'. The Guardian. Retrieved on 27 September 2014 from http://www.theguardian.com/environment/2013/jan/27/nicholas-stern-climate-change-davos Trainer, T. (2008). A short critique of the Stern Review. Real-World Economics Review, (45). Weitzman, M.L. (2007). A review of the stern review on the economics of climate change. Journal of Economic Literature, XLV, pp.703-724. Ward, B. (2012).Critics of the Stern Review presents both a case of bad economics and fundamentally flawed science. London School of Economics. Retrieved on 27 September 2014 from http://blogs.lse.ac.uk/politicsandpolicy/a-case-of-bad-economics-and-fundamentally-flawed-science/ Weyant, J.P. (2008). A critique of the stern review's mitigation cost analyses and integrated assessment. Review of Environmental Economics and Policy, 2 (1). pp.77-93. Read More