Nicholas Stern: World deserves better and more robust economic models of climate change
Nicholas Stern has called on researchers to improve radically the models used to estimate the costs of acting on climate change in an article published in the journal ‘Nature’ today (24 February 2016).
Lord Stern argues that flawed climate modelling is deeply damaging to public policy and that people around the world deserve better. He notes that existing models tend to underestimate the damages caused by climate change, as well as underestimating the potential of technology to help avoid dangerous climate change.
The article states: “Current economic models tend to underestimate seriously both the potential impacts of dangerous climate change and the wider benefits of a transition to low-carbon growth. There is an urgent need for a new generation of models that give a more accurate picture.”
Lord Stern points to the Intergovernmental Panel on Climate Change’s (IPCC) Fifth Assessment Report, which acknowledges the difficulties in estimating the global economic impacts of climate change.
Existing integrated assessment models (IAMs), for instance, “struggle to incorporate the scale of the scientific risks” as they do not account for tipping points and catastrophic changes that can be triggered, including by sea level rise, thawing of permafrost and release of methane into the atmosphere. IAMs also do not account for some of the largest potential impacts of climate change, such as extreme weather and conflict.
The article states: “It is these hard-to-predict impacts that are the most troubling potential consequences of inaction. The next IPCC report needs to be based on a much more robust body of economics literature, which we must create now. It could make a crucial difference.”
Lord Stern also argues that current models of the economic impacts of reducing greenhouse gas emissions can mislead policy-makers.
The article states that “the business-as-usual baseline, against which costs of action are measured, conveys a profoundly misleading message to policy-makers that there is an alternative option in which fossil fuels are consumed in ever greater quantities without any negative consequences to growth itself.”
Economic models for climate change must be improved radically, Lord Stern argues, noting that “incremental improvements to the present generation of IAMs may not be enough” to help national policy-makers implement the Paris Agreement effectively.
Lord Stern suggests that ‘damage functions’, which describe how losses increase due to climate change impacts, should be made much more realistic in existing models and that new types of models should be developed. These include dynamic stochastic computable general equilibrium (DSGE) models that can be used to “account for uncertainty about the future through the introduction of shocks”, and agent-based models (ABMs), which are widely used in the finance sector and could help understand complex changes to the economy under climate change.
The article states: “Now, a concerted effort is required by the research community to explore as many potential avenues as possible to better estimate the costs of action and inaction on climate change. The IPCC should distil what policy-makers need to inform their decision-making. Learned societies and national academies must bring together researchers from a wide range of relevant disciplines to focus attention on improving economic modelling quickly.”
It concludes: “There is huge potential in future technologies that can drive change. These are omitted or badly underestimated in our current climate modelling — deeply damaging to our guidance for policy-making. The well-being and prosperity of future generations are worth more.”
NOTES FOR EDITORS
- Lord Stern is chair of the Grantham Research Institute on Climate Change and the Environment and the ESRC Centre for Climate Change Economics and Policy, as well as I.G. Patel Professor of Economics and Government, at the London School of Economics and Political Science. Since July 2013, Lord Stern has been President of the British Academy for the humanities and social sciences. Lord Stern was with HM Treasury between October 2003 and May 2007. He served as Second Permanent Secretary and Head of the Government Economic Service, head of the review of the economics of climate change (the results of which were published in ‘The Economics of Climate Change: The Stern Review’ in October 2006), and director of policy and research for the Commission for Africa. His previous posts included Senior Vice-President and Chief Economist at the World Bank, and Chief Economist and Special Counsellor to the President at the European Bank for Reconstruction and Development. Baron Stern of Brentford was introduced in December 2007 to the House of Lords, where he sits on the independent cross-benches. He was recommended as a non-party-political life peer by the UK House of Lords Appointments Commission in October 2007. Lord Stern is also a Fellow of the Royal Society.
- The ESRC Centre for Climate Change Economics and Policy (https://www.cccep.ac.uk/) is hosted by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council (https://www.esrc.ac.uk/). The Centre’s mission is to advance public and private action on climate change through rigorous, innovative research.
- The Grantham Research Institute on Climate Change and the Environment (https://www.lse.ac.uk/grantham) was launched at the London School of Economics and Political Science in October 2008. It is funded by The Grantham Foundation for the Protection of the Environment (https://www.granthamfoundation.org/).