Australia's Productivity Commission today published a very useful assessment of the Stern report on climate change. The 125 page staff working paper by Rick Baker, Andrew Barker, Alan Johnston, and Michael Kohlhaas, The Stern Review: an assessment of its methodology, provides both an excellent summary and a balanced assessement of the report's analysis and recommendations. Press reports picked up on this particular connclusion:
The Review’s ‘urgent’ language can be explained by it being as much an exercise in advocacy as it is an economic analysis of climate change. It is not surprising, therefore, that reaction to it has been mixed.
Bias? To be sure. But the Commission paper remains broadly supportive of Stern's approach. They acknowledge the immense analytical challenges confronting Stern and his colleagues:
Rarely do analysts confront cost–benefit analyses with dimensions so long-term, uncertain and non-marginal. This places extraordinary strains on analytical techniques that generally have been devised for more conventional projects, and almost inevitably means that value judgements and ethical perspectives become more prominent.
The authors argue (p.xvi) that the Stern report has made an important contribution to the climate change debate:
There appears to be an emerging view that the Review has made a valuable contribution by establishing climate change as an economic issue that can be assessed through the ‘lens’ of a cost–benefit framework. Moreover, the Review team continues to engage with its critics and to expose its work (including rebuttals of critiques) to scrutiny. In some instances, its responses indicate acceptance of criticisms levelled. In this respect the Review continues to be important as a catalyst for engendering further analysis, development and refinement of the economics of climate change.
And conclude that:
Some of the criticisms of the Review are justified. The assertiveness with which some of the headline messages are delivered is not always matched by the caution attached to the evidence and analysis presented within the body of the report. And, relevant questions remain about the way the analysis was focused. It is based on a single high emissions scenario, inclines towards more pessimistic assumptions on damage costs, and adopts unconventional parameters for discount rates. These traits tend to escalate the present value of future costs and thereby elicit urgency in mitigation measures.
This is consistent with the Review authors’ apparent belief that, although catastrophic outcomes may be unlikely, the implications for future generations, were they to arise, would be so detrimental that it would be remiss to fail to give them sufficient weight. There is nothing especially wrong with this view — as one critic has conceded, the Review’s conclusions may well be proved right but for the wrong reasons. However, the Review presents itself to decision makers as yielding conclusions underpinned by conventional, rational economic analysis. In fact, the authors’ concerns about catastrophe in conjunction with their attendant ethical perspectives, permeate many stages of the analysis. More sensitivity analysis to highlight the consequences of alternative views and value judgements would have been valuable.
Anyone interested in climate change should read this paper. It is available free online.