This article is part of Nature's Climate Change 2007 special.

Climate Change 2007

Last year's review on climate change by Nicholas Stern, a senior British civil servant and former vice-president of the World Bank, was conceived as the definitive statement on the cost of climate change. So far, though, its legacy has been a debate among economists that has as much to do with ethics as money.

“The review and the critiques that have followed it highlight that many of the important questions boil down to what we choose to value,” says Roger Pielke Jr, an expert in climate-change policy at the University of Colorado, Boulder. Perhaps the most vexing question is how current generations should value their successors' welfare.

The Stern report, published in October 2006, concluded that doing nothing about climate change would mean a long-term loss in average world consumption of 5–20% per year, whereas stabilizing greenhouse-gas concentrations at roughly double pre-industrial levels would cost 1% of global gross domestic product (GDP) by the middle of this century, with a margin of error of plus or minus 3%.

These calculations depend partly on the value we in the present assign to money received or spent in the future — determined by discounting. To stop climate change, we are being asked to pay now and live later, but most people value future benefits less than current costs, and will only invest if the projected pay-off is large enough.

Nicholas Stern has been criticized for overestimating the current value of future generations' welfare. Credit: A. GRANT/AP

The contentious issue is the size of the 'pure-time' discount rate, which determines how much the the welfare of current generations is valued compared with future, as yet non-existent generations.

The Stern review used a very low pure-time discount rate, treating current and future generations equally. But there is little consensus on this among economists. Some, such as William Nordhaus of Yale University in New Haven, Connecticut, find low rates hard to accept, adding that the way markets work supports this position.

Stern's conclusion “depends decisively on the assumption of a near-zero discount rate”, Nordhaus wrote in a critique posted on his website in November. Nordhaus recalculated Stern's assessment of the optimal rate at which emissions should be reduced using a pure-time discount rate of 3% that declines to 1% in 300 years, rather than the 0.1% rate used in the Stern review. The change cut the optimal rate of emissions reduction by 2050 from 25% to 14%. Stern retorts that a pure-time discount rate of 1% is “outrageously high”, as it values things happening in 100 years as only one-third as important as things happening now.

How important a problem climate change is and what society should do about it is all about subjective judgements.

Economist Partha Dasgupta of the University of Cambridge, UK, although largely supportive of Stern's conclusions, takes issue with the way that the report's egalitarian approach to different generations — valuing their well-being equally — is not carried through to its discussion of inequalities in today's world. Stern's calculations, Dasgupta argues, understate the degree to which a given dollar benefits a poor person more than a rich one.

Such arguments may seem like a good way to stall progress, but many, including Stern, value the attention to ethics. “How important a problem climate change is and what society should do about it is all about subjective judgements,” says Mike Hulme, director of the Tyndall Centre for Climate Change Research in Norwich, UK.

However, the focus on the discount rate's effects on the estimated cost of damage has partly overshadowed the Stern report's second striking conclusion — that the worst effects of climate change can be avoided for at most 4% of GDP.

A few weeks after the main report's publication, the Stern review team released a sensitivity analysis that looked at how the conclusions might differ with more conservative estimates of damage costs derived from different value systems. Further analyses will be published in the next couple of weeks. These have shown that the conclusion that prevention will be much cheaper than dealing with the damage is fairly robust, given moderate changes in the parameters.

The debate about discount rates only looks at half the picture, says Ottmar Edenhofer, an economist at the Potsdam Institute for Climate Impact Research in Germany. Just as crucial is the debate about how to reduce emissions.