Peter Lilley MP: The statistical sophistry of the Stern Review on climate change

Peter Lilley is Member of Parliament for Hitchin and Harpenden.  Follow Peter on Twitter.

The most potent line in Mitt Romney’s acceptance speech was “Obama promised to stop the sea rising and to heal the planet; I promise to help struggling American families”.   Our government is vulnerable to similar ridicule as the costs of policies to decarbonise our economy are starting to hit families and firms.  

Maybe the reshuffle will give us an opportunity to reconsider whether such a costly programme is either necessary or affordable – especially if we want to win back the votes of struggling British families and businesses.

Ministers have been assuring people that the benefits of climate policies to the world exceed the costs to British taxpayers.  But a study I have just released demonstrates that those assurances lack any credible economic basis.

The government’s defence of its climate change policy rests on two pillars.  The UN Intergovernmental Panel on Climate Change "settled the science.   It is a slightly shaky pillar since the Council of National Science Academies criticised the IPCC “for emphasising the negative impacts of climate change … reporting high confidence in some statements for which there is little evidence”..

Nonetheless, the science has a solid basis.  Having studied physics at Cambridge I accept that without greenhouse gases this planet would be a frozen barren rock. 

So I take the IPCC assessment of the science as given in order to focus on the equally crucial economic questions: how much is it worth, and how much will it cost, to restrict carbon dioxide emissions and temperature increases?

With just four other MPs, I voted against the Climate Change Bill because the official Impact Assessment showed that its potential costs were nearly twice its maximum benefits.  In the then prevailing bipartisan euphoria about ‘saving the planet’ Ministers simply dismissed their own figures (they subsequently revised them, conjuring up a breathtaking £1trillion of benefits!) and meanwhile told Parliament to rely on the Stern Review of the Economics of Climate Change.    Ever since, when challenged on the costs and benefits of Climate Change strategy, their successors cling with increasing desperation to Stern: albeit like the proverbial drunk – more for support than illumination.   

To provide that illumination I have undertaken a detailed study - What is Wrong with Stern? the failings of the Stern Review - published by the Global Warming Policy Foundation. 

The first oddity is that the government puts so much faith in Stern since his key conclusion – that the benefits of reducing emissions would be 5 to 20 times the cost - flatly contradicts the IPCC which concluded: “costs and benefits are broadly comparable in magnitude” so it could not establish “an emissions pathway or stabilisation level where benefits exceed costs.”

Most environmental economists whose work Stern supposedly reviewed reached conclusions closer to the IPCC.  Strange that we are told to accept the IPCC consensus on the science but ignore it on the economics!  That is symptomatic of how Climate Change policy is formed.   Instead of evidence based policy we have policy based evidence.  That is true of the Stern Review in spades.

Stern reach conclusions far removed from those of most environmental economists by combining statistical sophistry and verbal virtuosity.  For example:

• Comparing a part with the whole.   Stern compares the benefit of preventing global warming entirely with the cost of avoiding part of potential global warming by preventing carbon emissions exceeding twice their pre-industrial level. 
• Describing future centuries as “now”.   Stern claims global warming will cut GDP by least 5% "now and forever".   Yet even on his worst projection, the cumulative losses from global warming over this century are below the costs of mitigation.
• Inconsistent discounting of costs and benefits.   Stern discounts benefits of curbing emissions at an ultra low rate (not revealed in his 700 page report).   But he effectively uses the normal market rate to discount the cost of decarbonising the economy – the return foregone on alternative investments.   So his estimated cost of avoiding climate change is understated relative to the benefits by between 2 1/2 and 5 times.
• Peculiar ethics.   Stern condemns those who reject his low discount rate as "unethical" and "lacking concern for future generations" as if global warming threatens humanity with extinction or immiseration.   Such a fate is an implausible consequence of a few degrees of warming, costly though that could be, given that mankind flourishes in latitudes whose average temperatures differ by 20 degrees and seasonal extremes vary 80 degrees.  Even in Stern's worst case people in 2200 will be 7 times richer than today if we do nothing to curb emissions.  Why should our generation, not least developing countries (the main source of emissions growth), make sacrifices to make future generations richer still.
• Cherry picking unreliable studies.   A World Bank study shows that Stern’s forecasts of storm damage to infrastructure, based on non-peer reviewed and alarmist literature, are up to 100 times too large.
• Ignoring adaptation.  He cites a study showing a 4oC rise could cut yields of one crop variety by 70% but assumes farmers will not switch to another variety whose yields would actually increase – a fact he withholds.

Government economists privately recognise that Stern's economics are no longer defensible.    They fall back on Professor Weitzman's suggestion that “Stern may be right for the wrong reasons”.   Weitzman says: if there is a finite possibility, however small, of an infinitely bad outcome (human extinction) then virtually an cost is justified to prevent it.    Paradoxically, using this thesis to rescue Stern's conclusions which provide the government's economic pillar means abandoning their scientific pillar - the IPCC's claim (shared by Stern) that “the science is certain” and climate sensitivity can be derived from known “laws of physics and chemistry”.  Instead, Weitzman assumes that neither scientific laws nor empirical studies can set any upper limit on the size of the greenhouse effect.  However, if climate sensitivity is as high as Weitzman's theory requires to put mankind's survival at risk its impact must have been largely concealed by natural variations even before the pause in warming this century. So it should soon become obvious as those fluctuations revert to the mean,  giving plenty of time to respond.  

There may be a case for a modest, gradual approach to climate change rather than Stern's crash programme to decarbonise the UK economy.   But Ministers can no longer rely on his discredited Review to defend an unaffordable policy.