An Even Sterner Review: Introducing Relative Prices into the Discounting Debate

The Stern Review (2006) has come to symbolize something of a dividing line in the evolution of the common appreciation of the climate problem. It is fair to say that during the last decade, there has been a gradual but uneven increase in the perceived gravity of anthropogenic climate change, among scientists and, with some time lag, the general public. However, save the United Nations’ Intergovernmental Panel on Climate Change (IPCC) assessments (see for example, IPCC, 2001, 2007a, b), the Stern Review is the first major, official economic report to give climate change a really prominent place among global problems. The political backing of the Stern Review in the UK—at its first presentation, Sir Nicholas Stern was flanked by both Prime Minister Tony Blair and Chancellor Gordon Brown—has been impressive and one of the factors commanding attention. Still, the Stern Review has been criticized on a number of accounts. The criticism has regarded both the manner in which the results are presented and the methodology underlying them, especially when it comes to the discount rate used when analyzing the future economic benefits and costs of climate change. The reason for the preoccupation with the discount rate, a seemingly trivial parameter, is simple: since the impacts of climate change will mostly be felt in the future (because emissions of greenhouse gases are rising and because of the inertia of the climate system), the rate at which we discount the future will have a huge impact on the level of emissions reduction that