The Stern review: An assessment of its methodology

Staff working paper

This paper by Rick Baker, Andrew Barker, Alan Johnston, and Michael Kohlhaas was released on Thursday 24 January 2008.

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Information release
Contents

The Productivity Commission today released a staff working paper titled The Stern Review: an assessment of its methodology. This technical paper contains a detailed examination of key elements of the Review's analytical approach. Originally prepared as an internal research memorandum following release of the Stern Review's report, the paper is being made more widely available given its ongoing relevance in light of Australia's Garnaut Review.

The staff paper finds that the Stern Review made some important analytical advances. The Review sought to move beyond analysis based on the mean expected outcome to one that incorporates low probability, but potentially catastrophic, events at the tail of probability distributions. The Review also attempted a more comprehensive coverage of damage costs than most previous studies.

The paper also finds that value judgements and ethical perspectives in key parts of the Stern Review's analysis led to estimates of future economic damages being substantially higher, and abatement costs lower, than most previous studies. The paper notes that the report could usefully have included more sensitivity analysis to highlight to decision makers the consequences of alternative assumptions or judgements.

Background Information

02 6240 3330

Preliminaries

Preface, Abbreviations and explanations, Summary

1 Introduction
1.1 Reaction to the Stern Review
1.2 A global externality
1.3 Outline of the paper

2 The science of climate change
2.1 The greenhouse effect
2.2 Stern and the effects of anthropogenic emissions
2.3 Summary

3 Damages (and benefits) from climate change
3.1 Impact on physical, biological and human systems
3.2 Modelling of the costs of climate change
3.3 Summary

4 Mitigation costs
4.1 Resource cost approach
4.2 Macroeconomic modelling approach
4.3 Summary and conclusions

5 Aggregating costs and benefits
5.1 Discounting over time
5.2 Treatment of risk and uncertainty
5.3 Equity weighting
5.4 Aggregating the Review's estimates
5.5 Summary

6 Climate change policy
6.1 Policy objective
6.2 Mitigation policy
6.3 Adaptation policy
6.4 International collective action
6.5 Summary

A Discount rates
A.1 Investment and consumption sourcing
A.2 Prescriptive versus descriptive approaches

References