Nicholas Stern’s climate report marks 20 years of economic debate

Nordhaus’s 2018 GDP-loss projections remain in use

Nicholas Stern published The Economics of Climate Change 20 years ago this week, and the 700-page review he wrote as a former World Bank chief economist turned adviser to Gordon Brown set out three conclusions that Fiona Harvey described as “key, and at the time radical”: that the costs of inaction on the climate were greater than the costs of action; that the climate crisis was a market failure; and that economic growth was compatible with cutting greenhouse gas emissions.

Harvey called the 700 dense pages of graphs and data “a model of transformative thinking,” written with standard economic tools and methods “in ways that other mainstream economists could understand.” In her account, the review “upended conventional wisdom among economists and dragged them into a new century” and “set out, for the first time, in clear and bold terms, why investing in a low-carbon future makes economic sense.”

Two decades on, Harvey said, Stern’s analysis “has been found sound.” Stern held to it through the objections it drew from fellow economists, including Nordhaus. If anything, she wrote, he underestimated both the rapidity of heating and its economic consequences, and overestimated the cost of renewable energy.

Harvey said Stern’s work “liberated many governments,” giving them grounds to justify bold climate strategies to investors, aid donors and “the ever-present bond markets.” Laggard administrations, she added, could be challenged at the ballot box and, increasingly, in court.

Harvey wrote that traditional economic approaches to the climate refuse to go away. In 2018, after a deluge of science showing that 3C heating would leave coastal cities under water and swathes of agricultural land as desert, William Nordhaus published a paper claiming that 3C would reduce global GDP by just 2.1%, and that even a 6C increase would incur just an 8.5% GDP loss. Other climate scientists, she wrote, have indicated that at 6C widespread famine could leave billions of people, in economic terms, “suboptimally productive” — “or, as the rest of us might say, dead.”

Nordhaus received the Nobel prize in 2018, and Harvey said his work on the climate was prominent in the citation and in his prize lecture. In hundreds of universities around the world, she wrote, economists are still being trained in the same traditional growth models he used, and projections that the climate crisis could shave just a few per cent off GDP are still in use, in her words “shockingly,” among governments, businesses and international institutions — even as temperatures “shatter records” and the “supercharged El Niño” threatens trillions of dollars in damages.

Stern’s central insight, Harvey wrote, was that future generations have as much right to be born as those already alive — “the revolutionary idea on which his whole thesis turned.” Traditional economics, she explained, mistrusts anything that could happen in the future by applying a “discount rate” to it, so that likely future profits and likely future losses are reckoned as lower in value than those of the present. Harvey said that practice “might make sense” when compiling companies’ accounts, because it prevents them over-selling themselves on optimistic assumptions. Applied to the climate, she wrote, discounting is “a gross distortion”: it assigns future lives less value and makes actions taken now to protect children when they grow up appear uneconomic.

Stern said that if he were to redo the review he would place more emphasis on the role of nature. Harvey reported that Stern sees the worldwide collapse of biodiversity as a key economic and national security threat that has been grossly underestimated, and neglected as a result.

Harvey described the economics that preceded the review. Mainstream economists, she wrote, “had proved that the climate crisis would be a mere economic blip, easily absorbed by growing economies and therefore not worth spending money on.” In their accounting, she said, ice caps and glaciers were “functionally worthless,” “trees only add to GDP when they are cut down,” and a livable climate “shouldn’t even merit a line on a spreadsheet.”

To gauge how startling Stern’s proposal was at the time, Harvey turned to William Nordhaus, a former professor of economics at Yale whose work had been the previous standard for climate economics. In the early 1990s, she wrote, Nordhaus confidently asserted that countries should budget for “moderate” global heating, of about 3C to 4C above preindustrial levels, because below that the cost of cutting greenhouse gas emissions would outweigh the damage of climate change. To reach those conclusions, his work relied on the same “discounting” assigned to future damage and future lives that Stern set out to challenge.

The reaction from fellow economists, including Nordhaus, was intense, Harvey recalled. She covered the dispute at the time for the Financial Times, and remembered the “spluttering outrage” of traditional economists, fuming that the discount rate — a central tenet of Treasury forecasting around the world — could be meddled with. The ethical point, she wrote, appeared to elude them: “Ethics have little place in GDP.”

Harvey listed the results she presented as clear: governments refusing to act, markets over-valuing fossil fuel companies, and investors punishing businesses that dare to prepare for a low-carbon world. On climate risk in finance, she cited allegations that many insurance companies, “supposedly the enforcers of probity in capital markets,” are “alleged to knowingly be fudging their figures to massage climate risk away,” referring to a Guardian report published earlier in the month.

Harvey marked the anniversary with a column headlined “The climate crisis will destroy our economies – we learned this 20 years ago” and asking “When will we act?” She wrote that the radical report showed that a low-carbon future is also good economics, but that “it seems that capitalism needs a reminder” of that finding. Her column opened with two propositions she described as seeming self-evident now: that saving the only planet we have makes good economic sense, and that “There is, after all, no money to be made on a dead Earth.” There may be costs involved now, she wrote, but they are worth paying to protect children from certain destruction.

Harvey’s conclusion was that a thriving future economy, a living planet and robust human societies require a new system of economics that values those things, and that Stern showed the way. Her final line: “Twenty years later, the rest of the world must catch up.”