A Review of the Stern Review on theEconomics of Climate Change1. Opposite Ends of the Globe2. Overview of the Issues3. Discounting in Growth and ClimateChange3.1 Alternative Discount Concepts3.2 The Analytical Background of OptimalEconomic Growth3.3. Philosophical Questions about the TimeDiscount Rate3.4. Real Interest Rates under AlternativeCalibrations of the Ramsey Equation3.5 A Fiscal-Policy Experiment3.6 Measuring Impacts with Near-ZeroDiscounting3.7 A Wrinkle Experiment3.8 Hair Triggers and Uncertainty4. Modeling Alternative Discount Strategiesin the DICE-2007 Model5. Summary VerdictReferencesFiguresFigure 1Figure 2Journal of Economic LiteratureVol. XLV (September 2007), pp. 686–702A Review of the Stern Review on theEconomics of Climate ChangeWILLIAM D. NORDHAUS∗How much and how fast should we react to the threat of global warming? The SternReview argues that the damages from climate change are large, and that nationsshould undertake sharp and immediate reductions in greenhouse gas emissions. Anexamination of the Review’s radical revision of the economics of climate changefinds, however, that it depends decisively on the assumption of a near-zero time dis-count rate combined with a specific utility function. The Review’s unambiguous con-clusions about the need for extreme immediate action will not survive thesubstitution of assumptions that are consistent with today’s marketplace real interestrates and savings rates.6861. Opposite Ends of the GlobeIt appears that no two places on earth arefurther apart on global warming policiesthan the White House and 10 DowningStreet. In 2001, President George W. Bushannounced his opposition to binding con-straints on greenhouse gas emissions. In hisletter of opposition, he stated, “I oppose theKyoto Protocol because it exempts 80 percentof the world, including major population cen-ters such as China and India, from compli-ance, and would cause serious harm to theU.S. economy” (Bush 2001). This policy,much like the war in Iraq, was undertakenwith no discernible economic analysis.1In stark contrast, the British governmentin November 2006 presented a comprehen-sive new study, the Stern Review on theEconomics of Climate Change (hereafter theReview).2Prime Minister Tony Blair painteda dark picture for the globe at its unveiling, “Itis not in doubt that if the science is right, theconsequences for our planet are literally dis-astrous....[W]ithout radical internationalmeasures to reduce carbon emissions within∗ Nordhaus: Yale University. The author is grateful forhelpful comments to early drafts by Scott Barrett, WilliamBrainard, Partha Dasgupta, Peter Diamond, GilbertMetcalf, Chris Hope, Jeff Shafer, Robert Stavins, T. N.Srinivasan, Nicholas Stern, Richard Tol, MartinWeitzman, John Weyant, Gary Yohe, and the Editor.1There is no record of a fact sheet or other economicanalysis accompanying the letter. The Bush Administration’seconomic analysis was contained in the Economic Reportof the President and the Council of Economic Advisers(2002), chapter 6, published almost a year after PresidentBush’s letter to the Senators. The Economic Report’sanalysis suggests that the Kyoto Protocol is costly, but itsanalysis does not show that binding action is economicallyunwarranted.2The printed version is Nicholas Stern (2007). Also,see the electronic edition at that reference. It is assumedthat the printed version is the report of record, and allcitations are to the printed version. The printed versioncontains a “Postscript” which is in part a response to theearly critics, including a response to the November 17,2006, draft of this review.sep07_Article3 8/17/07 4:30 PM Page 6863This strategy is a hallmark of virtually every study ofintertemporal efficiency in climate-change policy. It wasone of the major conclusions in a review of integrated-assessment models: “Perhaps the most surprising result isthe consensus that given calibrated interest rates and lowfuture economic growth, modest controls are generallyoptimal” (David L. Kelly and Charles D. Kolstad 1999). Asurvey of the results of greenhouse-gas stabilization inseveral models in contained in Energy Modeling ForumStudy 19 (2004). This result has been found in all five gen-erations of the Yale/DICE/RICE global-warming modelsdeveloped over the 1975–2007 period; see the referencesin footnote 28.4See James Hansen et al. (2006) for a recent warning.5An early precursor of this Review is the study byWilliam R. Cline (1992). Cline’s analysis of discountingwas virtually identical to that in the Review.6There is by spring 2007 a large body of commentaryon the Stern Review, including the companion article byMartin Weitzman in this issue. A critical discussion of keyassumptions is provided in Richard S. J. Tol and Gary W.Yohe (2006) and Robert O. Mendelsohn (2006). A partic-ularly useful discussion of discounting issues is containedin Partha Dasgupta (2007). An analysis which focuses onthe extreme findings of the Review is S. Niggol Seo(2006). A discussion of ethics is in Wilfred Beckerman andCameron Hepburn (2007). A sensitivity analysis of theethical parameters with much the same message as thepresent article is Sergey Mityakov (2007). A wide-rangingattack on various elements is contained in Robert M.Carter et al. (2006) and Ian Byatt et al. (2006). Insuranceissues and discounting are discussed in Christian Gollier(2006).the next 10 to 15 years, there is compellingevidence to suggest we might lose the chanceto control temperature rises” (Blair 2006).The summary in the Review was equallystark: “[T]he Review estimates that if wedon’t act, the overall costs and risks of cli-mate change will be equivalent to losing atleast 5% of global GDP each year, now andforever. If a wider range of risks and impactsis taken into account, the estimates of dam-age could rise to 20% of GDP or more....Our actions now and over the comingdecades could create risks...on a scale sim-ilar to those associated with the great warsand the economic depression of the first halfof the 20th century” (p. xv).These results are dramatically differentfrom earlier economic models that use thesame basic data and analytical structure. Oneof the major findings in the economics of cli-mate change has been that efficient or “opti-mal” economic policies to slow climate changeinvolve modest rates of emissions reductionsin the near term, followed by sharp reductionsin the medium and long term. We might