Stern Review

Based on Wikipedia: Stern Review

The Report That Put a Price Tag on the End of the World

In October 2006, a 700-page document landed on desks across the world with a stark message: doing nothing about climate change would eventually cost us twenty percent of everything we produce, every year, forever. The Stern Review, as it came to be known, was the first major attempt to answer a question that economists had largely avoided. What is the price of planetary catastrophe?

The answer, according to Sir Nicholas Stern, was terrifyingly large—and surprisingly precise.

The Man Behind the Numbers

Nicholas Stern wasn't your typical environmental campaigner. He was an economist's economist. Before writing the review, he had served as Chief Economist at both the World Bank and the European Bank for Reconstruction and Development. He would later chair the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. When Gordon Brown, then Britain's Chancellor of the Exchequer (essentially the finance minister), wanted someone to calculate whether fighting climate change made economic sense, Stern was the obvious choice.

The assignment came in July 2005. Brown wanted to understand—really understand, in pounds and percentages—what climate change would cost the world economy and what we could do about it.

Fifteen months later, Stern delivered his answer.

The Central Argument

The Stern Review made a claim that sounds almost paradoxical: spending money now to fight climate change is actually the cheap option. The alternative—doing nothing—would be far more expensive.

Here's how Stern broke it down. If we take no action, climate change will eventually cost the world at least five percent of global Gross Domestic Product every year. GDP is simply the total value of all goods and services produced in an economy, so five percent represents an enormous sum—trillions of dollars annually. And that's the conservative estimate. When Stern included harder-to-quantify risks like mass migration, ecosystem collapse, and feedback loops in the climate system, the damage rose to twenty percent of GDP. Not once. Not for a decade. Forever.

The cost of actually preventing this disaster? About one percent of global GDP per year.

In other words, for every dollar we spend on prevention, we avoid somewhere between five and twenty dollars in damage. This is what economists call a favorable benefit-cost ratio, and Stern's was more favorable than almost anyone had previously calculated.

Why This Was Revolutionary

Climate reports were nothing new in 2006. The Intergovernmental Panel on Climate Change had been publishing scientific assessments since 1990. Environmental groups had been sounding alarms for decades. What made Stern different was that he spoke the language of finance ministries and corporate boardrooms.

This wasn't a document about polar bears or melting ice caps—though those appeared too. It was a document about money. About GDP growth and discount rates and marginal costs of abatement. It translated climate science into the vocabulary of people who control the world's largest budgets.

Stern's core innovation was applying standard economic tools to an unprecedented problem. He treated climate change as what economists call a "market failure"—specifically, the largest market failure in human history. When you drive a car or heat your home with natural gas, you pay for the fuel. But you don't pay for the carbon dioxide that enters the atmosphere and contributes to warming that will affect people decades or centuries from now, many of them not yet born, most of them in countries far from your own.

This is what economists call an externality: a cost imposed on others that doesn't show up in the price you pay. The Stern Review argued that this externality was so massive, so global, and so long-lasting that it dwarfed any market failure that had come before.

The Prescription

If climate change is a market failure, the solution is to correct the market. Stern's prescription centered on one key mechanism: putting a price on carbon.

The idea is straightforward. If burning fossil fuels creates costs for society, then the price of fossil fuels should reflect those costs. You can do this through a carbon tax (directly charging for emissions) or through emissions trading (creating a limited number of pollution permits that companies can buy and sell). Either way, the goal is the same: make carbon-intensive activities more expensive so that people and businesses have an incentive to find alternatives.

Stern argued this carbon price needed to be global. If only Britain taxes carbon, British manufacturers will simply move their factories to countries without such taxes. The pollution continues; only the location changes. This is called "carbon leakage," and avoiding it requires international cooperation on a scale rarely achieved in human history.

Beyond carbon pricing, the Review called for massive investment in low-carbon technologies—everything from renewable energy to more efficient vehicles to carbon capture systems that could scrub emissions from power plants. Stern estimated these investments needed to be substantial, but again emphasized they were cheaper than the alternative.

The Review also stressed adaptation. Even if we cut emissions dramatically, some warming is already locked in. Sea levels will rise. Weather patterns will shift. Some regions will become harder to farm. Poor countries, which had contributed least to the problem, would suffer most from these changes. Helping them adapt wasn't just moral obligation—it was sound economic policy, preventing the instability and migration that climate disruption would otherwise cause.

The Response: Enthusiasm and Opportunity

The Stern Review landed like a bomb in policy circles.

Tony Blair, then Britain's Prime Minister, declared that the report showed the scientific evidence for global warming was "overwhelming" and its consequences "disastrous" if the world failed to act. The European Commission's spokesperson said doing nothing was simply not an option.

Business leaders saw opportunity as much as threat. The Carbon Trust's Tom Delay called it "a huge business opportunity." Richard Lambert, Director General of the Confederation of British Industry, said a global carbon trading system was "urgently needed." Shell UK's chairman spoke of "first mover advantage" in what he described as a "massive new global market."

This framing—climate action as economic opportunity rather than economic sacrifice—became central to how the Review was discussed. Asset managers spoke of generating value for clients. Union leaders saw jobs in new green industries. The Prince of Wales assembled fourteen major British companies to discuss how business and government could work together on the transition.

Even Australia, then led by the skeptical John Howard, responded by allocating sixty million dollars to cut greenhouse gas emissions—though Howard still refused to ratify the Kyoto Protocol, and much of the funding went to making coal slightly cleaner rather than replacing it.

The Backlash: Too Alarming

Not everyone was convinced. The Stern Review faced criticism from multiple directions, often contradictory.

Some argued Stern was too pessimistic, inflating the costs of climate change and understating the costs of fighting it.

Ruth Lea, director of the Centre for Policy Studies, questioned whether the underlying climate science was reliable enough to justify such massive economic interventions. She pointed out that economic forecasts for two or three years ahead are usually wrong—how could anyone trust projections spanning a century? Her conclusion: the Review was really just a justification for higher taxes.

The Institute of Directors warned that if Britain acted alone, without commitments from the United States, China, and India, British businesses would simply lose competitiveness while global emissions continued unabated. This was the carbon leakage problem in action.

Bjørn Lomborg, the Danish political scientist known for his book "The Skeptical Environmentalist," called the Review's arguments "fear-mongering" and its conclusions "flawed." He acknowledged the good references but argued Stern had been selective in how he used them.

The libertarian Cato Institute's Jerry Taylor offered a simple calculation: Stern's investment advice only made sense if you accepted his most dire predictions. If climate damage turned out to be only two percent of GDP rather than ten or twenty percent, then spending one percent of GDP to prevent it was, in Taylor's word, "lunacy."

Ronald Bailey of Reason magazine made a different argument: the best way to help future generations wasn't to spend money preventing climate change, but to maximize economic growth so those future generations would be wealthy enough to handle whatever problems arose. Making energy more expensive now, he argued, would slow growth and leave humanity worse off overall.

The Backlash: Not Alarming Enough

Here's where it gets interesting. While some critics said Stern was crying wolf, others argued he was dangerously understating the problem.

Professor Bill McGuire of the Benfield Hazard Research Centre said Stern may have "greatly underestimated" the effects of global warming. Climate scientists pointed to risks that economic models struggled to capture: potential collapse of major ice sheets, shutdown of ocean circulation patterns, release of methane from melting permafrost that could trigger runaway warming.

Environmental writers John Bellamy Foster, Brett Clark, and Richard York, in their book "The Ecological Rift," argued that Stern's emission reduction targets of about 550 parts per million of carbon dioxide equivalent were far too weak. They noted that climate scientist James Hansen considered anything above 350 parts per million dangerous—a threshold we had already crossed by the time Stern wrote his report.

The irony was striking. Stern was simultaneously accused of exaggerating the problem to justify a policy agenda and of downplaying the problem to avoid seeming too radical. The first group thought his solutions were too expensive. The second thought they were too cheap—that genuinely addressing climate change would require far more fundamental changes to how economies operated.

The Technical Debate: Discounting the Future

For economists, the most contentious part of the Stern Review was something called the discount rate. Understanding this debate requires a brief detour into how economists think about time.

Would you rather have a hundred dollars today or a hundred dollars in ten years? Most people choose today, and economists have various explanations for why: you could invest that money and have more in ten years, you might not be alive in ten years, or you simply prefer immediate gratification. This preference for the present over the future is captured by the discount rate—a percentage that tells you how much less a future dollar is worth compared to a present dollar.

Here's why this matters for climate change. Most of the costs of reducing emissions happen now: building renewable energy plants, retrofitting buildings, changing industrial processes. But most of the benefits—avoided damages from warming—accrue decades or centuries in the future. If you heavily discount those future benefits, they shrink to almost nothing in present value terms. A catastrophe in 2100 becomes barely worth preventing today.

Stern used an unusually low discount rate. He argued that just because people are impatient about their own money doesn't mean society should discount the welfare of future generations. Why should someone born in 2100 matter less than someone born in 2000? Isn't that a form of temporal discrimination?

Critics like William Nordhaus, a Yale economist who later won the Nobel Prize for his work on climate economics, argued Stern's discount rate was far below what markets and actual human behavior revealed. Using Stern's rate, Nordhaus pointed out, implied that current generations should make enormous sacrifices for future ones—a position most people wouldn't actually endorse if they understood its implications.

This technical disagreement had massive practical consequences. With Stern's discount rate, aggressive climate action made obvious economic sense. With higher rates, it became much harder to justify the costs. The question of what number to plug into a formula became a proxy war for deeper questions about obligations to people who don't yet exist.

What Actually Happened Next

The Stern Review helped shift the conversation. Before 2006, climate policy debates often pitted environmentalists against economists, with the latter frequently arguing that the costs of action outweighed the benefits. After Stern, that position became harder to defend. A mainstream economist, using mainstream tools, had concluded that action was the economically rational choice.

Britain introduced a Climate Change Act in 2008, the first major economy to set legally binding emissions reduction targets. The European Union expanded its emissions trading system. The concept of carbon pricing spread globally.

But Stern's prescriptions were never fully implemented. The international cooperation he called for proved elusive. The United States never joined the Kyoto Protocol and later, under President Trump, withdrew from the Paris Agreement. Carbon prices in most jurisdictions remained far below what Stern estimated was necessary. Emissions kept rising.

In 2008, just two years after the original review, Stern revised his estimates upward. The one percent of GDP he'd originally called for was now two percent, he said, because climate change was happening faster than expected. The science was moving, and not in a reassuring direction.

The Legacy

Almost two decades later, the Stern Review remains the most influential economic analysis of climate change ever published. It didn't end the debate—far from it. But it established a framework that subsequent work has built upon, challenged, and refined.

The report's genius was translation. It took the abstract threat of global warming and rendered it in the language of spreadsheets and quarterly reports. It gave policymakers and business leaders something they desperately needed: permission to treat climate change as an economic issue rather than merely an environmental one.

Whether Stern's numbers were precisely right matters less than the question he forced everyone to confront. We cannot escape choosing. Doing nothing is itself a choice—and according to Stern's analysis, by far the most expensive one.

The great irony is that the debate over whether climate action costs one percent or two percent of GDP, whether climate damage amounts to five percent or twenty percent, may ultimately prove academic. Those arguments assumed we had the luxury of careful calculation, of weighing costs and benefits across a century. The climate system operates on its own timetable, indifferent to our models and discount rates.

Stern himself understood this. "Climate change is the greatest and widest-ranging market failure ever seen," he wrote, "presenting a unique challenge for economics." It was a rare admission of humility from a discipline that often claims to have figured out how the world works. Some problems, it turns out, don't fit neatly into the equations.

What This Means for Financial Risk

The Stern Review did something that reverberates through financial markets to this day: it established that climate change could be quantified as economic risk. This framing—climate as financial risk rather than merely environmental concern—opened doors that environmental arguments alone could not.

Banks began assessing the climate exposure of their loan portfolios. Insurance companies recalculated their catastrophe models. Investors started asking companies about their carbon footprints. Entire industries emerged around measuring, reporting, and managing what came to be called "climate risk."

Whether this financialization of climate concern has helped or hurt the underlying cause remains contested. Critics argue it has reduced an existential threat to just another line item on a balance sheet, something to be managed rather than prevented. Supporters counter that speaking the language of money is the only way to get powerful institutions to act.

What's undeniable is that Stern changed how the world talks about climate change. Before his review, it was possible for serious people to argue that economics and environmentalism were fundamentally opposed—that we had to choose between prosperity and planetary survival. After Stern, that framing looked increasingly naive. The real choice, he showed, was between spending a little now or spending vastly more later.

That message, whatever its precise numerical accuracy, may be the Review's most enduring contribution.