Stern’s Review and Adam’s fallacy

Carlo Jaeger 0 1 Hans Joachim Schellnhuber 0 1 Victor Brovkin 0 1 0 V. Brovkin Max Planck Institute for Meteorology , Hamburg, Germany 1 H. J. Schellnhuber Oxford University , Oxford, England The Stern Review has played an enormous role in making the world of business aware of the challenge of long-term climate change. In order to make real progress on the basis of this awareness, it is important to pay attention to the difference between human suffering and losses of gross domestic product (GDP). The Review has compared climate change to experiences of suffering like World War I. That war, however, hardly affected global GDP. The long-term damages to be expected from business-as-usual greenhouse gas emissions include loss of the coastal cities of the world over the next millennia. This would be an act of unprecedented barbarism, regardless of whether it would slow down economic growth or perhaps even accelerate it. Business leaders worried about climate change need to pay attention to the tensions between ethical and economic concerns. Otherwise, a credibility crisis threatens global climate policy. An important step to establish the credibility needed for effective climate policy will be to gradually move towards a regime where emission permits are auctioned, not handed out as hidden subsidies. The revenues generated by permit auctions should be used to establish a global system of regional climate funds. - debate. For decades, scientists and environmentalists had warned that anthropogenic climate change was a threat of historic proportions, while industry had lobbied against attempts to implement effective climate policies. In most countries, public debates about climate change were shaped by the tension between images of pending climate catastrophes on one hand, and fears of job losses due to climate policy on the other. The burden of proof that it is economically reasonable to engage in the drastic emissions reductions advocated by those concerned about climate change lied with the latter. With the Stern Review, this has changed. It has changed because two powerful comparisons proposed by the review have captured the mind of both decision-makers and the general public. First, anthropogenic climate change is put into the same class as three huge experiences of human suffering that have marked the past century: World War I, the Great Depression of the 1930ies, and World War II. Second, the damages from climate change are said to be in the order of up to 20% of global gross domestic product (GDP), while the costs of climate policy are said to be in the order of 1%. Business leaders all over the world have endorsed these comparisons; in his State of the Union address of January 2007 even president G.W.Bushwho had been one of the most determined opponents of any effective climate protectiondeclared climate policy to be one of the priorities of US policy-making; the fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) has become part of a public discourse shaped by the Stern insights. The congruence of the two comparisons suggests thatat least with regard to climate changecaring about GDP amounts to much the same as caring about human suffering. Is this so? Figure 1 presents data that can be used to check what traces the three paradigmatic events quoted by the Stern Review left in economic growth. Consider World War I first (see Hirschfeld 2003, for data and further sources): about ten million people died from direct military impacts, about 20 million people were seriously wounded, about 30 million died from the pandemic that arose as a consequence of the war. In economic terms, World War I did hit the British economy, and certainly the GDP of Germany and France (not included in the table), but in the US, Canada, Australia, and Japan no interruption, let alone a slow-down of economic growth can be observed. If anything, the end of the war was an economic problem, as it triggered a temporary international recession. From the point of view of global GDP, World War I was a negligible event. The Great Depression, of course, was a huge shock to the world economy that went with massive losses of well-being for millions of people. However, after a few years it was over and long-run economic growth was certainly not slowed down. World War II, including the military buildup in the years before the war, may actually have helped to recover, even if the war led to a brief interruption in economic growth in the Anglo-Saxon countries. In Japan, World War II did wreck the economy; but in the following decades the Japanese economy engaged in a spectacular and successful catch-up race (much as was the case with Germany). When thinking about climate change in a historical perspectiveas is surely appropriate given the time-scales involvedthese facts tell an important message. The horrors of the Holocaust, but also the casualties of Iwo Jima and of Hiroshima, and all the suffering that came with the two great wars, are incommensurable with GDP figures. Both human suffering and global GDP are important, and so both Fig. 1 Real output per capita in five industrialized countries (Madison 1979) comparisons conveyed by the Stern Review do matter, but their congruence is a fallacy. These tensions arise in many areas of economics, and so far they are treated mainly with neglect. In the case of climate change, this is hardly appropriate. Foley (2006) argues that this neglect is a problematic part of the paradigm economics has inherited from Adam Smith, hence the Adams fallacy in the title of this essay. 2 What future are we discounting? One reason the fallacy matters for the debate on climate change is the fact that most voices in this debate still greatly underestimate the time scales involved. It was somewhat unfortunate that doubling of atmospheric CO2 concentration has been chosen as the benchmark for the bulk of research on climate change, as this shortens the time-horizon considered to a few decades. However, there is enough economically accessible carbon in the Earths crust for humankind to massively increase greenhouse gas emissions for another 200 years and more (Rogner 1997; Hasselmann et al. 2006; Archer and Brovkin, Millennial atmospheric lifetime of Fig. 2 Feasible emissions with available carbon (Archer and Brovkin Millennium atmospheric lifetime of anthropogenic CO2; submitted to Climatic Change), black. IPCC SRES A2 fossil fuel emissions for 21st Century, red anthropogenic CO2 (submitted to Climatic Change); Fig. 2. The IPCC SRES A2 scenario has very fast emissions growth; most likely emissions would have to fall very rapidly after a peak around 2100, with long-term effects similar to the scenario considered here). As a result, atmospheric CO2 concentration would increase by a factor of six or more over the next 300 years, and global mean temperature would increase by about 7C over the same time horizon. What is even more worrying, global m (...truncated)