Stern Review: economics of extreme events

A corrected proof of Roger Pielke, Jr.’s new paper

Pielke, R. Jr., Mistreatment of the economic impacts of extreme events in the Stern Review Report on the Economics of Climate Change. Global Environmental Change (2007), doi:10.1016/j.gloenvcha. 2007.05.004

is available for download [PDF]. Pielke argues persuasively that future costs are overestimated by an order of magnitude. This is an important paper — recommended to all who are interested in developing the best climate change policy options.

The abstract:

The Stern Review on the Economics of Climate Change has focused debate on the costs and benefits of alternative courses of action on climate change. This refocusing has helped to move debate away from science of the climate system and on to issues of policy. However, a careful examination of the Stern Review’s treatment of the economics of extreme events in developed countries, such as floods and tropical cyclones, shows that the report is selective in its presentation of relevant impact studies and repeats a common error in impacts studies by confusing sensitivity analyses with projections of future impacts. The Stern Review’s treatment of extreme events is misleading because it overestimates the future costs of extreme weather events in developed countries by an order of magnitude. Because the Stern Report extends these findings globally, the overestimate propagates through the report’s estimate of future global losses. When extreme events are viewed more comprehensively the resulting perspective can be used to expand the scope of choice available to decision makers seeking to grapple with future disasters in the context of climate change. In particular, a more comprehensive analysis underscores the importance of adaptation in any comprehensive portfolio of responses to climate change.

The concluding paragraphs of the introduction summarize the most serious errors:

However, in making its case for the significant future economic costs of extreme weather events in developed countries the Stern Review commits two significant errors that affect its estimates. In its Chapter 5 the Stern Review concludes, ‘‘The costs of climate change for developed countries could reach several percent of GDP as higher temperatures lead to a sharp increase in extreme weather events and large-scale changes.’’ (Stern, 2007, p. 137). This conclusion cannot be supported by the Review’s own analysis and references to literature. One error is a serious misrepresentation of the scientific literature, and the second is more subtle, but no less significant. The serious misrepresentation takes the form of inaccurately presenting the conclusions of an unpublished paper on trends in disaster losses. The second error is more complex and involves conflating an analysis of the sensitivity of society to future changes in extreme events, assuming that society does not change, with a projection of how extreme event impacts will increase in the future under the integrated conditions of climatic and societal change. The result of the errors in the Stern Review is a significant overstatement of the future costs of extreme climate events not simply in the developed world, but globally—by an order of magnitude.

In light of these errors if the Stern Review is to be viewed as a means of supporting a particular political agenda, then it undercuts its own credibility and this risks its effectiveness. If instead the Stern Review is to be viewed as a policy analysis of the costs and benefits of alternative courses of actions on climate change, then at least in the case of extreme events it has missed an opportunity to clarify the scope of such actions and their possible consequences, and arguably misdirects attention away from those actions most likely to be effective with respect to future catastrophe losses. In either case, on the issue of extreme events and climate change, the Stern Review must be judged a failure. This short paper documents these errors and suggests how an alternative approach might have been structured.

Included in the paper is a tabulation of the 2006 “Consensus (unanimous) statements of the Hohenkammer workshop on climate change and disaster losses”. I’ll cherry-pick just two of the “Policy implications identified by the workshop participants” which reflect conclusions I’ve reached:

1. Adaptation to extreme weather events should play a central role in reducing societal vulnerabilities

7. The community needs to agree upon peer-reviewed procedures for normalizing economic loss data.

Another excellent resource on the economics of the Stern Review is the 15th February Yale conference. I converted the six streaming video segments into 18 audio podcasts.