Lord Stern: Flawed economic models underestimate climate risk

Flawed climate economic modelling is underestimating the damage that climate change is causing as well as underestimating the potential of technology to remedy these damages, Lord Nicholas Stern has claimed.

According to Lord Stern, the Paris Agreement could also be nullified unless ‘incremental improvements’ to economic models are introduced

According to Lord Stern, the Paris Agreement could also be nullified unless ‘incremental improvements’ to economic models are introduced

Chair of the Grantham Research Institute on Climate Change and the Environment, Lord Stern has called on researchers to ‘radically improve’ the economic models used to estimate the costs of climate change, claiming that ‘the world deserves better’.

His comments, published in the journal Nature yesterday (24 February) state: “Current economic models tend to underestimate seriously both the potential impacts of dangerous climate change and the wider benefits of a transition to low-carbon growth. There is an urgent need for a new generation of models that give a more accurate picture.”

Lord Stern used the Intergovernmental Panel on Climate Change’s (IPCC) Fifth Assessment Report to acknowledge the challenges that researchers face when attempting to estimate the global economic impacts of climate change.

He states that existing models fail to account for tipping points and catastrophic repercussions - such as rising sea levels and permafrost thawing – when estimating climate costs.

Stern's warning

The article states: “It is these hard-to-predict impacts that are the most troubling potential consequences of inaction. The next IPCC report needs to be based on a much more robust body of economics literature, which we must create now. It could make a crucial difference.”

Lord Stern also warned that policy makers have been left misguided by these models which suggest that fossil fuels can be consumed in greater quantities without any negative consequences to economic growth.

According to Stern the Paris Agreement could also be nullified unless ‘incremental improvements’ to economic models are introduced.

Stern calls on new models to be introduced which highlight the ‘damage functions’ of economic losses in relation to climate change. These include dynamic stochastic computable general equilibrium (DSGE) models to account for future uncertainties and agent-based models (ABMs), which are widely used in the finance sector.

The article states: “Now, a concerted effort is required by the research community to explore as many potential avenues as possible to better estimate the costs of action and inaction on climate change.

“The IPCC should distil what policy-makers need to inform their decision-making. Learned societies and national academies must bring together researchers from a wide range of relevant disciplines to focus attention on improving economic modelling quickly.

“There is huge potential in future technologies that can drive change. These are omitted or badly underestimated in our current climate modelling — deeply damaging to our guidance for policy-making. The well-being and prosperity of future generations are worth more.”

Lord Stern has previously warned that the pledges made by major international emitters ahead of the Paris UN conference were not strong enough to limit global warming to 2C.

After the New Climate Economy (NCE) asserted that carbon pricing can significantly reduce emissions without harming the global economy, Stern stated that the ‘time was right’ to introduce carbon prices and reform fossil fuel subsidies.

Matt Mace


| ipcc | low carbon


CSR & ethics | Climate change
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