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15 years on from the Stern Review



On 26 October 2021, to mark the 15th anniversary of the publication of The Economics of Climate Change: The Stern Review, Nicholas Stern reviewed progress and looked forward to the prospects of success at COP26 and beyond. His talk was hosted by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics was recorded on YouTube and can be fully accessed here.


I believe that many economists who are not in the environmental economics field don’t know very much about the Stern Review. I have to say that before climate change issues got on my radar screen (and this is quite recent as I've primarily been doing work in health and labour economics until I recently started dabbling in environmental economics topics such as air pollution and the effects of extreme weather), I was also blissfully unaware of any substantive issues arising from this review. I therefore found this talk to be a real quick way to catch up to speed on the key issues raised in the Stern review.


The first part of the talk focuses on looking back to see what has happened in the 15 years since the Stern Review was published. What I found most interesting in his talk was from 49:10 onwards, which focuses on discussing a time for change in economics.


We must have an economics that can handle both extreme risks and fundamental structural and technological change

Stern argues that we must have an economics that can handle both extreme risks and fundamental structural and technological change. In Stern's view, the expected utility approach is not very good at grappling with this. He views much of the previous work in economics as attempts to shoehorn a "new" problem into a framework and toolkit of the standard workhorse models in economics (e.g. growth models and marginal change). There is a need for economics to help understand how to make fundamental structural change in real time, given the challenge of moving to a net-zero carbon economy within a few decades.


Ways Forward in Economics


In Stern's view, there is a path forward for economists interested in pursuing future work in the economics of climate change. Here are some of the main points he makes:


  • Key futures markets are absent, such as insurance markets covering increasing risks arising from climate change, and markets for unknown, but possibly vital, future technologies. Will the presence of such markets help spur quicker change that is needed?


  • Economics must focus on asking how to shape structures for purpose, by focusing on analyses of change and how to deliver investments in areas that are needed in the economy. This will involve innovation, changes in behaviour and in the political economy.


  • The process will involve learning from many branches of economics, including international, industrial, labour, health, education, environmental, energy economics and much more, and working together with science, technology and the social sciences and humanities.


  • Important areas for economic research includes the role of incentives and nudges in behavioural change, better understanding resource efficiency and the role of the circular economy, and how cities, transport and land use is organised.


Indeed, while the concept of the ‘circular flow of income’ is regularly taught in first-year macroeconomics courses around the world, perhaps it is time for the ‘circular economy’ to also feature as an important concept to learn about.


Wang-Sheng Lee

24 January 2022