Twenty years on, the Stern review's warning still beats GDP maths

Twenty years ago this week, a 700-page report by Nicholas Stern overturned the consensus among mainstream economists that the climate crisis was a manageable economic blip. The Economics of Climate Change, published by the former World Bank chief economist turned adviser to Gordon Brown, argued for the first time in mainstream terms that a low-carbon future made financial sense.

Stern reached three conclusions that Guardian environment editor Fiona Harvey, who covered the review's reception for the Financial Times at the time, calls radical for their era: the costs of inaction on climate exceeded the costs of action; the climate crisis was a market failure; and economic growth was compatible with cutting greenhouse gas emissions.

What did Stern actually change?

His target was the "discount rate" — the standard economic tool that values future profits and losses below present ones. Before Stern, that method produced startling results. William Nordhaus, then the standard-setter for climate economics as a professor at Yale, asserted in the early 1990s that countries should budget for "moderate" global heating of about 3C to 4C above preindustrial levels, because below that threshold the cost of cutting emissions would outweigh the damage from climate change.

Stern's counter-argument was ethical as much as technical: future generations have as much right to be born as we did. Discounting future lives, he argued, made protecting today's children look uneconomic — a gross distortion when applied to the climate.

The backlash was intense. Harvey recalls "the spluttering outrage of traditional economists, fuming that the discount rate — a central tenet of Treasury forecasting around the world — could be meddled with." Nordhaus was among the critics. The ethical point, she writes, appeared to elude them: "Ethics have little place in GDP."

How has the analysis held up?

Well, according to Harvey. If anything, Stern underestimated both the speed of heating and its economic consequences, while overestimating the cost of renewable energy. His work gave governments cover to justify bold climate strategies to investors, aid donors and bond markets — and gave courts and voters grounds to challenge laggard administrations.

Stern himself says he would now place more emphasis on nature. The collapse of biodiversity, he argues, is a key economic and national security threat that has been grossly underestimated and neglected as a result.

Why does the old economics persist?

Nordhaus, in 2018, published a paper claiming 3C of warming would reduce global GDP by just 2.1%, and that even a 6C increase would cost just 8.5% of GDP. That came after what Harvey describes as "a deluge of science showing that 3C heating would leave coastal cities under water and swathes of agricultural land as desert." Other climate scientists have indicated that at 6C, widespread famine could leave billions of people — in economic terms — "suboptimally productive." Or, as she puts it, dead.

That same year, Nordhaus received the Nobel prize, with his climate work prominent in the citation and his prize lecture. Hundreds of universities still train economists in the traditional growth models he used. Sunny predictions that the climate crisis will shave only a few per cent off GDP remain in use across governments, businesses and international institutions — even as temperatures shatter records and the supercharged El Niño threatens trillions of dollars in damages.

What is the so-what?

The costs are visible now, Harvey writes: governments refusing to act, markets over-valuing fossil fuel companies, and investors punishing businesses that prepare for a low-carbon world. Many insurance companies — supposedly the enforcers of probity in capital markets — are alleged to be knowingly fudging their figures to massage climate risk away, as the Guardian revealed this month.

Her conclusion is blunt: a thriving future economy, a living planet and robust human societies require a new system of economics that values all three. Stern showed the way twenty years ago. The rest of the world, on this evidence, still hasn't caught up.