How much and how fast should we react to the threat of global warming? The Stern Review argues that the damages from climate change are large, and that nations should undertake sharp and immediate reductions in greenhouse gas emissions. An examination of the Review's radical revision of the economics of climate change finds, however, that it depends decisively on the assumption of a near-zero time discount rate combined with a specific utility function. The Review's unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today's marketplace real interest rates and savings rates.

The Stern Review calls for immediate decisive action to stabilize greenhouse gases because “the benefits of strong, early action on climate change outweighs the costs.” The economic analysis supporting this conclusion consists mostly of two basic strands. The first strand is a formal aggregative model that relies for its conclusions primarily upon imposing a very low discount rate. Concerning this discount-rate aspect, I am skeptical of the Review's formal analysis, but this essay points out that we are actually a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged. The Review's second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertainties that are difficult to quantify. Concerning this uncertainty aspect, I argue that it might be recast into sound analytical reasoning that might justify some of the Review's conclusions. The basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consumption smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings.

This paper measures the economic impact of climate change on US agricultural land by estimating the effect of random year-to-year variation in temperature and precipitation on agricultural profits. The preferred estimates indicate that climate change will increase annual profits by $1.3 billion in 2002 dollars (2002$) or 4 percent. This estimate is robust to numerous specification checks and relatively precise, so large negative or positive effects are unlikely. We also find the hedonic approach—which is the standard in the previous literature—to be unreliable because it produces estimates that are extremely sensitive to seemingly minor choices about control variables, sample, and weighting.