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Leontief Home | Other Recipients

2011 Leontief Prize
Nicholas Stern and Martin Weitzman

Provost Jamshed Bharucha, Dr. Neva Goodwin, Lord Nicholas Stern,
Dr. Martin Weitzman, President Lawrence Bacow,
Dr. William Moomaw
Photo by Mukhtar Amin

Towards a New Economics of Climate Change

On March 8 the Global Development And Environment Institute (GDAE) presented the 2011 Leontief Prize to Lord Nicholas Stern of the London School of Economics and Dr. Martin Weitzman of Harvard University.  Both economists are widely renowned for their pioneering and influential analysis of the economics of global climate change.  The Leontief Prize recognizes economists whose theoretical and empirical work provides a deeper understanding of the nexus between economic, social, and environmental objectives.

GDAE co-director Neva Goodwin introduced the event by noting that it is becoming increasingly clear that climate change is the overarching challenge of our time. She mentioned that the Stern Review has successfully bridged the gap between the science and the economics of climate change. The Review's rigorous analysis of the full cost of climate change is impossible to ignore. The fact that hardly any country has yet to live up to its recommendations is instead a matter of politics, and a moral failure in favoring the present over the future. Dr. Goodwin discussed how Martin Weitzman's work has indicated that, given the levels of uncertainty about the extent and impacts of climate change and the prohibitively high costs of extreme climate disaster, economic analysis should pay special attention to the possibilities of catastrophe.  She concluded her remarks by pointing out a pertinent quote from one of Weitzman's recent papers: "The climate system is an angry beast and we are poking it with sticks."

See the full text of Neva Goodwin's introductory remarks.

Lectures on the Economics of Climate Change

stern
Lord Nicholas Stern receiving award
Photo by Mukhtar Amin

Lord Stern’s lecture emphasized that climate change is no ordinary policy issue for many reasons, including the long time frames involved, the uncertainty of the impacts, the need for international cooperation among rich and poor nations, and the technical requirements for a wide-ranging new industrial revolution.  He warned that continuing along a business-as-usual path could commit the planet to eventual warming of 5 degrees Celsius with a probability of perhaps 50%.  This would result in a global average temperature higher than at any time in the past 30 million years, likely precipitating radical changes in the distribution of where people live, prolonged global conflict, and potential reversals of economic development in many regions of the world.

Stern contended that policy analysis of climate change cannot be formulated using standard expected utility models that assign known probabilities to various outcomes.  Instead, he proposed that we need to think of the climate challenge in terms of how to manage extreme risks.  Specifically, we should aim to limit the eventual temperature increase to 2 degrees Celsius in order to increase the probability of avoiding dangerous tipping points that could produce instability in the global climate system.  However, achieving this goal will require a new industrial revolution encompassing all sectors of the economy from agriculture to power generation. 

In contrast to previous industrial revolutions, the revolution required to address climate change must be driven by public policy.  As is widely recognized, the externalities associated with greenhouse gas emissions must be internalized through a carbon tax or cap-and-trade permit system.  But other externalities must be recognized as well including the positive externalities of innovation and the network externalities of public infrastructure.  Going beyond simply pricing carbon reveals the importance of fostering private investment using dynamic public policies.

Finally, an explicit discussion of ethics is absolutely necessary to address the inter- and intra-generational distributional issues related to climate change.  With respect to discounting, there is no market-based rate that reflects collective long-term decision-making.  Dialogues on rights, responsibilities, and justice are needed to promote international cooperation.  Stern concluded by noting that climate change cannot be managed without also overcoming global poverty – if we fail at one we will fail at the other.

See full text of Lord Nicholas Stern's remarks

weitzman
Dr. Martin Weitzman receiving award
Photo by Mukhtar Amin

Martin Weitzman’s lecture reviewed the economic debate on climate change, emphasizing the transformational role of the Stern Review.  Prior to the Stern Review, economic analyses of the costs and benefits of climate policies were commonly based on integrated assessment models – the most famous model being the DICE model created by William Nordhaus.  This modeling approach views climate change as a question of investment efficiency, whereby climate change policies must compete with alternative investments such as public health and education.  These models provided estimates of the appropriate price path on carbon emissions, with prices starting relatively low and gradually rising as a result of discounting.

The Stern Review was a bombshell because unlike previous analyses, it recommended strong, immediate action on climate change.  The Stern Review diverged from previous economic analyses in three critical ways.  First, it incorporated new scientific evidence suggesting that the climate system may be more sensitive than previously thought.  Second, it called for a multi-dimensional approach to policy guidance rather than a deterministic reliance upon cost-benefit analysis.  Third, starting from an ethical position, rather than a market basis, it supported the application of much lower discount rates.

The Stern Review initially received mixed reviews from economists.  Most critiques focused on the discount rate, arguing that Stern’s choice represented an activist position rather than defensible economic analysis.  But supported by subsequent work by Stern and others, the Stern Review’s analysis has held up to scrutiny rather well.  Some of its most important lessons include a better understanding of the ecological and economic uncertainties associated with significant temperature increases and of the problems associated with discounting over the very long term.

In conclusion, Weitzman suggested that despite recent climate policy stagnation, there is still hope for instituting carbon prices – which is essential for induced innovation.  Given the large deficits facing many nations, politicians may eventually recognize the need for additional revenues through taxation.  Faced with the choice between raising income taxes or instituting carbon taxes, a carbon tax may suddenly become politically viable.

Media Coverage

Lord Nichlas SternOn March 8, 2011, GDAE Senior Research Fellow Frank Ackerman sat down with 2011 Leontief Prize recipient Lord Nicholas Stern to discuss the new economics of climate change.

 

The Stern Interview, a three-part interview with Nicholas Stern on the ThinkProgress Blog, March 10-14, 2011.

Eco−friendly economists awarded the Leontief Prize, The Tufts Daily, March 10, 2011.

Stern, Weitzman Honored For Climate Economics Research, Real Climate Economics Blog, November 10, 2010.

Leontief Prize jointly awarded to LSE's Lord Stern, London School of Economics and Political Science, November 17, 2010.

Tufts Institute Will Award Annual Economics Prize to Nicholas Stern and Martin Weitzman, Harvard University Department of Economics.

Weitzman, Stern named Leontief Prize winners, Speakers BCC: The International Bureau, November 22, 2010.

Weitzman, Stern named Leontief Prize winners: The Tufts Daily, November 22, 2010.

Cancún and the new economics of climate change: In this article published by The Guardian on November 30, 2010, GDAE's Kevin P. Gallagher and Frank Ackerman, of the Stockholm Environment Institute (SEI) cite Nicholas Stern and Martin Weitzman’s work on climate economics to highlight the urgency of taking action and the high costs of delay.

See the event announcement and Details

 

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