“Also, it is important to recognise that the scientific models follow a different modelling strategy from standard econometrics. The physics and quantitative chemistry constrain the model parameters, so specifying such models is not simply a curve-fitting exercise; in any case, the complexity of the models, the number of variables of interest that they try to explain, and the number of possible criteria by which to judge goodness to fit preclude choosing the value of uncertain parameters to obtain the best fit...
Assessing the merits of policies entailing different degrees of mitigation and adaptation requires the comparison of very different possible paths for economic development. This is a problem in non-marginal dynamic stochastic cost–benefit analysis quite different from the usual project appraisal approach to cost–benefit analysis that treats macroeconomic parameters such as growth rates and discount factors as given and known.
Let me explain this in the context of scenarios for future greenhouse gas (GHG) emissions. The key points are that, in the absence of an appropriate policy framework, first, global economic growth is likely to lead to rising GHG emissions and, second, incentives to develop and adopt less carbonintensive technologies are and will remain absent.11 This gives rise to a substantial risk of adverse impacts on economic growth and human development, particularly in developing countries, in the future. This risk should be reflected in the policy-maker’s growth modelling and approach to evaluating future benefits in the ‘business as usual’ scenarios. Generally, where extra benefits accrue in more difficult circumstances, they should have higher weight than on more attractive paths.
In the absence of policies to correct the externalities and market imperfections associated with the emission of GHGs and with innovation, markets cannot be expected to deliver efficient or desirable outcomes. Further, fossil fuels, particularly coal, are available in sufficient abundance to make the ‘business-as-usual’ scenarios feasible. Trajectories of GDP and emissions can, and should, be very different from ‘business-as-usual’. This could, we shall argue, be achieved with fairly modest net initial costs relative to ‘business-as-usual’ but very large benefits from avoided damage later in the century. Thus appropriate analysis must be non-marginal in the sense that it must be able to compare possible paths some of which perform very badly later in the century (i.e. those involving ‘business-as-usual’ now) with paths that take corrective action now and that allow continued growth.”
- Reply to Byatt et al. by Nicholas Stern, World Economics, Volume 7, Number 2 (April-June 2006)(emphasis mine)
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