Rt Hon Lord Lilley

    Mr. Peter Lilley (Hitchin and Harpenden) (Con):
    I am grateful for this opportunity to discuss the Stern report, two years after its publication. I came to the subject when I was chairing a policy group. The globalisation and global poverty group was considering ways of trying to improve the lot of people in developing countries who live on a fraction of the money that we have in the developed world. We were conscious that climate change was likely to have a more adverse impact on them than on anyone else. Yet, by definition, people in those countries cannot be held to blame for carbon emissions, their emissions per head being a fraction of those in the developed world. However, they are likely to suffer most, and are already experiencing climate change, which in many areas has had adverse consequences, but they have the greatest need to use energy to raise their living standards.

    I accepted and took it for granted that we in the developed world should bear the brunt of the costs of mitigating climate change and helping people to adapt, and it was with that outlook that I opened the Stern report when it was published shortly before my report went to press. I opened it at the section on development. The first page says that studies show that the effect of global warming by the middle of this century could be to reduce crop yields in India by up to 70 per cent., and then gave more details. That rang a bell, because I had been examining agriculture in India and other developed countries. When I read the footnote, I found that, sure enough, it was a study that I had seen. It showed that the impact of climate change, if there was no adaptation, on one species of grain could be to reduce its yield by 70 per cent. It also showed that climate change could increase yields of other varieties of the same grain by up to 15 per cent., but that was not in the Stern report. When I read the footnote, it gave the exact source, but said that it assumed no change in behaviour.

    That made me suspicious of the Stern report. It showed one side of the picture-the downside-but deliberately ignored the upside. I am not saying that the upside cancels out the downside, but that is not a proper way to approach the subject. In his review, Professor Stern makes much of the importance of the peer review process, but his report was not subjected to peer review, and it is time that it was, or at least to a common or garden review in the House.

    Mr. Andrew Tyrie (Chichester) (Con):
    I think I have found the reference to India in the Stern review-[Interruption.] It is on page 97 in my version. It refers to a recent study that predicts up to a 70 per cent.

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    reduction in crop yields by the end of the century, but that is for groundnuts only. What about all the other crops?

    Mr. Lilley: It is for only one variety of groundnuts. There is another variety for which a 15 per cent. improvement will be produced.

    Mr. Tyrie: No mention is made of the fact that the reference is to groundnuts only. One must read the footnotes to find that information, and then look up the reference. Is that not an example of the appalling opacity of the document?

    Mr. Lilley: It is, and that is why, if it had been subjected to peer review, it would not have been passed fit for publication.

    My overall position on global warming is that, as a physicist-I studied physics at Cambridge-I am not one of those who deny that carbon dioxide emissions heat the planet. They do have that effect, although there is less certainty about how much the complex feedback effects that climate models seek to replicate may amplify the comparatively modest effect of increasing CO2 and other greenhouse gas emissions. None the less, in my view it is wise to take measures to prevent and to adapt to global warming, and it is sensible to try to assess the costs and benefits of action and inaction to ensure that we adopt the most cost-effective approach. I was hoping that the Stern report would help us in that process, but I am afraid that it does not offer us much help in the analysis of the science or the economics.

    I shall begin with economics, because the review is by an economist and purports to be a review of the economics of climate change. Rather surprisingly, the economics, above all, have come in for most criticism. Professor Stern’s conclusion is that we can prevent or mitigate the impact of CO2 and other greenhouse gas emissions, that it will cost relatively little, and that the cost of inaction far exceeds those of decarbonising the economy. In reaching that conclusion, however, he had to adopt several rather unusual assumptions, and he has been criticised for, among other things, using low discount rates and far-distant horizons, making high but unspecified estimates of the impact cost of global warming and low and optimistic assumptions about mitigation costs, and assuming that little adaptation takes place. Above all, his use of low discount rates was criticised. The report is not explicit about the rate that he uses, and that came out only in subsequent discussion and debate. It then emerged that his basic discount rate for future benefits from mitigating the impact of climate change is 1.4 per cent. per annum. That is far lower than that used by other people and in other circumstances. It has two unsatisfactory consequences.

    First, as Professor Stern projects the benefits of mitigating global warming far into the distant and indefinite future, using a low discount rate gives great weight to supposed changes that will not occur until centuries ahead.

    Mr. Andrew Smith (Oxford, East) (Lab): I congratulate the right hon. Gentleman on securing this debate on what we all agree is an important subject. Is it not possible to become overly technical about discount rates, and does the issue not boil down to the fact that if one cares a lot about the future one is prepared to do

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    rather more to avert catastrophe, and if one does not care so much one is prepared to do rather less? We believe that it is right to do more.

    Mr. Lilley: The right hon. Gentleman is right to say that there is an ethical dimension. It is perhaps that dimension on which we in the House should focus and reach our own conclusions. I shall return to why Professor Stern uses those discount rates, and whether the right hon. Gentleman’s assumption that the matter is simple is true.

    Professor Nordhaus said that if one uses the same methodology as Stern, one can calculate that half the benefits of mitigating climate change, which would be taken into consideration under his methodology of a low discount rate and far-distant horizons, will not occur until after 2800. Even if he uses higher discount rates and other scenarios, it is hundreds of years ahead. There is something rather vain about assuming that we know what the world will be like that far ahead.

    A second consequence relates to the question that I have just been asked. Professor Stern is saying that if we do nothing, by the end of this century, people’s incomes will, on average, be 20 per cent. below what they would be if we were to stabilise greenhouse emissions to 450 to 550 parts per million between now and then. However, he is still assuming that people will have incomes that are a multiple of what we have now. He is saying that if we do nothing, people’s incomes will, for example, be four times what they are now. However, if we take strenuous and costly action, their incomes will be five times what they are now. In other words, we are being asked to make sacrifices now so that, in nearly a century’s time, our great-grandchildren will be five times richer than us-instead of only four times richer. When challenged about that, Lord Stern says, “Well, we could’ve used different assumptions that said we value the extra income from rich people far less than we value extra income from poor people now in the world. But, since we don’t believe in redistribution in the present, we shouldn’t believe in treating rich people differently in the future from poor people now.”

    Labour Members who do believe in redistribution will find Lord Stern’s dismissal of normal discount rates even stranger than I do. The best analysis of these issues that I have found has been published by Friends of the Earth, which commissioned a report on the Stern review from Professor Ackerman. That is an excellent report. Clearly, Friends of the Earth’s sympathies lie with Professor Stern, and I am sure the attitudes, conclusions and political philosophy of Professor Ackerman are different from mine. However, he has produced an excellent report and I commend it to hon. Members because it is so objective and fair. It leaves one pretty free to make up one’s mind on the issues that he clarifies. Even he concludes that Stern’s methodology is open to criticism:

      “A balanced conclusion might be that Stern demonstrates that 1.4% is among the plausible discount rates – and that such low rates have profoundly different implications from rates like 5-6%, used in many other analyses.”

    He acknowledges that such a rate is rather unusual-although it is plausible. However, it is important to note that it leads to different conclusions.

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    It is equally important to note that the Government have effectively repudiated the use of such a low discount rate. They published an impact assessment on the Climate Change Bill to inform the House during the debate on the Bill. Sadly, hon. Members chose not to refer to the impact assessment-Minister’s did not refer to it, it was not referred to in Committee and it was not referred to in debates, other than by me. However, when I asked what discount rate the Government were using to assess, compare and contrast future costs and benefits, it emerged that they were using the standard Treasury discount rate of 3.5 per cent. a year, falling to 3 per cent. after, I think, 60 years. That is still far lower than the rate used by most people who do commercial feasibility studies. The Government failed to mention or address that fact during debates. However, the fact they are using a more normal discount rate leads them to a different assessment of the relative balance of costs and benefits from that reached by Professor Stern.

    In the impact assessment, the Government refer to excluding transitional costs, which they put at between 1.3 and 2 per cent. of gross domestic product up to 2020, and excluding the effects of driving businesses away from this country to overseas, where they will continue to emit the same amount of carbon dioxide-although we will receive none of the economic revenues generated by them. The Government make the heroic assumption that industry adapts instantly and perfectly with full knowledge to use the best and most efficient technology to reduce carbon emissions. Even making such an assumption, the potential cost of this country meeting its former target of a 60 per cent. reduction in emissions is £205 billion. Yet the same report from the Government shows that the maximum benefit from reducing the amount of global warming via the programme enshrined in the Climate Change Bill is £110 billion.

    In short, the potential costs are nearly twice the maximum benefits. That was when the target was still 60 per cent. When I asked the Government to update their estimate to take account of the fact that we were increasing emission targets by a third to 80 per cent., they said that they would do so only after the Bill has received Royal Assent. So, we are not to know the cost of what we have voted for until the measure is enshrined in law.

    I have three questions for the Minister. First, does she stand by the discount rate used by her Government, or does she think that that rate was wrong and Professor Stern was right? Secondly, if they do stand by the discount rate that they used, why do they still quote the conclusions about the balance between costs and benefits in the Stern report and never mention the costs and benefits in their own impact assessment? Thirdly, when will we receive a revised impact assessment telling us how much additional cost and benefit we can expect as a result of increasing the emissions target from 60 to 80 per cent?

    A lot hangs on this because, even if we accept Stern’s forecasts for global warming, there are three possible different strategies. In general, one would expect to use a balance of the three, but that balance will be determined by the analysis of costs and benefits. Those strategies are: a straight reduction in emissions by setting targets for the country and particular sectors; helping the developed world adapt to aspects of climate change that affect it most directly, severely and adversely; and a massive

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    programme of research into alternative ways of reducing emissions and generating energy in a carbon-free fashion. The way in which we distribute resources between those alternatives will depend heavily on how we discount future costs and benefits.

    I would like to return to the science of the issue. I mentioned that I studied physics and natural sciences at Cambridge before studying economics. Subsequently, after I had left university, I also studied statistics. The fact that I have some knowledge of physics does not make me a climate scientist; it simply means that I can understand the basic physics that is involved. More importantly, I understand the scientific method. I and my generation were taught the Karl Popper approach to science, which is that one should constantly confront the prediction of our theories with the facts and if the two are not in accord, we should modify the theory. That is not the approach taken by Professor Stern or his disciples. His approach is not so much that of Karl Popper as that of the great German philosopher Hegel, who believed that it was possible to deduce all scientific truths from first principles. When his disciples pointed out to him that his theories were refuted by the facts he replied, “So much the worse for the facts.”

    That is the general approach taken by many of those who belong to the alarmist school of climate change-not least, Professor Stern himself. The simple fact is that since the beginning of this century, the average global temperature has flatlined; indeed, over the past 18 months it has fallen back and, according to the satellite measurements of temperature, it is now basically back at the level it was in 1979, when such measurements started to be taken. Professor Stern ignores that and, throughout his report, refers to continual global warming. However, global warming has not continued. Even Adair Turner, who on all other topics is a model of objectivity, ignores recent developments when discussing climate change, in the section of his letter to the Treasury summarising recent developments. The facts show that the world has not been heating over the past decade. The response is, “So much the worse for the facts.” While we were passing the Climate Change Bill, based on the assumption that the world was becoming hotter, I mentioned in a point of order that it was snowing outside in October for the first time in 70 years. I was told that I should realise that exceptional cold was a consequence of global warming-so much the worse for the facts.

    The recent period of global cooling does not itself disprove the greenhouse effect. The greenhouse effect is a scientific fact. Other things being equal, an increase in carbon dioxide and other greenhouse gases in the atmosphere will raise the temperature. However, the recent period of cooling does suggest that either manmade global warming may be smaller or that the impact of other factors may be greater than climate models have so far assumed. In those circumstances, the climate models should be adjusted; the facts should not be ignored.

    The second aspect of the strange approach to science taken by Professor Stern is that he applies a one-way filter to new evidence. Even though he asserts that the science is settled, he accepts that it can change in the light of new evidence. Indeed, he says that since he published the report, lots of new evidence means that

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    the situation is much more serious than he thought and we should raise our targets accordingly. The point about the one-way filter is that Professor Stern and his disciples will accept evidence of change only in one direction. A one-way filter is applied so that only studies suggesting that the situation is more dire than we had previously believed may be cited. Where climate science is concerned, the theme song seems to be “Things can only get worser”.

    It is right that we should publish, look at and examine any new evidence that shows that the situation is becoming worse. Equally, we should examine and take on board any evidence that shows that it is not or that the sensitivity of the climate to carbon dioxide emissions may be less than the models-certainly the most extreme models-have suggested, but that was not done in the Stern report and it has not been done by Lord Stern since.

    Mr. Christopher Chope (Christchurch) (Con): I am grateful to my right hon. Friend for securing this long-overdue debate. Does he agree that there may be a message for the Government in the words of our right hon. Friend the Leader of the Opposition yesterday, who said yesterday:

      “Politicians shouldn’t be stubborn and cling to beliefs if circumstances render them obsolete.”

    Mr. Lilley: That is absolutely correct. It was Lord Keynes who said:

      “When the facts change, I change my mind. What do you do, sir?”

    Well, if the facts suggest modification, not abandonment, of the quantitative assessment of global warming, we ought to modify our assessments accordingly. We hear a lot, rightly, about melting ice in the Arctic, but little or nothing about the increased ice cover in the Antarctic or, indeed, in the Arctic over the past year.

    The third strange aspect of the scientific methodology adopted by Professor Stern and his disciples is that he believes that truth in science is determined by majority verdicts and once a majority has spoken, its verdict should not be questioned. I remember that back in the 1930s, the German Government got 100 physicists together to sign a declaration stating that Einstein’s theory of relativity was false, to which Einstein replied: “If I was wrong, it would take only one scientist to prove it.” Science is not a question of adding up majorities. That is particularly not true when one moves from science to statistical models, and this is the last aspect that I want to dwell on.

    As I said, I accept the science of the greenhouse effect. Carbon dioxide and other greenhouse gases, not least water vapour, absorb outgoing infrared radiation and reflect it back to the earth, while allowing incoming radiation at higher wavelengths from the sun to pass through. That is the core greenhouse effect. It can be quantified mathematically. We know that a doubling of greenhouse gas emissions-CO2-would bring about a 1.2 to 1.3° change in the temperature of the climate by the direct impact of the greenhouse effect. There is little dispute about that. There is little dispute, either, that we have already had 0.7 of that 1.2°, because the effect is logarithmic; early increases in CO2 have a far bigger impact than later ones.

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    That is the science. Beyond that, one goes to statistical modelling. I used to do statistical modelling to try to fit models to complex economic systems in much the same way that the climate scientists try to fit complex models to the complex climate system. I know how difficult that is to do well, not because it is difficult to find a good fit between a model and reality, but because if there are many unknown parameters, it is all too easy. A famous mathematician said, “Give me four unknown parameters and I’ll make my model describe an elephant. Give me five and I’ll make it wave its trunk.” There are so many unknown parameters that it is very easy to fit a climate model to the data in the past, but very difficult to get it to predict accurately the future. I think that it was Milton Friedman who said, “There is only one perfect correlation that comes out of statistical analysis, and that is between the prejudices of the model builder and the conclusions his model incorporates.” That is true of many climate models, and it is time that we confronted the facts and asked the people who rely on those models to explain why they have not predicted, for example, the past decade of comparative temperature stability.

    Equally, we should question those who deny the science and are critical of the models. I have noticed how some people on the sceptical wing of the argument who have always been very sceptical of the climate-alarmist prediction based on their models, latched on to a recent German study that tried to explain the period of cooling or comparative stability that we have had and went on to predict cooling for another 15 years. We should be as sceptical of that as we are of other positions. We simply do not know to what extent the feedback mechanisms will amplify the basic modest impact of carbon dioxide emissions in reflecting heat back on to the earth.

    I hope that we will hear from the Minister today the Government’s current views on the Stern report. Do they accept it as a valid analysis of the costs and benefits of taking action to mitigate climate change, or is it superseded by their own report? Do they have any explanation of why the science has not predicted recent developments? Are they undertaking work to adjust climate models and climate predictions in that regard? Are they reconsidering the balance of investment we should make between mitigation, adaptation and research and development? Unless and until we receive answers to those questions, the Stern report will stand open to question and the Government will have to share the-

    Mr. Andrew Smith: I am grateful to the right hon. Gentleman for giving way as he is bringing his remarks to a conclusion. Given what he has said, does he not accept that, given the catastrophic consequences of global warming, the precautionary and sensible thing to do is to act now to avert possible catastrophe-he may argue about how likely that is-because the consequences of not doing that means that it will be impossible to act effectively in future? In other words, should we not err on the safe side?

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    Mr. Lilley: It is sensible to take out an insurance policy against global warming. We do not know how much of it there will be, but there will be some. We do not know how damaging the consequences will be, but beyond a certain point they will be negative. We do not

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    know whether the consequences will be catastrophic, but a theoretical case suggests that in certain circumstances, there could be major damage. However, that must be balanced against the costs. The route that we are offered might cost this generation more than it will save future generations. If we stop helping poor people to raise their living standards to our level, by concentrating on people who, in any case, have benefited from a century of growth, and try to achieve a yet bigger multiple of living standards higher than our own, that is not a sensible thing to do.

    The Ackerman analysis that I mentioned is critical of Lord Stern’s attempts to try to find and cost large future damages and catastrophes. He cites a range of recent disasters and assumes that instead of being rare and random events, they will almost become the norm in the centuries ahead. However, the costs are hard to assess. For example, he puts the costs of Hurricane Katrina at £135 billion, but that loss of lives and property could have been prevented for a small amount, regardless of climate change-if indeed that had anything to do with Hurricane Katrina.

    Our path is determined by an assessment of the costs and benefits. Although it is sensible to take out an insurance policy against future damage caused by global warming, it is foolish to take out such a policy if the premiums are greater than the value of what we seek to protect. The Government analysis says that the £205 billion premium that we could be required to pay to mitigate climate change, is greater than the £110 billion of benefits which they assess will flow from that. We must answer these questions sensibly rather than sidestepping them. It is not enough to say that because the facts are inconvenient and the questions difficult, so much the worse for the facts, we will not bother to answer the questions.