Two decades ago, mainstream economic thinking largely dismissed the climate crisis as a manageable issue with minimal economic impact. However, a landmark report published 20 years ago by Nicholas Stern, a former World Bank chief economist and adviser to then-British Prime Minister Gordon Brown, fundamentally shifted this perspective. Stern’s review, The Economics of Climate Change, argued that the costs of inaction on climate change would exceed the costs of taking action, that climate change represents a significant market failure, and that economic growth can coexist with efforts to reduce greenhouse gas emissions.
Stern’s report challenged traditional economic models by emphasizing the importance of valuing the well-being of future generations. Conventional economic assessments apply a “discount rate” to future outcomes, reducing the perceived importance of long-term effects and effectively devaluing future lives and environmental health. This practice had led many economists, including Nobel laureate William Nordhaus, to argue that moderate global warming—rising by 3 to 4 degrees Celsius above preindustrial levels—would be tolerable and that the costs of mitigation would not outweigh the damage caused by climate change.
Stern’s approach provoked intense debate within the economic community. Critics argued that adjusting discount rates undermined established financial forecasting methods, which prioritize immediate economic returns. Nevertheless, over the past 20 years, Stern’s analysis has largely been vindicated. Studies now indicate that climate change is accelerating faster than previously expected, with more severe economic and social consequences. Additionally, the cost of renewable energy has fallen substantially, contrary to earlier projections.
Despite these findings, traditional economic views remain influential. In 2018, Nordhaus published research suggesting that a 3-degree Celsius increase in global temperature would reduce global GDP by only about 2.1%, and even a 6-degree increase would cut GDP by 8.5%. These estimates have been criticized by climate scientists who warn that such temperature rises would cause widespread ecological collapse, famine, and large-scale human suffering—outcomes that are difficult to capture fully in GDP metrics.
Nordhaus’s continuing influence is reflected in his reception of the Nobel Prize in Economic Sciences in 2018 and the persistence of his growth models in academic curricula worldwide. His optimistic economic assessments of climate change effects are still cited by some governments and institutions, despite mounting scientific evidence of escalating climate risks, including record high temperatures and the destructive economic impacts of phenomena like the intensified El Niño.
Meanwhile, many governments have been slow to implement effective climate policies, with fossil fuel companies remaining highly valued by markets and some investors penalizing firms that adopt low-carbon strategies. Allegations have also emerged that some insurance companies are downplaying climate-related risks in their financial reporting, potentially distorting the true scale of economic exposure.
Stern himself has acknowledged that if revising his report today, he would place greater emphasis on the critical role of biodiversity and nature, which present further economic and security challenges. His work has provided a framework for justifying ambitious climate policies and holding governments and corporations accountable.
As the world faces escalating climate emergencies, economists and policymakers alike are confronted with the urgent need to develop new economic models that adequately value human well-being, ecological health, and the long-term stability of the planet. Two decades after Stern’s pivotal contribution, aligning economic priorities with environmental sustainability remains a critical challenge.