Jun 29, 1999 - Almost no consideration of specific impacts on Canada was used in .... between monetary and social values: the price of diamonds is much.
Costing Climate Change in Canada: Impacts and Adaptation DRAFT
Peter Bein, Ian Burton, Quentin Chiotti, David Demeritt, Mohammed Dore, Dale Rothman, and Marnie Vandierendonck.
Vancouver 29. June, 1999
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Executive Summary This paper builds on an earlier paper prepared for the Canada Country Study, and contains three main messages. The level of knowledge about the economic cost of climate change impacts and adaptive actions that might be taken in Canada is insufficient (Section 3). Subject to many caveats it can be said that Canadians now spend in the order of 2% of GDP on adapting to current climate. This total is likely to increase sharply with climate change. Fragmentary ‘guesstimates’ ranging from a loss of a couple percentage points of Canadian GDP, to a gain of a few points, have been made under heroic analytical and value judgement assumptions. Almost no consideration of specific impacts on Canada was used in developing these estimates. Canada is one of the few countries (besides the Scandinavian and Baltic countries, and Russia) likely to experience significant benefits from climate change. The state of costing knowledge is unsatisfactory, but only some of the reasons can be addressed short-term (Section 4). Costing should not continue running ahead of scientific developments in sector impact and adaptation. Such approach necessarily makes unreasonable assumptions and generates confusing (if not harmful) cost information that is of limited value for policy. Costing, like any other analysis method supporting policy, is not flawless, but there is no better alternative. The analysis rests on a few assumptions that create surmountable problems, but assure consistency and rigor at the same time. The greatest advancements can be made by valuing natural resources with ecological economics methods, and by adopting social rate of time preference in discounting long-term impacts. Recognizing that costing should not forerun impact research, costing work for Canada should concentrate on (1) compiling adaptation strategies for sectors, (2) better estimating present costs of climate, and (3) developing unit costs that will be used with the quantities of impacts when they become firmer (Section 5). Historical and spatial analogies can help compile adaptation options. Input-output analysis can brace support estimates of current and short-term costs of normal climate. To improve current estimates of future impact costs and benefits, research on valuation of Canadian ecosystem services is the most promising. Integrated assessments can explore adaptation capacity, and can develop sector- and sitespecific costing information when impact information becomes available. Given the difficulties in developing reliable estimates of uncertainties, the usefulness of risk assessment and multiobjective decision analysis is limited. Research agenda, capacity and funding need to be established, possibly under the National Climate Change Strategy to advance understanding of the costs of impacts and adaptation, including the capacity to take advantage of new opportunities. 1.
Purpose and Organization of Paper
This paper provides a summary of what is known in economic terms about the potential future changes to the Canadian economy, society, and environment that might be caused by climate change. This information is one of many inputs to the unfolding policy process. The Canada Country Study has explored the topic (Rothman et al. 1998). Since the state of knowledge is shown to be rudimentary and unreliable, the present paper explains why this is so and suggests what steps might be taken to provide a better basis for policy in the absence of reliable
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information. Four cost components bear on the economic significance of climate change: •
the future stream of costs and benefits that would be imposed by changing climate would impose in the absence of any policy response;
•
the continuing costs of slowing down the rate of change (mitigation costs);
•
the costs and benefits of progressively adapting to those climate changes not prevented by mitigation; and,
•
the residual costs which will remain after an appropriate mix of mitigation and adaptation measures is taken.
This paper focuses on impact and adaptation costs and benefits. Although it is believed that the overall impacts of climate change will be negative, there could also be substantial benefits. In all regions and sectors there will be a mix of costs and opportunities. For some regions and some sectors the net effect may actually be beneficial. The economic benefits will not be realized, unless Canadians set out to make use of them. Taking advantage of the opportunities of climate change requires effort, initiative, and investment, the costs of which must also be considered in examining the effects of climate change on Canada. Impact costs are of two kinds: those likely to be experienced without policy-led adaptation or mitigation (costs of inaction), and those remaining after some mitigation and adaptation measures have been taken. ’Cost of inaction’ is somewhat misleading in reference to adaptation because adaptation to a varying climate is an ongoing process that will continue to some extent even without policy response. The key concepts are defined in Section 2. Section 3 presents existing estimates of impact and adaptation costs derived by various , albeit rather limited, methods for Canada. Section 4 reviews and assesses the methodological and conceptual problems associated with existing methods. Section 5 suggests several ways of improving the estimates and specifies needs and priorities for continuing work on the subject. 2.
Impacts, Adaptive Responses and Valuation
2.1
Climate Change Impacts, Costs, and Benefits
Usually, cost is used interchangeably with price to reflect market transactions, but economists define the word more broadly as benefits forgone. Thus, anything that requires a trade-off of another benefit implies a cost. Cost could be used interchangeably with negative impact, resource loss or problem to reflect negative tradeoffs. A gainful tradeoff of a good or service is a benefit, or negative cost. In considering a non-market cost of climate change impacts, we consider the value of the good or service that is changed as a consequence. The change can be in either direction: the good or service may be degraded or lost, or it may be enhanced or created. The costs of climate change and other environmental consequences of anthropogenic activities can be thought of as the last link in an analysis chain. Starting at the top of Figure 1, human activities or sources produce stressors (greenhouse gases in the case of climate change), which can be mitigated before they reach the environment. receptors. The range and fate of a stressor transported through air, water or land must be determined in order to assess exposure of the receptors, i.e. humans, other life forms and materials. Impacts are the consequences expected in a receptor after a change in exposure to stressors. Dose-response and physical damage functions describe the impact sensitivity of receptors to a given concentration of a stressor. Receptors may have an adaptation ability which lessens the magnitude of the impact with time. Sensitivity to change in a stressor and ability to adapt to it determine a receptor’s vulnerability. 3
The net quantities of impacts remaining after mitigation and adaptation are multiplied by the unit values of each category of the residual damage. The costs of mitigation and adaptation are added to the total cost of impacts. Possible side-benefits of the impacts and of the adaptations are subtracted for a full accounting. Non-monetizable impacts cannot be quantified in the same way, but they must be described in order to maintain a comprehensive representation in policy. Figure 1.
Impact Cost Flow Chart (modified from Bein (1997))
Activities/Sources Production and Consumption of Goods and Services Disposal of Goods Energy Use Land Use
ê Stressors Water Pollution and Hydrological Impacts Exhaust Emissions, Noise and Vibration Resource and Energy Consumption Land Use Changes Waste Disposal
ê Receptors Humans, Animals, Plants Ecosystems Materials
ê Impacts Human Stress, Morbidity, Fecundity, Mortality Changed Natural Resource Production Ecosystem and Biodiversity Changes Changed Natural Waste Absorption, Loss of Open Space Material Damage Social Change
ê Vulnerability Sensitivity + Adaptability Magnitude of Change Rate of Change
ê Monetized Total Cost of Climate Change = Sum (residual damage × unit cost of damage) + Sum (mitigation costs) + Sum (adaptation costs) – Sum (benefits) ê Non-monetized Accounts
ç MITIGATION Emission-oriented Measures Volume-oriented Measures Structural Change Quality Improvements Sink Enhancement Ancillary Benefits
ç Range/Fate/Exposure Dispersed, Concentrated, Bioconcentrated Current, Near Future, Distant Future Local, Regional, Global
ç Dose-Response/Physical Damage Assimilative Capacity Critical Load, Target Load Damage per Unit of Stressor
ç First and Higher Order Impacts Natural Processes Primary Economic Sectors Ripple Effects in the Economy
ç ADAPTATION Short and Long Term Spontaneous in Ecosystems Planned in Socioeconomic Systems Ancillary Benefits
ç Unit Values Value of Ecosystem Services Value of Material Damage/Replacement Value of Human Life and Health Costs of Social Consequences Sectoral Mitigation and Adaptation Costs
ç Intangibles/Uncertainty/Ignorance Imperfect Knowledge or Lack of It Irreversibility and Risk Aversion Non-market and Social Values
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The impacts of climate change have been described as a chain of consequences caused by increased greenhouse gas concentrations in the atmosphere. The first order impacts are the direct consequences for environmental processes linked to the atmosphere, such as, the hydrological and nutrient cycles, changes in the extent of permafrost, and the distribution of ecosystems and species. First order impacts affect virtually all natural processes and conditions, and the largest first order impacts might be non-monetary. Changes in Canada’s natural resources are probably expressed best in physical and biological terms. Second order impacts include next step consequences in those economic sectors (primary sectors) most closely dependent on natural resources. The second order impacts take different forms and are difficult to trace. For example, forests may be damaged because some tree species will no longer survive in their present location, due to changes in temperature and precipitation, distribution of insect pests and disease vectors, or increased incidence of forest fires. The combined effect of these changes may result in significant geographical and structural shifts in the forest products industry, loss of some species, and decline in biodiversity. Third order impacts refer to the change in economic values associated with first and second order impacts. There may be employment and production losses in the forest industry, loss of recreational and amenity values of a degraded forest, and gains in agriculture encroaching on the retreating forests. Further impacts extend like a growing circle of waves across the economy and might involve the forest machinery supply industry, forest products transport, the balance of trade, and so on. To capture all these cost entails following the “waves” into banking, commerce, and other service sectors. The higher order impacts could be widespread, but some of them would be less important than initially assumed, for example, the insurance industry would spread the risk onto the insured to prevent loss of profits (Tol 1998). The aggregation of costs and benefits of first and higher order impacts across all regions and sectors in Canada could be an enormous task, without a guarantee of reliable results. Meaningful aggregated national results cannot be obtained with alternative means, because the national total is a sum of local and sector costs and benefits. 2.2
Valuation
Value stands for attributed or relative worth, merit or usefulness. Valuation generally aggregates diverse values to a common metric that could facilitate decision making. In monetary valuation, this metric is money. Monetary value portrays somewhat narrow representation of a true measure of value. Social value is more inclusive, but not easy to measure. A common example describes the difference between monetary and social values: the price of diamonds is much greater than that of water, but no one has been known to die from lack of diamonds, while it is impossible to live without water. Climate change impacts and responses generally divert resources from alternative uses. The purpose of cost benefit assessments is therefore to translate the effects of climate change action into comparable units that reflect the impacts on society’s welfare. Cost estimation is predicated on the assumption that scarce resources can indeed be measured in money terms, but monetization is not always valid. Other, non-economic values, such as social equity, intergenerational fairness, spirituality, quality of life, preservation of natural resources, are important as well, but economic valuation, as opposed to more qualitative forms, is not well suited to representing them. Where consequence of impacts of climate change cannot be put in monetary terms, they should be noted and reported in physical and qualitative terms. Market economics is built on the concept of market price. Market price determines value under the assumption that the market is characterized by perfect competition, perfect information of consumers, and rational choices. Even a perfect market cannot value public goods (forests, rivers, 5
oceans, the atmosphere, etc.) and does not place a value on damage inflicted to them (so-called external impact, external cost, or simply externality). Externalities land on third parties without invitation or compensation, while the party who generates them does not have to offset the cost in monetary terms. External costs often do not receive adequate weight in private decision making, and represent a failure of the market or decision-makers to capture all costs of production and consumption. Thus, there is a problem of the valuation of both market and non-market goods in economics. Non-economic considerations often make economic valuation very difficult, impractical, if not offensive to many, as follows. •
Some people find it difficult to determine their own monetized value for a hypothetical good that is not normally bought and sold.
•
People may doubt that society can agree on an acceptable monetized value, given a wide range of individual values and preferences, especially in spiritual and cultural.
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Individuals may be afraid that monetization will allow natural resources to be sold as commodities and will increase environmental degradation and social inequity.
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Some goods may be considered sacred, and some people believe that the goods should be allocated by a system other than a competitive market.
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Individuals may be afraid that monetization will be skewed by poor analysis or will be controlled by experts and decision makers who manipulate the results to their own ends.
The use of a common valuation metric implies that very different items can be traded off. Monetary valuation of climate change damage converts climate change all of the various impacts into a single, monetary metric. In effect, monetary valuation allows for the depletion of natural resources to be offset by future increases in human-produced capital, or by the substitution of other goods. The possibility of irreversible impacts and extinction does not matter, because future generations can be adequately compensated for any declines in the stocks of a natural resource by increases in the stock of other kinds of capital. Pearce et al. (1996) distinguish two norms to deal with the issue of tradeoffs between man-made and natural capital in climate change policy evaluation: •
Absolute standards approach seeks to avoid any harm. Inspection of the costs of climate change impacts and responses is unhelpful. The costs are irrelevant under the assumption that environmental and social goods and services must be absolutely preserved because they are irreplaceable. Proponents of this approach seek to account for biophysical limits to development, irreversibility of natural resource degradation or loss, uncertainty about biosphere functioning and its total service value, and equity between generations. The approach would preclude consuming any non-renewable natural resource and is not practical for climate change policy.
•
Safe minimum standards approach maintains that since many potential impacts are irreversible and the risks uncertain, harm should be avoided, subject to the constraint that avoiding harm (mitigation) does not impose unacceptable costs. Some limited tradeoffs and substitutions are allowed between human and natural capital.
2.3
Functions and Values of Natural Resources
Climate change may have the greatest impacts on natural resources, since, unlike society, they cannot readily adapt. An appreciation of the costs and benefits of climate change impacts on Canadian nature is gained by considering the goods and services which natural resources provide. To distinguish from the human-produced goods and services, the natural ones are termed natural capital. Climate change impacts may result in a loss or enhancement of the following categories of functions of the natural systems (de Groot 1994).
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•
Regulation of essential life-supporting processes which provide clean air, water and productive soil. Examples include photosynthesis in plants, prevention of soil erosion and sediment control, operation of the hydrological cycle including flood control and drinking water supply, regulation of climate, natural pest control by birds, and pollination by insects.
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Space and medium for human activities such as habitation, transportation, agriculture, and recreation.
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Production of resources, ranging from food and raw materials for industrial use to energy resources and genetic material.
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Information functions providing opportunities for reflection, aesthetic experiences, spiritual enrichment, cognitive development, scientific study and education.
These functions are essential to more direct economic benefits, which provide the environmental stability necessary for the existence of the economy and well being of people. For example, fixation of solar energy in the biomass provides food, fuel, green space necessary for aesthetic and recreational experiences, timber, oxygen, and regulation of climate. Loss or drastic reduction in the natural capital may have destabilizing social and political effects that are felt through wars, refugee waves, and requirements for massive international aid (f. ex. Ayres and Walter 1991). Individuals, society and nature, regardless of who owns the resource, enjoy natural goods and services. They are sometimes more appreciated when the good or service is reduced (compare depletion of stratospheric ozone). Environmental benefits include a combination of the following economic and non-economic values (de Groot 1994). •
Direct use value consists of productive use and employment value. The importance of the environment is obvious in agriculture, mining, energy, forestry, fisheries, tourism and recreation. Since production and employment benefits are relatively easy to express in monetary terms and employment figures, this is often the only economic value of environmental functions in economic assessments.
•
Consumptive use value reflects the direct benefits of natural products that are harvested and consumed without passing through a market. Examples include the value of game, fish, berries and mushrooms obtained by individuals in hunting, fishing and other recreational activities. Harvests of natural resources by aboriginal people, while in principle not different than agricultural harvests in market economies, are classified as consumptive values because they bypass the market.
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Indirect use value contributes to human health. Nature and its regulation processes contribute to the maintenance of clean water, air, soils and healthy food. They also provide a large array of medicinal resources, and shield humans and other life forms from ultraviolet radiation. Nature provides opportunities for recreation and cognitive development (nonconsumptive use) which are necessary for mental health.
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Option value reflects the desire to maintain access to future direct and indirect use of natural resources. Option value reflects human aversion to the risk of loosing the benefits of possible uses, either in their own lifetime or by future generations. Quasi-option value, which preserves a good until more information is available about its value, is quite relevant for climate change, given the uncertainties.
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Existence value stems from the ethical feelings of stewardship over nature held by people on behalf of future generations and other species, even though we do not benefit ourselves directly. This is clearly a difficult item to quantify. The existence values cannot be infinite since humans would not be willing to sacrifice their existence for the sake of other species.
Other non-use values exist but are not well defined. The understanding of the functions of ecosystems is imperfect and the corresponding values reflect an anthropocentric perspective. They are a product of the present-day industrial culture, and reflect the value system and ethics of
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the materialistic society. No one knows how nature itself values the natural capital that partly benefits us (the intrinsic value of environmental assets). Also, there must be natural goods and services that we have not discovered yet. It is therefore impossible to determine the value of amenities such as biodiversity or a particular species. It is also futile to guess the values that will be held by future human generations. A few studies imply that non-use values can be a significant portion of total environmental values (Walsh et al. 1984; Freeman 1993a). 2.4
Normal Climate and Capacity to Adapt
Climate change is sometimes characterized as a totally new threat. While the projected rate and magnitude of climate change is unprecedented, it is true that humans have always contended with changing and variable climates. Hence, a distinction is necessary between ‘normal’ climate including natural climate change and variability, and anthropogenic climate change. Climate change refers in this paper to human-caused changes in climate. Normal climate is the climate in its unmodified state, including its natural variation over time. Some authors argue for analysis of social adaptations to climate rather than climate change (f. ex. Pielke 1998). There are political and technical obstacles in the way of cutting emissions. Inevitable man-induced and natural climate changes are projected to happen, even if some mitigation was successful, while vulnerability of society to natural climate impacts grows due to population growth and technological change. Adaptation responses provide complementary benefits even if mitigation efforts do succeed, as society is in many aspects poorly adapted to climate variability. From this standpoint, it would be worthwhile to research: (1) costs and benefits of adaptation in the context of normal climate-related problems; (2) society’s vulnerability to climate variability and extreme events (vs. vulnerability to climate change); (3) distinction between climate impacts and climate change impacts; and, (4) how far reducing vulnerabilities to climate goes toward reducing society’s vulnerability to climate change. All countries experience economic loss and gain from normal weather and climatic conditions, and have routine adaptation measures to reduce damage caused by normal climate and to take advantage of opportunities climate offers. The process of adapting to climate has been extremely successful. Viable human societies and productive economies have been established in a wide range of climatic conditions. Although Canada has one of the world’s widest ranges and extremes of climate, the country has grown through immigration of people from many different climates who have been able to adapt their culture and livelihood. The economic growth of Canada has also involved the development and adaptation of technology appropriate to the climate. Adaptive social capacity exists, and a spontaneous adaptation will occur even without public intervention. Normal climate is so universally present that it is barely noticed. This is most obvious in agriculture where the choice of crops and mode of cultivation have been finely tailored over time to the prevailing climate. The same is true for forestry, fisheries, water resources, recreation and tourism, and clothing industry, all of which obviously depend on and are sensitive to climate. The public health protection system has built-in safeguards against viruses, bacteria, insects, and parasites. All present infrastructure embodies sunk costs of past adaptation to climate, and climate is a factor in the design, construction and operation of civil engineering structures, systems and works of all description. The practices of insurance, credit, commodity futures and the like are also all attuned to climate norms and known variability. The adaptation represents the outcome of a slow accumulation of policies and practices that are intended to protect people and property, while allowing economic and social activities to continue with a minimum of loss or disruption in all but the most extreme weather conditions. Adaptation costs tend to be incorporated into routine expenditures and budgets, and can be viewed as an important input to society’s production functions. With climate change, it is expected that 'built-in'
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costs will change, as the level of adaptation itself changes with the magnitude and speed of global warming. Many of the second and higher order impacts of climate change on society and economy can be reduced by adaptive responses. Adaptation and adaptive responses refer to all actions that can be taken by individuals and society to offset or reduce the impacts of climate change, as follows: •
autonomous actions of individuals or enterprises, and
•
policy driven responses by those concerned with planning and infrastructure development and operations.
As the adaptive capacity of a country, region or sector decreases, the vulnerability to climate change increases, leading to greater costs associated with impacts. Successful adaptation will reduce the impacts associated with climate change, but will depend on technology, institutional arrangements, availability of financing, and information exchange. Developed countries will be impacted less severely than developing countries, due in part to their greater adaptive capacity. Natural resources are more vulnerable than social systems, because of natural limits to adaptation. The public and private adaptation choices and decisions will need revision for conditions of climate change at an unusual rate and in ways that are not fully understood. A wealthy and educated Canada, with a high availability of technical and organizational skills, will be able to offset at least some of the impacts of climate change, subject to the following conditions: •
Successful adaptation can only be achieved at a large cost compared with the present costs of adaptation. The capacity to adapt varies amongst sectors, regions of the country, and social groups (children, the aged infirm or handicapped, the poor and otherwise disadvantaged).
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Adaptation should take advantage of opportunities arising with climate change. The opportunities will not automatically produce economic benefits unless Canadians put an effort, initiative, and investment, the costs of which must also be considered.
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Significant residual impacts and costs will remain due to changes in means, variability, and extreme events associated with climate change. The costs the less predictable elements of climate will remain significant and are likely to increase over present levels.
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There are likely to be some irreversible species loss, the disappearance of landscapes and loss of some of the natural heritage of Canada that it will not be possible to conserve.
Despite all protective measures, extreme weather events cause damage. An occasional disaster proves that improper attention to adaptation can have major and serious consequences. Adaptation is subject to forgetting, while learning is weak and unreliable. In the rush to restore normal life of the affected community, responses to current climate disasters often neglect or resist longer-term adaptation needs. Broad public understanding and support are necessary, and measures to improve adaptation have to be developed within the organizational structures of society. The measures are most effective at the community and municipal level. However, incentives to adopt responsible adaptation strategies sometimes encourage risk-taking and the reliance on disaster relief from others. Therefore, more emphasis should be placed on building adaptive capacity, and not just specific adaptation measures that could prove inappropriate (Burton et al. 1999). Adaptation to the extremes and the harshness of climate costs moneyhe cost cannot be specified with great accuracy, but it is certainly considerable. Preliminary estimates of these costs in Canada are summarized in Section 3. 3.
Existing Estimates of the Costs of Impacts and Adaptation in Canada
There is no sound basis for estimating the costs and benefits of adaptation and residual impacts to 9
climate change in Canada. Some progress has been made in identifying adaptation options in response to climate change, but there is little information on the actual costs and benefits of adaptation, or the residual costs that occur despite adaptive measures. A wide but "not necessarily exhaustive" range of adaptive options to climate variability and change in Canada from responses to past, present, and possible future climate conditions is compiled in (Smit 1993). Costs and benefits of adaptation options are not included, and the task of estimating them across many sectors and geographical areas is daunting. Other methods must be sought in order to develop reasonable estimates of adaptation and residual costs and benefits. Before doing so, however, it is worth noting that there is considerable agreement in the literature on at least three key issues: •
The costs and benefits of adaptations vary geographically, and from sector to sector. Further research is needed to improve our understanding of these differences in costs.
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Many measures promoted for adapting to climate change are small steps up from currently available technologies, suggesting that associated costs could be small, if initiated early.
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Canadian decision-makers may have a good, albeit imperfect, understanding of the broad range of adaptation options available for current climate. It is uncertain, if this knowledge is sufficient to enable successful adaptation to climate change by future Canada.
One study has attempted to estimate the costs of adaptation to current climate in Canada. The results are useful, but need improvement. Two other studies estimated the possible costs of adaptation to, and residual impacts of, climate change. They are based on modification of rather volatile estimates originally made for the United States, so their value is limited. 3.1
Estimates of Current Adaptation and Residual Impact Costs
Herbert and Burton (1994) estimated current costs of adaptation to present climate at over C$11.6 billion (Table 1). The results are by no means rigorous. Section 5.1 lists the points in the estimation method that need improvement. The survey results include total expenditures in 8 major sectors, percentage and cost attributable to climate adaptation, and possible trend under climate change. The costs of energy are subsumed under the appropriate sectors, while some adaptive costs were ignored (e.g. health care adaptations). Sector cost attribution to climate is based on, • •
published material ( f. ex. air transportation costs of aircraft de-icing, runway snow and ice removal, and aviation weather services), and expert opinion on current expenditures at the national level (f. ex. estimate of 4% of construction costs attributable to climate elements).
Table 1
Estimates of the Cost of Adaptation to Current Climate in Canada and Possible Trends Under Climate Change [IAN, ARE FIGURES IN TABLE 1 CORRECT? CCS Vol. IV, p. 29 says total construction in 1990 was $102.4 billion, on p. 30 quotes your 1994 paper with $4 billion estimate. CCS National Sectoral Volume, p. 450, value of construction $93 billion ($618B x 15%). % Attributable to Cost of Climate Total Cost Climate Adaptation Sector/Activity (C$ million) Adaptation (C$ million) Possible Trend
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Transport Air Marine Rail Roads Construction Agriculture Forestry Water Flood Control Household Expenditure Emergency Planning Weather Information TOTAL
7,368 83.5 258.8 702.0 6,323 50,000 1,887 556 1,058 4.7 6,023
Decrease Decrease Decrease Uncertain Decrease Increase Increase Increase Increase
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1,657 83.5 143.8 203.2 1,227 2,000 1,330 403 767 3.8 5,296
14.4
75
10.8
Increase
189
100
189
Increase
19,096
61
11,653
100 55 29 19 4 70 72 73 80
Decrease
Source: adapted from Herbert and Burton (1994). Values are in 1991 or 1992 dollars.
It is difficult to assess how adaptation costs to current climate will change under future climate, but reasonable estimates of trends for specific sectors can be made. Possible trends in Table 1 are judged for Canada from climate change literature of the early 1990s. Adaptation costs in agriculture, forestry, water, emergency planning and weather information are expected to increase, while those associated with transportation and most notably household expenditure are expected to decrease. Residual costs remaining in spite of adaptation are variable and not well defined. Between 1984 and 1994, the Canadian insurance industry paid more than C$1 billion to compensate for losses sustained by major natural disasters. This figure is rising (Brun 1997). Some of these costs would be due to maladaptation and some due to the extremity of weather events. The claims arose from thunderstorms, tornadoes, hail, windstorms and flooding, and concerned damage to homes, businesses and vehicles. The total costs to Canada, including the uninsured costs and damage to public property, is estimated at more than double the insurance costs. This figure does not include smaller events, suggesting that the true residual costs are much higher. Prior to the Red River Flood of 1997 and the ice storm of 1998, the costliest single Canadian weather event during this decade was the Calgary hailstorm of 1991. It caused C$450 million in economic losses, with C$360 million sustained by the insurance industry. In July 1996, there was C$295 million insured costs for severe hailstorm damage in Calgary and Winnipeg. Excessive precipitation and flood in the Saguenay region in July 1996 caused estimated damage of C$1-1.5 billion, of which only C$350-400 million was insured. At the other extreme, extensive drought throughout the Prairies in 1988 resulted in C$1.4 billion in insurance payments and government subsidies. These are only a few, albeit severe, examples of the residual costs associated with extreme events, and it is quite possible that such costs will increase under climate change. While these figures may suggest that Canadians are not adequately prepared to deal with extreme events resulting in major disasters, the recent Red River flood offers useful insights. The costs of the flood are extensive, but they could have been much higher if it was not for a C$50 million floodway around Winnipeg constructed in 1963-1967, and the rapid construction of the 40 km long Brunkild Dike. The floodway has paid itself off many times over, protecting the City of Winnipeg from no less than 3 major floods. Despite the heroic efforts of many volunteers and the extensive 11
building of protective infrastructure, the costs associated with the most recent flood are large. More drastic measures, if not changing land use or location, may be necessary. Adaptive responses may also be required in other regions vulnerable to climate change and rising sea level. For example, an upgrading of existing dykes to protect Lower Fraser Valley in British Columbia may cost hundreds of millions of dollars. Careful and proactive planning, especially in infrastructure with a relatively long life, is cost effective and sensible. Planners in the Town of Milton have recommended spending of an additional C$7-10 million on waterworks to accommodate expected water shortages under climate change. This amount represents an extra 10-15% of the base cost, yet is much cheaper than if changes were required later. The design of recently completed Northumberland Strait Bridge accounted for 1 m potential sea level rise due to global warming over 100 year life of the structure. The added cost of increasing the height of the bridge is small relative to both the total project cost and the possible future costs of countering the effects of a sea level rise. 3.2
Estimates for North America
Tol (1995) considered present USA together with Canada under an equilibrium 2.5 °C warming and a 50 cm rise in sea level due to doubling of atmospheric concentration of CO2. By scaling estimates of 1.5% reduction of North American GDP in 1988, Rothman et al. (1998) estimated that the climate would entail losses of C$8.3 billion (1986) in Canada (Table 2). Human mortality and morbidity make up nearly half of the total damages. Tol (1995) used a value for a statistical life of about US$3.5 million, and neglected impacts on forestry, energy, water, air and water pollution, and many other potential impacts. Only coastal protection is clearly an adaptive measure among Tol’s categories. Dryland and wetland loss, and agriculture, reflect costs of adaptation plus residual damages. The estimates are extremely volatile and shrouded in a wide, yet unknown band of uncertainty. They are based on heroic assumptions and depend on constantly evolving understanding of the impacts of climate change and the economic values. Tol (1996) substantially revised both the total cost and the distribution among sectors for North America, showing US$55.2 billion total instead of former estimate of US$74.5 billion. The loss of species has nearly quadrupled, whereas the estimate of mortality losses has dropped by nearly 75%. Table 2
Category Coastal Defense Dryland Loss Wetland Loss Species Loss Agriculture Human Amenity Human Life
Estimates of the Cost of Doubled CO2 for Canada in 1988 (2.5 °C, 50 cm sea level rise) Data for N. America (Tol 1995) Billion US$ % Total 1.5 2.0 2.0 2.7 5.0 6.7 5.0 6.7 10.0 13.4 12.0 16.1 37.7 50.6
Calculated Costs for Canada Billion 1986 C$ 0.167 0.223 0.557 0.557 1.113 1.336 4.197
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Migration Natural Hazards
1.0 0.3
1.3 0.4
0.111 0.033
TOTAL % of GDP
74.5 1.5
100%
8.294
Source: Rothman et al. (1998). Data for Canada assumes sector share as in the USA, total Canadian GDP from CANSIM. Several categories, e.g. coastal defense, dryland and wetland loss, and agriculture, reflect costs of adaptation plus residual damages. Neglected: • impacts on insurance, construction, transport, and energy supply, • damage from non-tropical storms, river floods, hot/cold spells, and other catastrophes, • other ecosystem losses, • morbidity, physical comfort, political stability, hardship, and other human impacts. Categories considered in other studies, but not considered by Tol: forestry, energy, water, other sectors, air pollution, water pollution. A statistical life, the "personal willingness to pay for risk reductions" (Pearce 1997, p.3), is assessed at $250,000 plus 175 times per capita income (Tol 1996a). Migration are the costs of incorporating immigrants into the social welfare system (Pearce, et al. 1996).
Using newest information about impacts on selected sectors, Tol (1999) produced estimates for North America for 1 °C warming and 20 cm sea level rise. It is unclear how assumptions about warming advance to 2.5 °C and 50 cm rise would affect the new estimate. Tol scaled his 1995 results for 2.5 °C warming and 50 cm rise proportionately by a factor of 2.5 to make comparison possible with the newest estimate. From a total loss of US$30 billion, the estimate rose to a welfare gain of US$175 billion (3.4% of North American GDP). Tol (1999) somewhat arbitrarily ascribed a standard deviation of US$107 billion to the total estimate. Agriculture (for 2.5 °C warming), forestry, nature (ecosystems, species and landscapes), sea level rise (loss and change in value of wetlands and drylands, protection costs, and population migration), mortality (from malaria, schisto, dengue, heat and cold stress, and cardiovascular), heating and cooling energy demand, and water resources were accounted for. Impacts on agriculture with adaptation amount to a net gain in welfare, compared to considerable loss estimated by Tol (1995) and Tol (1996). Human amenity, recreation, tourism, extreme weather, fisheries, construction, transport, energy supply, morbidity and many other impacts were omitted because “no comprehensive, quantified impact studies have been reported.” Using the static model of Tol (1999) as a starting point, a dynamic model of Tol (1999a) attempts to take some account of sector response to climate change, and of the changes in society’s vulnerability (sensitivity modified by adaptation) in years 2000-2200. The model is beset with more uncertainties and heroic assumptions, but gives some insights. In the short term, the estimated sensitivity of a sector to climate change is the crucial parameter. As time progresses, the change in the vulnerability of the sector is often more important for the total impacts. For North America, total impacts are negative in the beginning (losses of up to 1.5% of GDP by about 2040). They reverse very sharply, reaching a GDP gain of 3% in the middle of next century, which then gradually diminishes, reaching about constant GDP losses of below 1% beginning in 2140. In the poorer regions of the world, the negative impacts tend to dominate. The two models are not compatible. The sharp change in sign of impacts after 2040 is indicative of some deficiencies in the dynamic model. The static gain of 3.4% GDP “matches” the peak 3% dynamic gain about 2050, but the coincidence may be spurious. Both estimates may be of the wrong sign and wrong order of magnitude, since natural resource valuation is rather inadequate. 3.3
Estimates by Mendelsohn et al. 13
Mendelsohn et al. (in preparation) have developed predictive equations, based on a series of studies in the US (except for the tourism sector) (Mendelsohn and Neumann forthcoming). The equations relate market value to average temperature and precipitation levels, atmospheric concentrations of CO2, length of coastline, land area, and other variables. The sectors considered are agriculture, forestry, coastal resources, energy, water, and tourism. The impacts of a changed climate are calculated for each sector by varying the climatic parameters. Canada north of 65° latitude (well over half the land area of the three territories of Canada) was omitted on the assumption that economic activities are limited there. Some authors believe that the equations provide helpful estimates for Canadian totals, if not for the specific sectoral impacts, costs, and benefits (Kloeppel 1997; Mendelsohn et al. in preparation). For Canada, a warming of 2.5 °C in 2060 is estimated to provide significant overall positive benefits, largely dominated by gains in agriculture and forestry. A closer examination of the studies raises a number of questions about: •
the adequacy of representation of the dynamics of adaptive capacity and vulnerability of sectors in the equations,
•
optimistic assumptions about the benefits to agriculture and forestry from CO2 fertilization,
•
the lack of consideration of many of the costs of adaptation,
•
restriction to direct-use value and only a subset of economic sectors, at the exclusion of indirect and non-use values of natural resources,
•
the adequacy of impact estimates using single, country-wide, annual average values for temperature and precipitation, and
•
applying these results to countries with climate, biological, and socio-economic system characteristics outside the range over which the equations were estimated.
4.
Review and Assessment of Costing Methodology
Monetary estimates of the costs of future climate change impacts and adaptation inform climate change policy. If climate change will occur, regardless of mitigation attempts, adaptation will be necessary, will involve costs and benefits, and some residual impacts will remain. There will be a number of dimensions to the impacts and the adaptation process. Monetization attempts to cover as many of them as possible, so that policy makers become aware of the magnitude of some of the effects of climate change. Estimation of costs and benefits is most often carried out at the project and sector levels (microeconomic analysis). Macroeconomic approaches yield aggregate “ball park” estimates of the net impact on the national economy, but they are of little value at the specific project, sector or regional level. Macroeconomic models are still unable to include non-market accounts in the standard measures of economic sector inputs and outputs, yet these accounts may represent the most significant residual impacts of climate change in Canada. Climate change will affect a large array of natural processes, which in turn will affect the socioeconomic systems. Most of the impacts and the effectiveness of future adaptations are still not known, or are highly uncertain, and are difficult to translate into costs and benefits. Value judgments are necessarily built into any assessment. Although monetary valuation is highly contentious (Vatn and Bromley 1995), it is a standard way to represent changes in welfare and consumption. A comprehensive valuation of impacts and adaptive responses is a daunting task. Assigning monetary values to the changes will “push economic valuation techniques to their limits, and quite possibly beyond” (Fankhauser 1995). This section reviews the key issues, and assesses the methodology used in monetary estimation of climate change impacts and adaptation. 14
4.1
Valuation of Market Goods
Climate change impacts and adaptation will put demands on some economic and natural resources, and will enhance the use of other resources. Economics studies the allocation of scarce resources that have alternative uses. Resources are not free, and when used for one purpose, they are no longer available for other purposes. The conceptual foundation of all cost estimation is the value of the scarce resources to individuals (Markandya et al. 1998). The total value of any resource is the sum of the values of the different individuals involved in the use of the resource. This distinguishes this system of values from one based on ‘expert’ preferences, or on the preferences of political leaders. Costs are estimated in terms of the willingness to pay (WTP) by individuals to receive the resource or by the willingness of individuals to accept payment (WTA) to part with the resource. This basis of costing is inequitable, as WTP and WTA are related to an individual’s ability to pay (income), so the ‘well off’ receive greater weight. The full value of resources is measured in terms of the value of the next best thing that could have been produced with the same resources (social opportunity cost). The social cost of any activity includes the value of all the resources used in its provision. Some of these are priced and externalities are not. External impacts arise from any human activity that is not accounted for by the agent causing the externality. There is no market for such impacts. The external costs are distinct from the private costs of inputs (labour, materials, energy, services from others) that producers do take into account when determining the value of their production outputs. The total cost to society is the sum of the external costs and the private costs. Market goods are valued on the basis of consumer demand, assuming that the market is perfect, or that producers cannot collude and fix the price nor exercise some form of market power. In the absence of market power, independent consumers determine the value. It is possible to determine a consumer’s willingness to pay for different price and quantity combinations, and then use this information to obtain the consumer’s demand curve. In general this demand curve is downward sloping. The area under the demand curve—over any given price level—is called the consumer’s surplus (CS). In much of the environmental economics (and also cost benefit analysis), the CS is the measure of social cost. It has been shown that WTP < CS < WTA. Thus, there are three different measures of value. The conditions under which the three are equal are very restrictive (f. ex. Chipman and Moore 1980; Dore 1998, 1996). Willingness to accept compensation for a loss is often several times higher than willingness to pay for the use of a good. WTA is more difficult to determine and many analysts opt to use WTP instead, which can seriously bias assessments and undermine policies based on them (Knetsch 1994). The demands for valuation numbers are so great that the shortcomings of the monetary valuation methods are often ignored. Expressing this concern, Knetsch (1994) writes: "Rather than a continuation of present practice, perhaps socially desired interests and objectives might be better served by a more even-handed regard for empirical findings..., and a greater willingness to explore alternatives to current practices." For market goods, social cost is defined as the amount of consumer surplus foregone by a consumer. Thus a measure of one of the dimensions of the cost of climate change is the amount of CS foregone in order to adapt to climate change. For non-market assets, such as goods and services provided by nature, other monetization methods are used. National studies of climate change report costs of impacts and responses at the microeconomic level of projects and sectors, and at the macroeconomic level. A macroeconomic cost assessment attempts to estimate the cost of a response to climate change after considering all of the linkages between sectors in national economy. The macroeconomic analysis is usually reported as changes in GDP or growth in GDP, but may also be reported as loss of ‘welfare’ or loss of consumption. 15
Various sectors are interrelated directly through purchases of goods and services, and indirectly through government taxation, spending, borrowing, and other mechanisms. The net overall costs in the economy differ from the direct, sectoral costs. A wide range of models is used for macroeconomic analysis, some of which assume that demand and supply are in equilibrium at all times, and others that allow for lack of market equilibrium. The macroeconomic costs of alternative climate change policies are sensitive to the choice of model and assumptions, and are less precise than the costs obtained by microeconomic analysis. Typically macroeconomic models do not work with adjusted prices and do not include externalities. Hence the estimates of cost generated by these models are not based on social opportunity cost or WTP (WTA). Nevertheless, because they consider the impacts of policies at an integrated level and allow for inter-sectoral effects, they are an important contribution to the policy debate. Many researchers have noted deficiencies, and suggested revising the conventional systems of national accounts to incorporate full social pricing of resources. Conventional macroeconomic accounting would not report expenditures on climate change responses (either mitigation or adaptation) separately from other accounts. Consumption of environmental assets is not included at all, although some countries begin to calculate changes in the natural environment, using physical measures of flows and stocks of resources, and the value of natural resource depletion. Full social costing would also include changes to ‘quality of life’, as measured by the Human Development Index (combination of three key indicators: longevity, education and income), for example. 4.2
Monetary Valuation of Natural Resources
Monetary valuation applies to direct use values, indirect use values, option values, existence values, and other non-use values (Figure 2). Ideally, all of these values would be represented in the price of a good or service sold in an open, competitive market, in which the external impacts of the production and use of the item have been taken into consideration. The price of a good would then provide an accurate estimate of its economic value. These conditions are not met more often than they are—many items are not bought and sold, many markets are neither open nor competitive, and many externalities are not considered in the pricing of goods and services. The farther one moves away from direct use values in Figure 2, the less effort has been put into including these values in estimates of the costs of climate change. A variety of techniques assign economic values to goods and services for which there are no price-fixing markets. Often this is the cost of replacing the specific good or service of interest with a proxy good or service. A popular technique, the travel cost method, derives monetary estimates from costs of traveling to visit a particular recreational site or engage in a particular activity. Hedonic pricing methods attempt to break down property and wage differentials into components that capture the use value of non-market goods such as air quality or mortality risk. Contingent valuation method directly asks people what they would pay for (or accept as compensation for the removal of) goods normally not traded on the market (Freeman 1993). Different techniques are often used to piece together the value of a thing, but aspects not amenable to monetization are left out. Though accepted within economics and other disciplines, these valuation techniques remain problematic. For price to accurately represent economic value requires that a free market and a world of rational agents exists, who are perfectly knowledgeable about the consequences of their actions and able to act consistently in a way that maximizes their individual utility. Many, if not most, existing markets are not free and ignore externalities. People hardly ever behave rationally, and do not always understand the consequences of their behaviour. Non-economic values are important as well, but economic valuation is not well suited to representing them. 16
Figure 2
Categories of Economic Values Attributed to Environmental Assets (Munasinghe et al. 1996) Total Economic Value
Use Values
Non-Use Values
Direct Use Values
Indirect Use Values
Option Values
Existence Values
Output that can be consumed directly
Functional Benefits
Future direct and indirect use values
Value from knowledge of continued existence
Biodiversity Conserved habitats
Habitats Endangered species
Food Biomass Recreation Health
Ecological functions Flood control Storm protection
Other Non-Use Values
Decreasing ‘tangibility’ of value to individuals
Current work reflects the difficulties with natural resource valuation. The forthcoming (forthcoming: Marnie to check???) study by Mendelsohn and Neuman, which in many ways represents the state of the art, omits "non-market impacts, such as health effects, aesthetics, and some ecosystem impacts.” Tol (1999) assumes that an average person is willing to pay US$50 per year to preserve species, ecosystems and landscapes. These non-market impacts will likely include some of the most severe outcomes of future climate changes. An economic valuation that omits or undervalues them is inadequate for policy. The underestimation may be substantial. Costanza et al. (1997) appraised the annual economic value of all ecosystem services at just below twice the world GDP. Using similar methodology, but perhaps more realistic unit economic values, Bein (1997, page 4.36) obtains an estimate at least one order of magnitude higher. 4.3
Discounting and Other Aggregation
Economic analysis compares costs and benefits occurring at different times by discounting. Higher discount rates give less weight to the future. The costs of climate change are extremely sensitive to the choice of discount rate due to the long time horizons. Some economists argue that current resources can be used to increase wealth through investment, so they have greater value than future resources. This is the opportunity cost of capital (OCC) approach, commonly used in project and investment analysis, which spans time horizons up to 50 years. The rates used (6% to
17
10%) distort the costs of future impacts. At a 7% discount rate, $1 billion 50 years hence have a present value of $33.9 million; the same amount 200 years hence has a present value of $1300. Long-term impacts on natural resources are thus trivialized. On this basis a number of authors (Broome 1992; Howarth and Norgaard 1995; Arrow et al. 1996; Khanna and Chapman 1996) have argued that discounting is inappropriate to the evaluation of climate change impacts. Arrow et al. (1996) prescribe a discount rate model that does not undervalue the future. In this model, individuals have higher preferences for consumption now rather than consumption later, and an extra dollar is worth more to a poor person than a rich person. This is reflected by the social rate of time preference (SRTP) approach. SRTP ranges from about 1% to 4%. In the analysis of climate change costs and benefits, economic costs of long-term impacts should be calculated using the SRTP as a discount rate. The cost of capital should be calculated based on its opportunity cost, and included before discounting the long-term impacts (Cline 1992). Once the correct prices for the long-term impacts are incorporated, the OCC discount rate can be used in evaluations of mitigation and adaptation projects. Willingness to pay and consumer surplus are a function of both the culture and level of income of an individual. Most of the techniques used for costing are thus biased against persons with low income, because the poorer the consumer, the lower the valuation (Banuri, et al., 1996). This problem was central to the IPCC controversy over the value of a statistical life, which is higher in the developed countries than in the developing countries (Pearce 1996; Pearce et al. 1996). Aggregating biased estimates of value across individuals requires some set of predetermined weights to compensate for inequity. The monetary measure of climate change could vary by a factor of 5 depending on the weights chosen (Fankhauser et al. 1996). Estimates of climate change costs are also sensitive to assumptions about future social capacity to adapt, and values held in the future about the resources that will be threatened. Most studies use present monetary values, which flow from present-day culture, attitudes and preferences, to represent the future. Many authors argue that, with projected future increases in income, willingness to pay for non-market environmental goods will likely increase. Future generations may value the environment differently than we do. Eastern hardwoods, which were regarded by the professional foresters a century ago as weeds, are now valuable commodities harvested for biomass (Irland 1996). Most of the work on economic valuation of climate change is based on conditions for the United States. Estimates for other geographical regions generally transfer US-based estimates of impacts and values to very different sites. Demeritt and Rothman (1999) compare this undesirable situation to “…an immense pyramid, whose conclusions are founded upon a single underlying study.” Natural resources, societies, economies, cultures and values differ widely within and between countries. For a number of countries, extrapolations of the temperature and precipitation values outside the range over which the original estimates were made may be tenuous. By aggregating estimates of economic values obtained at a smaller scale, crucial interdependencies are lost. In examining the higher-order effects of climate change, Tol (1996a) notes that the "cost of impacts together is larger than the sum of the individual impacts” and gives an extreme example from agriculture. Since agriculture comprises only 1-2% of GDP in developed countries, a complete destruction of agriculture would only result in a comparable loss. This ignores, however, the extreme dependence of other sectors of a developed economy on agriculture. Howarth and Monahan (1992) show how much considering these dependencies could affect estimates. 4.4
Uncertainty, Ignorance and Expert Opinion
18
It is difficult to place a value on the current climate, let alone place a value on changes in it. The climate, impact, and socioeconomic futures are highly uncertain, if knowable at all. Being the last activity in an analytical chain (Figure 1), estimation of costs or benefits cannot be expected to be any more certain. The Canadian costs and benefits of global climate change will strongly depend on the ability of countries to cooperate and share capital, technology, information and other resources needed for mitigation of and adaptation to climate change and other priorities. All these factors will depend on the rate of change and severity of impacts, new knowledge and technology, domestic and international politics, and possible climate catastrophes, all of which are major uncertainties and unknowns in their own right. The response of the natural systems to climate change may be surprising. Many of the component values of biodiversity, ecosystems and individual species are still unknown. To cope with the uncertainties and ignorance, costs are often estimated for impacts of an assumed new static climate on present-day society. By doing so, these estimates ignore: §
the distinction between transition and equilibrium costs of adaptation and residual impacts,
§
future social and economic conditions and values,
§
the transaction costs that would be required to adapt to continually changing climate, and
§
the impacts before and beyond the assumed equilibrium.
The bulk of cumulative adaptation costs will arise in the transition processes to a new climate and less vulnerable society. Very little is known about such transitions, yet this is the prominent aspect of costing the responses to climate change over the next century. In many cases the ability to adapt, which can significantly reduce climate change impacts (Fankhauser and Tol 1996), may be greatly exaggerated. Assumptions about rates of climate change and the speed of damage restoration and adaptation significantly affect the estimates (Tol 1996a). The relation between estimates for an equilibrium and changing climate is unclear, if there is any at all (Tol 1999, 1999a). Impacts are likely to increase more than proportionally with changes in climate, but vulnerability is a major unknown, since it depends on social adaptive behaviour. The present value of adaptations and residual impacts over a long time horizon depends critically on how discounting is applied in the analysis. Neither the costs nor the benefits of adaptation to climate change have been systematically studied, hence the available information is of limited use to decision makers (Tol et al. 1998). The assumptions usually made about adaptation are not very realistic, since equilibrium climate and equilibrium adaptation in response to climate changes are unlikely. Adaptation has a strong influence on the sign and magnitude of estimated impacts. Adaptation costs, as opposed to net costs of damages, are seldom reported separately from total costs. Models allow calculation of the benefits of adaptation (avoided impacts), but the costs of investment into adaptive measures is neglected. A sector or region is often studied in isolation, even in cases of strong interactions. There are also obvious omissions, for example, the built environment and transportation operations (Bein and Rintoul 1996). Existing structures and facilities would require retrofits, and new ones would be designed with consideration of climate extremes likely to occur in their lifecycles, making them more expensive than in a baseline case. Damages may come regardless, for design standards might be difficult to set in the face of inter-annual variability. The net costs (or benefits) per type of structure multiplied by the number of structures in the country may add up to large annual changes in welfare. Other impact categories might also be significant by virtue of small but pervasive changes adding up over a large number of units affected. For example, a noticeable change in environmental amenity during he life of one generation may affect their psychological and mental wellbeing.
19
The presentation of the costs in the literature has focused on ‘best guesses’ of the most likely static scenario. Figure 3 illustrates the problem with this approach. For many of the uncertainties the range of uncertainty is not symmetric, i.e. there is more possibility of low probability – high impact events. The best guesses of the most probable events can be significantly lower than the expected value (a weighted average obtained by adding together products of impact costs and their probability). The best guess downplays the risk of very costly scenarios. A policy based on a best guess would imply that society likes to take risks. This runs counter to most public policy choices, which are averse to risk. Banuri et al. (1996) recognize “that attempts to quantify the costs associated with climate change involve inherently difficult and contentious value judgments, and different assumptions may greatly alter the resulting conclusions." Grubb (1995 ) warns, "(t)here is the danger that economic evaluations enshrine in apparent objectivity the current value system of the practitioner." A survey by Nordhaus (1994) polled 10 economists (including himself), and 9 other social scientists, natural scientists and engineers—all experts on climate change. The participants provided their best subjective estimates of damage in terms of global GDP The lowest estimates were from 8 economists. The poll revealed "...major differences among disciplines, particularly between mainstream economists and natural scientists." Figure 3
Hypothetical Probability Distribution of Damage and Estimates (after Fankhauser 1995)
Probability è
Nordhaus's survey reveals that economists' estimates should not be taken at the face value, due to uncertainties, lack of knowledge, and disagreements on valuation methodology. Standardization by Smith (1996) brings the estimates down by 20-30%. A correction of just two basic values (service value of wetlands and value of statistical life) boosts the estimates by at least a third (Bein and Rintoul 1996). Selection process and composition of the expert group together with biases in the elicitation of expert opinions affect the results. The same could be true for estimates provided to policy makers. A narrow band of uncertainty around subjective estimates of highly uncertain things does not necessarily characterize an expert (Paté-Cornell 1996, Keith 1996). Consensus in any subset of the estimates does not constitute a proof that it represents real world, and the fraction of experts who hold a given view is not proportional to the probability of that view being correct. Effectiveness at influencing group dynamics has no known correlation with accuracy of scientific viewpoint. For a range of plausible climate change, impacts, values and discount rates, Bein and Rintoul (1996) found a wide range of impact costs, which spans three orders of magnitude, not counting some of the values of natural resources. Many authors question the capability of the IPCC scientific assessment process to respond to the Worst Case Best Guess Expected Value actual requirements of society (f. ex. Shackley et al. 1998; Cohen et al. 1998; Demeritt and ( mode) (mean) Rothman 1999). Climate change economists, “a select, ‘invisible college’ ” work in “social and disciplinary insularity.” As a result, the process forecloses public debate about the moral and Costs ètheir reports. Addressing the controversy, the political judgements built into the technical details of climate change economists acknowledge difficulties with the valuation, but legitimately point out that no alternative method can flawlessly provide all the information required for making policy (f. ex. Fankhauser et al. 1998). 4. 5
Conclusion
Monetization of costs and benefits of impacts and adaptive responses could provide useful information for climate change policy, if dependable climate change data and derived sector- and site-specific information on impacts and adaptation were available. The costing relies on a solid understanding of the climate, socioeconomic, and ecological systems. Any meaningful appraisal of 20
climate change impacts must recognize that predictive tools will remain limited. Projections of social, economic, climate and other natural conditions based on current understanding will be subject to uncertainty and insufficient knowledge. Some key assumptions may be inaccurate, or outright wrong. Examples in sectors abound. Estimates of costs and benefits of adaptation and residual impacts derived from such scenarios will be shrouded in a wide, unspecified band of uncertainty, and worse, may be off the mark, as the history of costing has witnessed to date. The biggest problem with costing is not that it is based on deficient methodology, but that it attempts to run ahead of estimates of climate change impacts on individual sectors. Lack of reliable climate change and impact data for sites and sectors compel analysts to, §
ignore sectors and interactions for which information is scarce or unavailable,
§
adopt tentative sectoral results from other sites,
§
estimate snapshot situations in a static climate instead of transient climate,
§
make arbitrary assumptions about future climate, society and its value system, and
§
avoid specifying confidence intervals on the estimates.
Estimates change in magnitude and sign with new findings in sector impact sciences. The costing methodology has some flaws, but alternative methods are flawed as well, and cannot furnish better information. Monetization is based on general principles that should assure uniformity, repeatability and analytical rigor. The principles are not followed consistently, which leads to discrepancies between studies and authors. The most serious inconsistencies include: §
ignoring or arbitrarily valuing externalities, non-market values and some of the component values of natural resources,
§
measuring willingness to pay for saving natural assets, instead of the higher willingness to accept compensation for loss of same,
§
using values of present society to represent future values,
§
using opportunity cost of capital instead of social rate of time preference in discounting longrange impacts, and
§
conducting analysis for “best guesses” about impacts for which likelihood is most probable according to subjective judgement of the economists, but which may be accidental samples from a wide range of possibilities.
Alternatives to costing as a way of providing a convenient metric for climate change policy exist, but are beset by the same problems: incomplete knowledge, complexity and value judgements. Formal decision analysis (Keeney and Raiffa, 1976), operates on the concept of ‘utility’—a common metric with which value judgements of the decision makers are assessed for quantitative and qualitative criteria, including economic. The method is difficult to implement for problems as complex as climate change. Scarcity of objective probabilities, controversy of subjective probabilities from numerous decision makers and stakeholders, and the difficulty of extracting consistent value judgements limit the method’s application to climate change policy (Arrow et al., 1996a). However, the problem of adaptation to climate change impacts, including mitigation, could still be structured to fit the decision analysis schematic, with a view on a better cognition of the complex information content, rather than on conducting a complete analysis with specified probabilities and utilities. Risk assessment is a subset of the decision analysis scheme, but without value judgements. The assessment considers a range of possible outcomes each associated with a probability estimate of its occurrence. Its usefulness to climate change evaluation is currently limited for reason of insufficient knowledge on magnitude of the impacts and probabilities. Although not useful short-
21
term, risk assessment may prove helpful in identifying the crucial impacts, costs and benefits once better sectoral information becomes available. Valuation of policy choices based on the sustainability philosophy must recognize that society needs to make day-to-date decisions that are responsive to near-term economic needs. This leaves only the ‘safe minimum standards’ approach to sustainability decisions as workable. The standard allows the current generation to use resources to a limit imposed by leaving future generations as well off as itself. The approach is not operationalized. Climate change mitigation, adaptation and residual impacts problem modelling would be a formidable challenge to those who would attempt to implement the concept. Calls for proposals could be issued, if there was enough political support for the concept. If the concept was to be implemented, it would most likely need the same cost and benefit data as other approaches to policy-making. 5.
Research Needs and Priorities
Information available on the costs of climate change impacts and potential adaptation in Canada is very limited and unreliable. This significant gap in knowledge needs bridging to provide better information to the policy process. Until these estimates can be improved, Canadian policy and decision making will be flying blind. The work should be paced with advancements in local climate change prediction and in sector impact and adaptation assessments. Estimation of future costs should not forerun estimation of future impacts. Many of the difficulties that hinder progress cannot be resolved short-term, as many uncertainties and ‘unknowables’ will remain. We recommend the following thrusts: 1. Determine the costs and benefits of present and future normal climate. 2. Estimate the range of short-term costs based on input output models. 3. Improve information on adaptability to climate and other change. 4. Prepare unit cost data for costing when sector impact information becomes firmer. 5. Start implementing costing into integrated assessment processes in all Canadian regions. 5.1
The Costs and Benefits of Normal Climate
Evaluation of future climate change impacts and adaptation must be done net of base case costs and benefits of normal climate, variability, and extremes. Not enough is known quantitatively about costs and benefits of present and future normal climate. This is not only a Canadian issue. Normal climate cost data will become a requirement in international negotiations under the UN Framework Convention on Climate Change. This is an issue that could be taken up by Canada within the Intergovernmental Panel on Climate Change and the World Meteorological Organization. Work presented in Section 3.1 on the costs of present climate variability and extremes should continue. The research is important because it would provide a present base case against which climate change scenarios could be compared. However, an even more important element in scenario analysis are the costs and benefits of a natural (as opposed to anthropogenic) continuation of the present climate in the future, taking into account future socioeconomic scenarios. A number of points in this research need greater attention and improvements in order to produce more rigorous results of value to climate change policy. The work should first of all address the question of an appropriate baseline: relative to what climate should these costs and benefits be estimated? Every place and every sector operation, from the poles to the tropics, exists in a
22
climate regime. Some climates are more benign, but all normal climates require expenditure of resources on one hand and provide some benefits on the other hand. If the sectors were not coping with the present climate regime, they would be dealing with another combination of weather elements. Some benefits of the Canadian climate would not be possible to realize if another climate prevailed in the country. What is the climate baseline to compare with, and what are the differential costs and benefits? For example, in all climates some percentage of total costs of built infrastructure is due to the weather elements. Which climate constitutes the baseline, and by how much do Canadian costs differ? Here are other points that need improvement regarding the estimation method for the costs of a normal climate presented in Section 3.1: • Lack of indication of avoidable costs of overadaptation and maladaptation. • Social costs of resources consumed in the adaptation should be compiled instead of financial costs (f. ex. construction costs should include shadow price of labour—not the actual expenditures, and material costs should be net of taxes). • Incomplete accounting for climate adaptation; examples of missing items: costs of airport runway repair attributable to climate elements, providing transportation with winter versus summer fuels, industry and public operating costs, and research in several sectors. • Double-counting (f. ex. facilities repair is largely included in aggregate construction costs). • Subjective apportioning of costs to climate adaptation (f. ex. 10% of facilities maintenance and repair costs). • Underestimation of present costs, as they were calculated from the early 1990s data (f. ex. flood control costs reflect expenditures during the 1992-1993 fiscal year, predating many 'floods of the century' across Canada). The cost estimates for current extreme events in Canada are largely based on insurance claims which are not consistent across the country; do not include flood losses from overland flow; and do not include non-insured damages from natural hazards. Data suggest recent rapid rise in losses. Estimates of costs of living with normal climate are based on inconsistent methodology. To collect better, rigorous data in a systematic fashion is the responsibility of the federal government. The necessary technical expertise exists in Statistics Canada. Until there are reliable time series of the present costs, some temporary estimates are needed. Present costs can be collected and verified at the time they occur. In the past such information was not so important to policy issues, and it was adequate to rely on unsystematic evidence. The fact that claims under the Federal Disaster Assistance Act are now rising sharply speaks for the development of standard methods of climate damage and adaptation cost data collection. A task force of statisticians, economists and climate change experts could be established to suggest designs for such information gathering and processing, and to propose how this might be done in a cost effective and policy relevant manner. 5.2 Short-term Cost Estimates Based on Input Output Models [MOHAMMED, CAN THIS APPROACH CAPTURE BENEFITS OF CLIMATE AS WELL? SEE SECTION 5.1] Input output models can measure the costs of current climate and extrapolated costs of short-term changes to climate. The measurement depends on appropriate and operational definition of the costs [WOULD THE DEFINITIONS LIMIT THE SCOPE OF CATEGORIES INCLUDED?]. Suppose that the adaptation and residual costs are: (a) changes in production costs for particular sectors or regions due to climate, (b) changes in capital costs for making the private capital stock and public infrastructure more resilient to extreme climate events and variability,
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(c) increased public expenditures needed to meet the emergencies as a results of extreme climate events, and (d) increased (precautionary) consumer expenditures necessary to cope with extreme climate events and variability. So defined, the costs are readily measurable. For increased costs of market goods, the appropriate measure is the consumer surplus foregone. For increased resilience of the capital stock, it is the cost of investment that has an opportunity cost—what the investment would have earned in its best alternative use. Provided good time series data in the form of input output tables can be compiled for individual administrative and economic regions of Canada, all the above costs of current climate can be estimated econometrically [WHAT IS STATISTICAL ABOUT ANNUAL INPUTS AND OUTPUTS, MOHAMMED? AREN’T THEY DETERMINISTIC? DO YOU MEAN SOME AVERAGE OVER TIME OR WHAT, MOHAMMED? ]]. A necessary and plausible assumption would be that climate change occurs slowly, and therefore the production and consumption structure of the economy also changes slowly. The econometric time series data can then be used to compute the upper and lower confidence limits of the four estimated cost parameters. These limits will then indicate the [expected shortterm?] range of the costs. The time series approach would be a valid method because the structure of the economy will change slowly in pace with climate change, i.e. without any sudden and catastrophic changes in the economy. In the case where evidence suggests that the costs will increase, the difference between the upper confidence limit and the fitted regression estimate can be a good measure of the particular cost. Suppose that data on Ontario agricultural inputs is collected, a statistically significant model fitted, and confidence limits computed. Assume that, as a result of climate change, there will be higher precipitation in Ontario, which will reduce the need for some inputs, such as fertilizer and water. [WHAT IF AT THE SAME TIME THERE IS CLIMATE-RELATED PESTILIENCE AND PLANT ILLNESS WHICH WILL REDUCE CROP YIELDS AND INCREASE RESPONSE COSTS?] Then we can take the difference between the fitted estimate and the lower confidence limit to find the expected reduction in the adaptation costs of this particular sector for this particular region. The approach can be applied on a sectoral basis to each of the four cost components, provided that input output tables exist. For Canada there is a good annual input output data from 1965 to 1995. In principle, the data can be disaggregated and carried out by province. [IS THE DATA AVAILABLE IN THE REQUIRED FORMAT? IF NOT, WHAT NEEDS TO BE DONE?] 5.3
Information on Adaptability to Climate and Other Change
While considerable potential for adaptation exists, there is little information about what would Canadians be adapting to and when, what responses might be chosen, how much they are likely to cost, and what impacts would remain after adaptation. In seeking to minimize the costs of climate change to Canada it is therefore imperative to have a better understanding of what can be accomplished by adaptation, at what cost, and what residual impacts could be expected after adaptation of Canadian society and natural resources. Adaptation will be needed in all sectors of the Canadian economy and all regions, regardless of mitigation efforts implemented internationally. While the level and speed of adaptation actually implemented cannot be known in advance, it makes good precautionary sense to prepare now for adaptation, and to ensure that adaptive capacity exists and is strengthened where necessary. Research into the level and variability of adaptive capacity of all sectors across Canada could help fill a considerable knowledge gap, increase awareness of Canadians, and prepare for possible future.
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Not much is known about society’s transition to a new climate and less vulnerable society—the prominent aspect of costing the responses to climate change. Little is known about the adaptation capacity of different sectors and different regions of Canada. Vulnerability to climate variability and change is not evenly distributed across the country. Research is needed to assess climate change impacts in terms of the capacity of regions and sectors to adapt, which are by no means obvious. Beside climate and weather, societies have been continually adapting to natural and maninduced change and hazards. Analysis of future climate change impacts and adaptation in Canada will assume scenarios of future social responses, which might have common elements with those observable in adaptations at other times (historical analogies), and in other places (spatial analogies). Studies of comparable situations can identify transferable factors that may be relevant to projections of adaptation behaviour of Canadians under climate change. Several authors have examined analogies in the climate change context (Lamb 1982; Glantz 1988; Glantz 1996). Phillips and McKay (1981) and Etkin (1998) present consequences of extreme weather in Canada. On the basis of recent weather extremes in various provinces, Burton et al. (1999) examine some of the factors that determine how Canadian society could develop to be more adapted to extreme weather events. Historical and spatial analogies of other natural and man-made hazards and of their impacts on societies might also be insightful. The research would attempt to answer in a systematic manner the following question: How do present and past societies adapt to transient phenomena, variability and extremes, either natural or caused by human activity, including weather and climate? The results would improve general understanding of social adaptation to climate and change, and would support construction of the adaptation component in socio-economic scenarios prior to costing. The following steps would be involved in the research: • Identify natural and man-caused cases driving social adaptation to change in Canada and elsewhere, and sub-divide into adaptation to the consequences of an event, and transient adaptation to change over time. • Stressors and socioeconomic conditions that determine sensitivity, vulnerability and adaptive response in each case; sectors affected and spillover to others. • The role of technology, knowledge, culture and tradition; concurrent natural and social change. • Coping and adaptation mechanisms adopted; learning/forgetting, failing to adhere to set standards of good practice; maladaptation; and, how adaptive actions chosen differ from longterm needs. • Transferability of the above information across time and regions, and applicability to Canadian sectors and regions under climate change. 5.4
Canadian Unit Cost Data
Regardless of progress on developing climate, socioeconomic and impact scenarios, work can proceed independently on estimating the unit values of Canadian natural resources. There are large gaps in the valuation of ecosystems, particularly in the indirect use, option, and non-use values. Natural habitats and biodiversity will be significantly affected by climate change. The evaluation of climate change impacts can be substantially enhanced, if the monetizeable part of natural resource changes could be more accurately represented. Monetary valuations of ecosystem services have been attempted for natural capital outside of Canada (Costanza et al. 1997; Farber 1996), but are either inaccurate or do not apply to Canada (Bein 1997). Canadian ecosystems have unique characteristics and are richly diversified, which warrants monetization locally for habitats known to be affected by climate change.
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The research needs to, • Identify significant ecosystems in Canada and reduce the set to a manageable number of classes. • Derive classes not present in Canada today, but plausible under climate change. • Examine use and non-use functions of each ecosystem class. • Develop use and non-use values. • Assess variability of values over time and under various socioeconomic conditions. • Develop a set of aggregated unit costs of ecosystem services by class of ecosystem, for use in climate change policy. Unit cost research can also pursue the value of human life and unit costs for health impacts possible under climate change. Other disciplines and studies are currently focussing on the topics, so research for climate change policy should concentrate on assessing temporal and social variability of these value judgements. 5.5
Moving Forward
Research agenda, capacity and funding need to be established, possibly under the National Climate Change Strategy, to advance understanding of the costs of impacts and adaptation, including the capacity to take advantage of new opportunities. The process will be incremental and will take time, because costing analysis will be paced with advancements in local climate, social, and impact scenarios. An initial stage of the process could be scheduled up to about 2010, when the need for adaptation policy and options becomes clearer and politically more imperative. How the process would be best structured, is too early to tell. Probably the current structure of sector ‘tables’ for mitigation option assessments would not be adequate, because adaptations will be locally specific. Perhaps a replication of ‘tables’ across socioeconomic regions of Canada would work. The body of impact and adaptation knowledge that is required for policy, management, and decision making is fragmented into disciplinary expertise and professional specialization, and is often removed from the stakeholders. With the advent of climate change the standards and criteria applied in professional practice should be revised beyond the sector by sector adjustments and disciplinary insularization. The challenge of the new research will be to capture the higher order effects on other sectors and geographical regions, including inter-provincial and international shifts in the distribution of natural resources and economic activities dependent on them. Costing would be applied as the last step in the analysis. Integrated assessment (IA) evaluates adaptive measures and impacts of climate change in a systemic context (Cohen and Tol 1998). IA studies attempt to transcend sector, disciplinary, cultural, and jurisdictional barriers, promoting collaboration and shareholding in the climate change issues. IA studies involve scientists with local stakeholders, policy and decision-makers, and the public. The participants become familiar with potential consequences of climate change in their own jurisdiction and think about responses in local terms. Integrated assessment can unify issues of mitigation and adaptation. The IA process draws both on the local knowledge and values, and on the scientific research results, posing the climate change problem to those who ultimately will be adapting to impacts. Costing can be applied to data generated in a local IA study of future climate and social scenarios. Such studies can produce costing information of high relevance to policy making. The data is more comprehensive, accurate and representative, as local climate change impacts and adaptation are considered together with natural and socioeconomic changes taking place at the same time. Broad
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context of IA studies facilitates connecting sustainable development with climate change, a missing link in other approaches (Cohen et al. 1998). Integrated assessment models (IAMs) differ from IA studies. They tend to be reductionist, simplify the real world in order to facilitate numerical analysis, and they introduce limiting assumptions of the underlying components. IAMs incorporate costing data and models with their drawbacks. By contrast, IA studies are free to use or not to use sector and other mathematical models as they see fit to accomplish study objectives. Canada has performed an IA using a scientist-stakeholder collaborative approach in the Mackenzie Basin Impact Study, but costing of impacts and adaptation options has not been incorporated into any IA studies in Canada yet. A current example is the assessment taking place across regions and sectors of the United States (Melillo 1999; Parson 1999) [DOES SOMEONE HAVE A BETTER REFERENCE?]. The study will aggregate the results into a national whole. In Canada, IA of climate change, and the costing component of it, could be incorporated into regional initiatives. The costing component of IA studies will make sense when solid local and sectoral information on the impacts and adaptation can be generated. In the short-term, costing in IA studies may emphasize gathering process experience to be used when impact information is ripe. IA studies across Canada can examine a priority impact for each region (f. ex. sea level rise for Atlantic Canada), estimate the costs of foreseen adaptation options, and perform costing of the most important residual impacts. IA can also define the costs of normal climate. Existing impact and adaptation cost estimates are detached from their defining, local context. An IA study has a better chance of defining and generating the following information that is necessary for costing: • climate change and socio-economic scenarios specific to the study area, • analysis of impacts on market and non-market sectors, including interactions, • adaptation responses reflecting stakeholder capacities and preferences, • connection between mitigation, adaptation and residual impacts in the study area, • unit costs specific to the study area, including service values of local ecosystems, • value judgements of stakeholders, • influence of other social and natural change taking place concurrently. The IA study elements need to be planned and conducted as multi- and inter-disciplinary, with due regard for the utility of results to costing. In addition, should costing prove inadequate, alternative evaluation approaches, such as risk assessment could be applied within the IA study. A great deal of learning will be involved, so a pilot application meshed with an ongoing or planned IA study is in order. References Arrow, K.J., Cline, W.R., Maler, K.-G., Munasinghe, M., Squitieri, R. and Stiglitz, J.E. (1996). “Intertemporal Equity, Discounting, and Economic Efficiency”, in Bruce, Lee and Haites (1996), 125-144. Arrow, K.J., Parikh, J. and Pillet, G. (1996a). “Decision-making Frameworks for Addressing Climate Change”, in Bruce, Lee and Haites (1996), 53-77. Ayres, R.U. and Walter, J. (1991). The Greenhouse Effect: Damages, Costs and Abatement. Environmental and Resource Economics 1, 237-270. Banuri, T., Göran-Mäler, K., Grubb, M., Jacobson, H.K. and Yamin, F. (1996). “Equity and Social Considerations”, in Bruce, Lee and Haites (1996), 79-124.
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