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Values, cost-benefit analysis and adaptation to climate change
Alistair Hunt and Tim Taylor University of Bath, UK
Tyndall Conference Living with climate change: are there limits to
adaptation?
7 February 2008, RGS, London
Cost benefit analysis and adaptation
N
nnnn
r
cbNPV
0 1 =
Where
NPV is the net present value;
bn is the benefit in year n;
cn is the cost in year n; and
r is the discount rate.
Value perspective starting point
• Use of Willingness to Pay in Cost-Benefit Analysis assumes:– Consumer sovereignty over preferences– Comparability of preference measures
between individuals– Perfect knowledge– Economic rationality– Non-satiation
Time preference discounting
• Value of r = 3.5% - HM Treasury • Value of 1.4% - Stern Review
Difference reflects alternative ethical judgements
“individual preferences have a sovereign role in welfare economics”
versus
“no a priori reason to weight the utility of one person at one point in time different than that of another person at another point in time”
Discounting and adaptation
• In appraising options, inconsistencies:
• discrepancy between GHG mitigation decisions utilising the Stern discount rate and adaptation decisions using HMT rate
• public sector actions are likely to be discounted at a different (lower) rate from decisions made by other agents (e.g. using a market rate of interest).
Discounting and adaptation
In appraising adaptive capacity
• Positive discount rates imply capital substitutability
• discounting in adaptation assessment may be best utilised in conjunction with the use of capital constraints – But how to do so?
Preferences and socio-economic change
Future preferences not just time-contingent; likely to be determined by socio-economic context. Derived by:
• Extrapolating historical trends • Developing simulation value functions • Survey-based approaches: respondents hypothesise
what their values might be under alternative socio-economic futures
All three techniques rely on credible, well-developed, comprehensible socio-economic scenarios
Preferences & Socioeconomic change: Lessons from survey applications
• Health heat stress:– Valuation of current versus future health risks – Income changes and reliability of transfer on
“income elasticity” as incomes increase dramatically over time
Preferences & Socioeconomic change: Lessons from survey applications
• Heritage:– Changes in use of buildings may affect values;– Difficulties in valuing extreme events in terms of risk
perception;– Sensitivity to climatic variation at time of study
St Thomas à Beckett church and Harveys Brewery in Lewes
Preferences & socio-economic change
• temporal limit to validity of projecting (changes in) preferences and resource costs? – technological change and societal development
renders resource mixes and households consumption baskets unknown/highly uncertain
capital-based decision rules more practical than economic efficiency-based rules such as CBA.
values then reflected in way in which social decisions respond to indicators of adaptive capacity?
Conclusions
• The CBA decision rule, as currently applied in project appraisal, will be used in the adaptation context
• But there are limits to its validity for considering longer term:– model preferences to appraise options (<30
yrs?)– Employ capital-based decision rules to assess
adaptive capacity (SR: in tandem with CBA; LR: as principal adaptation indicator)