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Costing Climate Change in Canada: Impacts and Adaptation

DRAFT

Peter Bein, Ian Burton, Quentin Chiotti, David Demeritt, Mohammed Dore, DaleRothman, and Marnie Vandierendonck.

Vancouver29. June, 1999

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Executive Summary

This paper builds on an earlier paper prepared for the Canada Country Study, and contains threemain messages.

The level of knowledge about the economic cost of climate change impacts and adaptive actionsthat 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 GDPon 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 CanadianGDP, to a gain of a few points, have been made under heroic analytical and value judgementassumptions. Almost no consideration of specific impacts on Canada was used in developingthese estimates. Canada is one of the few countries (besides the Scandinavian and Balticcountries, 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 addressedshort-term (Section 4).

Costing should not continue running ahead of scientific developments in sector impact andadaptation. Such approach necessarily makes unreasonable assumptions and generatesconfusing (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 betteralternative. The analysis rests on a few assumptions that create surmountable problems, butassure consistency and rigor at the same time. The greatest advancements can be made byvaluing natural resources with ecological economics methods, and by adopting social rate oftime preference in discounting long-term impacts.

Recognizing that costing should not forerun impact research, costing work for Canada shouldconcentrate on (1) compiling adaptation strategies for sectors, (2) better estimating present costsof climate, and (3) developing unit costs that will be used with the quantities of impacts when theybecome firmer (Section 5).

Historical and spatial analogies can help compile adaptation options. Input-output analysis canbrace support estimates of current and short-term costs of normal climate. To improve currentestimates of future impact costs and benefits, research on valuation of Canadian ecosystemservices is the most promising.

Integrated assessments can explore adaptation capacity, and can develop sector- and site-specific costing information when impact information becomes available. Given the difficultiesin developing reliable estimates of uncertainties, the usefulness of risk assessment and multi-objective decision analysis is limited.

Research agenda, capacity and funding need to be established, possibly under the NationalClimate 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 futurechanges to the Canadian economy, society, and environment that might be caused by climatechange. This information is one of many inputs to the unfolding policy process. The CanadaCountry Study has explored the topic (Rothman et al. 1998). Since the state of knowledge isshown to be rudimentary and unreliable, the present paper explains why this is so and suggestswhat 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 wouldimpose 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 bymitigation; and,

• the residual costs which will remain after an appropriate mix of mitigation and adaptationmeasures is taken.

This paper focuses on impact and adaptation costs and benefits. Although it is believed that theoverall impacts of climate change will be negative, there could also be substantial benefits. In allregions and sectors there will be a mix of costs and opportunities. For some regions and somesectors 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 climatechange requires effort, initiative, and investment, the costs of which must also be considered inexamining the effects of climate change on Canada.

Impact costs are of two kinds: those likely to be experienced without policy-led adaptation ormitigation (costs of inaction), and those remaining after some mitigation and adaptation measureshave been taken. ’Cost of inaction’ is somewhat misleading in reference to adaptation becauseadaptation to a varying climate is an ongoing process that will continue to some extent evenwithout policy response. The key concepts are defined in Section 2.

Section 3 presents existing estimates of impact and adaptation costs derived by various , albeitrather limited, methods for Canada. Section 4 reviews and assesses the methodological andconceptual problems associated with existing methods. Section 5 suggests several ways ofimproving 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 economistsdefine the word more broadly as benefits forgone. Thus, anything that requires a trade-off ofanother 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 isa benefit, or negative cost. In considering a non-market cost of climate change impacts, weconsider the value of the good or service that is changed as a consequence. The change can be ineither 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 activitiescan be thought of as the last link in an analysis chain. Starting at the top of Figure 1, humanactivities or sources produce stressors (greenhouse gases in the case of climate change), whichcan be mitigated before they reach the environment. receptors. The range and fate of astressor transported through air, water or land must be determined in order to assess exposure ofthe receptors, i.e. humans, other life forms and materials. Impacts are the consequences expectedin a receptor after a change in exposure to stressors. Dose-response and physical damagefunctions 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.

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The net quantities of impacts remaining after mitigation and adaptation are multiplied by the unitvalues of each category of the residual damage. The costs of mitigation and adaptation are addedto the total cost of impacts. Possible side-benefits of the impacts and of the adaptations aresubtracted 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/SourcesProduction and Consumption of Goods and

ServicesDisposal of Goods

Energy UseLand Useê

StressorsWater Pollution and Hydrological Impacts

Exhaust Emissions, Noise and VibrationResource and Energy Consumption

Land Use ChangesWaste Disposal

êReceptors

Humans, Animals, PlantsEcosystems

Materialsê

ImpactsHuman Stress, Morbidity, Fecundity, Mortality

Changed Natural Resource ProductionEcosystem and Biodiversity ChangesChanged Natural Waste Absorption,

Loss of Open SpaceMaterial Damage

Social Changeê

VulnerabilitySensitivity + Adaptability

Magnitude of ChangeRate of Change

êMonetized Total Cost of Climate Change

= Sum (residual damage × unit cost ofdamage)

+ Sum (mitigation costs) + Sum (adaptation costs)

– Sum (benefits)ê

Non-monetized Accounts

ç MITIGATIONEmission-oriented MeasuresVolume-oriented MeasuresStructural ChangeQuality ImprovementsSink EnhancementAncillary Benefits

ç Range/Fate/ExposureDispersed, Concentrated, BioconcentratedCurrent, Near Future, Distant FutureLocal, Regional, Global

ç Dose-Response/Physical DamageAssimilative CapacityCritical Load, Target LoadDamage per Unit of Stressor

ç First and Higher Order ImpactsNatural ProcessesPrimary Economic SectorsRipple Effects in the Economy

ç ADAPTATIONShort and Long TermSpontaneous in EcosystemsPlanned in Socioeconomic SystemsAncillary Benefits

ç Unit ValuesValue of Ecosystem ServicesValue of Material Damage/ReplacementValue of Human Life and HealthCosts of Social ConsequencesSectoral Mitigation and Adaptation Costs

ç Intangibles/Uncertainty/IgnoranceImperfect Knowledge or Lack of ItIrreversibility and Risk AversionNon-market and Social Values

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The impacts of climate change have been described as a chain of consequences caused byincreased greenhouse gas concentrations in the atmosphere. The first order impacts are the directconsequences for environmental processes linked to the atmosphere, such as, the hydrological andnutrient cycles, changes in the extent of permafrost, and the distribution of ecosystems andspecies. First order impacts affect virtually all natural processes and conditions, and the largestfirst order impacts might be non-monetary. Changes in Canada’s natural resources are probablyexpressed best in physical and biological terms.

Second order impacts include next step consequences in those economic sectors (primarysectors) most closely dependent on natural resources. The second order impacts take differentforms and are difficult to trace. For example, forests may be damaged because some tree specieswill 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. Thecombined effect of these changes may result in significant geographical and structural shifts in theforest 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 orderimpacts. There may be employment and production losses in the forest industry, loss ofrecreational and amenity values of a degraded forest, and gains in agriculture encroaching on theretreating forests. Further impacts extend like a growing circle of waves across the economy andmight 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, andother service sectors. The higher order impacts could be widespread, but some of them would beless important than initially assumed, for example, the insurance industry would spread the riskonto the insured to prevent loss of profits (Tol 1998).

The aggregation of costs and benefits of first and higher order impacts across all regions andsectors in Canada could be an enormous task, without a guarantee of reliable results. Meaningfulaggregated national results cannot be obtained with alternative means, because the national total isa sum of local and sector costs and benefits.

2.2 Valuation

Value stands for attributed or relative worth, merit or usefulness. Valuation generally aggregatesdiverse 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 truemeasure of value. Social value is more inclusive, but not easy to measure. A common exampledescribes the difference between monetary and social values: the price of diamonds is muchgreater than that of water, but no one has been known to die from lack of diamonds, while it isimpossible to live without water.

Climate change impacts and responses generally divert resources from alternative uses. Thepurpose of cost benefit assessments is therefore to translate the effects of climate change actioninto comparable units that reflect the impacts on society’s welfare. Cost estimation is predicatedon the assumption that scarce resources can indeed be measured in money terms, butmonetization is not always valid. Other, non-economic values, such as social equity, inter-generational fairness, spirituality, quality of life, preservation of natural resources, are important aswell, but economic valuation, as opposed to more qualitative forms, is not well suited torepresenting them. Where consequence of impacts of climate change cannot be put in monetaryterms, 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 underthe assumption that the market is characterized by perfect competition, perfect information ofconsumers, and rational choices. Even a perfect market cannot value public goods (forests, rivers,

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oceans, the atmosphere, etc.) and does not place a value on damage inflicted to them (so-calledexternal impact, external cost, or simply externality). Externalities land on third parties withoutinvitation or compensation, while the party who generates them does not have to offset the cost inmonetary 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 andconsumption. Thus, there is a problem of the valuation of both market and non-market goods ineconomics. 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 goodthat is not normally bought and sold.

• People may doubt that society can agree on an acceptable monetized value, given a widerange of individual values and preferences, especially in spiritual and cultural.

• Individuals may be afraid that monetization will allow natural resources to be sold ascommodities and will increase environmental degradation and social inequity.

• Some goods may be considered sacred, and some people believe that the goods should beallocated by a system other than a competitive market.

• Individuals may be afraid that monetization will be skewed by poor analysis or will becontrolled 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 impactsinto a single, monetary metric. In effect, monetary valuation allows for the depletion of naturalresources to be offset by future increases in human-produced capital, or by the substitution ofother goods. The possibility of irreversible impacts and extinction does not matter, because futuregenerations can be adequately compensated for any declines in the stocks of a natural resource byincreases in the stock of other kinds of capital.

Pearce et al. (1996) distinguish two norms to deal with the issue of tradeoffs between man-madeand natural capital in climate change policy evaluation:

• Absolute standards approach seeks to avoid any harm. Inspection of the costs of climatechange impacts and responses is unhelpful. The costs are irrelevant under the assumption thatenvironmental and social goods and services must be absolutely preserved because they areirreplaceable. Proponents of this approach seek to account for biophysical limits todevelopment, irreversibility of natural resource degradation or loss, uncertainty aboutbiosphere functioning and its total service value, and equity between generations. Theapproach would preclude consuming any non-renewable natural resource and is not practicalfor climate change policy.

• Safe minimum standards approach maintains that since many potential impacts are irreversibleand 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 areallowed 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, theycannot readily adapt. An appreciation of the costs and benefits of climate change impacts onCanadian nature is gained by considering the goods and services which natural resourcesprovide. To distinguish from the human-produced goods and services, the natural ones are termednatural capital. Climate change impacts may result in a loss or enhancement of the followingcategories 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 productivesoil. Examples include photosynthesis in plants, prevention of soil erosion and sediment control,operation of the hydrological cycle including flood control and drinking water supply, regulationof climate, natural pest control by birds, and pollination by insects.

• Space and medium for human activities such as habitation, transportation, agriculture, andrecreation.

• Production of resources, ranging from food and raw materials for industrial use to energyresources and genetic material.

• Information functions providing opportunities for reflection, aesthetic experiences, spiritualenrichment, cognitive development, scientific study and education.

These functions are essential to more direct economic benefits, which provide the environmentalstability 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 aestheticand recreational experiences, timber, oxygen, and regulation of climate. Loss or drastic reductionin 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 andservices. They are sometimes more appreciated when the good or service is reduced (comparedepletion of stratospheric ozone). Environmental benefits include a combination of the followingeconomic and non-economic values (de Groot 1994).

• Direct use value consists of productive use and employment value. The importance of theenvironment is obvious in agriculture, mining, energy, forestry, fisheries, tourism andrecreation. Since production and employment benefits are relatively easy to express inmonetary terms and employment figures, this is often the only economic value ofenvironmental functions in economic assessments.

• Consumptive use value reflects the direct benefits of natural products that are harvested andconsumed without passing through a market. Examples include the value of game, fish, berriesand mushrooms obtained by individuals in hunting, fishing and other recreational activities.Harvests of natural resources by aboriginal people, while in principle not different thanagricultural harvests in market economies, are classified as consumptive values because theybypass the market.

• Indirect use value contributes to human health. Nature and its regulation processescontribute to the maintenance of clean water, air, soils and healthy food. They also provide alarge array of medicinal resources, and shield humans and other life forms from ultravioletradiation. Nature provides opportunities for recreation and cognitive development (non-consumptive use) which are necessary for mental health.

• Option value reflects the desire to maintain access to future direct and indirect use of naturalresources. Option value reflects human aversion to the risk of loosing the benefits of possibleuses, either in their own lifetime or by future generations. Quasi-option value, whichpreserves a good until more information is available about its value, is quite relevant forclimate change, given the uncertainties.

• Existence value stems from the ethical feelings of stewardship over nature held by people onbehalf of future generations and other species, even though we do not benefit ourselvesdirectly. This is clearly a difficult item to quantify. The existence values cannot be infinitesince 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 ofecosystems 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 partlybenefits us (the intrinsic value of environmental assets). Also, there must be natural goods andservices that we have not discovered yet. It is therefore impossible to determine the value ofamenities such as biodiversity or a particular species. It is also futile to guess the values that willbe held by future human generations. A few studies imply that non-use values can be a significantportion 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 andmagnitude of climate change is unprecedented, it is true that humans have always contended withchanging and variable climates. Hence, a distinction is necessary between ‘normal’ climateincluding natural climate change and variability, and anthropogenic climate change. Climatechange refers in this paper to human-caused changes in climate. Normal climate is the climate inits 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. Inevitableman-induced and natural climate changes are projected to happen, even if some mitigation wassuccessful, while vulnerability of society to natural climate impacts grows due to population growthand technological change. Adaptation responses provide complementary benefits even if mitigationefforts do succeed, as society is in many aspects poorly adapted to climate variability. From thisstandpoint, it would be worthwhile to research: (1) costs and benefits of adaptation in the contextof normal climate-related problems; (2) society’s vulnerability to climate variability and extremeevents (vs. vulnerability to climate change); (3) distinction between climate impacts and climatechange impacts; and, (4) how far reducing vulnerabilities to climate goes toward reducingsociety’s vulnerability to climate change.

All countries experience economic loss and gain from normal weather and climatic conditions, andhave routine adaptation measures to reduce damage caused by normal climate and to takeadvantage of opportunities climate offers. The process of adapting to climate has been extremelysuccessful. Viable human societies and productive economies have been established in a widerange of climatic conditions. Although Canada has one of the world’s widest ranges and extremesof climate, the country has grown through immigration of people from many different climateswho have been able to adapt their culture and livelihood. The economic growth of Canada hasalso involved the development and adaptation of technology appropriate to the climate. Adaptivesocial 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 agriculturewhere the choice of crops and mode of cultivation have been finely tailored over time to theprevailing climate. The same is true for forestry, fisheries, water resources, recreation andtourism, and clothing industry, all of which obviously depend on and are sensitive to climate. Thepublic health protection system has built-in safeguards against viruses, bacteria, insects, andparasites. All present infrastructure embodies sunk costs of past adaptation to climate, and climateis a factor in the design, construction and operation of civil engineering structures, systems andworks of all description. The practices of insurance, credit, commodity futures and the like arealso all attuned to climate norms and known variability.

The adaptation represents the outcome of a slow accumulation of policies and practices that areintended to protect people and property, while allowing economic and social activities to continuewith a minimum of loss or disruption in all but the most extreme weather conditions. Adaptationcosts tend to be incorporated into routine expenditures and budgets, and can be viewed as animportant 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 globalwarming.

Many of the second and higher order impacts of climate change on society and economy can bereduced by adaptive responses. Adaptation and adaptive responses refer to all actions that canbe 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 andoperations.

As the adaptive capacity of a country, region or sector decreases, the vulnerability to climatechange increases, leading to greater costs associated with impacts. Successful adaptation willreduce the impacts associated with climate change, but will depend on technology, institutionalarrangements, availability of financing, and information exchange. Developed countries will beimpacted 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 climatechange at an unusual rate and in ways that are not fully understood. A wealthy and educatedCanada, with a high availability of technical and organizational skills, will be able to offset at leastsome 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 ofadaptation. The capacity to adapt varies amongst sectors, regions of the country, and socialgroups (children, the aged infirm or handicapped, the poor and otherwise disadvantaged).

• Adaptation should take advantage of opportunities arising with climate change. Theopportunities will not automatically produce economic benefits unless Canadians put an effort,initiative, and investment, the costs of which must also be considered.

• Significant residual impacts and costs will remain due to changes in means, variability, andextreme events associated with climate change. The costs the less predictable elements ofclimate will remain significant and are likely to increase over present levels.

• There are likely to be some irreversible species loss, the disappearance of landscapes and lossof 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 disasterproves that improper attention to adaptation can have major and serious consequences. Adaptationis subject to forgetting, while learning is weak and unreliable. In the rush to restore normal life ofthe affected community, responses to current climate disasters often neglect or resist longer-termadaptation needs. Broad public understanding and support are necessary, and measures toimprove adaptation have to be developed within the organizational structures of society. Themeasures are most effective at the community and municipal level. However, incentives to adoptresponsible adaptation strategies sometimes encourage risk-taking and the reliance on disasterrelief from others. Therefore, more emphasis should be placed on building adaptive capacity, andnot 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 specifiedwith great accuracy, but it is certainly considerable. Preliminary estimates of these costs inCanada 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

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climate change in Canada. Some progress has been made in identifying adaptation options inresponse to climate change, but there is little information on the actual costs and benefits ofadaptation, or the residual costs that occur despite adaptive measures.

A wide but "not necessarily exhaustive" range of adaptive options to climate variability and changein 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 estimatingthem across many sectors and geographical areas is daunting. Other methods must be sought inorder to develop reasonable estimates of adaptation and residual costs and benefits. Before doingso, however, it is worth noting that there is considerable agreement in the literature on at leastthree key issues:

• The costs and benefits of adaptations vary geographically, and from sector to sector. Furtherresearch is needed to improve our understanding of these differences in costs.

• Many measures promoted for adapting to climate change are small steps up from currentlyavailable technologies, suggesting that associated costs could be small, if initiated early.

• Canadian decision-makers may have a good, albeit imperfect, understanding of the broadrange of adaptation options available for current climate. It is uncertain, if this knowledge issufficient 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. Theresults are useful, but need improvement. Two other studies estimated the possible costs ofadaptation to, and residual impacts of, climate change. They are based on modification of rathervolatile 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 climateat over C$11.6 billion (Table 1). The results are by no means rigorous. Section 5.1lists the points in the estimation method that need improvement. The survey resultsinclude total expenditures in 8 major sectors, percentage and cost attributable toclimate adaptation, and possible trend under climate change. The costs of energyare subsumed under the appropriate sectors, while some adaptive costs wereignored (e.g. health care adaptations). Sector cost attribution to climate is basedon,• 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 Canadaand Possible Trends Under Climate Change

[IAN, ARE FIGURES IN TABLE 1 CORRECT? CCS Vol. IV, p. 29 says totalconstruction 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%).

Sector/ActivityTotal Cost

(C$ million)

% Attributable toClimate

Adaptation

Cost of ClimateAdaptation(C$ million) Possible

Trend

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TransportAirMarineRailRoads

7,36883.5258.8702.06,323

100552919

1,65783.5143.8203.21,227

DecreaseDecreaseDecreaseUncertainDecrease

Construction 50,000 4 2,000 IncreaseAgriculture 1,887 70 1,330 IncreaseForestry 556 72 403 IncreaseWater

Flood Control1,058

4.773

80767

3.8Increase

HouseholdExpenditure

6,023 88 5,296 Decrease

EmergencyPlanning

14.4 75 10.8 Increase

WeatherInformation

189 100 189 Increase

TOTAL 19,096 61 11,653Source: 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 arejudged for Canada from climate change literature of the early 1990s. Adaptation costs inagriculture, forestry, water, emergency planning and weather information are expected toincrease, while those associated with transportation and most notably household expenditure areexpected to decrease.

Residual costs remaining in spite of adaptation are variable and not well defined. Between 1984and 1994, the Canadian insurance industry paid more than C$1 billion to compensate for lossessustained by major natural disasters. This figure is rising (Brun 1997). Some of these costs wouldbe due to maladaptation and some due to the extremity of weather events. The claims arose fromthunderstorms, tornadoes, hail, windstorms and flooding, and concerned damage to homes,businesses and vehicles. The total costs to Canada, including the uninsured costs and damage topublic property, is estimated at more than double the insurance costs. This figure does not includesmaller 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 Canadianweather event during this decade was the Calgary hailstorm of 1991. It caused C$450 million ineconomic losses, with C$360 million sustained by the insurance industry. In July 1996, there wasC$295 million insured costs for severe hailstorm damage in Calgary and Winnipeg. Excessiveprecipitation and flood in the Saguenay region in July 1996 caused estimated damage of C$1-1.5billion, of which only C$350-400 million was insured. At the other extreme, extensive droughtthroughout the Prairies in 1988 resulted in C$1.4 billion in insurance payments and governmentsubsidies. These are only a few, albeit severe, examples of the residual costs associated withextreme 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 extremeevents resulting in major disasters, the recent Red River flood offers useful insights. The costs ofthe flood are extensive, but they could have been much higher if it was not for a C$50 millionfloodway around Winnipeg constructed in 1963-1967, and the rapid construction of the 40 km longBrunkild Dike. The floodway has paid itself off many times over, protecting the City of Winnipegfrom no less than 3 major floods. Despite the heroic efforts of many volunteers and the extensive

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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. Adaptiveresponses 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 Columbiamay cost hundreds of millions of dollars.

Careful and proactive planning, especially in infrastructure with a relatively long life, is costeffective and sensible. Planners in the Town of Milton have recommended spending of anadditional C$7-10 million on waterworks to accommodate expected water shortages under climatechange. This amount represents an extra 10-15% of the base cost, yet is much cheaper than ifchanges were required later. The design of recently completed Northumberland Strait Bridgeaccounted for 1 m potential sea level rise due to global warming over 100 year life of thestructure. The added cost of increasing the height of the bridge is small relative to both the totalproject 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 warmingand a 50 cm rise in sea level due to doubling of atmospheric concentration of CO2. By scalingestimates of 1.5% reduction of North American GDP in 1988, Rothman et al. (1998) estimatedthat the climate would entail losses of C$8.3 billion (1986) in Canada (Table 2). Human mortalityand morbidity make up nearly half of the total damages. Tol (1995) used a value for a statisticallife of about US$3.5 million, and neglected impacts on forestry, energy, water, air and waterpollution, and many other potential impacts. Only coastal protection is clearly an adaptive measureamong Tol’s categories. Dryland and wetland loss, and agriculture, reflect costs of adaptation plusresidual 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 theimpacts of climate change and the economic values. Tol (1996) substantially revised both the totalcost and the distribution among sectors for North America, showing US$55.2 billion total insteadof former estimate of US$74.5 billion. The loss of species has nearly quadrupled, whereas theestimate of mortality losses has dropped by nearly 75%.

Table 2 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)

Calculated Costsfor Canada

Category Billion US$ % Total Billion 1986 C$Coastal Defense 1.5 2.0 0.167Dryland Loss 2.0 2.7 0.223Wetland Loss 5.0 6.7 0.557Species Loss 5.0 6.7 0.557Agriculture 10.0 13.4 1.113Human Amenity 12.0 16.1 1.336Human Life 37.7 50.6 4.197

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Migration 1.0 1.3 0.111Natural Hazards 0.3 0.4 0.033

TOTAL 74.5 100% 8.294% of GDP 1.5Source: 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 ofadaptation 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, airpollution, 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 forNorth America for 1 °C warming and 20 cm sea level rise. It is unclear how assumptions aboutwarming advance to 2.5 °C and 50 cm rise would affect the new estimate. Tol scaled his 1995results for 2.5 °C warming and 50 cm rise proportionately by a factor of 2.5 to make comparisonpossible with the newest estimate. From a total loss of US$30 billion, the estimate rose to awelfare gain of US$175 billion (3.4% of North American GDP). Tol (1999) somewhat arbitrarilyascribed a standard deviation of US$107 billion to the total estimate. Agriculture (for 2.5 °Cwarming), forestry, nature (ecosystems, species and landscapes), sea level rise (loss and changein value of wetlands and drylands, protection costs, and population migration), mortality (frommalaria, schisto, dengue, heat and cold stress, and cardiovascular), heating and cooling energydemand, and water resources were accounted for. Impacts on agriculture with adaptation amountto 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, energysupply, morbidity and many other impacts were omitted because “no comprehensive, quantifiedimpact studies have been reported.”

Using the static model of Tol (1999) as a starting point, a dynamic model of Tol (1999a) attemptsto take some account of sector response to climate change, and of the changes in society’svulnerability (sensitivity modified by adaptation) in years 2000-2200. The model is beset with moreuncertainties and heroic assumptions, but gives some insights. In the short term, the estimatedsensitivity of a sector to climate change is the crucial parameter. As time progresses, the changein 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). Theyreverse very sharply, reaching a GDP gain of 3% in the middle of next century, which thengradually diminishes, reaching about constant GDP losses of below 1% beginning in 2140. In thepoorer 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 indicativeof 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 thewrong sign and wrong order of magnitude, since natural resource valuation is rather inadequate.

3.3 Estimates by Mendelsohn et al.

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Mendelsohn et al. (in preparation) have developed predictive equations, based on a series ofstudies in the US (except for the tourism sector) (Mendelsohn and Neumann forthcoming). Theequations relate market value to average temperature and precipitation levels, atmosphericconcentrations of CO2, length of coastline, land area, and other variables. The sectors consideredare agriculture, forestry, coastal resources, energy, water, and tourism. The impacts of a changedclimate 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 theassumption that economic activities are limited there.

Some authors believe that the equations provide helpful estimates for Canadian totals, if not for thespecific 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 positivebenefits, largely dominated by gains in agriculture and forestry. A closer examination of thestudies raises a number of questions about:

• the adequacy of representation of the dynamics of adaptive capacity and vulnerability ofsectors 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 ofindirect and non-use values of natural resources,

• the adequacy of impact estimates using single, country-wide, annual average values fortemperature and precipitation, and

• applying these results to countries with climate, biological, and socio-economic systemcharacteristics 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 climatechange policy. If climate change will occur, regardless of mitigation attempts, adaptation will benecessary, will involve costs and benefits, and some residual impacts will remain. There will be anumber of dimensions to the impacts and the adaptation process. Monetization attempts to coveras many of them as possible, so that policy makers become aware of the magnitude of some ofthe 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 ofthe net impact on the national economy, but they are of little value at the specific project, sector orregional level. Macroeconomic models are still unable to include non-market accounts in thestandard measures of economic sector inputs and outputs, yet these accounts may represent themost significant residual impacts of climate change in Canada.

Climate change will affect a large array of natural processes, which in turn will affect thesocioeconomic systems. Most of the impacts and the effectiveness of future adaptations are stillnot known, or are highly uncertain, and are difficult to translate into costs and benefits. Valuejudgments are necessarily built into any assessment. Although monetary valuation is highlycontentious (Vatn and Bromley 1995), it is a standard way to represent changes in welfare andconsumption. 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 assessesthe methodology used in monetary estimation of climate change impacts and adaptation.

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4.1 Valuation of Market Goods

Climate change impacts and adaptation will put demands on some economic and naturalresources, and will enhance the use of other resources. Economics studies the allocation of scarceresources that have alternative uses. Resources are not free, and when used for one purpose, theyare no longer available for other purposes. The conceptual foundation of all cost estimation is thevalue of the scarce resources to individuals (Markandya et al. 1998). The total value of anyresource 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 thepreferences of political leaders. Costs are estimated in terms of the willingness to pay (WTP) byindividuals 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 anindividual’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 havebeen produced with the same resources (social opportunity cost). The social cost of any activityincludes the value of all the resources used in its provision. Some of these are priced andexternalities are not. External impacts arise from any human activity that is not accounted for bythe agent causing the externality. There is no market for such impacts. The external costs aredistinct from the private costs of inputs (labour, materials, energy, services from others) thatproducers do take into account when determining the value of their production outputs. The totalcost 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 theabsence of market power, independent consumers determine the value. It is possible to determinea consumer’s willingness to pay for different price and quantity combinations, and then use thisinformation to obtain the consumer’s demand curve. In general this demand curve is downwardsloping. The area under the demand curve—over any given price level—is called the consumer’ssurplus (CS). In much of the environmental economics (and also cost benefit analysis), the CS isthe measure of social cost. It has been shown that WTP < CS < WTA. Thus, there are threedifferent 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 payfor the use of a good. WTA is more difficult to determine and many analysts opt to use WTPinstead, which can seriously bias assessments and undermine policies based on them (Knetsch1994). The demands for valuation numbers are so great that the shortcomings of the monetaryvaluation methods are often ignored. Expressing this concern, Knetsch (1994) writes: "Rather thana continuation of present practice, perhaps socially desired interests and objectives might be betterserved by a more even-handed regard for empirical findings..., and a greater willingness to explorealternatives to current practices."

For market goods, social cost is defined as the amount of consumer surplus foregone by aconsumer. Thus a measure of one of the dimensions of the cost of climate change is the amountof CS foregone in order to adapt to climate change. For non-market assets, such as goods andservices provided by nature, other monetization methods are used.

National studies of climate change report costs of impacts and responses at the microeconomiclevel of projects and sectors, and at the macroeconomic level. A macroeconomic cost assessmentattempts to estimate the cost of a response to climate change after considering all of the linkagesbetween sectors in national economy. The macroeconomic analysis is usually reported as changesin GDP or growth in GDP, but may also be reported as loss of ‘welfare’ or loss of consumption.

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Various sectors are interrelated directly through purchases of goods and services, and indirectlythrough government taxation, spending, borrowing, and other mechanisms. The net overall costs inthe economy differ from the direct, sectoral costs.

A wide range of models is used for macroeconomic analysis, some of which assume that demandand supply are in equilibrium at all times, and others that allow for lack of market equilibrium. Themacroeconomic costs of alternative climate change policies are sensitive to the choice of modeland assumptions, and are less precise than the costs obtained by microeconomic analysis.Typically macroeconomic models do not work with adjusted prices and do not includeexternalities. Hence the estimates of cost generated by these models are not based on socialopportunity cost or WTP (WTA). Nevertheless, because they consider the impacts of policies atan integrated level and allow for inter-sectoral effects, they are an important contribution to thepolicy debate.

Many researchers have noted deficiencies, and suggested revising the conventional systems ofnational accounts to incorporate full social pricing of resources. Conventional macroeconomicaccounting would not report expenditures on climate change responses (either mitigation oradaptation) separately from other accounts. Consumption of environmental assets is not includedat all, although some countries begin to calculate changes in the natural environment, usingphysical 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 HumanDevelopment Index (combination of three key indicators: longevity, education and income), forexample.

4.2 Monetary Valuation of Natural Resources

Monetary valuation applies to direct use values, indirect use values, option values, existencevalues, and other non-use values (Figure 2). Ideally, all of these values would be represented inthe price of a good or service sold in an open, competitive market, in which the external impacts ofthe production and use of the item have been taken into consideration. The price of a good wouldthen provide an accurate estimate of its economic value. These conditions are not met more oftenthan they are—many items are not bought and sold, many markets are neither open norcompetitive, and many externalities are not considered in the pricing of goods and services. Thefarther one moves away from direct use values in Figure 2, the less effort has been put intoincluding 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 noprice-fixing markets. Often this is the cost of replacing the specific good or service of interest witha proxy good or service. A popular technique, the travel cost method, derives monetary estimatesfrom 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 componentsthat capture the use value of non-market goods such as air quality or mortality risk. Contingentvaluation method directly asks people what they would pay for (or accept as compensation for theremoval of) goods normally not traded on the market (Freeman 1993). Different techniques areoften used to piece together the value of a thing, but aspects not amenable to monetization are leftout.

Though accepted within economics and other disciplines, these valuation techniques remainproblematic. For price to accurately represent economic value requires that a free market and aworld of rational agents exists, who are perfectly knowledgeable about the consequences of theiractions and able to act consistently in a way that maximizes their individual utility. Many, if notmost, 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 areimportant as well, but economic valuation is not well suited to representing them.

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Figure 2 Categories of Economic Values Attributed to Environmental Assets(Munasinghe et al. 1996)

Total Economic Value

Use Values Non-Use Values

Direct UseValues

Indirect UseValues

OptionValues

ExistenceValues

Other Non-UseValues

Output thatcan be

consumeddirectly

FunctionalBenefits

Future directand indirectuse values

Value fromknowledge

of continuedexistence

FoodBiomass

RecreationHealth

Ecologicalfunctions

Floodcontrol

Stormprotection

BiodiversityConserved

habitats

HabitatsEndangeredspecies

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 waysrepresents the state of the art, omits "non-market impacts, such as health effects, aesthetics, andsome ecosystem impacts.” Tol (1999) assumes that an average person is willing to pay US$50 peryear to preserve species, ecosystems and landscapes. These non-market impacts will likelyinclude some of the most severe outcomes of future climate changes. An economic valuation thatomits 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 justbelow twice the world GDP. Using similar methodology, but perhaps more realistic unit economicvalues, 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. Higherdiscount rates give less weight to the future. The costs of climate change are extremely sensitiveto the choice of discount rate due to the long time horizons. Some economists argue that currentresources can be used to increase wealth through investment, so they have greater value thanfuture resources. This is the opportunity cost of capital (OCC) approach, commonly used inproject and investment analysis, which spans time horizons up to 50 years. The rates used (6% to

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10%) distort the costs of future impacts. At a 7% discount rate, $1 billion 50 years hence have apresent 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 thismodel, 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 thesocial rate of time preference (SRTP) approach. SRTP ranges from about 1% to 4%. In theanalysis of climate change costs and benefits, economic costs of long-term impacts should becalculated using the SRTP as a discount rate. The cost of capital should be calculated based on itsopportunity cost, and included before discounting the long-term impacts (Cline 1992). Once thecorrect prices for the long-term impacts are incorporated, the OCC discount rate can be used inevaluations of mitigation and adaptation projects.

Willingness to pay and consumer surplus are a function of both the culture and level of income ofan individual. Most of the techniques used for costing are thus biased against persons with lowincome, because the poorer the consumer, the lower the valuation (Banuri, et al., 1996). Thisproblem was central to the IPCC controversy over the value of a statistical life, which is higher inthe developed countries than in the developing countries (Pearce 1996; Pearce et al. 1996).Aggregating biased estimates of value across individuals requires some set of predeterminedweights to compensate for inequity. The monetary measure of climate change could vary by afactor 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 toadapt, and values held in the future about the resources that will be threatened. Most studies usepresent monetary values, which flow from present-day culture, attitudes and preferences, torepresent 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 mayvalue the environment differently than we do. Eastern hardwoods, which were regarded by theprofessional foresters a century ago as weeds, are now valuable commodities harvested forbiomass (Irland 1996).

Most of the work on economic valuation of climate change is based on conditions for the UnitedStates. Estimates for other geographical regions generally transfer US-based estimates of impactsand values to very different sites. Demeritt and Rothman (1999) compare this undesirable situationto “…an immense pyramid, whose conclusions are founded upon a single underlying study.”Natural resources, societies, economies, cultures and values differ widely within and betweencountries. For a number of countries, extrapolations of the temperature and precipitation valuesoutside the range over which the original estimates were made may be tenuous.

By aggregating estimates of economic values obtained at a smaller scale, crucial inter-dependencies are lost. In examining the higher-order effects of climate change, Tol (1996a) notesthat the "cost of impacts together is larger than the sum of the individual impacts” and gives anextreme example from agriculture. Since agriculture comprises only 1-2% of GDP in developedcountries, a complete destruction of agriculture would only result in a comparable loss. Thisignores, however, the extreme dependence of other sectors of a developed economy onagriculture. Howarth and Monahan (1992) show how much considering these dependencies couldaffect estimates.

4.4 Uncertainty, Ignorance and Expert Opinion

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It is difficult to place a value on the current climate, let alone place a value on changes in it. Theclimate, impact, and socioeconomic futures are highly uncertain, if knowable at all. Being the lastactivity in an analytical chain (Figure 1), estimation of costs or benefits cannot be expected to beany more certain. The Canadian costs and benefits of global climate change will strongly dependon the ability of countries to cooperate and share capital, technology, information and otherresources 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 andtechnology, domestic and international politics, and possible climate catastrophes, all of which aremajor uncertainties and unknowns in their own right. The response of the natural systems toclimate change may be surprising. Many of the component values of biodiversity, ecosystems andindividual species are still unknown. To cope with the uncertainties and ignorance, costs are oftenestimated for impacts of an assumed new static climate on present-day society. By doing so, theseestimates 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 andless vulnerable society. Very little is known about such transitions, yet this is the prominent aspectof costing the responses to climate change over the next century. In many cases the ability toadapt, which can significantly reduce climate change impacts (Fankhauser and Tol 1996), may begreatly exaggerated. Assumptions about rates of climate change and the speed of damagerestoration and adaptation significantly affect the estimates (Tol 1996a). The relation betweenestimates 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, butvulnerability is a major unknown, since it depends on social adaptive behaviour. The present valueof adaptations and residual impacts over a long time horizon depends critically on how discountingis applied in the analysis.

Neither the costs nor the benefits of adaptation to climate change have been systematicallystudied, hence the available information is of limited use to decision makers (Tol et al. 1998). Theassumptions usually made about adaptation are not very realistic, since equilibrium climate andequilibrium adaptation in response to climate changes are unlikely. Adaptation has a stronginfluence on the sign and magnitude of estimated impacts. Adaptation costs, as opposed to netcosts of damages, are seldom reported separately from total costs. Models allow calculation of thebenefits of adaptation (avoided impacts), but the costs of investment into adaptive measures isneglected.

A sector or region is often studied in isolation, even in cases of strong interactions. There are alsoobvious omissions, for example, the built environment and transportation operations (Bein andRintoul 1996). Existing structures and facilities would require retrofits, and new ones would bedesigned with consideration of climate extremes likely to occur in their lifecycles, making themmore expensive than in a baseline case. Damages may come regardless, for design standardsmight be difficult to set in the face of inter-annual variability. The net costs (or benefits) per typeof structure multiplied by the number of structures in the country may add up to large annualchanges in welfare. Other impact categories might also be significant by virtue of small butpervasive changes adding up over a large number of units affected. For example, a noticeablechange in environmental amenity during he life of one generation may affect their psychologicaland mental wellbeing.

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The presentation of the costs in the literature has focused on ‘best guesses’ of the most likelystatic scenario. Figure 3 illustrates the problem with this approach. For many of the uncertaintiesthe range of uncertainty is not symmetric, i.e. there is more possibility of low probability – highimpact events. The best guesses of the most probable events can be significantly lower than theexpected value (a weighted average obtained by adding together products of impact costs andtheir probability). The best guess downplays the risk of very costly scenarios. A policy based on abest guess would imply that society likes to take risks. This runs counter to most public policychoices, which are averse to risk.

Banuri et al. (1996) recognize “that attempts to quantify the costs associated with climate changeinvolve inherently difficult and contentious value judgments, and different assumptions may greatlyalter the resulting conclusions." Grubb (1995 ) warns, "(t)here is the danger that economicevaluations enshrine in apparent objectivity the current value system of the practitioner." A surveyby Nordhaus (1994) polled 10 economists (including himself), and 9 other social scientists, naturalscientists and engineers—all experts on climate change. The participants provided their bestsubjective estimates of damage in terms of global GDP The lowest estimates were from 8economists. The poll revealed "...major differences among disciplines, particularly betweenmainstream economists and natural scientists."

Figure 3 Hypothetical Probability Distribution of Damage and Estimates(after Fankhauser 1995)

Nordhaus's survey reveals that economists' estimates should not be taken at the face value, due touncertainties, lack of knowledge, and disagreements on valuation methodology. Standardization bySmith (1996) brings the estimates down by 20-30%. A correction of just two basic values (servicevalue of wetlands and value of statistical life) boosts the estimates by at least a third (Bein andRintoul 1996). Selection process and composition of the expert group together with biases in theelicitation of expert opinions affect the results. The same could be true for estimates provided topolicy makers. A narrow band of uncertainty around subjective estimates of highly uncertainthings 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 viewbeing correct. Effectiveness at influencing group dynamics has no known correlation withaccuracy of scientific viewpoint. For a range of plausible climate change, impacts, values anddiscount rates, Bein and Rintoul (1996) found a wide range of impact costs, which spans threeorders 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 theactual requirements of society (f. ex. Shackley et al. 1998; Cohen et al. 1998; Demeritt andRothman 1999). Climate change economists, “a select, ‘invisible college’ ” work in “social anddisciplinary insularity.” As a result, the process forecloses public debate about the moral andpolitical judgements built into the technical details of their reports. Addressing the controversy, theclimate change economists acknowledge difficulties with the valuation, but legitimately point outthat 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 usefulinformation for climate change policy, if dependable climate change data and derived sector- andsite-specific information on impacts and adaptation were available. The costing relies on a solidunderstanding of the climate, socioeconomic, and ecological systems. Any meaningful appraisal of

Best Guess(mode)

Expected Value(mean)

Worst Case

Pro

babi

lity

è

Costs è

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climate change impacts must recognize that predictive tools will remain limited. Projections ofsocial, economic, climate and other natural conditions based on current understanding will besubject to uncertainty and insufficient knowledge. Some key assumptions may be inaccurate, oroutright wrong. Examples in sectors abound. Estimates of costs and benefits of adaptation andresidual impacts derived from such scenarios will be shrouded in a wide, unspecified band ofuncertainty, 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 itattempts to run ahead of estimates of climate change impacts on individual sectors. Lack ofreliable 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 costingmethodology has some flaws, but alternative methods are flawed as well, and cannot furnishbetter information. Monetization is based on general principles that should assure uniformity,repeatability and analytical rigor. The principles are not followed consistently, which leads todiscrepancies between studies and authors. The most serious inconsistencies include:

§ ignoring or arbitrarily valuing externalities, non-market values and some of the componentvalues of natural resources,

§ measuring willingness to pay for saving natural assets, instead of the higher willingness toaccept 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 long-range impacts, and

§ conducting analysis for “best guesses” about impacts for which likelihood is most probableaccording to subjective judgement of the economists, but which may be accidental samplesfrom 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’—acommon metric with which value judgements of the decision makers are assessed for quantitativeand qualitative criteria, including economic. The method is difficult to implement for problems ascomplex as climate change. Scarcity of objective probabilities, controversy of subjectiveprobabilities from numerous decision makers and stakeholders, and the difficulty of extractingconsistent 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, couldstill be structured to fit the decision analysis schematic, with a view on a better cognition of thecomplex information content, rather than on conducting a complete analysis with specifiedprobabilities and utilities.

Risk assessment is a subset of the decision analysis scheme, but without value judgements. Theassessment considers a range of possible outcomes each associated with a probability estimate ofits occurrence. Its usefulness to climate change evaluation is currently limited for reason ofinsufficient knowledge on magnitude of the impacts and probabilities. Although not useful short-

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term, risk assessment may prove helpful in identifying the crucial impacts, costs and benefits oncebetter sectoral information becomes available.

Valuation of policy choices based on the sustainability philosophy must recognize that societyneeds to make day-to-date decisions that are responsive to near-term economic needs. Thisleaves only the ‘safe minimum standards’ approach to sustainability decisions as workable. Thestandard allows the current generation to use resources to a limit imposed by leaving futuregenerations 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 whowould attempt to implement the concept. Calls for proposals could be issued, if there was enoughpolitical support for the concept. If the concept was to be implemented, it would most likely needthe 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 isvery limited and unreliable. This significant gap in knowledge needs bridging to provide betterinformation to the policy process. Until these estimates can be improved, Canadian policy anddecision making will be flying blind. The work should be paced with advancements in local climatechange prediction and in sector impact and adaptation assessments. Estimation of future costsshould not forerun estimation of future impacts.

Many of the difficulties that hinder progress cannot be resolved short-term, as many uncertaintiesand ‘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 costsand benefits of normal climate, variability, and extremes. Not enough is known quantitatively aboutcosts and benefits of present and future normal climate. This is not only a Canadian issue. Normalclimate cost data will become a requirement in international negotiations under the UNFramework Convention on Climate Change. This is an issue that could be taken up by Canadawithin the Intergovernmental Panel on Climate Change and the World MeteorologicalOrganization.

Work presented in Section 3.1 on the costs of present climate variability and extremes shouldcontinue. The research is important because it would provide a present base case against whichclimate change scenarios could be compared. However, an even more important element inscenario 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 socioeconomicscenarios.

A number of points in this research need greater attention and improvements in order to producemore rigorous results of value to climate change policy. The work should first of all address thequestion of an appropriate baseline: relative to what climate should these costs and benefits beestimated? Every place and every sector operation, from the poles to the tropics, exists in a

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climate regime. Some climates are more benign, but all normal climates require expenditure ofresources on one hand and provide some benefits on the other hand. If the sectors were notcoping with the present climate regime, they would be dealing with another combination ofweather elements. Some benefits of the Canadian climate would not be possible to realize ifanother climate prevailed in the country. What is the climate baseline to compare with, and whatare the differential costs and benefits? For example, in all climates some percentage of total costsof built infrastructure is due to the weather elements. Which climate constitutes the baseline, andby how much do Canadian costs differ?

Here are other points that need improvement regarding the estimation method for the costs of anormal 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 actualexpenditures, and material costs should be net of taxes).

• Incomplete accounting for climate adaptation; examples of missing items: costs of airportrunway repair attributable to climate elements, providing transportation with winter versussummer 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 claimswhich are not consistent across the country; do not include flood losses from overland flow; anddo 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 collectbetter, rigorous data in a systematic fashion is the responsibility of the federal government. Thenecessary technical expertise exists in Statistics Canada. Until there are reliable time series of thepresent costs, some temporary estimates are needed.

Present costs can be collected and verified at the time they occur. In the past such informationwas not so important to policy issues, and it was adequate to rely on unsystematic evidence. Thefact that claims under the Federal Disaster Assistance Act are now rising sharply speaks for thedevelopment of standard methods of climate damage and adaptation cost data collection. A taskforce of statisticians, economists and climate change experts could be established to suggestdesigns for such information gathering and processing, and to propose how this might be done in acost 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-termchanges to climate. The measurement depends on appropriate and operational definition of thecosts [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 moreresilient to extreme climate events and variability,

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(c) increased public expenditures needed to meet the emergencies as a results of extreme climateevents, and

(d) increased (precautionary) consumer expenditures necessary to cope with extreme climateevents and variability.

So defined, the costs are readily measurable. For increased costs of market goods, the appropriatemeasure is the consumer surplus foregone. For increased resilience of the capital stock, it is thecost of investment that has an opportunity cost—what the investment would have earned in itsbest alternative use. Provided good time series data in the form of input output tables can becompiled for individual administrative and economic regions of Canada, all the above costs ofcurrent climate can be estimated econometrically [WHAT IS STATISTICAL ABOUTANNUAL INPUTS AND OUTPUTS, MOHAMMED? AREN’T THEY DETERMINISTIC?DO YOU MEAN SOME AVERAGE OVER TIME OR WHAT, MOHAMMED? ]]. Anecessary and plausible assumption would be that climate change occurs slowly, and therefore theproduction and consumption structure of the economy also changes slowly.

The econometric time series data can then be used to compute the upper and lower confidencelimits of the four estimated cost parameters. These limits will then indicate the [expected short-term?] range of the costs. The time series approach would be a valid method because thestructure of the economy will change slowly in pace with climate change, i.e. without any suddenand catastrophic changes in the economy. In the case where evidence suggests that the costs willincrease, the difference between the upper confidence limit and the fitted regression estimate canbe 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 higherprecipitation 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 ANDPLANT ILLNESS WHICH WILL REDUCE CROP YIELDS AND INCREASE RESPONSECOSTS?] Then we can take the difference between the fitted estimate and the lower confidencelimit to find the expected reduction in the adaptation costs of this particular sector for thisparticular region. The approach can be applied on a sectoral basis to each of the four costcomponents, provided that input output tables exist. For Canada there is a good annual input outputdata 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 TOBE DONE?]

5.3 Information on Adaptability to Climate and Other Change

While considerable potential for adaptation exists, there is little information about what wouldCanadians be adapting to and when, what responses might be chosen, how much they are likely tocost, and what impacts would remain after adaptation. In seeking to minimize the costs of climatechange to Canada it is therefore imperative to have a better understanding of what can beaccomplished by adaptation, at what cost, and what residual impacts could be expected afteradaptation of Canadian society and natural resources.

Adaptation will be needed in all sectors of the Canadian economy and all regions, regardless ofmitigation efforts implemented internationally. While the level and speed of adaptation actuallyimplemented cannot be known in advance, it makes good precautionary sense to prepare now foradaptation, 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 helpfill a considerable knowledge gap, increase awareness of Canadians, and prepare for possiblefuture.

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Not much is known about society’s transition to a new climate and less vulnerable society—theprominent aspect of costing the responses to climate change. Little is known about the adaptationcapacity of different sectors and different regions of Canada. Vulnerability to climate variabilityand change is not evenly distributed across the country. Research is needed to assess climatechange impacts in terms of the capacity of regions and sectors to adapt, which are by no meansobvious. Beside climate and weather, societies have been continually adapting to natural and man-induced change and hazards. Analysis of future climate change impacts and adaptation in Canadawill assume scenarios of future social responses, which might have common elements with thoseobservable in adaptations at other times (historical analogies), and in other places (spatialanalogies).

Studies of comparable situations can identify transferable factors that may be relevant toprojections of adaptation behaviour of Canadians under climate change. Several authors haveexamined analogies in the climate change context (Lamb 1982; Glantz 1988; Glantz 1996). Phillipsand McKay (1981) and Etkin (1998) present consequences of extreme weather in Canada. Onthe basis of recent weather extremes in various provinces, Burton et al. (1999) examine some ofthe factors that determine how Canadian society could develop to be more adapted to extremeweather events. Historical and spatial analogies of other natural and man-made hazards and oftheir impacts on societies might also be insightful.

The research would attempt to answer in a systematic manner the following question: How dopresent and past societies adapt to transient phenomena, variability and extremes, either natural orcaused by human activity, including weather and climate? The results would improve generalunderstanding of social adaptation to climate and change, and would support construction of theadaptation component in socio-economic scenarios prior to costing. The following steps would beinvolved 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 transientadaptation to change over time.

• Stressors and socioeconomic conditions that determine sensitivity, vulnerability and adaptiveresponse 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 long-term needs.

• Transferability of the above information across time and regions, and applicability to Canadiansectors and regions under climate change.

5.4 Canadian Unit Cost Data

Regardless of progress on developing climate, socioeconomic and impact scenarios, work canproceed independently on estimating the unit values of Canadian natural resources. There arelarge gaps in the valuation of ecosystems, particularly in the indirect use, option, and non-usevalues. Natural habitats and biodiversity will be significantly affected by climate change. Theevaluation of climate change impacts can be substantially enhanced, if the monetizeable part ofnatural resource changes could be more accurately represented. Monetary valuations ofecosystem 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). Canadianecosystems have unique characteristics and are richly diversified, which warrants monetizationlocally 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 impactspossible 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 socialvariability of these value judgements. 5.5 Moving Forward Research agenda, capacity and funding need to be established, possibly under the NationalClimate 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 andwill 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, whenthe need for adaptation policy and options becomes clearer and politically more imperative. Howthe 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 belocally specific. Perhaps a replication of ‘tables’ across socioeconomic regions of Canada wouldwork. The body of impact and adaptation knowledge that is required for policy, management, anddecision making is fragmented into disciplinary expertise and professional specialization, and isoften removed from the stakeholders. With the advent of climate change the standards andcriteria applied in professional practice should be revised beyond the sector by sector adjustmentsand disciplinary insularization. The challenge of the new research will be to capture the higherorder effects on other sectors and geographical regions, including inter-provincial and internationalshifts in the distribution of natural resources and economic activities dependent on them. Costingwould be applied as the last step in the analysis. Integrated assessment (IA) evaluates adaptive measures and impacts of climate change in asystemic context (Cohen and Tol 1998). IA studies attempt to transcend sector, disciplinary,cultural, and jurisdictional barriers, promoting collaboration and shareholding in the climate changeissues. IA studies involve scientists with local stakeholders, policy and decision-makers, and thepublic. The participants become familiar with potential consequences of climate change in theirown jurisdiction and think about responses in local terms. Integrated assessment can unify issuesof mitigation and adaptation. The IA process draws both on the local knowledge and values, andon the scientific research results, posing the climate change problem to those who ultimately willbe 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 morecomprehensive, accurate and representative, as local climate change impacts and adaptation areconsidered 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, amissing 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 limitingassumptions of the underlying components. IAMs incorporate costing data and models with theirdrawbacks. By contrast, IA studies are free to use or not to use sector and other mathematicalmodels as they see fit to accomplish study objectives. Canada has performed an IA using a scientist-stakeholder collaborative approach in theMackenzie Basin Impact Study, but costing of impacts and adaptation options has not beenincorporated into any IA studies in Canada yet. A current example is the assessment taking placeacross regions and sectors of the United States (Melillo 1999; Parson 1999) [DOES SOMEONEHAVE 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 intoregional initiatives. The costing component of IA studies will make sense when solid local and sectoral information onthe impacts and adaptation can be generated. In the short-term, costing in IA studies mayemphasize gathering process experience to be used when impact information is ripe. IA studiesacross Canada can examine a priority impact for each region (f. ex. sea level rise for AtlanticCanada), estimate the costs of foreseen adaptation options, and perform costing of the mostimportant residual impacts. IA can also define the costs of normal climate. Existing impact and adaptation cost estimates are detached from their defining, local context. AnIA study has a better chance of defining and generating the following information that isnecessary 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 dueregard for the utility of results to costing. In addition, should costing prove inadequate, alternativeevaluation approaches, such as risk assessment could be applied within the IA study. A great dealof learning will be involved, so a pilot application meshed with an ongoing or planned IA study is inorder.

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