Values, cost-benefit analysis and adaptation to climate change

Alistair Hunt and Tim Taylor University of Bath, UK

Tyndall Conference Living with climate change: are there limits to

adaptation?

7 February 2008, RGS, London

Cost benefit analysis and adaptation

N

nnnn

r

cbNPV

0 1 =

Where

NPV is the net present value;

bn is the benefit in year n;

cn is the cost in year n; and

r is the discount rate.

Value perspective starting point

• Use of Willingness to Pay in Cost-Benefit Analysis assumes:– Consumer sovereignty over preferences– Comparability of preference measures

between individuals– Perfect knowledge– Economic rationality– Non-satiation

Time preference discounting

• Value of r = 3.5% - HM Treasury • Value of 1.4% - Stern Review

Difference reflects alternative ethical judgements

“individual preferences have a sovereign role in welfare economics”

versus

“no a priori reason to weight the utility of one person at one point in time different than that of another person at another point in time”

Discounting and adaptation

• In appraising options, inconsistencies:

• discrepancy between GHG mitigation decisions utilising the Stern discount rate and adaptation decisions using HMT rate

• public sector actions are likely to be discounted at a different (lower) rate from decisions made by other agents (e.g. using a market rate of interest).

Discounting and adaptation

In appraising adaptive capacity

• Positive discount rates imply capital substitutability

• discounting in adaptation assessment may be best utilised in conjunction with the use of capital constraints – But how to do so?

Preferences and socio-economic change

Future preferences not just time-contingent; likely to be determined by socio-economic context. Derived by:

• Extrapolating historical trends • Developing simulation value functions • Survey-based approaches: respondents hypothesise

what their values might be under alternative socio-economic futures

All three techniques rely on credible, well-developed, comprehensible socio-economic scenarios

Preferences & Socioeconomic change: Lessons from survey applications

• Health heat stress:– Valuation of current versus future health risks – Income changes and reliability of transfer on

“income elasticity” as incomes increase dramatically over time

Preferences & Socioeconomic change: Lessons from survey applications

• Heritage:– Changes in use of buildings may affect values;– Difficulties in valuing extreme events in terms of risk

perception;– Sensitivity to climatic variation at time of study

St Thomas à Beckett church and Harveys Brewery in Lewes

Preferences & socio-economic change

• temporal limit to validity of projecting (changes in) preferences and resource costs? – technological change and societal development

renders resource mixes and households consumption baskets unknown/highly uncertain

capital-based decision rules more practical than economic efficiency-based rules such as CBA.

values then reflected in way in which social decisions respond to indicators of adaptive capacity?

Conclusions

• The CBA decision rule, as currently applied in project appraisal, will be used in the adaptation context

• But there are limits to its validity for considering longer term:– model preferences to appraise options (<30

yrs?)– Employ capital-based decision rules to assess

adaptive capacity (SR: in tandem with CBA; LR: as principal adaptation indicator)