Hostname: page-component-586b7cd67f-gb8f7 Total loading time: 0 Render date: 2024-12-01T00:18:47.858Z Has data issue: false hasContentIssue false
  • English
  • Français

Challenges in applying the paradigm of welfare economics to climate change

Published online by Cambridge University Press:  27 May 2015

Fran Sussman ,
Christopher P. Weaver  and
Anne Grambsch
Christopher P. Weaver
Affiliation:
Global Change Assessment Staff, U.S. Environmental Protection Agency, Washington, DC, USA
Anne Grambsch
Affiliation:
Global Change Assessment Staff, U.S. Environmental Protection Agency, Washington, DC, USA
Rights & Permissions [Opens in a new window]

Abstract:

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

This paper discusses the challenges inherent in developing benefit-cost analysis (BCAs) of climate change. Challenges are explored from three perspectives: meeting the foundational premises for conducting BCA within the framework of welfare economics, methodological considerations that affect the application of the tools and techniques of BCA, and practical limitations that arise out of resource constraints and the nature of the question, project, or policy being evaluated. Although economic analysts frequently face – and overcome – conceptual and practical complications in developing BCAs, climate change presents difficulties beyond those posed by more conventional environmental problems. Five characteristics of the climate system and associated impacts on human and natural systems are identified that pose particular challenges to BCA of climate change, including ubiquity of impacts, intangibility, non-marginal changes, long timeframes, and uncertainty. These characteristics interact with traditional economic challenges, such as valuing non-market impact, addressing non-marginal changes, accounting for low-probability but high-impact events, and the eternal issue of appropriately discounting the future. A mapping between the characteristics of climate change and traditional economic challenges highlights the difficulties analysts are likely to encounter in conducting BCA. Despite these challenges, the paper argues that the fundamental ability of economic analysis to evaluate alternatives and tradeoffs is vital to decision making. Climate-related decisions span a wide range in terms of their scope, complexity, and depth, and for many applications of economic analyses the issues associated with climate change are tractable. In other cases it may require improved economic techniques or taking steps to ensure uncertainty is more fully addressed. Augmenting economic analysis with distribution analysis or an account of physical effects, and exploring how economic benefit and cost estimates can be incorporated into broader decision making frameworks have also been suggested. The paper concludes that there are opportunities for BCA to play a key role in informing climate change decision-making.

Keywords

adaptationbenefit cost analysisclimate changeefficiencyequityimpactswelfare economics
Type
Research Article
Information
Journal of Benefit-Cost Analysis , Volume 5 , Issue 3: Special Issue: Perspectives on Implementing Benefit-Cost Analysis in Climate Assessment , December 2014 , pp. 347 - 376
Copyright
Copyright © Society for Benefit-Cost Analysis 2014

References

Ackerman, F., DeCanio, S. J., Howarth, R. B., & Sheeran, K. (2009). Limitations of integrated assessment models of climate change. Climatic Change 95(3-4), 297–315. doi:10.1007/s10584-009-9570-x.Google Scholar
Adger, W. N., Dessai, S., Goulden, M., Hulme, M., Lorenzoni, I., Nelson, D. R., … Wreford, A. (2009). Are there social limits to adaptation to climate change? Climatic Change, 93(3-4), 335–354. doi:10.1007/s10584-008-9520-z.CrossRefGoogle Scholar
Anand, P., Hunter, G., & Smith, R. (2005). Capabilities and well-being: Evidence based on the Sen–Nussbaum approach to welfare. Social Indicators Research, 74(1), 9–55. doi:10.1007/s11205-005-6518-z.Google Scholar
Arnell, N. W., Tompkins, E. L., & Adger, W. N. (2005). Eliciting information from experts on the likelihood of rapid climate change. Risk Analysis, 25(6), 1419–1431.Google Scholar
Bateman, I. J., Brouwer, R., Ferrini, S., Schaafsma, M., Barton, D. N., Dubgaard, A., … Semėnienė, D. (2011). Making benefit transfers work: Deriving and testing principles for value transfers for similar and dissimilar sites using a case study of the non-market benefits of water quality improvements across Europe. Environmental and Resource Economics, 50(3), 365–387. doi:10.1007/s10640-011-9476-8.Google Scholar
Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2006). Cost-benefit analysis: Concepts and practice (3rd ed.). Upper Saddle River, NJ: Pearson Prentice Hall.Google Scholar
Brent, R. J. (2006). Applied cost-benefit analysis (3rd ed.). Northampton, MA: Edward Elgar Publishing Inc.Google Scholar
Champ, P. A., Boyle, K. J., & Brown, T. C. (Eds.). (2003). A primer on nonmarket valuation (1st ed.). Boston, MA: Kluwer Academic Publishers.Google Scholar
Chisholm, D. (2006). Dollars, DALYs and decisions economic aspects of the mental health system. Geneva, CH: World Health Organization. Retrieved from http://site.ebrary.com/id/10161480.Google Scholar
Cropper, M. (2012). How should benefits and costs be discounted in an intergenerational context? Washington, DC: Resources for the Future. Retrieved from http://www.rff.org/RFF/Documents/RFF-DP-12-42.pdf.Google Scholar
Cyert, R. M., & DeGroot, M. H. (1987). Bayesian analysis and uncertainty in economic theory. Totowa, NJ: Rowman & Littlefield.Google Scholar
De Groot, R. S., Wilson, M. A., & Boumans, R. M. J. (2002). A typology for the classification, description and valuation of ecosystem functions, goods and services. Ecological Economics, 41(3), 393–408. doi:10.1016/S0921-8009(02)00089-7.Google Scholar
Dietz, S., & Stern, N. (2008). Why economic analysis supports strong action on climate change: A response to the Stern Review’s critics. Review of Environmental Economics and Policy, 2(1), 94–113. doi:10.1093/reep/ren001.Google Scholar
Florio, M. (2014). Applied welfare economics: Cost-benefit analysis of projects and policies. New York, NY: Routledge.CrossRefGoogle Scholar
Fox-Rushby, J., & Hanson, K. (2001). Calculating and presenting disability adjusted life years (DALYs) in cost-effectiveness analysis. Health Policy Plan, 16(3), 326–331. doi: 10.1093/heapol/16.3.326.Google Scholar
Freeman, A. M., Herriges, J. A., & Kling, C. L. (2014). The measurement of environmental and resource values: Theory and methods (3rd ed.). Washington, D.C.: Taylor & Francis Group.Google Scholar
Gamble, J. L., Ebi, K. L., Grambsch, A. E., Sussman, F. G., & Wilbanks, T. J. (2008). Analyses of the affects of global change on human health and welfare and human systems (Synthesis and Assessment Product 4.6). Washington, DC: U.S. Environmental Protection Agency. Retrieved from http://cfpub.epa.gov/ncea/cfm/recordisplay.cfm?deid=197244#Download.Google Scholar
GAO. (2014). Regulatory impact analysis: Development of social cost of carbon estimates (Report to Congressional Requesters No. GAO-14-663) (p. 36). Washington, D.C.: Government Accountability Office. Retrieved from http://www.gao.gov/products/GAO-14-663.Google Scholar
Gramlich, E. M. (1990). A guide to benefit-cost analysis. Englewood Cliffs, NJ: Prentice Hall.Google Scholar
Hallegatte, S., Shah, A., Lempert, R., Brown, C., & Gill, S. (2012). Investment decision making under deep uncertainty: Application to climate change. Washington, D.C.: The World Bank. Retrieved from http://elibrary.worldbank.org/doi/book/10.1596/1813-9450-6193.Google Scholar
Hausman, J. (2012). Contingent valuation: From dubious to hopeless. Journal of Economic Perspectives, 26(4), 43–56. doi:10.1257/jep.26.4.43.Google Scholar
Heal, G., & Millner, A. (2014). Reflections on uncertainty and decision making in climate change economics. Review of Environmental Economics and Policy, 8(1), 120–137. doi:10.1093/reep/ret023.Google Scholar
John Heinz, H. IIICenter for Science, Economics, and the Environment. (1999). The hidden costs of coastal hazards: Implications for risk assessment and mitigation. Washington, D.C.: Island Press.Google Scholar
Interagency Working Group on the Social Cost of Carbon. (2010). Social cost of carbon for regulatory impact analysis under Executive Order 12866 (p. 51). Washington, D.C.: United States Government. Retrieved from http://www.whitehouse.gov/sites/default/files/omb/inforeg/for-agencies/Social-Cost-of-Carbon-for-RIA.pdf.Google Scholar
IPCC. (1995). Climate Change 1995: Economic and social dimensions of climate change. Bruce, J., Lee, H., & Haites, E. (Eds.), Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, UK and New York, NY: Cambridge University Press.Google Scholar
IPCC. (2001). Climate change 2001: Mitigation. Metz, B., Davidson, O., Swart, R., & Pan, J. (Eds.), Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, UK: Cambridge University Press.Google Scholar
IPCC. (2012). Managing the risks of extreme events and disasters to advance climate change adaptation. Field, C. B., Barros, V., Stocker, T. F., Qin, D., Dokken, D. J., Ebi, K. L., …, Midgley, P. M. (Eds.), A special report of the Intergovernmental Panel on Climate Change. Cambridge, UK; New York, NY: Cambridge University Press.Google Scholar
IPCC. (2013). Climate change 2013: The physical science basis. Stocker, T. F., Qin, D., Plattner, G.-K., Tignor, M., Allen, S. K., Boschung, J., … Midgley, P. M. (Eds.), Contribution of Working Group I to the Intergovernmental Panel on Climate Change Fifth Assessment Report. Cambridge, UK and New York, NY: Cambridge University Press. Retrieved from http://www.ipcc.ch/report/ar5/wg1/#.Ukn99hCBm71.Google Scholar
IPCC. (2014). Summary for policymakers. In Field, C. B., Barros, V. R., Dokken, D. J., Mach, K. J., Mastrandrea, M. D., Bilir, T. E., … White, L. L. (Eds.), Climate change 2014: Impacts, adaptation, and vulnerability. Part A: Global and sectoral aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, UK; New York, NY: Cambridge University Press.Google Scholar
Jones, C. (2005). Applied welfare economics. Oxford, UK: Oxford University Press.Google Scholar
Just, R. E., Hueth, D. L., & Schmitz, A. (2004). The welfare economics of public policy. Northampton, MA: Edward Elgar Publishing Inc.Google Scholar
Knight, F. H. (1921). Risk, uncertainty, and profit. Library of Economics and Liberty. Boston, MA: Hart, Schaffner & Marx; Houghton Mifflin Co. Retrieved from http://www.econlib.org/library/Knight/knRUP.html.Google Scholar
Kunreuther, H., Heal, G., Allen, M., Edenhofer, O., Field, C. B., & Yohe, G. (2013). Risk management and climate change. Nature Climate Change, 3(5), 447–450. doi:10.1038/nclimate1740.Google Scholar
Layard, R., & Glaister, S. (1994). Cost-benefit analysis (2nd ed.). Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Lempert, R. J. (2014). Embedding (Some) benefit-cost concepts into decision support processes with deep uncertainty. The Journal of Benefit-Cost Analysis, 5(3), 487–514.Google Scholar
Lenton, T. M., Held, H., Kriegler, E., Hall, J. W., Lucht, W., Rahmstorf, S., & Schellnhuber, H. J. (2008). Tipping elements in the Earth’s climate system. Proceedings of the National Academy of Sciences, 105(6), 1786–1793. doi:10.1073/pnas.0705414105.Google Scholar
Masood, E. (1995). Developing countries dispute use of figures on climate change impacts. Nature, 376(6539), 374.Google Scholar
Mendelsohn, R. (2006). A critique of the stern report. Regulation, 29(4), 42–46.Google Scholar
Mendelsohn, R. (2008). Is the Stern Review an economic analysis? Review of Environmental Economics and Policy, 2(1), 45–60.doi:10.1093/reep/rem023.CrossRefGoogle Scholar
Mendelsohn, R., Dinar, A., & Williams, L. (2006). The distributional impact of climate change on rich and poor countries. Environment and Development Economics, 11(02), 157–178.Google Scholar
Mishan, E. J. (1988). Cost benefit analysis (Vol. 4th ed.). Cambridge, MA: Unwin Hyman, Inc.Google Scholar
Mishan, E. J., & Quah, E. (2007). Cost-benefit analysis (5th ed.). New York, NY: Routledge.Google Scholar
Mitchell, R. C., & Carson, R. T. (1989). Using surveys to value public goods: The contingent valuation method. Washington, D.C.: Taylor & Francis Group.Google Scholar
Morgan, M. G., & Keith, D. W. (1995). Subjective judgements by climate experts. Environmental Science and Technology, 29(10), 468A–476A. doi:10.1021/es00010a003.Google Scholar
Narain, U., Margulis, S., & Essam, T. (2011). Estimating costs of adaptation to climate change. Climate Policy, 11(3), 1001–1019. doi:10.1080/14693062.2011.582387.Google Scholar
National Research Council (NRC). (2013). Abrupt impacts of climate change: Anticipating surprises. Washington, D.C.: National Academies Press.Google Scholar
Navrud, S., & Ready, R. C. (2002). Valuing cultural heritage: Applying environmental valuation techniques to historic buildings, monuments, and artifacts. Cheltenham, UK and Northampton, MA: Edward Elgar. Retrieved from http://public.eblib.com/EBLPublic/PublicView.do?ptiID?=s716099.CrossRefGoogle Scholar
Neumann, J. E. and Strzepek, K. (2014). State of the literature on the economic impacts of climate change in the United States. The Journal of Benefit-Cost Analysis, 5(3), 411–443.CrossRefGoogle Scholar
Nordhaus, W. D. (1994). Expert opinion on climatic change. American Scientist, 82, 45–51.Google Scholar
Nordhaus, W. D. (2007). A review of the Stern Review on the Economics of Climate Change. Journal of Economic Literature, 45(3), 686–702. doi:10.1257/jel.45.3.686.Google Scholar
Nordhaus, W. D. (2011). The economics of tail events with an application to climate change. Review of Environmental Economics and Policy, 5(2), 240–257. doi:10.1093/reep/rer004.Google Scholar
O’Brien, K. L., & Wolf, J. (2010). A values-based approach to vulnerability and adaptation to climate change. Wiley Interdisciplinary Reviews: Climate Change, 1(2), 232–242. doi:10.1002/wcc.30.Google Scholar
Pindyck, R. S. (2011). Fat tails, thin tails, and climate change policy. Review of Environmental Economics and Policy, 5(2), 258–274. doi:10.1093/reep/rer005.Google Scholar
Pindyck, R. S. (2013). The climate policy dilemma. Review of Environmental Economics and Policy, 7(2), 219–237. doi:10.1093/reep/ret007.Google Scholar
Polasky, S., & Segerson, K. (2009). Integrating ecology and economics in the study of ecosystem services: Some lessons learned. Annual Review of Resource Economics, 1(1), 409–434. doi:10.1146/annurev.resource.050708.144110.Google Scholar
Ranger, N. (2013). Topic guide: Adaptation: Decision making under uncertainty. UK: Evidence on Demand. Retrieved from http://www.evidenceondemand.info/topic-guideadaptation-decision-making-under-uncertainty.Google Scholar
Savage, L. J. (1972). The foundations of statistics (2nd revised ed.). New York, NY: Dover Publications, Inc.Google Scholar
Sen, A. (1977). Social choice theory: A re-examination. Econometrica, 45(1), 53–89. doi:10.2307/1913287.Google Scholar
Sen, A. (1999). Development as freedom. Oxford, UK: Oxford University Press.Google Scholar
Spash, C. L. (2007). The economics of climate change impacts à la Stern: Novel and nuanced or rhetorically restricted? Ecological Economics, 63(4), 706–713. doi:10.1016/j.ecolecon.2007.05.017.Google Scholar
Stern, N. H. (2007). The economics of climate change: The Stern review. Cambridge, UK; New York, NY: Cambridge University Press.Google Scholar
Sussman, F. G., Clarke, L., Grambsch, A. E., Vallario, R., Langner, L., O’Brien, S., & Jacobs, K. (2011). Valuation techniques and metrics for climate change impacts, adaptation, and mitigation options: Methodological perspectives for the national climate assessment (p. 56). Washington, DC: USGCRP. Retrieved from http://data.globalchange.gov/assets/14/63/751eb04772a6814b512b67d69b56/valuation_workshop_report_final_12-13-2011.pdf.Google Scholar
Sussman, F. G., Krishnan, N., Maher, K., Miller, R., Mack, C., Stewart, P., … Perkins, B. (2013). Climate change adaptation cost in the US: What do we know? Climate Policy, 14(2), 242–282. doi:10.1080/14693062.2013.777604.Google Scholar
Titus, J. G., & Narayanan, V. (1996). The risk of sea level rise, a Delphic Monte Carlo analysis in which twenty researchers specify subjective probability distributions for model coefficients within their respective areas of expertise. Climatic Change, 33, 151–212.Google Scholar
Toman, M. (2006). Values in the economics of climate change. Environmental Values, 15(3), 365–379.Google Scholar
Toman, M. (2014). The need for multiple types of information to inform climate change assessment. The Journal of Benefit-Cost Analysis, 5(3), 469–485.Google Scholar
United Nations. (2014). System of environmental-economic accounting 2012: Experimental ecosystem accounting. New York: United Nations. Retrieved from http://unstats.un.org/unsd/envaccounting/seeaRev/SEEA_CF_Final_en.pdf.Google Scholar
U.S. EPA. (1988). Regulatory impact analysis: Protection of stratospheric ozone. Stratospheric Protection Program. Washington, DC: U.S. Environmental Protection Agency. Retrieved from nepis.epa.gov/Exe/ZyPURL.cgi?Dockey=9101PLNU.TXT.Google Scholar
U.S. EPA. (2010, November 18). Improving the assessment and valuation of climate change impacts for policy and regulatory analysis: Modeling climate change impacts and associated economic damages. Washington, DC: U.S. Environmental Protection Agency. Retrieved from: http://yosemite.epa.gov/ee/epa/eerm.nsf/vwRepNumLookup/EE-0564?OpenDocument.Google Scholar
U.S. EPA. (2011, January 27). Improving the assessment and valuation of climate change impacts for policy and regulatory analysis: Research on climate change impacts and associated economic damages. Washington, DC: U.S. Environmental Protection Agency. Retrieved from http://yosemite.epa.gov/ee/epa/eerm.nsf/vwRepNumLookup/EE-0566?OpenDocument.Google Scholar
U.S. EPA. (2014). Guidelines for preparing economic analyses. 2010 report, updated May 2014. Washington, DC: U.S. Environmental Protection Agency. Retrieved from http://yosemite.epa.gov/ee/epa/eerm.nsf/vwAN/EE-0568-50.pdf/$file/EE-0568-50.pdf.Google Scholar
U.S. EPA Science Advisory Board. (2009). Valuing the protection of ecological systems and services (No. EPA-SAB-09-012) (p. 138). Washington, DC: U.S. Environmental Protection Agency. Retrieved from http://yosemite.epa.gov/sab/sabproduct.nsf/WebBOARD/SAB-09-012/$File/SAB%20Advisory%20Report%20full%20web.pdf.Google Scholar
U.S. Global Change Research Program. (2014). Climate change impacts in the United States: The third national climate assessment. Washington, DC: US Global Change Research Program. Retrieved from http://dx.doi.org/10.7930/J0Z31WJ2.Google Scholar
U.S. OMB. (1992). Circular A-94 revised. Washington, DC: Office of Management and Budget. Retrieved from http://www.whitehouse.gov/omb/circulars_a094/.Google Scholar
Von Neumann, J., & Morgenstern, O. (1953). Theory of games and economic behavior (3rd ed.). Princeton, NJ: Princeton University Press.Google Scholar
Watkiss, P., & Hunt, A. (2012). Decision support methods for climate change adaptation: Cost-effectiveness analysis. MEDIATION Project, Briefing Note 2. Funded by EC’s 7FWP.Google Scholar
Weitzman, M. L. (2007). A review of the Stern Review on the Economics of Climate Change. Journal of Economic Literature, 45(3), 703–724. doi:10.1257/jel.45.3.703.Google Scholar
Weitzman, M. L. (2009). On modeling and interpreting the economics of catastrophic climate change. Review of Economics and Statistics, 91(1), 1–19.Google Scholar
Weitzman, M. L. (2011). Fat-tailed uncertainty in the economics of catastrophic climate change. Review of Environmental Economics and Policy, 5(2), 275–292. doi:10.1093/reep/rer006.Google Scholar
Weitzman, M., & Gollier, C. (2010). How should the distant future be discounted when discount rates are uncertain? Economic Letters, 107(3), 350–353.Google Scholar
Wells, T. (n.d.). Sen’s capability approach. Retrieved September 10, 2014, from http://www.iep.utm.edu/sen-cap/.Google Scholar
Weyant, J. P. (2008). A critique of the Stern Review’s mitigation cost analyses and integrated assessment. Review of Environmental Economics and Policy, 2(1), 77–93. doi:10.1093/reep/rem022.Google Scholar
Weyant, J. P. F. (2014). Integrating economic assessments of climate change: State of the literature. The Journal of Benefit-Cost Analysis, 5(3), 377–409.Google Scholar
Whitehead, S. J., & Ali, S. (2010). Health outcomes in economic evaluation: the QALY and utilities. British Medical Bulletin, 96(1), 5–21. doi:10.1093/bmb/ldq033.Google Scholar
Zerbe, R. O. (2008). Benefit-cost analysis. Cheltenham; Northampton, MA: Edward Elgar.Google Scholar
Zerbe, R. O. (2013). Ethical benefit cost analysis as art and science: Ten rules for benefit-cost analysis. In Farrow, & Zerbe, Richard O. (Eds.), Principles and standards for benefit-cost analysis (Vol. 2). Cheltenham, UK and Northampton, MA: Edward Elgar.Google Scholar