Transcript Values, cost-benefit analysis and adaptation to climate change

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
Outline of Talk
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CBA as decision-making tool
Discounting and adaptation
Preferences and socio-economic change
Conclusions
Cost benefit analysis and
adaptation
bn  cn 
NPV = 
n
n 0 1  r 
N
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
• “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”
versus
• “individual preferences have a sovereign role in
welfare economics”
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
• Develop simulation value functions, combining observed
relationships and understandings of value determination
elicited from e.g. household-based interviews
– Evidence from mortality risk survey: see paper
• Survey-based approaches that require respondents to
hypothesise what their values might be under alternative
socio-economic futures
– Evidence from cultural heritage survey: see paper
All three techniques rely on credible, well-developed,
comprehensible socio-economic scenarios
Preferences and 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 relating to adaptation are made in
response to indicators of adaptive capacity,
projected for future time periods under
alternative policy scenarios?
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)