Transcript Hunt & Taylor-Values, cost-benefit analysis and adaptation to

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
bn  cn 
NPV = 
n
n 0 1  r 
N
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 socioeconomic 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)