Values, cost-benefit analysis and adaptation to climate change

1. 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

2. Cost benefit analysis and adaptation 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.

3. 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

4. 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”

5. 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).

6. 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?

7. 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

8. 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

9. 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

10. 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?

11. 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)