The value of the environment – Is it a matter of approach?

This paper discusses why estimates of the benefits of reduced air pollution differ in accordance with the approach used. Estimates based on bottom-up studies of the damage costs related to air pollution usually turn out much lower than estimates based on assessments of the utility of reduced air pollution, obtained for instance by willingness to pay assessments. This is usually explained by the fact that the willingness to pay approach includes the utility aspect of non-market values, and for this reason, it is often preferred to the damage cost approach. This is, however, not the whole story. The paper shows why alternative approaches should not be considered as being in conflict, but rather as means to get supplementary information necessary to put a value on environmental quality. Information from bottom-up assessments of damage costs and from studies of the willingness to pay is used in a macroeconomic model to carry out an evaluation of the social costs of energy saving measures in Hungary.     

Lost benefits and carbon uptake by protection of Indian plantations

There is a range of problems in assessing how protection of a specific forest to Reduce Emissions from Deforestation and forest Degradation (REDD+) affect global emissions of greenhouse gases. This paper shows how knowledge and information about the biophysical characteristics of forests can be combined with theories of forest management and economic behaviour to derive the impacts on global emissions of REDD+. A modelling experiment from India, where 10% of the forest plantations in eight different regions are protected, shows that the biophysical characteristics of forests are decisive for the global impacts on emissions. In regions with slow-growing forests, agents in the non-protected forests are able to increase their output significantly to fill the demand from the protected forests. This opportunity is strictly limited in regions with fast-growing forests. Therefore, prices increase far more in regions with fast-growing forests than in slow-growing forests. Over time, the markets for Indian forestry products contribute to reduce the resulting price differences across regions. When the carbon uptake from protected forests approaches zero, the leakage of emissions to other Indian forests is between 20 and 40%. Only a small part of this is international leakage. Combining different models also helps to identify knowledge gaps, and to distinguish gaps that potentially may be filled with data and new knowledge, and gaps due to different angling of modelling biophysical processes and modelling of economic behaviour.     

Assessment of risks for adaptation to climate change: the case of land-slides

This paper describes how relatively detailed knowledge about probabilities of natural hazards can be used to make decisions to develop areas and control the risk within hazard zones. The assessment serves two purposes. First, it shows how information can support decisions. Second, decision criteria put leads on what information is required. This is helpful to identify unavailable information. We show by an example from a land-slide prone area in Norway how a relatively reliable estimate of the probability of slides ends up in a rather uncertain estimate of the risk. Uncertainty about the risk represented by natural hazards imply great challenges to the development of adaptation policies to meet climate change, but they are required. We develop a simplified criterion for optimal adaptation, and estimate the added social value required to defend development in hazard prone areas instead of developing a risk-free alternative. The value is estimated between 0 and 0.40 Euros per Euro invested in the case area, depending on type of slide, category of asset and other costs that occur in the wake of slides.     

Climate Change and Local Pollution Effects – An Integrated Approach

Few studies on measures for mitigation of damage caused by man-made emissions to the environment have tried to consider all major effects. We illustrate the importance of an integrated approach by estimating costs and benefits of a proposed energy saving program for Hungary, originally designed to reduce CO2 emissions. The dominant benefit of implementing the program is likely to be reduced health damage from local pollutants. Also reduced costs of material damage and to a lesser extent vegetation damage contribute to make the net benefit considerable. Compared to the reduction in these local and regional effects, the benefits from reducing greenhouse gases are likely to be minor. Since local effects in general occur much earlier after measures have been implemented than effects of increased emissions of greenhouse gases, inclusion of local effects makes evaluation of climate policy less dependent on the choice of discount rate. In our opinion, similar results are likely for many measures originally designed to reduce emissions of greenhouse gases particularly in some areas in developing countries with high local pollution levels. Main uncertainties in the analysis, e.g. in the relationships between damage and pollution level, are discussed.     

Modelling economic impacts and adaptation to extreme events: Insights from European case studies

Adaptation to climate change in Europe has only recently become a true policy concern with the management of extreme events one priority item. Irrespective of future climatic changes increasing the need for systematic evaluation and management of extremes, weather-related disasters already today pose substantial burdens for households, businesses and governments. Research in the ADAM project identified substantial direct risks in terms of potential crop and asset losses due to combined drought and heatwave, as well as flood hazards in Southern and Eastern Europe, respectively. This paper focuses on the indirect, medium to longer term economic risks triggered by the direct risks and mediated by policy responses. We present a selection of three economic impact and adaptation assessments and modelling studies undertaken on extreme event adaptation in Europe. Responding to a need for more economically based adaptation assessments, we address some relatively unresearched issues such as the understanding of past adaptation, the role of market response to impacts as well as government’s ability to plan for and share out extreme event risks. The first analysis undertakes an empirical exploration of observed impacts and adaptation in the agricultural sector in the UK comparing the impact of consecutive extreme events over time in order to determine whether adaptation has occurred in the past and whether this can be used to inform future estimates of adaptation rates. We find that farmers and the agricultural sector clearly have adapted to extreme events over time, but whether this rate can be maintained into the future is unclear, as some autonomous adaptation enacted seemed rather easy to be taken. Markets may mediate or amplify impacts and in the second analysis, we use an economic general equilibrium model to assess the economic effects of a reduction in agricultural production due to drought and heatwave risk in exposed regions in Spain. The analysis suggests that modelled losses to the local economy are more serious in a large-scale scenario when neighbouring provinces are also affected by drought and heatwave events. This is due to the supply-side induced price increase leading to some passing on of disaster costs to consumers. The simulation highlights the importance of paying particular attention to the spatial and distributional effects weather extremes and possibly changes therein induced by climate change may incur. Finally, we discuss how national governments may better plan their disaster liabilities resulting from a need to manage relief and reconstruction activities post event. We do so using a risk based economic planning model assessing the fiscal consequences associated with the coping with natural extremes. We identify large weather-related disaster contingent liabilities, particularly in the key flood hot spot countries Austria, Romania, and Hungary. Such substantial disaster liabilities (“hidden disaster deficits”) when interacting with weak fiscal conditions may lead to substantial additional stress on government budgets and reduced fiscal space for funding other relevant public investment projects. Overall, our paper suggests the importance of respecting the specific spatial and temporal characteristics of extreme event risk when generating information on adaptation decisions. As our adaptation decisions considered, such as using sovereign risk financing instruments are associated with a rather short time horizon, the analysis largely focuses on the management of today’s extreme events and does not discuss in detail projections of risks into a future with climate change. Such projections raise important issues of uncertainty, which in some instances may actually render future projections non-robust, a constraint to be kept in mind when addressing longer term decisions, which at the same time should account for both climate and also socioeconomic change.     

Contents Volume 7

Volume Contents

Contents Volume 7     

The adequacy of GWPs as indicators of damage costsincurred by global warming

This article looks at the ability of Global Warming Potentials (GWPs) towork as indicators of equivalence for temperature development and damagecosts. We look at two abatement scenarios that are equivalent when using100-year GWPs: one scenario reduces short-lived gases, mainly methane(CH₄); the other scenario reduces carbon dioxide (CO₂).Despite their equivalence in terms of CO₂ equivalents, the scenariosdo not result in equal rates or levels of temperature change. The disparitiescontinue as we move further down the chain of causality toward damagecosts, measured either in terms of rate of climate change or level of climatechange. Compared to the CH₄ mitigation scenario, the CO₂mitigation scenario gives present value costs 1.3 and 1.5 times higher forlevel- and rate-dependent damage costs, respectively, assuming a discountrate of 3%. We also test the GWPs for other time horizons and theconclusions remain the same; using GWP as an index to reflect equivalentclimate effects and damage costs from emissions is questionable.     

A macroeconomic analysis of adaptation to climate change impacts on forests in India

We examine the potential for adaptation to climate change in Indian forests, and derive the macroeconomic implications of forest impacts and adaptation in India. The study is conducted by integrating results from the dynamic global vegetation model IBIS and the computable general equilibrium model GRACE-IN, which estimates macroeconomic implications for six zones of India. By comparing a reference scenario without climate change with a climate impact scenario based on the IPCC A2-scenario, we find major variations in the pattern of change across zones. Biomass stock increases in all zones but the Central zone. The increase in biomass growth is smaller, and declines in one more zone, South zone, despite higher stock. In the four zones with increases in biomass growth, harvest increases by only approximately 1/3 of the change in biomass growth. This is due to two market effects of increased biomass growth. One is that an increase in biomass growth encourages more harvest given other things being equal. The other is that more harvest leads to higher supply of timber, which lowers market prices. As a result, also the rent on forested land decreases. The lower prices and rent discourage more harvest even though they may induce higher demand, which increases the pressure on harvest. In a less perfect world than the model describes these two effects may contribute to an increase in the risk of deforestation because of higher biomass growth. Furthermore, higher harvest demands more labor and capital input in the forestry sector. Given total supply of labor and capital, this increases the cost of production in all the other sectors, although very little indeed. Forestry dependent communities with declining biomass growth may, however, experience local unemployment as a result.