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5. Benefits/damage valuation

Economists have tried to assign dollar values to expected climate damages; early estimates often projected surprisingly small economic impacts. Which damages can be evaluated in monetary terms? Are newer estimates of expected damages growing larger?


A global ranking of port cities with high exposure to climate extremes
Susan Hanson, Robert Nicholls, N. Ranger, S. Hallegatte, J. Corfee-Morlot, C. Herweijer and J. Chateau
Climatic Change (2011) 104(1): 89-111.
This paper presents a first estimate of the exposure of the world’s large port cities (population exceeding one million inhabitants in 2005) to coastal flooding due to sea-level rise and storm surge now and in the 2070s, taking into account scenarios of socio-economic and climate changes. The analysis suggests that about 40 million people (0.6% of the global population or roughly 1 in 10 of the total port city population in the cities considered) are currently exposed to a 1 in 100 year coastal flood event. For assets, the total value exposed in 2005 across all cities considered is estimated to be US$3,000 billion; corresponding to around 5% of global GDP in 2005 (both measured in international USD) with USA, Japan and the Netherlands being the countries with the highest values. By the 2070s, total population exposed could grow more than threefold due to the combined effects of sea-level rise, subsidence, population growth and urbanisation with asset exposure increasing to more than ten times current levels or approximately 9% of projected global GDP in this period. On the global-scale, population growth, socio-economic growth and urbanization are the most important drivers of the overall increase in exposure particularly in developing countries, as low-lying areas are urbanized. Climate change and subsidence can significantly exacerbate this increase in exposure. Exposure is concentrated in a few cities: collectively Asia dominates population exposure now and in the future and also dominates asset exposure by the 2070s. Importantly, even if the environmental or socio-economic changes were smaller than assumed here the underlying trends would remain. This research shows the high potential benefits from risk-reduction planning and policies at the city scale to address the issues raised by the possible growth in exposure.

Climate change and hailstorm damage: Empirical evidence and implications for agriculture and insurance
W.J.W. Botzen, L.M. Bouwer and J.C.J.M. van den Bergh
Resource and Energy Economics (2010) 32(3): 341-362.
There is much uncertainty about the effects of anthropogenic climate change on the frequency and severity of extreme weather events like hailstorms, and subsequent economic losses, while this is also relevant information for the design of climate policy. Few studies conducted indicate that a strong positive relation exists between hailstorm activity and hailstorm damage, as predicted by minimum temperatures using simple correlations. This relation suggests that hailstorm damage may increase in the future if global warming leads to further temperature increase. This study estimates a range of Tobit models of relations between normalized insured hailstorm damage to agriculture and several temperature and precipitation indicators for the Netherlands. Temporal dynamics are explicitly modelled. A distinction is made between damage costs for greenhouse horticulture and outdoor farming, which appear to be differently affected by variability in weather. ‘Out of sample’ forecast tests show that a combination of maximum temperatures and precipitation predicts hailstorm damage best. Extrapolations of the historical relations between hailstorm damage and weather indicators under climate change scenarios project a considerable increase in future hailstorm damage. Our estimates show that by 2050 annual hailstorm damage to outdoor farming could increase by between 25% and 50%, with considerably larger impacts on greenhouse horticulture in summer of more than 200%. The economic implications of more hailstorm damage for, and adaptation by, the agricultural and insurance sectors are discussed.

Tropical cyclone losses in the USA and the impact of climate change — A trend analysis based on data from a new approach to adjusting storm losses
Silvio Schmidt, Claudia Kemfert and Peter Höppe
Environmental Impact Assessment Review (2009) 29(6): 359-369.
Economic losses caused by tropical cyclones have increased dramatically. Historical changes in losses are a result of meteorological factors (changes in the incidence of severe cyclones, whether due to natural climate variability or as a result of human activity) and socio-economic factors (increased prosperity and a greater tendency for people to settle in exposed areas). This paper aims to isolate the socio-economic effects and ascertain the potential impact of climate change on this trend. Storm losses for the period 1950–2005 have been adjusted to the value of capital stock in 2005 so that any remaining trend cannot be ascribed to socio-economic developments. For this, we introduce a new approach to adjusting losses based on the change in capital stock at risk. Storm losses are mainly determined by the intensity of the storm and the material assets, such as property and infrastructure, located in the region affected. We therefore adjust the losses to exclude increases in the capital stock of the affected region. No trend is found for the period 1950–2005 as a whole. In the period 1971–2005, since the beginning of a trend towards increased intense cyclone activity, losses excluding socio-economic effects show an annual increase of 4% per annum. This increase must therefore be at least due to the impact of natural climate variability but, more likely than not, also due to anthropogenic forcings.

An even Sterner Review: Introducing relative prices into the discounting debate
Thomas Sterner and U. Martin Persson
Review of Environmental Economics and Policy (2008) 2(1): 61-76.
By estimating that the cost of unmitigated climate damages is an order of magnitude higher than most earlier estimates, the Stern Review on the Economics of Climate Change has had a major influence on the policy discussion on climate change. Not surprisingly, severe criticism has been levied against the report, especially by those who claim that the Stern Review's results hinge mainly on a discount rate that is too low. While we have no strong objections to the discounting assumptions adopted in the Stern Review, our main point in this article is that the conclusions reached in the Stern Review can be justified without using a low discount rate. We argue that nonmarket damages from climate change are probably underestimated and that future scarcities caused by the changing composition of the economy and climate change should lead to rising relative prices for certain goods and services. This will raise the estimated damage of climate change and modify as well as counteract the effect of discounting. We illustrate this effect using a slightly modified version of Nordhaus's DICE model and show that taking relative prices into account can have as large an effect on economically warranted abatement levels as a low discount rate.

Costs of climate change: The effects of rising temperatures on health and productivity in Germany
Michael Hübler, Gernot Klepper and Sonja Peterson
Ecological Economics (2008) 68(1-2): 381-393.
The aim of the study is to quantify climate induced health risks for Germany. Based on high resolution climate scenarios for the period 2071 to 2100 we forecast the number of days with heat load and cold stress. The heat frequency and intensity rise overall but more in the south. Referring to empirical studies on heat induced health effects we estimate an average increase in the number of heat induced casualties by a factor of more than 3. Heat related hospitalization costs increase 6-fold not including the cost of ambulant treatment. Heat also reduces the work performance resulting in an estimated output loss of between 0.1% and 0.5% of GDP.

A comment on "Economy-wide estimates of the implications of climate change: Human health"
Frank Ackerman and Elizabeth A. Stanton
Ecological Economics (2008) 66: 8-13.
Economists have often projected very small damages, or even net benefits, from the early stages of warming. This article responds to an extreme case, in which Francesco Bosello, Roberto Roson, and Richard Tol make the remarkable prediction that one degree of global warming will save more than 800,000 lives annually by 2050 — an estimate that Bosello et al. fail to substantiate. They rely on research that identifies a simple empirical relationship between daily temperature and mortality, but ignores the countervailing effect of human adaptation to gradual changes in average temperature. While focusing on small changes in average temperature, they ignore the important health impacts of extreme weather events. Bosello et al. extrapolate the effects of changes in average temperature far beyond the level that is apparently supported by their principal sources, and introduce arbitrary assumptions that bias the result toward finding net health benefits from warming.
Note: the original article, to which this responds, is
Economy-wide estimates of the implications of climate change: Human health
Francesco Bosello, Roberto Roson and Richard S. J. Tol
Ecological Economics (2006) 58(3): 579-591.
A rejoinder from the authors of the original article appears at
Economy-wide estimates of the implications of climate change: A rejoinder
Francesco Bosello, Roberto Roson and Richard S. J. Tol
Ecological Economics (2008) 66(1): 14-15.

The impact of global warming on U.S. agriculture: An econometric analysis of optimal growing conditions
Wolfram Schlenker, W. Michael Hanemann and Anthony C. Fisher
Review of Economics and Statistics (2006) 88(1): 113-125.
Older analyses often projected net agricultural gains from the first few degrees of warming in the U.S. and other northern countries. This study links farmland values (a proxy for value of agricultural output) to climatic, soil, and socioeconomic variables for U.S. counties east of the 100th meridian, the historical boundary of agriculture not primarily dependent on irrigation. Many econometric specifications are explored; the authors’ preferred version shows farmland value peaking at about the current average temperature for the region, and at precipitation levels well above current averages. Days with temperatures above 34°C are always harmful to crops; climate change would cause a sharp increase in the number of those days. The impacts projected from climate change in this century would reduce average farmland value by 27% to 69%, depending on the climate scenario employed. Gains would be restricted to northern New England, upstate New York, and northern parts of Michigan, Wisconsin, and Minnesota, while losses, much larger in aggregate, would occur in the great majority of agricultural counties.

The Impact of Global Warming on U.S. Agriculture: An Econometric Analysis of Optimal Growing Conditions
Wolfram Schlenker, W. Michael Hanemann and Anthony C. Fisher
The Review of Economics and Statistics (2006) 88(1): 113-125.
We link farmland values to climatic, soil, and socioeconomic variables for U.S. counties east of the 100th meridian, the historical boundary of agriculture not primarily dependent on irrigation. Degree days, a nonlinear transformation of the climatic variables suggested by agronomic experiments as more relevant to crop yield, gives an improved fit and increased robustness. Estimated coefficients are consistent with the experimental results. The model is employed to estimate the potential impacts on farmland values for a range of recent warming scenarios. The predictions are very robust, and more than 75% of the counties in our sample show a statistically significant effect, ranging from moderate gains to large losses, with losses in the aggregate that can become quite large under scenarios involving sustained heavy use of fossil fuels.

The economics of inaction on climate change: a sensitivity analysis
Frank Ackerman and Ian J. Finlayson
Climate Policy (2006) 6: 509-526.
Economic models of climate change often take the problem seriously, but paradoxically conclude that the optimal policy is to do almost nothing about it. We explore this paradox as seen in DICE. Three aspects of that model, involving the discount rate, the (large) assumed subjective benefits of moderate warming, and the treatment of the latest climate science, are sufficient to explain the timidity of the model’s optimal policy recommendation. With modifications to those three points, DICE shows that the optimal policy is a much higher and rapidly rising marginal carbon price; and that higher carbon price has a greater effect on physical measures of climate impacts. Our modifications exhibit nonlinear interactions; at least at low discount rates, there is synergy between individual changes to the model.

Climate and happiness
Katrin Rehdanz and David Maddison
Ecological Economics (2005) 52: 111-125.
Climate affects heating and cooling requirements, health, clothing and nutritional needs as well as recreational activities. As such, it is to be expected that individuals will have a preference for particular types of climate. This paper analyses a panel of 67 countries attempting to explain differences in self-reported levels of happiness by reference to, amongst other things, temperature and precipitation. Various indices are used, including means, extremes and the number of hot, cold, wet and dry months. Even when controlling for a range of other factors, climate variables have a highly significant effect on country-wide self-reported levels of happiness. Thus differential patterns of anthropogenically induced climate change might alter the distribution of happiness between nations, with some countries moving toward a preferred climate and others moving further away. Only a few high-latitude countries might benefit from projected near-term temperature changes. Countries already characterized by very high summer temperatures would most likely suffer losses from climate change.

Emissions pathways, climate change, and impacts on California
Katharine Hayhoe, Daniel Cayan, Christopher B. Field, Peter C. Frumhoff, Edwin P. Maurer, Norman L. Miller, Susanne C. Moser, Stephen H. Schneider, Kimberly Nicholas Cahill, Elsa E. Cleland, Larry Dale, Ray Drapek, R. Michael Hanemann, Laurence S. Kalkstein, James Lenihan, Claire K. Lunch, Ronald P. Neilson, Scott C. Sheridan and Julia H. Verville
Proceedings of the National Academy of Sciences of the United States of America (2004) 101(34): 12422-12427.
The magnitude of future climate change depends substantially on the greenhouse gas emission pathways we choose. Here we explore the implications of the highest and lowest Intergovernmental Panel on Climate Change emissions pathways for climate change and associated impacts in California. Based on climate projections from two state-of-the-art climate models with low and medium sensitivity (Parallel Climate Model and Hadley Centre Climate Model, version 3, respectively), we find that annual temperature increases nearly double from the lower B1 to the higher A1fi emissions scenario before 2100. Three of four simulations also show greater increases in summer temperatures as compared with winter. Extreme heat and the associated impacts on a range of temperature-sensitive sectors are substantially greater under the higher emissions scenario, with some interscenario differences apparent before midcentury. By the end of the century under the B1 scenario, heatwaves and extreme heat in Los Angeles quadruple in frequency while heat-related mortality increases two to three times; alpine/subalpine forests are reduced by 50–75%; and Sierra snowpack is reduced 30–70%. Under A1fi, heatwaves in Los Angeles are six to eight times more frequent, with heat-related excess mortality increasing five to seven times; alpine/subalpine forests are reduced by 75–90%; and snowpack declines 73–90%, with cascading impacts on runoff and streamflow that, combined with projected modest declines in winter precipitation, could fundamentally disrupt California's water rights system. Although interscenario differences in climate impacts and costs of adaptation emerge mainly in the second half of the century, they are strongly dependent on emissions from preceding decades.