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 CBA as decision-making tool Discounting and adaptation Preferences and socio-economic change Conclusions

Cost benefit analysis and adaptation

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)