An Economic Framework for Evaluating “Climate
Proofing” Investments on Infrastructure
Matthew J. Kotchen
Yale University, USA
Presentation prepared for the international conference on
ESTRATEGIAS PARA ADAPTAR LA INFRAESTRUCTURA PUBLICA Y PRIVADA AL
CAMBIO CLIMATICO
Organized by the United Nations Development Program
San Salvador, El Salvador, June 30, 2010
Acknowledgement: Jesse Burkhardt for
valuable research assistance
Focus On Adaptation to Climate Change
(not mitigation)
• El Salvador’s carbon dioxide (C02) emissions in 2006
– Less than 0.1% of global emissions
– Ranked 107th among nations
• All of Central America emits 1.6% of global emissions
• CO2 emissions from fossil fuels in 2006
1,000s metric tons
11,766
7,854
7,194
6,461
6,428
4,334
ize
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Climate-Change Impacts on El Salvador
(SICA 2008)
• Temperature increases
– 2020 between 0.8°C and 1.1°C
– 2100 between 2.5°C and 3.7°C
• Changes in precipitation
– 2020 between -11.3% and 3.5%
– 2100 between -36.6% and 11.1%
• Sea-level increase
How to
better
prepare?
– 20cm by 2030
– 40cm by 2040
– 70cm by 2100
Outline of Presentation
• Economic valuation of infrastructure climate proofing
– Costs and benefits
– Market and nonmarket valuation
• A framework for decision-making
– How to set priorities given finite resources
• Further considerations
–
–
–
–
Co-benefits
Geographic scope
Proofing vs. prioritizing infrastructure projects
Discounting
• Building capacity for efficient climate-change adaptation
• Final thoughts
The Costs of Climate Proofing Infrastructure
Climate proofing
• Insuring against adverse climate
change impacts
• Effectiveness b/w 0% – 100%
$
MC
Requirements
• Climate/weather forecasts
• Engineering inputs
• Market valuation
Notation
• MC = marginal costs
• TC = total costs
TC
0%
Q
Climate proofing
100%
The Benefits of Climate Proofing Infrastructure
Benefits are avoided damages
• Property
• Economic activity
• Health & human life
• Environmental services
$
MSB
Requirements
• Non-market valuation
• Social vs. private perspective
Notation
• MSB = marginal social benefits
• TSB = total social benefits
TSB
0%
Q
Climate proofing
100%
The Example of Tropical Storms
Selected significant impacts
in El Salvador
Forecasted impacts in Central America
(Mendelsohn et al. 2010)
• Hurricane Mitch (1998)
– Destroyed 49% of agricultural
and livestock sectors
– Direct fatalities 240
– Damage estimate $400 million
• Hurricane Stan (2005)
– Destroyed 70% basic crops
– Direct fatalities 69
– Damage estimate $355 million
• Climate models predict an increase
in storm frequency and intensity
Damages relative to no climate-change
baseline 2100 (million $/year)
Notation
• NSB = net social benefit
• Q* = efficient level of climate
proofing
$
MC
MSB
0%
Q*
Climate proofing
100%
la
em
a
at
ma
na
Economically Efficient Climate Proofing
Gu
ca
R i
sta
Co
Pa
e
l iz
Be
a
gu
ra
ca
do
r
Sa
lva
ur
a
El nd
Ho
Ni
s
600
500
400
300
200
100
0
‐100
Economically Efficient Climate Proofing
Notation
• NSB = net social benefit
• Q* = efficient level of climate
proofing
$
MC
MSB
TC
Q*
0%
100%
Climate proofing
Economically Efficient Climate Proofing
Notation
• NSB = net social benefit
• Q* = efficient level of climate
proofing
$
MC
MSB
TSB
0%
Q*
Climate proofing
100%
Economically Efficient Climate Proofing
Notation
• NSB = net social benefit
• Q* = efficient level of climate
proofing
$
MC
MSB
NSB
Q*
0%
100%
Climate proofing
Economically Efficient Climate Proofing
Notation
• NSB = net social benefit
• Q* = efficient level of climate
proofing
$
Notation
• MNSB = marginal net social benefit
• Q* = efficient level of climate
proofing
$
MC
MSB
MNSB (= MSB – MC)
NSB
NSB
0%
Q*
Climate proofing
100%
0%
Q*
Climate proofing
100%
Prioritizing Among Projects with a Fixed Budget
Project A
Project B
$
$
MNSBA
MNSBB
Q*A
0%
100%
Q*B 100%
0%
Prioritizing Among Projects with a Fixed Budget
Objective is to maximize total net social benefits subject to the budget constraint
Project A
Project B
$
$
MNSBA
MNSBB
0%
Q’A
Q*A
100%
0%
Q’B
Solution is MNSBA = MNSBB where
cost of Q’A and Q’B = Budget
Q*B 100%
Prioritizing Among Projects with a Fixed Budget
Objective is to maximize total net social benefits subject to the budget constraint
Project A
Project B
$
$
MNSBA
MNSBB
NSBA
0%
NSBB
Q’A
Q*A
100%
0%
Q’B
Q*B 100%
Solution is MNSBA = MNSBB where
costs of Q’A and Q’B exhaust Budget
Implications of Framework
• Framework requires marginal social net benefits of projects
– Marginal costs
• Engineering inputs
• Education and retraining
• Market valuation
– Marginal social benefits
• Nonmarket valuation
• Choose projects with greatest social net benefits
– Extensive margin: which ones?
– Intensive margin: how much?
Importance of Climate-Proofing Externalities
• Projects may be associated with valuable co-benefits
– Infrastructure for flood control can provide water storage
– Vegetation prevents landslides and promotes biodiversity
(also opportunity for carbon offset payments)
• Infrastructure often closely tied with networks
– Transportation, communication, electricity distribution, etc.
– Spillover benefits across jurisdictional boundaries
Departamentos de El Salvador
Prioritizing Among Projects
Accounting for Externality
Project A
Project B
$
$
MNSBB
MNSBA
0%
Q’A
Q*A
100%
0%
Q’B
Q*B 100%
Prioritizing Among Projects
Accounting for Externality
Project A
Project B
$
$
MNSBB + externality
MNSBA
0%
Q*A
Q’A
100%
0%
Q*B 100%
Q’B
Prioritizing Among Projects
Accounting for Externality
Project A
Project B
$
$
MNSBB + externality
MNSBA
0%
Q’A Q’A
Q*A
100%
0%
Q’B Q’B
Q*B 100%
Prioritizing Among Projects
Accounting for Externality
Project A
Project B
$
$
MNSBB + externality
MNSBA
0%
Q*A
Q’A Q’A
100%
0%
Q’B Q’B
Q*B 100%
Prioritizing Among Projects
Accounting for Externality
Project A
Project B
$
$
MNSBB + externality
MNSBA
0%
Q’A Q’A
Q*A
100%
0%
Q’B Q’B
Q*B 100%
Further Considerations
• Proofing vs. prioritizing infrastructure projects
– Thus far discussed efficient proofing given infrastructure priorities
– Framework generalizes to optimal infrastructure priorities
accounting for climate-change impacts
– Priorities may change: e.g., estimated land loss due to sea-level
rise between 10% and 27.6% land area (IPCC 2007)
• Discounting is the way to account for differences in the
timing of costs and benefits
–
–
–
–
Higher discount rates imply less value placed on the future
Developing vs. developed nation differences?
Implications for inter-generational equity
What about intra-generational equity?
Building Capacity for Efficient Climate-Change
Adaptation
• Identify the universe of potential infrastructural adaptations
– Worldwide and region specific
– Summary of success and failures
• Expand knowledge base of nonmarket values
– More research in developing nations
– Improved data availability for “benefits transfer”
– e.g., Canada’s Environmental Valuation Reference Inventory
(EVRI): North America (1,178 studies), Asia (229 studies), Latin
America (38 studies)
• Construct a parallel approach for costs of climate proofing
• Strengthen institutions for greater international and
regional coordination of efforts
Human Capital to Institutional Support
• Geographic information systems to identify vulnerabilities
– Geophysical information
– Socioeconomic information
– Inter-connectedness
• Census data is important
• Data collection during storm events
– Impacts?
– Responses?
• Training in microeconomic theory
– Welfare economics
– Nonmarket valuation
• Training in quantitative statistical methods
• On-going program evaluation
Concluding Thoughts
• The role of public policy
– Intervention when public goods and externalities
– Reduce distortions in private markets (e.g., information disclosure)
• Remember to consider what should not be done
– Infrastructure somewhat permanent or irreversible
– Reduce “regrettable” decisions
• Types of policies
– Direct regulation
– Price signals as incentives
• Economic development among the most important
adaptation strategies
– Caution against focusing exclusively on most vulnerable (poorest)
– Dividends from adaptation that promotes development