Volume 5, Issue 3 - Special Issue: Perspectives on Implementing Benefit-Cost Analysis in Climate Assessment / Guest Editor: Fran Sussman, Coordinating editor: William H. Hoyt

Over the past half-century or more, economists have developed a robust literature on the theory and practice of benefit-cost analysis (BCA) as applied to diverse projects and policies. Recent years have seen a growing demand for practical applications of BCA to climate change policy questions. As economists seek to meet this demand, they face challenges that arise from the nature of climate change impacts, such as the long time frame and the potential for non-marginal changes, the importance of intangible effects, and the need to grapple with Knightian uncertainty. As a result of these and other characteristics of climate change, many of the fundamental tenets of BCA are coming under scrutiny and the limits of BCA’s methodological and practical boundaries are being tested. This special issue assembles a set of papers that review the growing body of literature on the economics of climate change. The papers describe the state of the literature valuing climate change impacts, both globally and at more disaggregated levels. The papers also discuss the challenges economists face in applying BCA to support climate change decision making and adaptation planning. This introduction provides background and context on the current use of BCA in climate change analysis, and sets each paper firmly in that context, identifying also areas for future research. While the challenges in conducting BCA and interpreting its results are significant, across the papers it becomes clear that economic analysis in general, and the tools and methods of BCA in particular, have a central role to play in supporting decision-making about how to respond to climate change.

This paper discusses the challenges inherent in developing benefit-cost analysis (BCAs) of climate change. Challenges are explored from three perspectives: meeting the foundational premises for conducting BCA within the framework of welfare economics, methodological considerations that affect the application of the tools and techniques of BCA, and practical limitations that arise out of resource constraints and the nature of the question, project, or policy being evaluated. Although economic analysts frequently face – and overcome – conceptual and practical complications in developing BCAs, climate change presents difficulties beyond those posed by more conventional environmental problems. Five characteristics of the climate system and associated impacts on human and natural systems are identified that pose particular challenges to BCA of climate change, including ubiquity of impacts, intangibility, non-marginal changes, long timeframes, and uncertainty. These characteristics interact with traditional economic challenges, such as valuing non-market impact, addressing non-marginal changes, accounting for low-probability but high-impact events, and the eternal issue of appropriately discounting the future. A mapping between the characteristics of climate change and traditional economic challenges highlights the difficulties analysts are likely to encounter in conducting BCA. Despite these challenges, the paper argues that the fundamental ability of economic analysis to evaluate alternatives and tradeoffs is vital to decision making. Climate-related decisions span a wide range in terms of their scope, complexity, and depth, and for many applications of economic analyses the issues associated with climate change are tractable. In other cases it may require improved economic techniques or taking steps to ensure uncertainty is more fully addressed. Augmenting economic analysis with distribution analysis or an account of physical effects, and exploring how economic benefit and cost estimates can be incorporated into broader decision making frameworks have also been suggested. The paper concludes that there are opportunities for BCA to play a key role in informing climate change decision-making.

This paper reviews applications of benefit-cost analysis (BCA) in climate policy assessment at the US national and global scales. Two different but related major application types are addressed. First there are global-scale analyses that focus on calculating optimal global carbon emissions trajectories and carbon prices that maximize global welfare. The second application is the use of the same tools to compute the social cost of carbon (SCC) for use in US regulatory processes. The SCC is defined as the climate damages attributable to an increase of one metric ton of carbon dioxide emissions above a baseline emissions trajectory that assumes no new climate policies. The paper describes the three main quantitative models that have been used in the optimal carbon policy and SCC calculations and then summarizes the range of results that have been produced using them. The results span an extremely broad range (up to an order of magnitude) across modeling platforms as well as across the plausible ranges of input assumptions to a single model. This broad range of results sets the stage for a discussion of the five key challenges that face BCA practitioners participating in the national and global climate change policy analysis arenas: (1) including the possibility of catastrophic outcomes; (2) factoring in equity and income distribution considerations; (3) addressing intertemporal discounting and intergenerational equity; (4) projecting baseline demographics, technological change, and policies inside and outside the energy sector; and (5) characterizing the full set of uncertainties to be dealt with and designing a decision-making process that updates and adapts new scientific and economic information into that process in a timely and productive manner. The paper closes by describing how the BCA models have been useful in climate policy discussions to date despite the uncertainties that pervade the results that have been produced.

This paper discusses the current literature on impacts and adaptation costs at the sectoral level. The focus is primarily the US, but includes examples on international applications that highlight key differences or other relevant demonstrations of method and data use. The paper provides an overall framework that addresses the components of economic impacts, including definitions of impacts, adaptation costs, and residual damages. The paper then focuses on understanding the current breadth and depth of the literature that exists to characterize what we know about economic sectors studied in the recent literature (agriculture, coastal resources, water resources, infrastructure, health, crime, energy, labor productivity, and ecosystems), how the methodologies differ, what the gaps and challenges are, and offers a sense of the impacts at the US national level. A new generation of impact studies, including the U.S. EPA’s ongoing Climate Impacts and Risk Analysis (CIRA) project; the new Intergovernmental Panel on Climate Change (IPCC) AR5 Working Group II report; the U.S. National Climate Assessment; and the Risky Business Project led by the Next Generation Foundation, provide the motivation for this review. These efforts, taken together, have advanced the state of US economic impact assessment work along two critical frontiers, both of which support benefit-cost analyses of climate change: assessment of the risk and economic consequences of extreme climatic events; and assessment of ecosystem effects. Yet, the latest work also highlights gaps in the lack of comprehensive sectoral coverage; more complete incorporation of adaptation opportunities in impact assessment; and critical cross- and multi-sectoral effects that remain poorly understood.

The development of national and sectoral climate change adaptation strategies is burgeoning in the US and elsewhere in response to damages from extreme events and projected future risks from climate change. Increasingly, decision makers are requesting information on the economic damages of climate change as well as costs, benefits, and tradeoffs of alternative actions to inform climate adaptation decisions. This paper provides a practical view of the applications of economic analysis to aid climate change adaptation decision making, with a focus on benefit-cost analysis (BCA). We review the recent developments and applications of BCA with implications for climate risk management and adaptation decision making, both in the US and other Organisation for Economic Co-operation and Development countries. We found that BCA is still in early stages of development for evaluating adaptation decisions, and to date is mostly being applied to investment project-based appraisals. Moreover, the best practices of economic analysis are not fully reflected in the BCAs of climate adaptation-relevant decisions. The diversity of adaptation measures and decision-making contexts suggest that evaluation of adaptation measures may require multiple analytical methods. The economic tools and information would need to be transparent, accessible, and match with the decision contexts to be effective in enhancing decision making. Based on the current evidence, a set of analytical considerations is proposed for improving economic analysis of climate adaptation that includes the need to better address uncertainty and to understand the cross-sector and general equilibrium effects of sectoral and national adaptation policy.

Many critics of economic analysis of climate change impacts and response options claim that information is needed on ecosystem characteristics as well as on economic values to fully inform decisions about how climate change affects human well-being. Information on the irreversibility of impacts also is important, critics argue, because it relates to how society evaluates implications for intergenerational equity. In addition, because climate change is subject to a large degree of Knightian uncertainty, it is useful to understand both the information available for assessing climate change risks, and how individuals themselves perceive and evaluate risks. The paper discusses rationales for using these types of information as important complements to benefit-cost analysis for evaluating climate change risks and responses. Ideally such information could be available in a “dashboard” for decision makers assessing social and economic impacts, although limits on currently available information are a significant barrier to using that approach.

Benefit-cost analysis (BCA) aims to help people make better decisions. But BCA does not always serve this role as well as intended. In particular, BCA’s aim of aggregating all attributes of concern to decision makers into a single, best-estimate metric can conflict with the differing world views and values that may be an inherent characteristic of many climate-related decisions. This paper argues that new approaches exist that can help reduce the tension between the benefits of providing useful, scientifically based information to decision makers and the costs of aggregating uncertainty and differing values into single best estimates. Enabled by new information technology, these approaches can summarize decision-relevant information in new ways. Viewed in this light, many limitations of BCA lie not in the approach itself, but with the way it is used. In particular, this paper will argue that the problem lies in a process that begins by first assigning agreed-upon values to all the relevant inputs and then using BCA to rank the desirability of alternative decision options. In contrast, BCA can be used as part of a process that begins by acknowledging a wide range of ethical and epistemological views, examines which combinations of views are most important in affecting the ranking among proposed decision options, and uses this information to identify and seek consensus on actions that are robust over a wide range of such views.