The Economic Impact of Climate Change: the Benefits of Adaptation Policy

Emanuele Massetti FEEM and CMCC

Costs and Benefits of Adaptation to Climate Change and the Sustainability of Public Finance in the EU

Fondazione Eni Enrico Mattei and Università Ca’ Foscari Venezia

November 21, 2013 COP19 – Warsaw – Poland

The benefit of adaptation Cost of cc w/o adaptation –

cost of cc w adaptation – cost of adaptation

= Net benefit of adaptation

• Benefit estimates require:

1. Estimate impact with climate change 2. Estimate impact with adaptation 3. Estimate of cost of adaptation

• Impacts should include:

1. Macroeconomic and financial impacts 2. Imperfect markets and intertemporal budgetary problems (rarely

considered)

The impact on public finances Public deficit:

(Public revenues – Public expenses)/ GDP

• Short term shocks:

– public expenses up • Long-term shocks:

– GDP and public revenues down

• Adaptation: long-term investment – Public expenses go up in the short-term – In the long-term public revenues are higher, public expenses are

lower and GDP is higher

Private and public adaptation

• Individuals and firms will adapt autonomously to reduce (increase) private costs (benefits)

• Public sector should focus on public adaptations (i.e. adaptations with externalities): – Early warning systems – Regulation, building codes – New technologies with low private returns – Public health – Water management (irrigation, flood waters) – Coastal protection – Well functioning and flexible markets

Sea-level rise

• Clear evidence of large benefits from adaptation

People Flooded Land Loss Damage Cost Adaptation

Cost Total Cost thousand/year km2/year billion € / year billion € / year billion € / year

A2 B1 A2 B1 A2 B1 A2 B1 A2 B1

2100 without adaptation 776.2 204.5 16.4 12.2 16,933 17,496 0 0 16,933 17,496

2100 with adaptation 3.4 1,8 0 0 2,291 1,917 3,536 2,621 5,827 4,538

Source: Hinkel et al. (2010)

Impact of sea-level rise and cost/benefits of adaptation in Europe

Floods

• EEA estimates that river flooding costs 6.4 billion euros annually

• Expected to rise to 21.5 billion euros by 2100 • Cost of floods in Summer 2002 about 15

billion • Adaptations worked for 2013 floods but

insured losses lower than in 2002

Public Health

• Heat waves: – Heat wave of 2003: about 24,000 deaths – Tremendous potential for early warning systems and

outreach: • France 2003: 14,802 deaths • France 2006: 40 deaths

• Vector borne diseases:

– Reduce the habitat of the vectors – New vaccines or treatment methods – Information

Impacts on agriculture

• Short-term:

– Heat waves and droughts – Reduce output, increase need for assistance – 2003 heat wave cost about 13 billion Euros to EU

agriculture

• Long-term: – Reduced productivity

Long-term impacts on agriculture

Hadley CM3 SRESA2 – 2100 – Impact as share of land value

Van Passel, S., E. Massetti and R. Mendelsohn (2013). “A Ricardian Analysis of the Impact of Climate Change on European Agriculture.” FEEM Nota di Lavoro No. 083.2012, November 2012.

Impacts on European agriculture

• Adaptations included: – All past private and public adaptations – More adaptation than in crop models

• Adaptations not included:

– New seed varieties – More efficient irrigation – More accurate seasonal weather forecasts – Given set of market distortions – No CO2 fertilization

Land value losses

• Undiscounted capital loss (2100 compared to 2010) • Large potential for public adaptation projects • Uncertainty requires flexibility:

– “Soft adaptation”

Hadley CM3 ECHO-G NCAR PCM -363 billions € 232 billions € 63 billions €

-44% of present land value -28% of present land value -8% of present land value

Tropical cyclones • Tropical cyclones have a devastating impact on

the affected areas

• Economic impacts hard to predict but high – Sandy (68 USD billion), Katrina (125 USD billion)

• Home depot may be happy, but local government

is not

• With climate change annual global impacts from 25 USD billions/year to about 50 USD billions/year in 2100 (Mendelsohn et al. 2011)

Mendelsohn, R., K. Emanuel, S. Chonabayashi and L. Bakkensen (2012). “The impact of climate change on global tropical cyclone damage.” Nature Climate Change http://dx.doi.org/10.1038/nclimate1357

Extremes in the extreme events

• How should we adapt to catastrophic 1/300 years events? • Global insurance and risk sharing?

Mendelsohn, R., K. Emanuel, S. Chonabayashi and L. Bakkensen (2012). “The impact of climate change on global tropical cyclone damage.” Nature Climate Change http://dx.doi.org/10.1038/nclimate1357

Global macroeconomic impacts

-14-12-10

-8-6-4-202

0 1 2 3 4 5 6

Real

GDP

Los

s in

Perc

enta

ge

Temperature change (°C) wrt Pre-industrial

• Impact with current technologies and private adaptation • Public adaptation not included

Bosello F. and R. Parrado (2013) – Work in preparation for the Global-IQ project with the ices model.

Uncertainty on future emissions Politically meaningful impact area

• SSPs scenarios generated using the WITCH model (www.witchmodel.org) • Carrara, S., T. Longden and E. Massetti (2013). Work in preparation for the Global IQ

project

Conclusions

• Efficient allocation of public funds requires adaptation

• Public funds should go to public adaptations

• Large benefits in many sectors, including increased sustainability of public finances

Emanuele Massetti FEEM and CMCC emanuele.massetti@feem.it emanuele-massetti.blogspot.com

Emanuele Massetti acknowledges funding from the Marie Curie International Outgoing Project “Cli-EMA”. Research in part funded by the Global-IQ project Grant Agreement no. 266992, CUP no. E41J11000180004.

Costs and benefits of adaptation • Cost-benefit analysis for adaptation projects

• Desirable adaptations provide benefits that exceed

their cost – Society should encourage only efficient adaptation – Residual damage

• Optimal adaptation maximizes net benefits

• The evaluation metric should not be resource

mobilization but welfare impact

Deadliest Tropical Cyclones in the Philippines

Thelma Megi Bopha Nanmadol Utor Haiyan

Year 1991 2010 2011 2012 2013 2013 Name Thelma Megi Nanmadol Bopha Utor Haiyan Category Tropical Storm 5 5 5 4 5 Highest winds

10-minute sustained (km/h): 75 230 185 185 195 230 1-minute sustained: 85 295 260 280 240 315

Lowest pressure (mbar) 992 885 925 930 925 895

Fatalities 5,081 - 8,165 69 - 73 38 1,146 - 1,980 25 4,009 (prel.)

Damage (million USD) 27.67 709 603 1,040 2,300 1,080 (prel.)

• The deadliest tropical cyclone in the Philippines was Thelma (1991), which was only a tropical storm

Source: Wikipedia

Fatalities and wind speed of the deadliest storms in the Philippines

Wind speed (knots)

Num

ber o

f fat

aliti

es

Data from EM-DATA database kindly provided by Laura Bakkensen.

• Unclear relationship between strength of tropical cyclone and fatalities

• Possibly explained by adaptation and/or randomness of impacts