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Samfundsøkonomiske analyser i forbindelse med klimatilpasninger

Summary and conclusions

Introduction

The overriding purpose of the work leading up to this report is to gain experience with welfare economic approaches to assessment of climate change adaptation measures in various sectors in Denmark. This experience has now been achieved, partly through a survey of relevant theoretical and practical costing studies abroad and partly through five case studies of potential climate change measures in Denmark.

The case studies are based on three different climate change scenarios being the IPCC A2 and B2 scenarios as well as the EU 2 degree scenario for the three different time periods 2010-20, 2040-50, and 2090-2100.

The cross-ministerial work of the Danish Government on climate change adaptation focuses on the effects on climate change within 11 different key sectors in relation to climate change adaptation. Out of these 11 sectors, five illustrative cases were chosen, in which welfare economic assessments of specific adaptation measures where carried out. The objective with this procedure is to exemplify different relevant approaches and challenges in using welfare economics within the area of climate change adaptation.

Experiences from other countries

Based on the survey of experiences with economic approaches to climate change adaptation in other countries, it was concluded that only sporadic work has been carried out in this field world wide. Accordingly, very few references have been collected, both in terms of the development of a general methodology as well as empirical studies within specific sectors.

Within the general methodology, only UKCIP in the UK has carried out considerable work with their 2004 report, Costing the Impacts of Climate Change in the UK - Implementation Guidelines. To the extent that other countries have engaged in the development of a general methodology, they base their considerations on the work of UKCIP without contributing new ideas or insights.

In Denmark, The National Environmental Research Institute has prepared a report with methodological considerations for the Danish Environmental Agency. This report is to a large extent based on the work by UKCIP, but it also contributes a few additional key points, in particular how the costing of climate change measures should take spontaneous adaptation to a changing climate into consideration.

Concerning case studies, the UK has at the time of writing only carried out two assessments using the UKCIP methodology. However, other countries have some sporadic case study experience. One Australian cost-benefit study evaluates the salinity mitigation options for the Mary River in the Northern Territories. The study includes relevant considerations on the applicability of traditional costing methodology. DEKLIM is an extensive climate change adaptation study on costal defences in Northern Germany, which contributes insights relevant to the future coastal defence of Denmark. Finally, Accelerates is a study of the impact of climate change on European farming, including economic assessments of adaptability.

Methodology

The methodological starting point is a welfare economic analysis in which the welfare economic consequences of climate change adaptation measures are assessed. Non-marketed goods like e.g. environmental services are included in the analyses using shadow pricing or through different methods of benefit-transfer. In each case, both welfare economic as well as financial distribution assessment are carried out. The assessments are performed as partial single-period analysis meaning that multiplier effects and knock-on effects in the wider economy are not taken into account.

Adaptation to the effects of climate change is split into two categories, those that happen spontaneously and those that are planned through centralised political decision-making. The value of the planned adaptation measures are assessed in relation to a reference scenario, which includes the expected effects of climate change as well as the spontaneous adaptation to these effects. Accordingly, the availability of reliable data on climate change effects and the spontaneous adaptation is crucial. However, great uncertainty surrounds the effects of climate change, which to a large degree influences on the choice of specific approach to each of the five cases.

In all cases, except for the forestry case, a discounting rate of 6 percent is used as recommended in The Danish Finance Ministry’s guidelines on welfare economic evaluation. A sensitivity analysis is carried out with discounting rates of 1 and 3 percent.

Sensitivity analysis is generally performed by changing the value of central parameters in the analysis with the purpose of assessing the strength of the results relative to the value of chosen parameters. This assessment of the strength of the results is particularly important given the sparse data available and the long time horizons of the analysis. Accordingly, a number of relevant sensitivity analyses were carried out for each case study.

Case studies

The purpose of working with five different cases was to illustrate possible approaches, which covers different challenges within welfare economic costing of climate change adaptation measures. The five cases are:

1. River valleys – The change of farmland into natural wetlands
2. Forestry – Changing pine plantations into near-nature forests
3. Health – Vaccination against tick-borne encephalitis
4. Sewers – Changing the dimensions according to changes in precipitation patterns
5. Coastal protection – Establishment of defences against rising water levels.

River valleys

This case assesses the climate change effects on the welfare economic value of changing farmland in river valleys into natural wetlands.

The relevant climatic changes are in this case higher temperatures and a higher CO₂ concentration in the atmosphere, which results in higher productivity of the existing farmland. In this regard, the spontaneous adaptation is farmers taking advantage of this effect by increasing production, among other things by increasing usage of fertilisers.

In addition to higher farm outputs, the assumed spontaneous adaptation will lead to a higher level of nitrate and phosphorus emissions. As a result, the reference scenario in this case is a situation, where both farm output and emissions of nitrate and fertilisers per hectare of farmland increase as a result of climate change.

Against this reference scenario, the specific adaptation measure is assessed. The measure consists in the change of 4,300 hectares of farmland into natural wetlands in a large part of the catchment area of Ringkøbing Fjord. This would help reducing the emissions of nitrate and phosphorus from 70,000 hectares of surrounding farmland. The assessment of the value of the adaptation measure is based on an analysis of the productivity effects on Danish farming of the A2 and B2 climate change scenarios.

The result of the welfare economic analysis has been summarised in the table below. The conclusions are that implementing the measure results in a net gain. Furthermore, implementing now gives a better net return in present value than waiting till the climate change takes effect in 2050. The conclusion is the same for the A2 and B2 climate scenarios.

Welfare economic assessment of the measure in 2005 prices in million DKK

In the analysis, the value of improved recreational possibilities as well as increased biodiversity in the area has not been included due to insufficient data. Analysis of the value of improved recreation and biodiversity suggests great welfare economic gains from the establishment of new natural wetlands. These values would, if included, further increase the net gain of implementing the adaptation measure.

The result is particularly sensitive to the pricing of the reduction of nitrate emissions due to the fact that 75% of the combined gain from the measure comes from nitrate reduction. Another sensitivity analysis shows that if the private net gain from farming the land in question increases by more than 4 percent, the measure will result in a net loss not taking the recreational and biodiversity values into account. It is, however, more likely that flooding in the river values will decrease the net gain from farming in the area, and thus contribute to the welfare economic surplus of the measure. Finally, the result does not change with discounting rates of 1 and 2 percent.

Forestry

In the forestry case, the effects of climate change on forestry in Denmark is assessed. The focus in the analysis is whether or not spruce, which is covering 28% of the Danish forest area, should be converted to near-natural forest.

A warmer climate and a larger risk of storm is expected to negatively impact the growth conditions of spruce, but there is no known direct link between the climate change scenarios and the growth conditions of spruce in Denmark. Compared to the operating conditions of spruce, operation of a near-nature forest has a number of advantages, which relates to less vulnerability to storm, and better adaptation to a warmer climate.

A financial analysis shows that converting spruce to near-nature forest gives a financially better result compared to a reference scenario, in which spruce is continued. The analysis furthermore shows that it makes financially sense to convert sooner for better soil conditions. Also, the net present value of converting is lower for poor soil qualities compared with better qualities. These conclusions are both due to the higher return on investments in conversion on better soil qualities. Contrary to the other cases, the discounting rate used in the forestry analysis is 2%, which is the norm within forestry.

Financial assessment of future forestry

Note 1: The ideal rotation age for spruce gives the latest optimal age for conversion to near-nature forest.

Furthermore, a welfare economic assessment has been carried out. The welfare economic assessment is based on studies carried out by researchers, which include the recreational and biological values of the forest. The studies show that the improvement in biodiversity and the increased recreational value due to conversion to near-nature forest generate a very large willingness to pay. As such, the willingness to pay in the population seams to be of a far larger magnitude than the total financial costs of conversion. With the large willingness to pay for the near-nature forest, it is viable from a welfare economic perspective to convert spruce to near-nature forest as fast as possible.

Hence the conclusion is that conversion to near-nature forest is financially and welfare economically viable.

Health

The health case assesses whether there is a net welfare gain from vaccinating against tick-born encephalitis.

It is expected that a warmer climate will move a higher concentration of encephalitis infected ticks north into Denmark and thus increase the risk of human encephalitis infection. A more precise knowledge on the connection between the climate scenarios (A2, B2 and EU2C) and the expected infection risk in Denmark does not exist. Consequently, the analysis is carried out as a break-even analysis that assesses how high a risk factor is needed in order to derive a net welfare gain from vaccination against encephalitis in Denmark.

In this case study, the specific planned climate adaptation measure is an information campaign, which is assumed to result in the vaccination of five percent of the population. The five percent being among the most infestation prone segments of the population.

The break-even analysis shows that vaccination is welfare economically neutral at a risk level where one in 1014 are infected. This is eight times higher than the present infestation risk at Bornholm, which is the only place in Denmark that has a confirmed risk of infection.

There are no European studies that have shown infestation levels anywhere near one in 1014. As a consequence, the conclusion is that there does not seem to be a net gain from this measure and that this will not change in the foreseeable future. Only if a lower discounting rate is used or a higher success rate of the vaccination is applied, the measure is likely to have a net welfare gain as the effects of climate change appears.

Sewers

This case considers the methodological problems of assessing the value of climate change adaptation in regards to sewage infrastructure. As opposed to the other cases, this case does not assess the value of a possible adaptation measure due to a lack of specific data in this area.

The case is relevant because the effects of a changing climate are expected to put a strain on the present sewage infrastructure in Denmark. The strain comes from an increased risk of flooding as a result of more uneven rain patterns, including more intense periods of rain in Denmark as well as a general rise of the groundwater level. The risk of flooding and the extent of the floods depend on the quality of attributes of the present sewer system such as age, capacity, inclination, natural run-off possibilities, and not least the surrounding landscape.

Adaptation of the sewer system must take into account the long planning horizon of 50-100 years. As a consequence, it is necessary to consider the implementation of adaptation measures already now in spite of the lack of data on climate change effects on the specific local sewer systems. Some systems are already given dimensions that can withstand increased pressure from a changing climate, while others are at their capacity limit already today. For the latter exists a number of adaptation measures that the local authorities, who are responsible for the maintenance of the Danish sewers, can use to increase the adaptive capacity of their sewers.

Costing methodology can be used to assess two different aspects. For one, if there is a desire to continue with the present service level, a cost-effectiveness analysis (CEA) can be applied. By assessing and ranking possible combinations of adaptive measures, the CEA gives the local authorities the option of choosing the most cost efficient adaptation strategy. Secondly, cost-benefit analysis (CBA) is used to assess the optimal service-level from a society point of view given the climate changes. In order to perform local welfare economic analysis of the best suited adaptation strategy, two forms of local research need to be carried out:

• Risk analysis, estimating the risk of instances of intense rain leading to flooding and the extent of the average damage caused by each instance.
• Mapping the potential adaptation strategies by assessing the cost-effectiveness of each relevant combination of measures.

The environmental agency has completed estimations of the necessary extra investments to uphold the present service levels in Denmark given increases in instances of intense rain at about 20-50 percent, which is the expected increase according to climate scenario A2 for the period of 2071-2100. The result of this estimation is presented in the table below.

Costs of preparing the entire Danish sewer system to a changed climate

Coastal defence

The challenges of securing the Danish coasts against the effects of climate change are addressed in this case. Specifically, the case assesses the welfare economic value of establishing an enhanced protection against erosion along the coast of Northern Zealand. The assessment is based on a welfare economic cost-benefit analysis.

The maximum sea level is expected to sire as a result of a general rise of the sea level combined with increased storm strength. Consequently the erosion will increase along the Danish coasts. The analysis is based on rises in the maximum sea level of 0.22 m, 1.05 m, and 0.5m, which corresponds to the minimal rise according to the EU2C and the maximum rise resulting from the A2 scenario during the period 2071-2100. Along the North Zealand coast, increasing water levels are expected to lead to the loss of 32 m³ for each meter coast, with each 10 cm increase of the maximum water level.

The cost-benefit analysis assesses whether there is a net welfare economic gain from protecting the coast against the increased erosion along the summer house areas of Liseleje-Hyllingebjerg in Northern Zealand. In about 2050, the local coast protection needs renewal. Therefore, the analysis compares the extra costs of changing the dimensions of the coastal defence in 2050 with the gain of avoiding the erosion of the coast. The analysis is made for each of the three given rises in the maximum sea level.

In the table below is shown the combined summer house area that is expected to be lost through erosion in the period 2050-2100, if the coastal defence is not strengthened in 2050, as well as the result of the cost-benefit analysis. The period of analysis is 2050-2100 but the relevant climate change effect data is calculated for the period 2071-2100.

CBA of the establishment of enlarged coastal defences by Liseleje-Hyllingebjerg

The welfare economic value of adapting the coastal defence in accordance with the future rises in maximum sea level is positive for all three given sea level rises. The result comes in spite of a conservative estimate of the future value of the summer houses in danger of erosion. In addition, the recreational value of the beach has not been included, even though it is assumed to have a positive effect on the surrounding summer houses as well as a positive value for the non local users of the public beach. If the coastal defence is not strengthened, parts of the beach will erode away and in some places entirely disappear. As a result, the conclusion is that when all is taken into consideration, the analysis shows a result which is significantly in favour of coastal defence.

A sensitivity analysis shows that the result of the analysis stands even with changes in the applied development in price level or with discounting rates lower than the 6 percent used.

Conclusion

This project has shown that partial welfare economic assessments of climate change adaptation measures can help shed light on the value of carrying through planned climate change adaptation measures. That said more extensive and solid data on the effects of climate change is needed in order to reach conclusions with enough clarity to be beneficial. The data available today can be used to identify areas in which adaptation measures seem relevant, but in most cases it is insufficient for the purpose of thorough welfare economic assessment. For that reason, analyses of physical consequences could be initiated within the areas where climate change adaptation is most relevant and/or urgent.

The survey of experiences in other countries demonstrated that there is only sporadic experience with welfare economic analysis in relation to climate change adaptation. As a consequence, work like this project leading to particular Danish experiences is necessary if welfare economic assessment is to be part of a Danish climate change adaptation strategy. At the same time, Denmark has now practical knowledge that can be used as inspiration to similar work in other countries and as part of that process contributing to a process of mutual learning.

Partial analysis still appears recommendable relative to the more extensive general equilibrium analyses given the sporadic data and the complexity of the general equilibrium analyses. Cost-benefit analysis is the obvious choice of analytical approach as long as there is no set target that must be fulfilled, in which case cost-effectiveness is the preferred approach. Finally, it can be relevant to reconsider the the discounting rate of 6 percent in relation to specific climate change adaptation measures.

The general considerations of DMU and now the practical experience gained through this project constitute a foundation for the use of welfare economic analysis in the Danish climate change adaptation strategy. The next step should be more detailed consequence analyses to be used as data in a more systematic assessment of relevant climate change adaptation measures within the 11 main sectors.

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Version 1.0 Oktober 2006, © Miljøstyrelsen.