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Challenges in applying the paradigm of welfare economics to climate change

Fran Sussman, Christopher P. Weaver and Anne Grambsch

Abstract

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.


Corresponding author: Fran Sussman, ICF International, 1725 Eye Street, N.W., Washington, DC, 20006, USA, Tel.: +202 862 1200, e-mail:

Acknowledgments

We would like to thank an anonymous reviewer for insights and constructive suggestions, and also thank our colleagues and the authors of other papers in this Special Issue who provided helpful comments. Editorial assistance was provided by Brad Hurley, Tara Hamilton, and John Snyder of ICF International. We acknowledge the support of the U.S. Environmental Protection Agency’s Office of Research and Development, Contract EP-W-09-030. The views expressed in this document are those of the authors and do not necessarily reflect the views or policies of the U.S. Environmental Protection Agency.

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Published Online: 2015-1-13
Published in Print: 2014-12-1

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