Economics of Adaptation FAQs

Submitted by Sukaina Bharwani | published 25th Mar 2011 | last updated 30th Mar 2011

Frequently Asked Questions: Economics of Adaptation


Introduction

Several groups have been working on the economics of climate impacts and adaptation. This is a technical area, with emerging methodologies. It also has its own concepts and terminology. Here is a place to record general answers to questions that come up repeatedly.


GDP

Gross Domestic Product (GDP) is a standard metric for comparing economies. For instance, GDP per capita is a key component in the Human Dimensions Index, used in some countries as a measure of progress.

GDP is calculated according to standard methodologies. However, it is reported in three different forms:

  • Nominal values are the national currency for a specific year, sometimes converted to an international currency using the average bank rate for that year. For instance, GDP in Country X in 2007 was QQ millions ($ZZ million).
  • When comparing nominal GDP across countries a standard market rate of exchange for all currencies can be used. This may show slight variations with the nominal values while reporting all GDP in one currency (usually US$, sometimes Euros, rarely any other currency although there is no reason why Rupees couldn't be used too).
  • Purchasing Power Parity (PPP) converts nominal GDP values to a single currency, taking account of the exchange value of a basket of goods. This tries to adjust GDP for currencies that are not widely traded or have controlled exchange rates. In many developing countries it leads to a lower value than the nominal value.


Base year

Related to the conversion rates for GDP, is deciding on a base year for an analysis. There is no real standard here, but users should be aware of the issues.

  • Some time series adjust each year's values (say of GDP) to a single base year. For instance, $XXX (2007 values). This adjusts for inflation over the entire time series.
  • Climate change studies had used a 1990 base year quite widely, more or less corresponding to the benchmark of awareness on climate change and the more dramatic rises in global temperature. More recent studies (and commitments) have used 2000 and increasingly other years. At an inflation rate of 5% per year, 1990 values would be nearly two-thirds greater by 2000.



Significant decimals

Rounding off numbers seems trivial in one sense. A model result showing the cost of $122,900,444 is easier to understand as 'a bit more than $1 million' or 'about 1.25 million'. Rounding in this way is making a judgement as to the confidence in the model result--how many of the digits are significant in terms of a robust result? For most studies of climate change at a reasonably large scale (national for instance), results rounded up the nearest million dollars would be the highest precision that would be warranted. And in many cases the numbers are not even reliable at the 100s of millions level.

Conversion of 'rounded off' numbers from one currency to another is a related issue. Most studies work in US$--for instance we might show the cost of current climate impacts in a country as on the order of $100 million per year (2008 values). Converting to Euros (7,120,000), GBP (60,200,000) or Rupees (4,678,000,000) (just for a sample) should not imply greater precision by reporting more apparently significant digits. But this is confusing in practice!



Cost, Impacts...

The economics terminology is confusing, sometimes quite precise but at other times colloquial. Here is a partial guide...

Impact

Loss

Cost

Value

Economic value

Benefit

Net cost or net benefit



Economic valuation

Often three categories of economic values are important in climate change:

  • Market exchanges: where the goods and services are traded, economic valuation is more reliable. For instance, the change in a farmer's crop production can be valued as the farm gate price received.
  • Non-market services: More controversial are economic valuations of environmental services, quality of life and loss of life, things that are not generally traded in a market economy. Techniques exist and are helpful, but not fully agreed among all economists (or indeed decision makers).
  • Socially contingent effects are even more difficult to value--the non-marginal effects, tipping points and socially valued elements of societies and economies that might change in radical ways with climate change. What is the value of a nation's patrimony? Not quite the same as the value of all the land.



Do edit, add...more to come!
--Tom Downing 11:25, 6 November 2009 (CET)