Evaluation of Climate Change

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The first relevant question to consider is the appropriateness of cost benefit analysis as a tool for evaluating climate change policy.  The merits of the technique are widely debated and, although most agree that it is not ideal, the technique continues to be used to inform public-sector decisions and the private decisions of those companies that will be most affected by climate change policy decisions [1, 3, 11, 12].  The following paragraphs discuss a number of factors that limit the usefulness of this analytical framework as a tool for climate change policy evaluation.

The time span of the benefits of climate change transcend the project level time span for which the cost-benefit analysis was originally created.  Traditionally, cost benefit analysis was used for project level analyses that considered the costs and benefits that arose over a time span of 15 to 25 years, which corresponded to the life span of the project in question [1]. With climate change, the time span involves a century or more, and thus traditional techniques may not be appropriate. The time issue associated with the use of cost benefit analysis for climate change policy evaluation presents a unique challenge.  There is a conflict between standard discounting and long-term environmental policy [2] because very long-term environmental impacts are important, but with typical discount rates used in public program analysis (5% to 10%) very long-term impacts are not important [2].  Furthermore, there is potential to affect the welfare of future generations.  This implies that the typical discount rates used in public program evaluation are inappropriate for evaluating climate change policy.

Another obvious problem with the cost-benefit technique is that there is a high degree of uncertainty regarding the appropriate values for many of the parameter used in the estimation models.  This only amplifies the problems normally associated with modeling tools, such as regression, which are recognized as imperfect tools for predicting near and especially far-term future events.  The value of a cost benefit analysis is limited if it is not possible to produce valid cost and benefit estimates {3}.

Damages caused by greenhouse gases are not directly related to current rates of emissions.  Therefore reducing green house gas emissions is not likely to result in a rapid decrease of atmospheric concentrations of greenhouse gases.  These gases have long atmospheric lifetimes, so atmospheric concentrations respond slowly to decreases in emissions{3}. 

There is a considerable lag between abatement efforts and decreases in atmospheric stocks of CO₂.  Even if emissions were decreased to zero today, the significant stocks of GHG’s in the atmosphere would prevent significant decreases in atmospheric concentrations from anywhere between 10-200 years.  Furthermore, if policy measures are not undertaken in the short run, it may be impossible to alleviate the damages of climate change when such impacts become more readily apparent {3}.

 Climate change problems are global in nature.  Although many environmental problems have “spill over” effects on surrounding regions, climate change is a problem that is truly global in nature.  Damages caused by greenhouse gases are dependent on global atmospheric concentrations of Cox.  The IPCC illustrates the global nature of this problem succinctly: “even a country that emits no greenhouse gases can incur the damages of emissions by other countries {3, p. 154}.”

There is a lack of actual impact data.  Estimates of physical impact data are based on judgments, predictions, and models.  There is no way to actually “know” the damages of climate change until have occurred.  Thus, the uncertainties surrounding climate change further complicate the evaluation of damages {3}. 

Despite the inherent difficulties of applying the issue climate change to the cost-benefit analytical framework, such an approach is necessary because society has limited resources.  In order to maximize the returns from scarce resources, one must consider the cost and benefit implications of policy choices that will affect welfare [10].  Keeping such considerations in mind helps put the discussion of climate change mitigation into perspective when deciding “how costly is costly?” [3].  As Darmstadter points out, global warming is just one of many societal problems and, at the rate of 3% of GDP per problem, a country can only finance 33 causes before “99 percent of the economic pie has been spoken for” [3].   The use of cost-benefit analysis can help ensure that society’s resources are allocated efficiently, and, although neither costs nor benefits are easy to quantify, it is worthwhile to evaluate them.