Problems With Traditional (Quantitative) Cost-Benefit Analysis
1) Cost-benefit analysis ignores many effects that are hard to quantify.
The biggest problem with traditional cost-benefit analysis is that it only accounts for those effects that can be given a dollar
value — quantified. Many impacts of global warming, however, are difficult or impossible to put in dollar terms, such as human
health effects, loss of wildlife habitat, and the loss of non-consumptive (e.g., non-timber) uses of forests and other resources —
the "non-market" effects. Economists cannot put an accurate dollar value on life, increased illness, the loss of spectacular
natural areas, or the loss of a plant or animal species.
Some economists have actually tried to fix this problem, but with very limited success. There are several techniques available
that attempt to quantify these non-market values, such as "contingent valuation," "hedonic pricing," and "opportunity cost"
methods. However, these techniques often yield unpredictable and inaccurate results (IPCC, 1995c).3 For example, Bill Cline,
in his 1992 analysis of the impacts of global warming on the U.S., includes an estimated value of species loss of more than $4
billion based on the opportunity cost of foregone timber operations. However, he admits that the value "could just as easily be
an order of magnitude larger, or $40 billion annually" (Cline, 1992, p. 106). This revised estimate alone would raise his
aggregate figure 66 percent! As a result, even cost-benefit analyses that use these valuation techniques likely ignore many
significant impacts. In addition, most analysts choose not to use these valuation techniques because they are time consuming
and complicated.
Some people have also criticized economic valuation techniques as being "discriminatory" and "immoral" (See IPCC, 1995c;
GCI, October 16, 1995). For example, many would argue that impacts such as the loss of human lives, irreversible harm to
ecosystems, and the loss of intrinsically valuable property or resources should never be put in monetary terms because no
quantitative cost-benefit analysis can adequately reflect their full value.
2) The biggest risks of global warming are hidden in aggregation.
Cost-benefit analysis typically involves the aggregation, or summing up, of cost and benefit values. As a result, such analysis
does not adequately reflect the distribution of impacts within countries, even though the regional effects of global warming are
likely to vary considerably. Some areas may not be greatly affected by global warming — but others could be devastated.
Similarly, global aggregates hide the distribution of impacts between countries. Impoverished regions and developing countries,
whose resources and ability to adapt to rapid changes are limited, are particularly at risk. Even if there are isolated cases of
so-called "winners" from global warming, the prospect of which is debatable, no one will be immune to the disruption that
climate change will place on societies, economies, and ecosystems.
The problems associated with estimating the costs of global warming are magnified at the global level. Very few studies have
estimated the global economic costs of global warming, largely due to the difficulties in obtaining consistent data and to the
significant complexities and uncertainty with respect to the interrelationships among the possible effects. The most prominent
studies express global economic impacts as the sum of regional damage estimates, extrapolating those costs to other countries
(See, for example, Fankhauser (1995) and Tol (1994)). However, in extrapolating the costs, economists frequently ascribe
different values to the lives and property of people in rich developed countries compared to those in poor developing
countries. Since most of the death and destruction that will result from global warming will occur in the latter, this method
creates a distorted and inequitable picture of how global warming will affect global society.
3) Discounting undervalues the costs of global warming on future generations.
Global warming is not going to happen all at once, and many of its most severe effects will occur over the next 20 to 100
years. To value these future effects in present terms, economists rely on a tool known as "discounting." Typically, the later in
time a cost or benefit occurs, the less it matters in economic terms — you would regard $1 of future damage as being less
important than $1 damage now, just as you would rather receive $1 now than wait until later to receive it. After all, you could
invest the $1 today and earn interest. Or you may feel that you will be better off in the future and will not need the money as
much then. Discounting reflects what economists call an individual's "time preference" for money. Given the long time frame in
which global warming impacts occur, the practice of discounting may seriously undervalue the significant harm that global
warming will place on future generations.
Precisely how economists measure the value of future costs and benefits depends on the size of the discount rate — the higher
the rate, the lower the future benefits or costs are worth in today's terms. For example, at a discount rate of 6 to 12%, which
is the range that analysts most often use to evaluate the present value of capital projects, the value of very long term effects
(say 100 years from now) will virtually disappear (See Nordhaus, 1994, pp. 122-35). But very long term effects are
important. Damages of, say, $100 billion accruing in 100 years will certainly affect the quality of life of future generations; but
at a discount rate of 10% its "present value" is only $7.25 million!
If we allow global warming to continue unabated, we will surely commit future generations to a legacy of irreversible climate
change with enormous economic and environmental consequences. Many scientists and economists agree, therefore, in order
to ensure that studies are not biased against future generations, analysts should use a lower discount rate — a social rate — to
evaluate the present value of future climate impacts.4 Several studies of the potential economic effects of global warming use a
social discount rate of between 0.5% and 3.0%, recognizing that discounting future benefits at a lower rate will help ensure that
policymakers do not undersell the value of our children's and our grandchildren's well-being (See Cline, 1992; Fankhauser,
1995; IPCC, 1995c).
Discounting makes it easier to decide not to take actions to curb global warming today, because the costs of inaction do not
seem so large. But by making the decision today to not curb global warming pollution, we are making the decision to expose
our children and grandchildren to the full costs of the consequences as they occur. We are passing the buck!
4) Cost-benefit analysis typically focuses on a snapshot of future impacts, even though the effects
of global warming will continue indefinitely.
Both scientific and economic studies of the impacts of global warming tend to focus on the impacts at a given point in time in
the future. The conventional technique is to identify the impacts of a "benchmark doubling" of carbon dioxide, which refers to
the accumulation of carbon dioxide and other greenhouse gases in the atmosphere at levels that trap heat by the same amount
that would be trapped by a doubling of carbon dioxide alone. The corresponding warming as a result of this benchmark is
estimated to be in the range of 1 to 3.5 degrees Celsius (or 1.8 to 6.3 degrees Fahrenheit) by the year 2100 (IPCC, 1995a, p.
5). Studying global warming under this benchmark scenario allows both scientists and economists to make consistent
comparisons between current and future climate trends. It is important to note, however, that the choice of this benchmark is
completely arbitrary. This "snapshot" analysis obscures the fact that global warming will not occur instantaneously, nor will it
stop once this benchmark is reached.
A notable exception to this snapshot analysis is a recent study by William Cline (1992). In addition to estimating the economic
costs of global warming from a benchmark doubling of CO2, Cline also looks at the potential costs of "very-long-term"
warming. According to Cline, "Because global warming is cumulative and irreversible on a time scale of centuries, a much
longer horizon [than 2050] should be considered" (Cline, 1992, p. 4). Under this longer time horizon of two to three centuries,
Cline points out that there is likely to be "far greater warming than associated with benchmark doubling and thus much greater
ecological and economic damage" (Cline, 1992, p. 43).
Beyond the Economics
Because of the many problems with quantitative cost-benefit analysis, it is an inadequate tool for policymakers to use as they
decide how to curb global warming. Rather, policymakers should consider more comprehensive, multidisciplinary analyses —
those that emphasize the economic, environmental, and social implications of global warming — using a combination of
quantitative and qualitative information.
The following section summarizes some of the potential impacts of global warming in a number of sectors, using this
multidisciplinary perspective, in order to illustrate the numerous ways in which global warming will likely affect society. The
costs from disasters alone, such as severe storms, floods, and droughts, could total hundreds of billions of dollars. Coastal
impacts and losses to the insurance industry could mount into the trillions. Add to this the impacts that cannot be put in dollar
terms, such as impacts on human lives, species, and ecosystems, and it is painfully clear that the economic and social
implications of global warming will likely be overwhelming.
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