Socio-economic analyses can help
us assess the benefits and costs associated with climate change
We use socio-economic analyses to calculate the value of
advantages and disadvantages for society of different climate
change adaptation measures. In this way we can find the measures
that will be of greatest use for society or which are the most
of climate change adaptation
The Ministry of Climate and Energy has published
a cross-sector, national socio-economic screening of climate
change adaptation, June 2010. An English summary of the
report can be downloaded from the publication list.
The screening looks at climate adaptation across the 14
sectors dealt with in the government's climate change adaptation
strategy from 2008.
The screening indicates that coastal protection, buildings,
roads/railways and sewerage are especially relevant candidates for
more in-depth analyses. Potential damage costs are high in these
sectors, and the example calculations indicate that these sectors
have the greatest potential for limiting damage costs in a
cost-effective manner through adaptation measures. The sectors
mentioned are characterised by long-term investments, and this
calls for early incorporation of climate change adaption. Within
the sector of coastal protection however, it is possible to
implement adaptation measures at shorter notice. In addition the
most significant consequences in this sector are not expected to
occur until after 2050.
An important conclusion of the screening is, that for almost all
of the sectors it is assessed that climate change adaptation can
take place within the existing regulatory framework.
Furthermore, the screening shows that there is a general demand
for socio-economic analyses at a more concrete level within
geographically delimited areas (e.g. at municipal level),
because the diversity within and across the different sectors makes
it difficult to reach conclusions based on analyses carried out at
a very general level. To ensure the best possible adaptation from a
socio-economic perspective, a cross-sectoral approach will have to
be used, so as far as possible, all relevant sectors and
cross-cutting effects are incorporated simultaneously.
Socio-economic assessments of climate change adaptation measures
are often carried out as partial analyses (as is also the case in
other areas). This means that only the effects that can be directly
or indirectly linked to the measure are quantified and
This partial approach has the advantage of being well defined, the
results are simple and easy to interpret, and it opens up for
numerous different methods of calculation of consequences. The
disadvantage is that we cannot be sure that what is optimal in the
analysis of a measure is also optimal in general. This makes it
more difficult to compare results across measures.
The alternative to the partial approach is an analysis carried out
using a model, e.g. a general equilibrium model. This will result
in a more integrated analysis which includes the interplay between
effects and derived effects.
Types of socio-economic analysis
Socio-economic analysis is a broad concept, which covers several
different types of analysis.
A welfare economic analysis assesses the welfare-related
consequences for society of a given measure. As far as possible,
assets that are not directly sold in the market and which therefore
cannot readily be valued or priced are also included in the
calculations, for example the recreational value of wetlands.
There is a significant methodological and data uncertainty linked
to valuing non-market goods.
A welfare economic analysis is carried out either as a
cost-benefit analysis (CBA) or as a cost-effectiveness analysis
In principle, a CBA values all the effects of both the reference
scenario and of the measure. The measure should only be implemented
if the present value of the benefits exceeds the present value of
the costs, so that the measure yields a socio-economic profit. When
comparing several measures, the measure yielding the highest
socio-economic return should be chosen.
A CEA measures the costs relative to a desired effect (e.g. net
costs per tonne of carbon emission reduction). A CEA is especially
suited for calculating how society can most cost-effectively
achieve a given target within e.g. the climate area.
In the area of climate adaptation, the concept of cost of inaction
(COI) is often applied, i.e. the costs of doing nothing in terms of
climate adaptation; of choosing a laissez-faire approach. The cost
of inaction is an expression for the damage we avoid if we adapt to
a changing climate.
Cost of inaction cannot stand alone. This is because the cost of
inaction only shows what will happen if we choose to do nothing in
terms of climate adaptation; if we take no political action. To
provide a full picture of things, the cost of inaction should be
held up against the costs of action in an overall cost-benefit
The cost of inaction can have considerable clout and is often used
in the early phases of policy preparation, where focus is on
identifying problems and communicating the need for political
action. Cost of inaction is thus often used to outline the
necessity of acting in a given area. Cost of in action is also used
to suggest in which sectors action should be taken. However, cost
of inaction cannot be used when comparing or choosing between
different political measures (for instance climate change
adaptation measures) or to assess a single given political measure.
This would require calculating the cost of the political
An economic analysis of the budget for a given climate change
adaptation measure should also be done. This type of analysis shows
how much the stakeholders involved will win or lose in connection
with the measure. Stakeholders include e.g. central and local
governments, households, the agriculture sector, summer cottage
owners, etc. An economic analysis of the budget shows the direct
financial effect for each stakeholder, i.e. the net costs for
central government, summer cottage owners, etc.
Uncertainty, the time perspective for benefits and costs,
and the availability of data can be decisive for the quality and
design of socio-economic analyses.
Often, there is a lack of knowledge about when and with how big an
effect the different climate change impacts will occur. This is
essential when assessing and timing climate change adaptation
measures. It entails an extra element of uncertainty when
interpreting and applying the results of a socio-economic
The climate change adaptation area raises certain methodological
issues. These occur because calculations are made for very
long time horizons, and because there is substantial uncertainty
linked to the future effects. Socio-economic analyses in the
climate change adaptation area are relatively new, both in Denmark
and elsewhere. Methods are under continuous debate and
The time perspective is particularly important in the climate
change adaptation area. Timing of the measure, i.e. when the
adaptation is to be made, can be of great significance for the size
of the costs and the benefits.
The time perspective becomes a challenge in socio-economic
analyses where the time gap between the costs and the resulting
benefits is too big. This is also the case where measures
have a long investment horizon.
The time horizons in the climate change adaptation area are very
long; we are calculating with 50 or 100 years or several hundred
years. Discounting is therefore a special challenge in this
If the discount rate is of a certain size, there is a risk that
the present value may become very small when discounting is over
such a long time horizon. This could mean that damage costs
incurred in the last part of the century will become so
insignificant that they are almost irrelevant in the calculations.
This could distort assessments of climate change adaptation
measures, because the benefits, i.e. the damage avoided in the far
future, become very small. It could also have consequences
for how resources and costs are distributed across
Sensitivity analyses should be performed in connection with
socio-economic analyses. That is, analyses in which the size of
significant variables is changed, one at a time, to see how much
the outcome changes. This provides a basis against which to assess
the robustness of a result. Another useful approach to sensitivity
analyses is to asses how much the value of different parameters
must change before the project reaches break-even, the point where
the costs correspond to the benefits.