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Socio-economic analyses

Socio-economic analyses can help us assess the benefits and costs associated with climate change adaptation measures.

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 cost-effective.

Socio-economic screening 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.

Partial analyses
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 valued.

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.

Welfare economic 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 (CEA).

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.

Cost of inaction
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 analysis.

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 measure.

Budgetary economic analysis
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.

Methodological issues
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 analysis.

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 development.

Time perspective
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 area.

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 generations.

Sensitivity analyses
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.