Adaptation benefits and costs measurement and policy issues

Transcription

1 WORKING PARTY ON GLOBAL AND STRUCTURAL POLICIES OECD Workhop on the Benefit of Climate Policy: Improving Information for Policy Maker Adaptation benefit and cot meaurement and policy iue by John M. Callaway Organiation for Economic Co-operation and Development 2003 Organiation de Coopération et de Développement Economique

2 Copyright OECD, 2003 Application for permiion to reproduce or tranlate all or part of thi material hould be addreed to the Head of Publication Service, OECD, 2 rue André Pacal, Pari, Cede 16, France 2

3 FOREWORD Thi paper wa prepared for an OECD Workhop on the Benefit of Climate Policy: Improving Information for Policy Maker, held December The aim of the Workhop and the underlying Project i to outline a conceptual framework to etimate the benefit of climate change policie, and to help organie information on thi topic for policy maker. The Workhop covered both adaptation and mitigation policie, and related to different patial and temporal cale for deciion-making. However, particular emphai wa placed on undertanding global benefit at different level of mitigation -- in other word, on the incremental benefit of going from one level of climate change to another. Participant were alo aked to identify gap in eiting information and to recommend area for improvement, including topic requiring further policy-related reearch and teting. The Workhop brought repreentative from government together with reearcher from a range of dicipline to addre thee iue. Further background on the workhop, it agenda and participant, can be found on the internet at: The overall Project i overeen by the OECD Working Party on Global and Structural Policy (Environment Policy Committee). The Secretariat would like to thank the government of Canada, Germany and the United State for providing etra-budgetary financial upport for the work. Thi paper i iued a an authored working paper -- one of a erie emerging from the Project. The idea epreed in the paper are thoe of the author alone and do not necearily repreent the view of the OECD or it Member Countrie. A a working paper, thi document ha received only limited peer review. Some author will be further refining their paper, either to eventually appear in the peer-reviewed academic literature, or to become part of a forthcoming OECD publication on thi Project. The objective of placing thee paper on the internet at thi tage i to widely dieminate the idea contained in them, with a view toward facilitating the review proce. Any comment on the paper may be ent directly to the author at: John M. Callaway UNEP Collaborating Centre on Energy and Environment Riø National Laboratory, Rokilde, Denmark mac.callaway@rioe.dk Comment or uggetion concerning the broader OECD Project may be ent to the Project Manager: Jan Corfee Morlot at: jan.corfee-morlot@oecd.org ACKNOWLEDGEMENTS Thi paper wa prepared with upport from the OECD, Aement of Impact and Adaptation to Climate Change (AIACC) Program, International START Secretariat, and the Danih Minitry of Reearch. I would alo like to thank Gary Yohe for hi helpful comment. 3

4 TABLE OF CONTENTS FOREWORD INTRODUCTION WHAT IS ADAPTATION? A FRAMEWORK FOR ESTIMATING THE BENEFITS AND COSTS OF ADAPTATION The original framework Modification to the framework Linking climate variability to climate change Making the framework tochatic Linking the counterfactual cae and damage/benefit definition to adjutment to climate variability and climate change Meauring climate change damage and benefit of adaptation AN EXAMPLE Adding no regret Aement modeling CONCLUSION: VULNERABILITY, ADAPTATION AND ECONOMIC DEVELOPMENT REFERENCES Table Table 1. Alternative Adaptation Scenario for Etimating Adaptation Cot and Benefit Table 2. Epected Net Welfare and Optimal Reervoir Capacity for Project Option Under Alternative State of Nature Full Adjutment Table 3. Epected Net Welfare for Project Option 3 (Dam only) Holding Reervoir Capacity Fied and Varying Climate Partial Adjutment Table 4. Epected Net Welfare for Project Option 4 (Dam + Water Market) Holding Reervoir Capacity Fied and Varying Climate Partial Adjutment Table 5. Etimate of Climate Change Damage, Impoed Cot of Climate Change and Net Benefit of Adaptation for Project Option Table 6. Etimate of Climate Change Damage, Impoed Cot of Climate Change and Net Benefit of Adaptation for Project Option Figure Figure 1. Illutration of adaptation in a good market (old framework) Figure 2. Illutration of adaptation in a good market (new framework) Figure 3. Illutration of adaptation for a no climate regret project

5 1. INTRODUCTION Thi paper ha three main objective. The firt to comment on the way in which adaptation to climate change i treated in the lead paper prepared for thi workhop by Smith and Hitz (2002) and to ummarie what I ee a the main technical iue in evaluating the contribution of adaptation to avoiding climate change damage. The econd i to how how thee iue can be incorporated into a conceptual framework for characterizing adaptation in regional and multi-regional ectoral aement of climate. The final objective i to how how thi framework might be operationalied uing a hypothetical eample from a river bain. But before I do thi, I want to briefly addre an important iue raied by Smith and Hitz (2002) in thi paper, which i: who need information about the global benefit of mitigation and adaptation and why do they need it? It i well known that adaptation benefit and cot, a well a mitigation cot, are local in nature. We alo know that, while the global marginal benefit of reducing a ton of GHG in the atmophere i the ame, no matter where mitigation take place, the local climate effect and local marginal benefit will be different. The artif cial ditinction between the charge of the World Bank with national environmental benefit and the GEF with global environmental benefit aide, why are we in uch a ruh to um up thee benefit? It i important to look at both ide of the iue regarding who need information about the global benefit of reducing climate change damage. Firt, a a keptic, my concluion i that under the current ytem of global climate governance, deciion maker in the UNFCCC ytem do not need information about the global benefit of reducing GHG or offetting climate damage to make deciion. However, quetion about the ditribution of climate change damage do raie iue that help u to undertand the current intability of global climate governance. Let me epand a little on thi in two direction. Firt, all of the Kyoto mechanim are either trictly regulatory-baed or mitigation cot-baed in the interet of making the regulatory cheme more cot-effective. To comply, the Partie only need to know their own quota and, if the market created under emiion trading, Joint Implementation and the Clean Development Mechanim are efficient, their own marginal mitigation cot. The marginal benefit of emiion reduction are irrelevant to compliance deciion. Second, two piece of information are emerging that have intereting burden haring implication that help to bring into focu iue about the ditribution of global damage and benefit that are at the heart of many UNFCCC debate. The firt i that marginal emiion reduction cot are probably lower in many non-anne I than Anne I countrie (IPCC 2001a). The econd i that climate change damage may be more evere in non-anne I countrie than in Anne I countrie (Mendelohn et al. 2000; Roenzweig and Parry et al. 1999; Sohngen et al. 2001) and in ome ector developed countrie that are located relatively cloer to the pole may eperience mall benefit from climate change (Mendelohn et al. 1994; Adam et al 1999). 5

6 For an economit, thee two piece of information have intereting implication for the tability of the current ytem of global climate governance. If, a an analytical eercie, one chooe to maimize the global benefit of emiion reduction, then two important firt-order condition that flow from thi are: 1) the um of the marginal damage avoided in each region (i.e., global damage)hould be equal in all region that undertake mitigation and 2) the marginal cot of mitigation in thee region alo hould be equal. If the region that are damaged the mot by climate at the margin alo have the lowet mitigation cot, thi thrut the economic burden of mitigation on them and give rie to the need to implement cheme for the winner in the Anne I countrie to compenate them under the polluter pay principle. Furthermore, if adaptation i viewed a a ubtitute for environmental input in production, the leat damaged nation will concentrate more on adaptation than mitigation, even when the technological eternality created by the tock of GHG emiion in the atmo phere i internalied through uch mechanim a ide payment and carbon tae. An equally troubleome iue regard entitlement to the benefit of emiion reduction in ector and countrie where the marginal benefit of reducing GHG emiion may be negative (meaning that the marginal impact of climate are beneficial). On the poitive ide, there are many good reaon why everyone involved in mitigation and adaptation deciion at the global, regional and national level need more information about the marginal benefit and cot of avoiding climate change damage. But before I dicu thee, I want to briefly make a imple point about the intitutional ditinction between the global benefit of mitigation veru the local benefit of adaptation. Adaptation i a ubtitute for mitigation, albeit far from perfect. If a farmer can limit the effect of reduced oil moiture on yield through different management practice and input ubtitution, thee action diplace the effect of mitigation action on global climate. A uch, local adaptation and global mitigation are linked and o are their benefit and cot. More adaptation locally mean le mitigation globally. While better information about the marginal benefit of mitigation and adaptation at the global level doe not play a direct role in the implementation of the Kyoto mechanim, it i important in the longer term for the Partie to the UNFCCC both to addre the iue of burden haring and to allow them to re-think how adaptation can be integrated into the eiting, mitigation-heavy UNFCCC. In thi regard, the general quetion of how effective and cotly adaptation i a a ubtitute for mitigation i very important. However, information about the ditribution of thee benefit acro ector, region and nation may be more important than global total to addre thee iue. Dometic policy maker in climate-enitive ector have more limited need for global information than for national information (ecept when it come to taking a poition on burden haring). Thoe in countrie with lowlevel of GHG emiion want to know the benefit and cot of adaptation in their countrie and the cot of mitigation that may be impoed on them (both by regulation and by participating voluntarily in the Kyoto mechanim) by international treatie and convention. Thoe in countrie with high level of emiion want to know the benefit and cot of both mitigation and adaptation in their countrie, ince reducing national emiion may alo have ome ubtantial national benefit (a well a cot, obviouly). The ame i even truer for dometic planner. Energy planner are focued narrowly on the cot of reducing emiion at home and in the market that develop a a reult of the Kyoto mechanim. Planner in climate-enitive ector are intereted in the local benefit and cot of adaptation related to pecific option and project. Thu, I would argue that reearch about the global benefit of adaptation and mitigation hould work from the national ectoral level up, not from the global level down, and that once data, tool and method for doing thi are in place, and are implemented ytematically, we can indeed produce global etimate that will be helpful in clarifying burden haring iue, even if they tir up a lot of trouble. We hould not be in a ruh to create global etimate, which I have argued have limited hort-term policy 6

7 value, until we get thing right at the national and ectoral level. We are a long way from being able to do thi, particularly in developing countrie, where adapting to the damage of climate change created by developed countrie i at the core of the current intability of the UNFCCC and Kyoto Protocol. 7

8 2. WHAT IS ADAPTATION? The paper by Smith and Hitz (2002) directly and indirectly draw attention to the general lack of conenu that eit about how to include the accomplihment and cot of adaptation in etimate of the damage due to climate change and the benefit of reducing GHG emiion. Thi confuion tem from a broader lack of conceptual agreement about what adaptation to climate change i, which i reflected both in a number of the tudie where adaptation i treated, and in the dicuion by Smith and Hitz. For eample, in Smith and Hitz dicuion covering the agricultural ector two type of adaptation are mentioned. The firt involve change in management practice, uch a hifting planting date, increaing fertilizer ue, introduction of new plant varietie and intallation of irrigation ytem to offet the effect of reduced precipitation and higher temperature on yield. Thee adaptation were introduced into the tudie by Roenzweig et al. (1995) and by Parry et al. (1999), eogenouly, by manipulating the input data/parameter to the relevant crop yield model. But they were not introduced into the tudy by Darwin et al. (1995) by, for eample, adjuting the return to land conitent with thee adjutment. Thee adjutment repreent adaptation to climate change, however, they were forced into the modeling framework eogenouly, rather than being an endogenouly determined outcome of farm level deciion and market force. Further, the adaptation that were introduced, in an eperimental way, by Roenzweig et al. (1995) and by Parry et al. (1999) were not homogenou, involving a mi both of hort- and long-run and autonomou and trategic meaure that, very arguably, hould be treated differently. A econd type of adaptation (directly related to the lat point) that Smith and Hitz addre in their paper relate to the equilibrium adjutment that occur in the global ectoral trade model ued by Roenzweig et al. and by Parry et al. and the general equilibrium model ued by Darwin et al. Partial and general equilibrium model are alo employed in ome of the tudie eamined for other ector: ea level rie (Darwin and Tol, 2001) and foretry (Sohngen et al., 2001 and Perez-Garcia et al and 2002). All of thee tudie hare in common the feature that when crop yield change eogenouly, the market price of good and ervice in the directly affected ector (in both partial and general equilibrium model) and in other ector linked to them through the inter-indutry flow of good and ervice (in general equilibrium model) alo change. Thee price change, in turn, have the potential to influence a wide variety of invetment, production and conumption deciion in the climate-enitive ector, a well a thoe linked to them in the variou model. So, do thee type of adjutment to market force repreent adaptation, or not? Smith and Hitz refer to thee adjutment a adaptation of a ort in their review of the Roenzweig et al. and Parry et al. tudie, but then in eplaining how the general equilibrium feature of Darwin model take into account adjutment in crop and livetock mie the author drop all reference to the term adaptation. The iue i not even raied by Smith and Hitz in connection with ea level rie or foretry, where both partial and general equilibrium model are ued to etimate climate damage. But, a I 1 Dicuion of thee tudie wa omitted from the paper by Smith and Hitz (2002), due to lack of information about the climate cenario ued in them. 8

9 will try to how later, I believe thee adjutment hould count a a part of the adaptation proce and the major quetion are: how to meaure their effect and how to value their contribution to the marginal benefit of adapting to climate change. A third type of adaptation i preented in the dicuion by Smith and Hitz regarding ea-level rie. Thi type of adaptation involve both autonomou and trategic invetment by the public ector in infratructure uch a, in the cae of thee tudie, ea wall and dyke. Thee invetment repreent a form of adaptation becaue they directly avoid climate damage. But what about invetment, other than ea wall, dyke and water upply reervoir, that have a le viibly direct relationhip to preventing climate change damage? One can give a few, more obviou eample: new invetment in agricultural and timber land to follow climate-induced change in NPP over time and pace 2, invetment in agricultural machinery and fertilizer production capacity in repone to climate-induced change in ubtitution poibilitie and invetment in agricultural torage capacity to mooth out climate-induced price fluctuation for agricultural commoditie. I have purpoely choen invetment that are rather immediately linked to climate variability and climate change. More generally the relationhip between a wide range of fied and quai-fied factor in weather and climate enitive natural reource ector, the contraint they impoe on hort-run adaptation meaure, and the effect of invetment on the cope of adaptation deciion ha not been dicued enough in the literature on adaptation. Another type of adaptation to climate change I want to addre in the contet of the paper by Smith and Hitz focue on the relationhip between economic development and adaptation to climate change and involve more generally the relationhip between no regret action taken by individual and government and adaptation. In the contet of adaptation, a no regret action i one that i taken for reaon other than avoiding climate change damage, but which neverthele often the impact of climate change a they occur. In their paper, Smith and Hitz indicate that eogenou aumption about economic development in a number of the tudie had a fairly ubtantial effect on many of the damage/benefit etimate. A they pointed out, economic development often reduce national vulnerability to climate change and in their concluding remark they emphaie the importance of proactive adaptation meaure that can be taken today to reduce regional vulnerability to climate change. I would make the point a little differently, and more trongly, by aying that there are potentially many action, particularly in developing countrie, that can be taken today for reaon that are more directly related to a broad variety of other developmental goal (including reduced vulnerability to eiting climate variability) that alo are potentially effective in reducing the vulnerability of nation and region to climate change. Related to the iue of what properly contitute adaptation i the quetion of how we account for the benefit and cot of adaptation and how we relate thee to the damage caued by climate change. Thi wa the topic of an earlier tudy by Callaway et al. (1999). In that tudy, my colleague and I made two point that are relevant to the paper by Smith and Hitz (2002). The firt point wa that, while a number of tudie had etimated the economic value of climate change damage, none of thee had eparated out the benefit of adaptation or related thee benefit, conitently, to the damage caued by climate change, with and without adaptation. I think thi till a true in 2002 a it wa in The econd relevant point wa that meaure of the value of reource ued to avoid climate change damage hould be counted a the real reource cot of adaptation and not a the benefit of adaptation. The Smith and Hitz paper reviewed the ea level rie tudy by Darwin and Tol (2001) in which the author demontrate the econd point very forcefully. Unfortunately becaue Darwin and Tol were 2 Change in pecie ditribution (i.e., location) were introduced eogenouly, not endogenouly by Sohngen et al. (2001). 9

10 uing different model and method to etimate the real reource cot of protective meaure againt ea level rie, on the one hand, and the value of the damage due to ea-level rie, on the other, they were not able to effectively pare out the damage avoided by thee protective meaure and relate thi to the value of the reidual (i.e., after protection) damage due to ea-level rie. Finally, I want to look at the iue of market integration and where it lie in relationhip to adaptation. All of the tudie reviewed by Smith and Hitz in the agricultural ector employ methodologie that link dometic production in variou region to world food market. The tudy by Darwin et al. (1995) and a related tudy by Roenzweig et al. (1993) directly focu on the role of world food market in filtering the damage that would occur if there were no trade (i.e., autarky). None of thee tudie eplicitly model the comparion between autarky and free trade, but Roenzweig et al. (1993) doe how that dometic market adjutment (which unfortunately are not clarified very well in the paper) and trade liberalization ignificantly offet climate change damage when meaured in term of cereal production and nutrition. In a related tudy, Winter et al. (1998) ued a computable general equilibrium approach to etimate the macro-economic impact of climate change on developing countrie (Aia, Latin America and Africa) in conjunction with the ame climate change cenario and a ubet of the yield data from Roenzweig and Parry (1994). Thi tudy confirmed the importance of adaptation in reducing the damage of climate change in all three region a meaured by percent change in agricultural production, GDP, and a number of other indicator. However, difference in the avoided damage between the three region could be eplained by the etent to which agricultural production wa concentrated in houehold, the degree of integration in dometic food market and by the degree of integration of the dometic farm ector into global food market. The author conclude that policie to reduce climate change damage in developing countrie hould focu on intenification of agricultural production and integration in the international market in Africa and the intenification of production of eport crop in Latin America and Aia. In other word, they tre a renewal of traditional agricultural development practice focuing on infratructure development and modernization in concert with current ofter development policie to develop human and ocial capital reource. The tudy by Winter et al. (1998) help to focu my earlier remark on no-regret adaptation meaure, ince the policie advocated in thi tudy are development policie, primarily, but which have econdary benefit. The tudy alo help to focu attention on the iue of adaptation capacity, an iue that i not raied directly in any of the tudie reviewed by Smith and Hitz (2002). And it alo help to illutrate that it i difficult to draw the line between the difference in an invetment in adaptation meaure and an invetment that trengthen adaptation capacity. Perhap there i no need to make thi ditinction. But what i important, at ome point, i to be able to link and meaure omething we call adaptation capacity to the ability of individual and organization to adapt to climate change through pecific meaure. The mot immediate meaure that come to mind are related to the eae with which input and output can be ubtituted for one another in conumption and production, a in Winter et al. (1998), along with meaure of reource carcity and mobility. Some of thi can be incorporated into multi-market ectoral model through demand and upply function (properly derived), but ultimately only through model that characterie inter-indutry tructure, a well, uch a ued by Darwin et al. (1995). Having aid thi, I would like to go on in the remainder of the paper to how how it i poible to: Combine variou type of adaptation behavioral adjutment, partial and general equilibrium price adjutment, and invetment in infratructure into a unified adaptation framework that include autonomou and trategic adaptation, a well a adaptation that ha a no regret component; Link adaptation to climate variability to climate change; and 10

11 Do thi in a framework that i general enough to apply to a large range of objective, not jut economic efficiency, but when it i appropriate ue a conitent welfare accounting ytem to iolate the benefit and cot of adaptation. Do thi in an eplicit type of modeling framework that can be applied at the national ectoral and project level, that ha ome relevance to planning under rik. 11

12 3. A FRAMEWORK FOR ESTIMATING THE BENEFITS AND COSTS OF ADAPTATION In thi ection of the paper I outline an earlier framework developed by Callaway et al. (1999) to characterie adaptation benefit and cot. I indicate the hortcoming of the framework in term of the iue I raied at the end of the lat ection and then go on to illutrate one way the framework can be modified to addre thee iue. Thi ection contain a made-up numerical eample to illutrate how the framework can be applied both to the planning and aement of adaptation option and project, including a dicuion of no regret option in the contet of Smith and Hitz concept of proactive adaptation. 3.1 The original framework In an earlier paper, Callaway et al. (1999) outlined a conceptual framework for etimating the benefit and cot of adaptation that can be applied at almot any cale. Thi framework wa largely baed on earlier work by Fankhauer (1997). Since writing the earlier paper, I have made a number of modification to thi framework and that i what I want to preent here. To preent the framework, it i neceary to define adaptation to climate change. I ue thi term to include, broadly, any adjutment that that individual, ingly and collectively (in whatever organizational framework), make autonomouly or policy maker undertake trategically to avoid (or benefit from) the direct and indirect effect of climate change. Individual and organiation can do thi autonomouly in the ene that economic, ocial and political intitution with which they interact provide incentive for them to adjut automatically to climate change, without political intervention. Or, they can adapt trategically through deciion made by government. Stated in thi way, the line between autonomou and trategic adaptation i not eay to draw in all cae, ince, conceptually, government do not uually operate outide the underlying incentive ytem that have developed to guide behaviour. In the cae of a market economy, thi ditinction i fairly eay to make baed on difference between the private objective of individual, firm and factor owner and the ocial objective of government and the divergence of thee objective due to market failure. In thi type of politically economy, private deciion maker repond to whatever incentive they face, whether thee are market or public policy driven. A uch, private deciion maker can be epected to repond autonomouly to trategic climate change policie, but would not take the ame action on their own, ecept for altruitic reaon. Maybe thi ditinction hold true for all ocietie, but I would not ue it generally, ince there may well be workable incentive ytem in ome ocietie where private and collective welfare are better aligned than in market or ocialit economie in developed countrie. It i important to note that thi ditinction applie broadly to all of the different type of adaptation dicued in the paper by Smith and Hitz (2002), namely: autonomou hort-run adjutment in the behaviour of individual and firm, autonomou market adjutment to climate change that indirectly affect human and organizational behaviour, and both autonomou and trategic long-run adjutment in technology, infratructure and intitution. I only ay thi becaue, even though trategic adaptation will often take the form of long-run adjutment, there i no theoretical reaon to limit the type of adjutment that can occur autonomouly or trategically. 12

13 The core idea in the conceptual framework developed, firt, by Fankhauer and touched up a bit by Callaway et al. (2002) can be eplained with the ue of Table 1 3. It hould be noted that thi framework wa originally developed in the contet of a market economy. Table 1 characterie four different, general adaptation cae. The column indicate the climate, either C 0, the eiting climate or C 1, the altered climate, to which individual and organiation are adapted, while the row indicate whether ociety i adapted to the eiting climate, A 0, or the altered climate, A 1. The idea wa that individual and organiational behaviour i optimally adapted to an eiting climate regime (C 0 ) through behaviour that can be broadly characteried a A 0. When the climate change from C 0 to C 1, there i aociated with the new climate, a new behavioural optimum, characteried by A 1. Table 1. Alternative Adaptation Scenario for Etimating Adaptation Cot and Benefit Adaptation Type Adaptation to eiting climate (A 0 ) Eiting Climate (C 0 ) Altered Climate (C 1 ) Eiting climate. Society i adapted to eiting climate: (C 0, A 0 ), or Bae Cae Altered climate. Society i adapted to eiting climate: (C 1, A 0 ). Adaptation to altered climate (A 1 ) Eiting climate. Society i adapted to altered climate: (C 0, A 1 ). Source: Modified from Fankhauer (1997) Altered climate. Society i adapted to altered climate: (C 1, A 1 ). The top left bo decribe a ituation in which ociety i adapted to the eiting climate, C 0, through adaptive behaviour A 0. Thi i ometime referred to a the Bae Cae. The lower right bo repreent a ituation where ociety i adapted to a change in climate from C 0 to C 1. that ha changed over time through behaviour A 1. The top right bo decribe a ituation in which ociety behave a if the climate wa not changing, and i adapted to the eiting climate, but not the altered climate. The bottom left bo repreent a cae in which ociety decide to behave a if the climate had changed, when in fact the climate ha not changed. Note that if the null hypothei i that the current climate doe not change, H 0 : C 0 = C 1, then accepting the null hypothei when it i fale, and not adjuting to climate change that doe occur (top right bo), i aociated with making a Type II error. Rejecting H 0 when it i true, by adjuting to climate change that doe not occur (bottom left bo), repreent a Type I error. In the paper by Callaway et al. (1999) the following definition were adapted from Fankhauer (1997) to define the variou benefit and cot aociated with climate change and adaptation: Climate change damage - the net cot to ociety of climate change, if climate change and adaptation doe not take place. Adaptation benefit - the value of the climate change damage avoided by adaptation action. Adaptation cot - the value of the reource ociety ue to adapt to climate change. Net adaptation benefit - the value of adaptation benefit minu adaptation cot 3 It hould be noted that thi framework wa originally developed in the contet of a market economy, but in thi paper I will refer more generally to behaviour in any kind of political economy. 13

14 Impoed cot of climate change - the net cot to ociety of climate change taking into account that adaptation occur. Thi i the difference between climate change damage and net adaptation benefit. If we let W(C, A) repreent net ocial welfare, however meaured, then the impoed cot of climate change i calculated a the difference between net welfare in the lower right cenario in Table 1, or W(C 1, A 1 ), minu net welfare in the top left cenario, W(C 0, A 0 ). However, thi i not the correct comparion to be ued for meauring the cot and benefit of adaptation. To do thi one mut compare the cot and benefit of action that are taken in the top right bo with thoe in the bottom right bo, or between the following two tate: (i) when climate change, but ociety i adapted to the eiting climate (C 1, A 0 ), and (ii) when climate change and ociety adapt to the altered climate (C 1, A 1 ). Thu, Climate Change Damage = W(C 1, A 0 ) W(C 0, A 0 ); the Impoed Cot of Climate Change = W(C 1, A 1 ) W(C 0, A 0 ); and the Net Benefit of Climate Change = W(C 1, A 1 ) W(C 1, A 0 ). Callaway et al. (1999) illutrated thee welfare meaure in the market for a ingle good produced in a climate enitive indutry. Thi i hown in Figure 1, below. The effect of climate change are illutrated by hift in the upply curve for the good S(A, C). D indicate the demand curve for the good. Often the demand for a good or an input i influenced by weather and climate, but howing thee change complicate the graphic analyi. Therefore D doe not repond to climate change in thi figure and the other like it in thi paper. In thi diagram, area A+B equal the lo in conumer and producer urplu aociated with climate change damage. The impoed cot of climate change i repreented by lo of conumer and producer urplu indicated by area B, and the area A repreent the poitive net benefit of adaptation. Figure 1 indicate welfare loe. However one can ue the ame conceptual approach to characterie the phyical damage of climate change in term of climate change damage and the reidual damage of climate change. In the ame way, the difference between the two, which are the net adaptation benefit can be characteried in term of the phyical climate change damage avoided by adaptation meaure. And the input ued to create and implement adaptation meaure can in ome ene be treated a the phyical analogue to the real reource cot of adaptation, although not all input, uch a information, are eay to characterie in phyical term, even if they have a real cot. The point i that thi framework could be applied uing many different damage metric. In paing we hould note that thi framework anwer the objection raied by Darwin and Tol (2001) about the ue of opportunity cot meaure to capture the benefit of adaptation. In our framework (Callaway et al. 1999), adaptation cot i not a meaure of avoided climate change damage, it i trictly a meaure (monetary or phyical) of the real reource ued to avoid climate change damage. A number of problem with thi framework were preented in Callaway et al. (1999) and other have emerged in my mind ince it wa publihed. Mot notable among thee are: The link between adaptation to climate variability and climate change wa miing, making the framework both determinitic and incomplete. The counterfactual cenario, (C 1, A 0 ), a tated, could not be oberved, and did not make empirical ene, either. More generally, the framework did not relate thi proce of adaptation to planning under uncertainty, both through planning model and how thi proce could be integrated into aement model at the ectoral and project level. 14

15 The framework did not ditinguih between hort- and long-run adjutment to climate change and variability. Figure 1. Illutration of adaptation in a good market (old framework) $/ unit output S ( A0, C1) S (A1, C1) P S (A0, C0) P1 P0 A B D Q Q1 Q0 Output Level (Q) 3.2 Modification to the framework Thi ection of the paper follow up on thee problem and how how the framework can be modified to addre them Linking climate variability to climate change In fact, all of the problem with the earlier framework are cloely related and the key to reolving thee problem lie in making the counterfactual cenario (C 1, A 0 ), believable. Thi involve two tep: firt, by linking the framework in a more detailed way to the way in which individual and organiation engaged in climate and weather-enitive activitie repond to climate variability and econd, by linking thi to a more general paradigm for planning under uncertainty. In the earlier adaptation framework paper (Callaway et al. 1999) and the even earlier work by Fankhauer (1997), the counterfactual cenario in which producer did not adjut their input ue to the new 15

16 climate wa neceary to iolate the adjutment that individual and organiation made to climate change. In upport of thi contruct, we know there are hitorical eample of place that were ettled due to lack of ufficient information about the true climate and then abandoned when random (perhap even peritent ) period of above-average rainfall eventually gave way to the dominant, drier climate pattern. We alo know that no matter how much information we have about climate and climate variability, we don t need to be mart get out of the rain. Thu, eperience and common ene tell u that, while it i indeed poible to be poorly-adapted to the true climate without ufficient information, one doe not need a lot of information to make ome adjutment to climate variability while other adjutment require a little more information and, thu, take longer. To better relate adjutment to climate variability with thoe to climate change I go back to Smit (1993,) and Carter (1993) and Smit et al. (1996, 2000) who uggeted that farmer are alway optimally adjuted to climate variability, given the information available to all of them formally and informally, but that at any given time they alo face contraint impoed by pat deciion to adjut to climate variability. Thi doe not mean that they can alway gue the weather with preciion but it doe mean two other important thing: a) given their knowledge about the joint ditribution of meteorological variable, individual and organiation build a certain amount of fleibility into their activitie in order to be able to cope with the weather variability they and other have faced in the pat, and b) thi fleibility may enable individual in region with a great deal of weather variability to better cope with climate change than thoe living in region where there i very little weather variability, even if they do not have information that the climate ha in fact changed. The point Smit (1993) and Smit et al. (1996, 2000) make about the importance of information in adapting to weather variability help u to link the trongly counter-factual adjutment cae ued for meauring adaptation benefit to the actual behaviour of individual under uncertainty, both in term of their adjutment to climate variability and climate change. When people, ingly or collectively, make hort- or long-term deciion that are weather or climate enitive, they take the information available to them from the joint ditribution of weather and/or climate variable into account, both in planning and implementation. The type of information that i relevant to them weather or climate depend on the time horizon aociated with a pecific action and the fleibility they have in adjuting their behaviour. Thee time horizon vary widely. For eample, information about the weather net week i crucial at harvet time for farmer, a i the day wind peed and wave height for a coatal fiherman. On the other hand, when individual make invetment deciion they uually take a long-term perpective, becaue invetment ependiture in land and capital good and other tangible aet are long-lived and often lumpy and it i cotly to replace them once the invetment deciion i made. An invetment deciion to plant a particular type of foret pecie for harvet require a planning horizon that pan the rotation length for the pecie and the product for which it will be harveted. The ueful life of a water upply reervoir for irrigation water may be 50 year or more. Thu, invetment deciion are more likely made on the bai of climate, a oppoed to weather information. The fleibility that individual and organiation have to adjut to climate variability i partly related to the above ditinction between the hort- and long-run, but it alo i related to environmental and technological feature that characterie the tructure of production activitie in the houehold, in firm and organiation, generally. When a crop i damaged by hail, for eample, the damaged plant cannot be reurrected back to life. In the ame way, once an ear of corn ha taelled, there i no ubtitute for unlight and peritent rain after thi occur will mean low yield. There i little the farmer can do about thi, ecept cut hi economic loe and hope for better weather in the net crop eaon. 16

17 To link adaptation to climate variability to adaptation to climate change, I want to formally define what I mean by weather, climate and climate variability. To undertand thee difference, we need, firt, to characterie the joint ditribution of k =1,, K meteorological variable (M) a: M M,..., M d 2 ) ( X, V,:, ), EQ.1 1 K M M M M 4M 2 where X M, V M, and : M are, repectively, the mean and variance of the partial ditribution of the individual random variable in M, : M i the variance-covariance matri of M, and 4 M repreent a vector of the higher order moment of the ditribution of M. In thi framework, climate i characteried by the ditribution parameter of M, while the oberved (or predicted) weather i characteried by the oberved (or predicted) value of the variou meteorological variable that comprie the joint ditribution of M. For eample at time t thi would be: M 1t, M 2t,, M Kt. Climate variability, which i a part of climate, i characteried by the variance of the partial ditribution of meteorological variable, the covariance between the meteorological variable and the higher-order moment of the partial and joint ditribution of the meteorological variable, uch a kewne and kurtoi. Now, to how how deciion-maker in the private and public ector deal with the randomne of climate and climate variability in their capacity a reource planner or manager we introduce the idea of the production function. The production function in a climate-enitive ector, indutry, or even more broadly an activity i a way to characterie the relationhip between the output of an activity and the input ued to create that output, including meteorological variable. Here, I will ue a very imple form of a production function, where there i jut one output: t t t t Q f X,K, M, EQ.2 where the ubcript and t repreent, repectively, the tate of nature (or climate) and t repreent time. Q tand for the ingle output and X and K are, repectively, vector of variable input (X) and fied or quaified factor (K), while M i a vector of random meteorological variable, a characteried in EQ.1 above. Note that a ingle value for any of thee meteorological variable, M it, i a weather value, for eample the oberved or predicted precipitation in a particular month. Thi i a imple production function, but the concept itelf i general enough. It i not only applicable in traditional production activitie, uch a in the agriculture, foretry, fiherie and energy ector, but can alo be ued to characterie the relationhip between the ervice provided by a wide variety of houehold and commercial activitie. For eample, the concept i broad enough to characterie the role of land and ea level rie to the output commercial enterprie that are located in low-lying coatal area. The concept of the production function i alo broad enough to apply, not only to activitie that are aociated with the production of good and ervice that are old in market, but alo to houehold production and the production of non-market good and ervice that are not old in market (Freeman 1994). Perhap the mot important eample of non-market production in the climate change arena i the production of ecoytem ervice (Toman 1997). Throughout thi paper, I will aume that the climate and the weather are eogenou: the planner/manager cannot change the climate. Thi aumption i retrictive for making global deciion, a well a in countrie that emit izeable fraction of global GHG emiion. In thee cae, emiion and climate are either completely or partially under the control of deciion maker. However, only a handful of nation produce a izeable enough fraction of global GHG emiion to ignificantly influence their own 17

18 climate and weather. Moreover, at the ectoral and activity level, where mot adaptation occur, deciion maker have no control over the climate or weather they face. Thu, from here on, it mut be undertood that the analyi contained in thi paper i baed on the notion of partially optimal adaptation, taking the level of GHG mitigation a eogenou. To how how the climate and weather influence production and how change in climate and weather affect the deciion of planner and manager in climate enitive ector and indutrie, I introduce the idea of e-ante, e-pot planning. The problem that confront planner i how to elect the amount of quai-fied factor that are optimal for the climate they face. Thi i a long-run deciion ince, once the invetment in quai-fied factor i made, they become fied factor. The problem of manager i a hort-run problem: how to adjut their variable input to cope with the weather, given that the amount of the fied factor have already been determined 4. An e-ante, e-pot planning problem combine both type of deciion and thi approach i commonly ued in planning new electrical generating capacity, where a given amount of capacity mut be able to cope with weather-driven peak demand Making the framework tochatic The e-ante, e-pot approach to planning i amenable both to autonomou adaptation and to trategic adaptation planning deciion. The e-ante part of the model make ene from the perpective of either type of adaptation deciion ince there i no retriction on the objective to be followed or the contraint impoed. The e-pot part of the model take into account autonomou adaptation that occur in repone to the e-ante deciion regarding invetment in quai-fied factor. Again, there i no reaon why the autonomou adaptation that i characteried in e-pot deciion hould be economic, or market driven. Autonomou adaptation i imply a general term ued to decribe how people repond on their own to political, ocial and economic incentive ytem and rule, regardle of the objective of thi ytem. Nor doe thi approach necearily involve the ue of mathematical model. A farmer in a developing country, whoe only objective i to feed hi family, ha to plan on the number of large animal he need for food and to perform work under a variable climate and ha to live with thee deciion through good time and bad (up to a point). For the purpoe of thi paper, I will ue a mathematical model to illutrate the principle of e-ante, e-pot planning in a mathematical framework, but that i only in order to be concie. And, ince the approach i general, I will illutrate it through a non-economic model 5 of output PD[LPLVDWLRQIRUDFOLPDWHVRYHU «7UDQGRPWULDOVRIZHDWKHUREVHUYDWLRQVRUSUHGLFWLRQVIRU that climate. The problem involve electing the value of X and K that will: 7 Maimie: Z pr( W )f (X,K, M ) W EQ.3.1 W Subject to: W M D(M, W) IRUDOO «7 EQ.3.2 W ZKHUHSU LVWKHSUREDELOLW\RIRFFXUUHQFHRIHDFK DQG'0 LVVKRUWKDQGIRUWKHFOLPDWH ditribution function that generate the random weather value for M V over T random trial. In thi model Z in EQ.3.1 i the epected value of output that i optimal over all T trial, while EQ.3.2 define the value of the weather variable that are generated in each trial. 4 For a variety of reaon, it i often too cotly or phyically difficult to adjut quai-factor to unplanned event. 5 Elewhere, Callaway and Ringiu (2002) have hown how thi approach can be applied to the problem of a houehold farmer whoe objective i to meet the nutritional need of hi family. 18

19 Note that in thi model the quai-fied factor, repreented by the vector K, do not change over WKHWULDOV 7KXVWKHRSWLPDOYDOXHVRIWKHTXDVL-fied factor, K, are optimal generally for the climate and only the value of the variable input, X W can be adjuted individually when the weather change in HDFKWULDO +RZHYHUERWKWKHORQJ-run adjutment in the quai-fied factor and the hort-run adjutment of the variable input, with the quai-fied factor held contant (a fied factor) are determined imultaneouly in thi model over all the random weather trial. In real life, thi will not be the cae. The quai-fied factor will be determined, e-ante, and the variable input will be adjuted, e-pot, given the fied factor. But if the oberved climate parameter ued in the model are the ame a the true climate parameter and the number of random (or repeated random) trail i large, thi type of approach mimic thi iterative proce, a well 6 We can write the e-ante (long-run) olution equation for the vector of quai-fied factor a: K k (M ). EQ.4 The e-pot (hort-run) olution equation for the vector of variable input can, with a little rearranging be written a: X (K, M ) [k (M ), M )] (M ). EQ.5 W The bar over K in EQ.5 i ued to how that once the optimal amount of the quai-factor have been determined in the long-run, they are fied over the individual weather event. By ubtituting thee olution equation into the production function, we get the olution equation for the e-pot (hort-run) olution equation for output: Q q [ (K,M ), K, M ] q [ (M ),k (M ),M ] q (M,M ). EQ.6 W W W W The e-ante, e-pot planning approach can alo be ued to characterie the proce of adaptation to climate change, both in the long-and hort-run, by howing what happen when climate change permanently, for eample from M 0 to M Linking the counterfactual cae and damage/benefit definition to adjutment to climate variability and climate change How deciion maker will react to thi climate change depend on two factor: whether or not climate change can be detected or predicted with enough reliability that deciion maker are willing to act (i.e., make invetment deciion) on the new information, and how much fleibility eit, both in economic term (i.e., hort-run v. long-run), and phyical/environmental term to adjut the variable input and quai-fied factor. Preumably the amount of fleibility i a function of pre-eiting adaptation to current climate variability and the overlap between climate change eiting climate variability. 6 The above formulation aume that weather i random, for illutrative purpoe. However, the weather generating mechanim in the model can be alo be deigned to mimic determinitic (time dependant) and partiallydeterminitic weather generating procee, if that i the cae. 19

20 If the information from either type of ource i reliable, then deciion maker will adjut the capital tock and intitutional arrangement under their control conitent with the reult of planning model that characterie thi climate change. One can call thi proce full adjutment 7 and it repreent the fullet kind of adaptation that can occur with reliable information about climate change. The change in a hort-run value of the output variable 8 aociated with thi proce of full adjutment can be written a: Q f X, K, f X, K, 0 M W 0W 0 0W where W Q EQ.8 1 M W 1W 1 1W Q 0 f X W 0, K W 0, M0 = q[ 0(K0, M0), K0,M0 ] and W Q = [ (K, M ), K, M ] 1 f X,K, M W 1W 1 1W q W In the earlier framework I helped to develop, we looked at the tranition between thee two et of optimal adjutment in term of jut two partial tep, with the counterfactual cae of no adjutment to climate change, lying in between full adjutment proce hown in EQ.8. Now, it can be een that by linking adjutment to climate variability to adjutment to climate change the tranitional proce become both more complicated and, I think, more realitic. If climate change i not detected or the information about predicted change i too unreliable for planning purpoe, thi put deciion maker effectively in a hort-run ituation where the quai-fied factor are fied and they repond to change in weather by varying their variable input. The change in the value of output in thee circumtance can be decompoed into three part. 1. Pure effect of climate change (a purely phyical repone, with no human adjutment poible): Q 0 f X W 0, K W 0, M0 W 1 f X W 0, K W 0, M1 W where Q f X, K, = [ (K,M ), K, M ] 1 M W 0W 0 1W Q. EQ.9 q W Thi part of the adjutment involve what I have elewhere (Callaway and Ringiu 2002) termed the pure climate effect, in which the output repond only to the change in the weather (under the new climate). The quai-fied factor are not adjuted in thi cae becaue the climate change ha not been detected or forecat with ufficient reliability to allow re-planning. The variable input, in theory at leat, could be adjuted to cope with the oberved change in weather, but in thi partial change cae they are not adjuted to cope with climate change, due to the retrictive nature of the production technology or jut the heer inability to alter the effect of nature. Such cae are eay to oberve in the dealing of farmer and water manager in a wide variety of etting. Can thi pure effect be modelled? I will deal with thi quetion later on, in connection with meauring the benefit of partially adjuting to climate change. 7 If a known non-tationary proce generate climate, then thee full adjutment will be gradual and perhap dicontinuou over time, but the proce of adjutment can neverthele be referred to a a full adjutment proce. 8 We can alo how imilar path for the optimal epected value of the objective function. 20