Hostname: page-component-788cddb947-jbkpb Total loading time: 0 Render date: 2024-10-10T09:14:54.853Z Has data issue: false hasContentIssue false

Accounting for the Effects of Employment, Equity, and Risk Aversion in Cost–Benefit Analysis: An Application to an Adaptation Project

Published online by Cambridge University Press:  01 February 2021

Ambika Markanday*
Affiliation:
Basque Center for Climate Change, Bilbao, Spain
Anil Markandya
Affiliation:
Basque Centre for Climate Change (BC3), Leioa, 48940, Spain
Elisa Sainz de Murieta
Affiliation:
Basque Centre for Climate Change (BC3), Leioa, 48940, Spain
Ibon Galarraga
Affiliation:
Basque Centre for Climate Change (BC3), Leioa, 48940, Spain

Abstract

This paper sets out to explore to what extent integrating employment effects, equity, and risk aversion within cost–benefit analysis (CBA) affect the economic appraisal of a climate change adaptation project designed to protect against flood risk in a region of Bilbao (Basque Country, Spain). Four CBAs are conducted: (i) a standard CBA; (ii) a standard CBA considering equity; (iii) a standard CBA considering equity and employment; and (iv) a standard CBA considering equity, employment and risk aversion. All CBAs are conducted using a time frame of 2014–2080 and considering a 100-year return period under a middle of the road emission scenario (RCP4.5). A sensitivity analysis is also undertaken. Results suggest that the economic efficiency of the adaptation investment is contingent on what types of considerations are included within CBA. Integrating elements of employment, equity and risk aversion can strengthen or weaken the case for action (leading to higher or lower net-present values) and (depending on the discount rate chosen) may even be the deciding factor for determining whether a particular action should be carried out or not (whether the net-present value is positive or negative).

Type
Article
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Society for Benefit-Cost Analysis

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ackerman, Frank and Heinzerling, Lisa. 2002. “Pricing the Priceless: Cost-Benefit Analysis of Environmental Protection.” University of Pennsylvania Law Review, 150(5): 1553. https://doi.org/10.2307/3312947.CrossRefGoogle Scholar
Adger, W., Neil, Arnell, Nigel W., and Tompkins, Emma L.. 2005. “Successful Adaptation to Climate Change across Scales.” Global Environmental Change, 15(2): 7786.CrossRefGoogle Scholar
Adger, W., Neil, Huq, Saleemul, Brown, Katrina, Conway, Declan, and Hulme, Mike. 2003. “Adaptation to Climate Change in the Developing World.” Progress in Development Studies, 3(3): 179195.CrossRefGoogle Scholar
Atkinson, Anthony B. 1970. “On the Measurement of Inequality.” Journal of Economic Theory, 2(3): 244263.CrossRefGoogle Scholar
Bartik, Timothy J. 2012. “Including Jobs in Benefit-Cost AnalysisAnnual Review of Resource Economics, 4: 5573.CrossRefGoogle Scholar
Basque Government. 2007. Metodología Para Valorar Los Costes de Los Impactos Del Cambio Climático En El País Vasco. El Caso de Bilbao – Methodology to Value the Costs of Climate Change Impacts in the Basque Country. The Case of Bilbao. Bilbao, Spain: Basque Government.Google Scholar
Brent, R.J. 1991. “The Shadow Wage Rate and the Numbers Effect.” Public Finance, 46: 186197.Google Scholar
Chiabai, A., Galarraga, I., Markandya, A., & Pascual, U. (2012). The Equivalency Principle for Discounting the Value of Natural Assets: An Application to an Investment Project in the Basque Coast. Environmental and Resource Economics, 56(4), 535550. doi:10.1007/s10640-012-9589-8 CrossRefGoogle Scholar
Climate-ADAPT. 2016. “Public-Private Partnership for a New Flood Proof District in Bilbao.” European Climate Adaptation Platform. https://climate-adapt.eea.europa.eu/metadata/case-studies/public-private-partnership-for-a-new-flood-proof-district-in-bilbao.Google Scholar
Cowell, F.A. and Gardiner, K.. 2000. Welfare Weights. London, UK: Office of Fair Trading.Google Scholar
Crespo Cuaresma, Jesús. 2017. “Income Projections for Climate Change Research: A Framework Based on Human Capital Dynamics.” Global Environmental Change, 42: 226–36. https://doi.org/10.1016/j.gloenvcha.2015.02.012 CrossRefGoogle Scholar
Cropper, Maureen L. and Laibson, David I.. 1998. The Implications of Hyperbolic Discounting for Project Evaluation. Washington, DC: World Bank Publications.Google Scholar
Dasgupta, Ajit Kumar and Pearce, David William. 1972. Cost-Benefit Analysis: Theory and Practice. London, UK: Macmillan International Higher Education.CrossRefGoogle Scholar
Dasgupta, Partha. 2007. “The Stern Review’s Economics of Climate Change.” National Institute Economic Review, 199(1): 47.CrossRefGoogle Scholar
Bo, Del, Chiara, Carlo Fiorio, and Florio, Massimo. 2011. “Shadow Wages for the EU Regions.” Fiscal Studies, 32(1): 109143.Google Scholar
Drèze, J. and Stern, N.. 1987. “The Theory of Cost-Benefit Analysis.” In Auerbach, A. and Feldstein, M. (Eds) Handbook of Public Economics (Vol. II). Amsterdam, The Netherlands: Elsevier North Holland.Google Scholar
Drèze, Jean and Stern, Nicholas. 1990. “Policy Reform, Shadow Prices, and Market Prices.” Journal of Public Economics, 42(1): 145.CrossRefGoogle Scholar
EUSTAT. 2018. “Activity, Occupation, and Employment Rate of the Population Aged 16 and over of the Basque Country by Province, Sex and Quarter (%).” Instituto Vasco de Estadistica Data Bank. http://en.eustat.eus/bankupx/pxweb/en/english/-/PX_2307_tab01.px#axzz64PLRwl8X (accessed July 23, 2020).Google Scholar
Fankhauser, S., Tol, R. S., & Pearce, D. W. (1997). The aggregation of climate change damages: a welfare theoretic approach. Environmental and Resource Economics, 10(3), 249266.CrossRefGoogle Scholar
Fankhauser, Samuel, Sehlleier, Friedel, and Stern, Nicholas. 2008. “Climate Change, Innovation and Jobs.” Climate Policy, 8(4): 421429. https://doi.org/10.3763/cpol.2008.0513 CrossRefGoogle Scholar
Glantz, Michael and Jamieson, Dale. 2000. “Societal Response to Hurricane Mitch and Intra-versus Intergenerational Equity Issues: Whose Norms Should Apply?Risk Analysis, 20(6): 869–82.CrossRefGoogle ScholarPubMed
Gollier, Christian. 2008. “Discounting with Fat-Tailed Economic Growth.” Journal of Risk and Uncertainty, 37(2–3): 171186.CrossRefGoogle Scholar
Gouveia, Miguel and Strauss, Robert P.. 1994. “Effective Federal Individual Income Tax Functions: An Exploratory Empirical Analysis.” National Tax Journal, 47(2): 317–39.CrossRefGoogle Scholar
Groom, B. 2014. “Discounting.” Routledge Handbook of the Economics of Climate Change Adaptation, Routledge International Handbooks: 138168. Oxon, UK and New York, NY: Routledge.Google Scholar
Haasnoot, Marjolijn, Kwakkel, Jan H., Walker, Warren E., and Maat, Judith ter. 2013. “Dynamic Adaptive Policy Pathways: A Method for Crafting Robust Decisions for a Deeply Uncertain World.” Global Environmental Change, 23(2): 485498.CrossRefGoogle Scholar
Hanley, Nick. 1992. “Are There Environmental Limits to Cost Benefit Analysis?Environmental and Resource Economics, 2(1): 3359.CrossRefGoogle Scholar
Hanley, Nick, Hallett, S., and Moffatt, I.. 1990. “Research Policy and Review 33. Why Is More Notice Not Taken of Economists’ Prescriptions for the Control of Pollution?Environment and Planning A, 22(11): 14211439.CrossRefGoogle Scholar
Johansson-Stenman, Olof. 2005. “Distributional Weights in Cost-Benefit Analysis—Should We Forget about Them?Land Economics, 81(3): 337352.CrossRefGoogle Scholar
Kahneman, Daniel and Tversky, Amos. 2013. “Prospect Theory: An Analysis of Decision under Risk.” In Handbook of the Fundamentals of Financial Decision Making: Part I: 99127. Singapore: World Scientific.CrossRefGoogle Scholar
Kaufman, Noah. 2014. “Why Is Risk Aversion Unaccounted for in Environmental Policy Evaluations?Climatic Change, 125(2): 127135.CrossRefGoogle Scholar
Kind, J., Wouter Botzen, W. J., & Aerts, J. C. (2017). Accounting for risk aversion, income distribution and social welfare in cost‐benefit analysis for flood risk management. Wiley Interdisciplinary Reviews: Climate Change, 8(2), e446.Google Scholar
Kolstad, C, Urama, K, Broome, J, Bruvoll, A, CariñoOlvera, M, et al. (2014). Social, economic and ethical concepts and methods. In: Edenhofer, O, Pichs-Madruga, R,Sokona, Y, Farahani, E, Kadner, S, et al., eds. Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge and New York: Cambridge University Press; 207282.Google Scholar
Kumar, Manasi and Kumar, Pushpam. 2008. “Valuation of the Ecosystem Services: A Psycho-Cultural Perspective.” Ecological Economics, 64(4): 808819.CrossRefGoogle Scholar
Lambert, Peter J., Millimet, Daniel L., and Slottje, Daniel. 2003. “Inequality Aversion and the Natural Rate of Subjective Inequality.” Journal of Public Economics, 87(5–6): 10611090.CrossRefGoogle Scholar
Leimbach, Marian, Kriegler, Elmar, Roming, Niklas, and Schwanitz, Jana. 2017. “Future Growth Patterns of World Regions – A GDP Scenario Approach.” Global Environmental Change, 42: 215225. https://doi.org/10.1016/j.gloenvcha.2015.02.005 CrossRefGoogle Scholar
Levy, Barry S. and Patz, Jonathan A.. 2015. “Climate Change, Human Rights, and Social Justice.” Annals of Global Health, 81(3): 310322.CrossRefGoogle ScholarPubMed
Lewis, W.A. 1954. “Economic Development with Unlimited Supplies of Labour.” The Manchester School, 22: 139191.CrossRefGoogle Scholar
Little, I.M.D. and Mirrlees, J.. 1974. Project Appraisal and Planning for Developing Countries. London, UK: Heinemann.Google Scholar
Marchand, M., Mintz, J., and Pestieau, P.. 1984. “Shadow Pricing of Labour and Capital in an Economy with Unemployed Labour.” European Economic Review, 25: 239252.CrossRefGoogle Scholar
Marglin, Stephen A. and Sen, Amartya. 1972. Guidelines for Project Evaluation. New York, NY: United Nations Industrial Development Organization.Google Scholar
Markanday, Ambika, Galarraga, Ibon, Chiabai, Aline, de Murieta, Elisa Sainz, Lliso, Bosco, and Markandya, Anil. 2019. “Determining Discount Rates for the Evaluation of Natural Assets in Land-Use Planning: An Application of the Equivalency Principle.” Journal of Cleaner Production, 230: 672684.CrossRefGoogle Scholar
Markanday, Ambika, Galarraga, Ibon, and Markandya, Anil. 2019. “A Critical Review of Cost-Benefit Analysis for Climate Change Adaptation in Cities.” Climate Change Economics, 10(4): 1950014. https://doi.org/10.1142/S2010007819500143 CrossRefGoogle Scholar
Markandya, Anil and Richardson, Julie (Eds). 2017. The Earthscan Reader in Environmental Economics. Abingdon, UK: Routledge.CrossRefGoogle Scholar
Masur, Jonathan S. and Posner, Eric A.. 2012. “Regulation, Unemployment, and Cost-Benefit Analysis.” Virginia Law Review, 98: 579.Google Scholar
OECD. 2018. Cost-Benefit Analysis and the Environment: Further Developments and Policy Use. Paris, France: OECD Publishing.Google Scholar
Olcina, Jorge, Sauri, David, Hernández, Maria, and Ribas, Anna. 2016. “Flood Policy in Spain: A Review for the Period 1983-2013.” Disaster Prevention and Management: An International Journal 25(1): 4158. https://doi.org/10.1108/DPM-05-2015-0108 CrossRefGoogle Scholar
Osés-Eraso, N., Foudi, S., and Galarraga, I.. 2012. “Análisis Del Impacto Socio Económico Del Daño Por Inundación En La Ría de Nervión: Un Cambio de Escenario Ante La Apertura Del Canal de Duesto.” In: Informe de Avance Del Proyecto. Bilbao, Spain: Basque Centre for Climate change.Google Scholar
Cédric, Philibert (2006) Discounting the future. In: Pannell, DJ, Schilizzi, SGM (eds) Economics and the future. Edward Elgar, Cheltenham Google Scholar
Ranger, Nicola, Reeder, Tim, and Lowe, Jason. 2013. “Addressing ‘Deep’Uncertainty over Long-Term Climate in Major Infrastructure Projects: Four Innovations of the Thames Estuary 2100 Project.” EURO Journal on Decision Processes, 1(3–4): 233262.CrossRefGoogle Scholar
Ray, Anandarup. 1984. Cost-Benefit Analysis: Issues and Methodologies. Washington, DC: The World Bank.Google Scholar
Reeder, Tim and Ranger, Nicola. 2011. How Do You Adapt in an Uncertain World?: Lessons from the Thames Estuary 2100 Project. Washington, DC. Available at http://www.worldresourcesreport.org (accessed July 20, 2019).Google Scholar
Riahi, Keywan, van Vuuren, Detlef P., Kriegler, Elmar, Edmonds, Jae, O’Neill, Brian C., Fujimori, Shinichiro, Bauer, Nico, et al. 2017. “The Shared Socioeconomic Pathways and Their Energy, Land Use, and Greenhouse Gas Emissions Implications: An Overview.” Global Environmental Change, 42: 153168. https://doi.org/10.1016/j.gloenvcha.2016.05.009.CrossRefGoogle Scholar
Roberts, K. 1982. “Desirable Fiscal Policies under Keynesian Unemployment.” Oxford Economic Papers, 34: 122.CrossRefGoogle Scholar
Sainz de Murieta, Elisa, Galarraga, Ibon, and Markandya, Anil. 2014. “An Introduction to the Economics of Climate Change.” In Markandya, Anil, Galarraga, Ibon, and Sainz de Murieta, Elisa (Eds), Routledge Handbook of the Economics of Climate Change Adaptation: 326. New York, NY: Routledge.Google Scholar
Schmidt, M. G., Held, H., Kriegler, E., & Lorenz, A. (2013). Climate policy under uncertain and heterogeneous climate damages. Environmental and Resource Economics, 54(1), 7999.CrossRefGoogle Scholar
Stanton, E. A. (2011). Negishi welfare weights in integrated assessment models: the mathematics of global inequality. Climatic Change, 107(3–4), 417432.CrossRefGoogle Scholar
Squire, Lyn and Van der Tak, Herman G.. 1975. Economic Analysis of Projects. Washington, DC: World Bank Publications.Google Scholar
Stern, Nicholas. 1977. “Welfare Weights and the Elasticity of the Marginal Valuation of Income.” In Artis, M. and Nobay, R. (Eds), Studies in Modern Economic Analysis. Oxford, UK: Basil Blackwell.Google Scholar
Stern, Nicholas, Peters, Siobhan, Bakhshi, Vicki, Bowen, Alex, Cameron, Catherine, Catovsky, Sebastian, Crane, Diane, Cruickshank, Sophie, Dietz, Simon, and Edmonson, Nicola. 2006. Stern Review: The Economics of Climate Change (Vol. 30). London, UK: HM Treasury.Google Scholar
Her Majesty’s Treasury. 2003. The Green Book: Appraisal and Evaluation in Central Government. London, UK: HM Treasury.Google Scholar
Her Majesty’s Treasury. 2018. The Green Book: Central Government Guidance on Appraisal and Evaluation. London, UK: HM Treasury.Google Scholar
Watkiss, Paul, Hunt, Alistair, Blyth, William, and Dyszynski, Jillian. 2015. “The Use of New Economic Decision Support Tools for Adaptation Assessment: A Review of Methods and Applications, towards Guidance on Applicability.” Climatic Change, 132(3): 401416.CrossRefGoogle Scholar
Weisbrod, Burton A. 1968. “Income Redistribution Effects and Benefit-Cost Analysis.” In Problems in Public Expenditure Analysis. Washington, DC: The Brookings Institution.Google Scholar
Weitzman, Martin L. 2009. “On Modeling and Interpreting the Economics of Catastrophic Climate Change.” The Review of Economics and Statistics 91(1): 119.CrossRefGoogle Scholar
Young, H. Peyton. 1990. “Progressive Taxation and Equal Sacrifice.” The American Economic Review, 80(1): 253266.Google Scholar
Supplementary material: File

Markanday et al. supplementary material

Markanday et al. supplementary material

Download Markanday et al. supplementary material(File)
File 39 KB