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http://en.wikipedia.org/wiki/Economics_of_global_warming
Cost-benefit analysis
Standard cost-benefit analysis (CBA)[68] (also referred to as a monetized cost-benefit framework)[69] can be applied to the problem of climate change.[70] This requires (1) the valuation of costs and benefits using willingness to pay (WTP) or willingness to accept (WTA) compensation[69][71][72][73] as a measure of value,[68] and (2) a criterion for accepting or rejecting proposals:[68]
For (1), in CBA where WTP/WTA is used, climate change impacts are aggregated into a monetary value,[69] with environmental impacts converted into consumption equivalents,[74] and risk accounted for using certainty equivalents.[74][75] Values over time are then discounted to produce their equivalent present values.[76]
The valuation of costs and benefits of climate change can be controversial[77] because some climate change impacts are difficult to assign a value to, e.g., ecosystems and human health.[6][78] It is also impossible to know the preferences of future generations, which affects the valuation of costs and benefits.[79]:4 Another difficulty is quantifying the risks of future climate change.[80]
For (2), the standard criterion is the (Kaldor-Hicks)[79]:3 compensation principle.[68] According to the compensation principle, so long as those benefiting from a particular project compensate the losers, and there is still something left over, then the result is an unambiguous gain in welfare.[68] If there are no mechanisms allowing compensation to be paid, then it is necessary to assign weights to particular individuals.[68]
One of the mechanisms for compensation is impossible for this problem: mitigation might benefit future generations at the expense of current generations, but there is no way that future generations can compensate current generations for the costs of mitigation.[79]:4 On the other hand, should future generations bear most of the costs of climate change, compensation to them would not be possible.[70] Another transfer for compensation exists between regions and populations. If, for example, some countries were to benefit from future climate change but others lose out, there is no guarantee that the winners would compensate the losers;[70] similarly, if some countries were to benefit from reducing climate change but others lose out, there would likewise be no guarantee that the winners would compensate the losers.[citation needed]
Cost-benefit analysis and risk
In a cost-benefit analysis, an acceptable risk means that the benefits of a climate policy outweigh the costs of the policy.[80] The standard rule used by public and private decision makers is that a risk will be acceptable if the expected net present value is positive.[80] The expected value is the mean of the distribution of expected outcomes.[81]:25 In other words, it is the average expected outcome for a particular decision. This criterion has been justified on the basis that:
a policy's benefits and costs have known probabilities[80]
economic agents (people and organizations) can diversify their own risk through insurance and other markets.[80]
On the first point, probabilities for climate change are difficult to calculate.[80] Also, some impacts, such as those on human health and biodiversity, are difficult to value.[80] On the second point, it has been suggested that insurance could be bought against climate change risks.[80] In practice, however, there are difficulties in implementing the necessary policies to diversify climate change risks.[80]
Risk
One of the problems of climate change are the large uncertainties over the potential impacts of climate change, and the costs and benefits of actions taken in response to climate change, e.g., in reducing GHG emissions.[84] Two related ways of thinking about the problem of climate change decision-making in the presence of uncertainty are iterative risk management[85][86] and sequential decision making[87] Considerations in a risk-based approach might include, for example, the potential for low-probability, worst-case climate change impacts.[88]
An approach based on sequential decision making recognises that, over time, decisions related to climate change can be revised in the light of improved information.[8] This is particularly important with respect to climate change, due to the long-term nature of the problem.
A near-term hedging strategy concerned with reducing future climate impacts might favour stringent, near-term emissions reductions.[87] As stated earlier, carbon dioxide accumulates in the atmosphere, and to stabilize the atmospheric concentration of CO2, emissions would need to be drastically reduced from their present level (refer to diagram opposite).[82] Stringent near-term emissions reductions allow for greater future flexibility with regard to a low stabilization target, e.g., 450 parts-per-million (ppm) CO2. To put it differently, stringent near-term emissions abatement can be seen as having an option value in allowing for lower, long-term stabilization targets. This option may be lost if near-term emissions abatement is less stringent.[89]
On the other hand, a view may be taken that points to the benefits of improved information over time. This may suggest an approach where near-term emissions abatement is more modest. [90] Another way of viewing the problem is to look at the potential irreversibility of future climate change impacts (e.g., damages to ecosystems) against the irreversibility of making investments in efforts to reduce emissions (see also Economics of climate change mitigation#Irreversible impacts and policy).[8] Overall, a range of arguments can be made in favour of policies where emissions are reduced stringently or modestly in the near-term (see: Economics of climate change mitigation#The mitigation portfolio).[91]
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