Valuing Climate Extremes

Over the past several years climate in the U.S. has become a much talked about media topic. Extreme events have become more conspicuous recently. During the summer of 1988 the Midwest experienced a record-breaking heat wave and associated drought that led to a 30% reduction in crop production that year. In 1993 record rains led to summer catastrophic flooding of the Mississippi River and its tributaries. The winters of 1994 and 1995 brought severe cold spells across the country. Trends in the U.S. climate since the beginning of this century include a 5% increase in precipitation since 1970 over that of the previous 70 years; more than 30% of the country experiencing severe moisture surplus in each of three different years during this time period (the Mississippi flooding is an example of this type of extreme event); and an average daily temperature increase of 0.3 degrees Celsius since the turn of the century (Karl et al., 1995). A Climate Extremes Index produced by the National Climate Center supports the belief that the U.S. has experienced more climate extremes in recent decades, and a Greenhouse Climate Response Index shows an increase in anticipated U.S. greenhouse climate response indicators (Figure 2). These indices combine data on weather extremes such as droughts, wet winters, severe rainstorms, and other events. While qualitatively consistent with generalized predictions for global greenhouse warming, the magnitude and persistence of these trends cannot yet be considered conclusive evidence of linkage. At the same time, however, normal variation in weather patterns may not be able to explain the increase in weather extremes since the mid-1970's, except perhaps as chance events with less than a 10% probability (e.g. Karl et. al, 1995). As part of our evaluation, we can anticipate costs associated with global change and place a preliminary value on some of the ecosystem services that could be affected.

Catastrophic floods and droughts are cautiously projected to increase in both frequency and intensity with a warmer climate as well as be influenced by human activities such as urbanization, deforestation, depleting aquifers, contaminating groundwater, and poor irrigation practices (IPCC, WG I 1995). Humanity remains vulnerable to extreme weather events. For example, consider that between 1965 and 1985 in the United States floods claimed 1767 lives and caused more than $1.7 billion in property damage (Dracup and Kendall, 1990). This estimate is based upon federal expenditures because private insurance losses/costs are unavailable. Ultimately, the effects of these floods are felt across a wide range of economic sectors as can be seen with the overall cost evaluation of the Midwest flood of 1993 (Table 1).

In the 1993 Midwest flood nine states and 525 counties declared disasters. The estimated federal response and recovery costs includes $4.2 billion in direct federal expenditures, $1.3 billion in payments from federal insurance programs, and more that $621 million in federal loans to individuals, businesses, and communities. In the upper Mississippi Valley states of Minnesota, Nebraska, North Dakota, and South Dakota as well as Wisconsin and northern Iowa, losses were primarily agricultural. In Illinois, central Iowa and Missouri, major losses occurred in agriculture as a result of bottomland flooding, but urban areas also sustained damages. There are numerous impacts of the flooding that are still largely unknown including cumulative effects of releases of hazardous material, including pesticides, herbicides, and other toxic materials; effects on groundwater hydrology and groundwater quality; distribution of contaminated river sediments; and alteration of forest canopy and subcanopy structure. In addition, the loss of tax revenue has not been quantified for the Midwest flood. It is important to note that while not all costs of the 1993 flood can be calculated in monetary terms, both quantifiable and non-quantifiable costs were significant in magnitude and importance. While we are not claiming that this event was directly caused by anthropogenic climate change, it does allow a rough estimate of the magnitude of costs should such changes cause increased extremes, a cautiously anticipated assessment by groups such as the IPCC (WGI 1995).

Like floods, severe droughts of the 20th century have affected both the biophysical and socioeconomic systems of many regions. Drought analyses indicate that even reasonably small changes in annual streamflows due to climatic change can have dramatic impacts on drought severity and duration. For example, changes in the mean annual streamflow of a region of only +/- 10% can cause changes in drought severity of between 30 to 115% (Dracup and Kendall, 1990). Damage estimates from the 1988 drought in the midwestern U.S. show a reduction in agricultural output by approximately one-third as well as billions of dollars in property damage. Hurricanes can also cause devastation in the tens of billions of dollars .Warmer surface waters in the oceans currently produce stronger hurricanes (that is, tropical cyclones are warm season phenomena). Other meteorological factors, though, are involved that may act to increase or decrease the intensity of hurricanes . An increase in intensity of hurricanes with warmer waters is plausible, yet speculative given the number of factors involved. There is little doubt, however, of the heightened damage that would be due to intense hurricanes.

Damage assessment is one possible way in which we can relate the cost of more inland and coastal floods, droughts, and hurricanes to the value of preventing the disruption of climate stability. In the 1993 Midwest flood example we delineated the costs of a single event. We now turn to an example of a more integrated analysis: the cost assessment of future sea level rise along U.S. coasts associated with possible ice-cap melting or with ocean warming and the resulting thermal expansion of the waters. In a probability distribution of future sea level rise by 2100, changes range from slightly negative values to a meter or more rise, with the midpoint of the distribution being approximately half a meter (Titus and Narayanan, 1996). A number of studies have assessed the potential economic costs of sea level rise along the developed coastline of the U.S. For a 50cm rise in sea level by the year 2100, estimates of potential costs range from $20.4 billion (Yohe et al., 1996) in lost property to $138 billion (Yohe, 1989). How do the costs of prevention compare to the losses potentially sustained by increasing floods and droughts, or by future sea level rises? The next sections explore this topic of placing a value on climate changes and abatement.

There is already a historic background on the evaluation of carbon that includes climate change policies such as the introduction of carbon taxes that reduce greenhouse gas emissions through increasing prices of carbon-based fuels proportional to the amount of carbon they emit (Nordhaus, 1992). Another mechanism for reducing greenhouse gas emissions is through an international tradable emissions permit system intended to limit emissions of certain pollutants (Grubb et al., 1994). These policies and others constitute ways of balancing the economic costs of emissions with some assumed benefit of averting the loss of ecosystem services (called "climate damage"). For example, William Nordhaus imposed carbon taxes range from a few dollars per ton to hundreds of dollars per ton in computer model scenarios. He showed, in the context of this economic model and its assumptions, that this carbon tax would cost the world economy anywhere from less than 1 percent in gross national product to a several percent loss by the year 2100. Even a 1 percent loss in GDP, based upon his assumed baseline of 460 percent growth in personal income between 1965 and 2100, amounts to trillions of dollars per year by 2100. This cost of preventing a degrading of the climatic environment, however, should be compared to estimates of the societal value of the climate services.

Any comprehensive attempt to evaluate the societal value of climate change should include such things as loss of species diversity, loss of coastline from increasing sea level, environmentally displaced persons, and agricultural losses. Nordhaus (1992) first estimated the climate damage at 1% reduction in GNP based on market sector losses for a central estimate of climate change. This was criticized (e.g. Oppenheimer, Schneider, 1993) as too narrow a view of climate as a type of public good since it reflected neither non-market values (e.g. species loss) nor climate "surprise" scenarios (e.g. see Schneider and Root, 1995). In response, Nordhaus (1994) conducted a survey of conventional economists, environmental economists, atmospheric scientists, and ecologists. Their estimates of loss of gross world product (GWP) resulting from a 3 degree Celsius warming by 2090 varied between a loss of 0 and 21% of GNP with a mean of 1.9% (Nordhaus, 1994). For a 6 degree Celsius warming scenario, the respondents predicted a loss of the world economy ranging from 0.8 to 62 % with a mean estimate of 5.5%. A striking difference was noted between respondents from different academic disciplines, with natural scientists' estimates of economic impact 20 to 30 times higher than conventional economists'. Even a two percent loss of GWP in 1995, however, represents climate damage of hundreds of billions of dollars annually.

While it is impossible to estimate credibly a numerical value on all of the ecosystem services provided through the maintenance of the carbon cycle at present state, it may be useful to look at land use change and loss of biomass, mostly through deforestation, as a source of atmospheric CO2. In a very simplistic and preliminary evaluation, we can use the rates of net deforestation to calculate a value for carbon. For example, global loss of above-ground biomass from deforestation in the tropics is approximately 1-3 gigatons/year over the past 10 years (FAO, 1993). This amounts to between 2-5 gigatons of carbon in carbon dioxide released into the atmosphere each year from deforestation and forest degradation (this does not include the 6 gigaton carbon emissions from the burning of fossil fuels). Much of the carbon from biosphere emissions is taken up immediately by vegetation, however, leaving approximately 1-2.5 gigatons of net carbon added to the atmosphere each year. We can apply the concept of carbon taxation for emissions to an ecosystem service valuation of retaining the carbon in the forests. Using a range of carbon taxes from typical macroeconomic models (e.g. Gaskins and Weyant, 1993) between $1 per ton and $100 per ton of carbon, the net value of carbon lost each year amounts to between $1 and $250 billion/year. However, use of optimizing economic models to estimate climate damage is highly unsatisfying since these studies use very limited and often ad hoc assumptions that both over and underestimate the likely damages to various market and non-market sectors.

The need for alternative methods of evaluation of these climate-related ecosystem services is quite clear when examining preliminary public opinion responses of global warming. In a controversial method called contingent valuation (see Goulder and Kennedy, chapter X, this volume), respondents are surveyed to determine how much they would be willing to pay to prevent a given global climate change scenario from happening or accept if so much change were to be allowed. The difficulties with this type of valuing of environmental goods and processes are immense, especially since much of the evaluation is subjective. Public opinion depends, in part, upon people's exposure to the issues and the level of education and information on these issues they have received.

In a Southern California study, the contingent valuation technique was applied to the determine the influence of potential changes in temperature and precipitation resulting from global warming on respondents willingness to pay (Berk and Schulman, 1995). Factorial survey methods were used to present a variety of hypothetical climate scenarios to a sample of 600 Southern California residents. Respondents were provided with a baseline microclimate for the region before future climate scenarios were evaluated. For example, for residents living in coastal communities, the baseline climate over the past 10 years was described as having a summer average high temperature of 75 degrees Fahrenheit, with daily highs ranging between 70 and 80 degrees, and an average of 13 inches per year of rain. One possible future scenario over the next 10 years included a summer average high temperature of 100 degrees Fahrenheit, with daily highs ranging from 80 to 120 degrees (the latter typical of Death Valley, California), and an average of 20 inches per year of rain. With these and other scenarios, predicted probabilities were determined from the respondents willingness to pay for the abatement of different mean high temperatures. In this scenario, respondents were willing to pay an average $140 to offset a mean high temperature of 100 degrees, while a mean high temperature of 80 degrees was worth approximately $100 (Figure 3). This represents a 40% increment in willingness to pay for a 20 degree rise in temperature and other scenario characteristics. Note, however, that unlike the Nordhaus 1994 Survey of Experts (all of whom assigned accelerating damage costs to climate change scenarios as they became larger), the Los Angeles residents reached a plateau (see Fig. 4) in their willingness to pay to prevent 120 degree Fahrenheit mean temperatures as compared to 110 degree Fahrenheit mean temperatures.

However, the actual damages to the L.A. basin residents of mean high temperatures of 110 or more degrees Fahrenheit (which would imply occasional extreme heat waves similar in temperature to Death Valley mean highs) would be orders of magnitude more costly, we believe, than a 100 degree Fahrenheit mean high temperature, as such extreme heat would decimate most existing vegetation and threaten the lives of tens of thousands of elderly and other persons vulnerable to heat stroke. For just such reasons, Berk and Shulman (1995) strongly caution against taking the dollar values from the survey literally or using them in cost-benefit analyses as they confound several source of value including stewardship and altruism. In addition, some of the climate increases were well above the range of current scientific estimates of greenhouse warming (IPCC, WGI 1995). The survey was not done in conjunction with atmospheric scientists and climatologists who could provide more realistic climate scenarios or ecologists, public health officials, or others who could help the respondents realize what such warming might mean for trees, birds, or people. Contingent valuation of the hypothetical good is possible when people believe the survey scenario. We present this type of evaluation study to highlight how difficult it is to find acceptable methods to place values on the climatic components of ecosystem services. In this survey case, the background of the respondents as well as their (limited) prior knowledge of the impacts of greenhouse warming played a large role in the survey outcomes. At the same time, however, contingent valuation points out that people are willing to pay to preserve ecosystem services as well as the tremendous need for education to help citizens more realistically value climate and other environmental services.