Valuing the costs and benefits of climate change risk and adaptation policy (Cambridge Econometrics)

The aim of the report is to inform how economics is used in CCRA4-IA to better value climate risk and more effectively speak to policy makers. It has also reviewed the potential ways of presenting socio-economic uncertainty in CCRA4-IA and estimating the macroeconomic impacts of climate change on the UK economy.

The key findings are: 

• Detailed monetary valuation of risks and opportunities resulting from climate change are key for driving adaptation action by key Government stakeholders. They reiterate the need for a systematic, comprehensive and consistent economic analysis of risks and opportunities the UK faces from climate change.

• The valuation approach taken in CCRA3-IA had significant gaps and, as it was based on a synthesis of the available literature, did not produce a sufficiently consistent picture of the true costs the UK faces from climate change. The costs were not presented against a consistent baseline/counterfactual and the high-level cost summary is likely to be a significant underestimate of the overall costs the UK faces. 

• Taking a system-level approach to valuation is helpful to ensure both direct and indirect impact costs are captured. They recommend supplementing unquantifiable costs with narratives of risk.  

• Alternative decision-making techniques to adaptation policy appraisal can better handle climate uncertainty, with the aim of informing how policies are appraised both inside and outside of Government decision making.  

• Socioeconomic uncertainties are key drivers in the uncertainty in presenting the value of climate change risk to the UK, as well as the interdependencies between climate and non-climate risks. Different approaches can be taken to capture these uncertainties depending on the audience. 

• There are many different modelling approaches that could be taken to estimate the macroeconomic impacts of climate change on the UK economy. The vast majority find that the impact is expected to be negative both globally and for the UK. The literature and modelling approaches covering acute risks is scarce compared to approaches addressing gradual or chronic impacts of climate change. Quantifying these extreme impacts remains a gap to be filled with further research. Additionally, the chronic impacts are often only considered for a select number of sectors.

• The differing assumptions and approaches lead to widely varying estimates on the overall cost (the majority of which are likely to underestimate the true costs) and the reasons behind this variation are difficult to communicate. These challenges lead to uncertain messaging for policy and decision-makers.