DCC ROUNDTABLE ON ECONOMIC INSTRUMENTS FOR CLIMATE CHANGE ADAPTATION

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• DCC ROUNDTABLE ON ECONOMIC INSTRUMENTS FOR
  CLIMATE CHANGE ADAPTATION
• 27 AUGUST 2008
• Climate Change Adaptation Needs Actors and
  Measured Benefits
• Jack Pezzey
• Fenner School of Environment and Society, ANU

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Caveats

• My first venture into economics of climate change
  adaptation (CCA), though experienced in economics
  of climate change mitigation (CCM)
• Only 15 hours of reading went into this
• Aimed at challenging assumptions and provoking
  discussion, rather than accuracy
• Agenda
• Two hypotheses, with quotes from literature
• Six examples of alternative government CCA
  policies
• Survey of international, federal and state CCA
  documents

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First hypothesis "Paralysis of the passive",
with danger of crowding out

• ? In Oz policy documents on CCA, far too little
  thought given so far to which actors are to do
  various CCA actions - actions are to be done (by
  "we"), but who are "we"?
• ? Many answers should come from standard
  economic analysis government should do CCA
  (planned adaptation) which gives public benefits,
  but should leave individuals and businesses to do
  CCA (autonomous adaptation) which gives private
  benefits
• ? Government spending on CCA with private
  benefits will crowd out (prevent, at much higher
  cost) autonomous CCA

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Second hypothesis Too little thought given to
measuring public benefits of CCA

• ? Too little thought given to what type of
  public benefits expected from planned CCA, and
  whether they're big enough to justify cost of CCA
• ? Generally true of CCA to maintain iconic
  Australian ways of life
• ? Particularly true of CCA to maintain current
  patterns of (human) population and population
  growth - because avoids difficult but needed
  debates on which communities will inevitably
  shrink, or must not grow, because of CC?

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Statements from literature

• ? Fankhauser et al. (1999)
• "...main role for government...to provide the
  right legal, regulatory and socio-economic
  environment to support autonomous adaptation..."
• "Providing the right incentives is therefore
  key..."
• "...provision of public goods is also a typical
  area for government...."
• ? McKibbin Wilcoxen (2003)
• "role for government...is not to mandate...an
  amount of adaptation at some point in the future
  ... Government needs to concentrate on creating
  and preserving property rights and appropriately
  regulating markets. It should focus on where
  public goods exist and where markets may not
  produce the socially desirable outcomes. It
  should focus on where there are serious
  coordination failures such as in federal and
  state relations..."

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Examples of alternative CCA policies

• ? Alpine ski industry
• ? Coastal development in Australia
• ? Biodiversity in the Alpine regions
• ? Agriculture in the Murray-Darling Basin
• ? Canberra January 2003 bushfire
• ? Federal immigration policy

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Alpine ski industry
(a) Governments do nothing but provide best
available information from climatic research
about the likely future effect of CC on reducing
skiable snow. Ski resorts adapt by spending more
on snowmaking, and passing on the costs to skiers
as higher prices. Skiing, and local employment
and population, gradually shrinks over
autonomous CCA. (b) Because of a impression
given to voters that it will maintain rural
population and employment despite CC, government
feels obliged to subsidise snow-making, at
ever-rising cost. Local employment and skier
visitation remains constant autonomous CCA has
been crowded out.
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Coastal development in Australia
(a) Government requires all new homes to have
flood insurance, thus creating demand. Supply
from insurers is enabled by risk information
publicly available. Builders choose not to build
in highest risk coastal areas, because buyers
will not pay required insurance premiums. Future
floods in coastal areas cause less damage because
no new homes in the riskiest areas autonomous
adaptation. (b) Government assures all homeowners
will receive compensation if flooded, thus
crowding out insurance demand. Builders build
new homes irrespective of flood risk future
floods inundate thousands more homes than under
(a) compensation costs to taxpayers are
enormous. BUT does CC uncertainty make some
climate risks uninsurable?
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Biodiversity in the Alpine regions
Rare plants and animals in Australia's alpine
region clearly have public value, which justifies
some taxpayer spending on research into what CCA
actions might be possible However, some (fairly
cheap, economic) research into the scale of
such values may inform scale of expensive,
scientific research. Seems likely that for some
species nothing will be possible, and extinction
is unavoidable if so, should be explicit, since
then need to end some hopeless lines of research.
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Agriculture in the Murray-Darling Basin
(a) Government provides nothing more than the
best available climatic information. Industry
declines even faster than now (? more than
1.5/yr popn declines over last 5 yr in 13 local
govt areas in W NSW) pure autonomous CCA. (b)
Government gives disguised subsidies, e.g.
assistance for (no longer) Exceptional
Circumstances, or for investment in more
water-efficient irrigation systems (Wong 2008b).
Because subsidies disguised, less incentive to
make them efficient in aim of slowing autonomous
population decline. (c) As (b), but govt
explicitly states iconic value of Murray-Darling
farming populations ? better value subsidies?
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Canberra January 2003 bushfire
? Would less homes have been burnt if more CCA
planning, both within and between NSW and the
ACT, had led to delegation by the ACT of its
firefighting authority to NSW under certain
climatic conditions? ? Were data on fire risks
in streets next to pine plantations available to
insurance companies? Would they have led to
higher insurance premia, and thus pressure from
Duffy residents to have the plantation removed?
? Or were conditions of January 2003 bushfire
essentially unforeseeable, because of CC?
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Federal immigration policy
? Immigration is main source of popn. growth in
fastest-growing areas like Sydney Basin and S.E.
Qld, could greatly worsen water shortages as CC
reduces supplies. ? So surely a need to debate
immigration policy in context of CCA. But
nothing on DIAC website no mention of CC at
all ? Suggest reason for lack of debate is
over-reporting of benefits of immigration, in two
main ways reporting effect on total not per
person economic output failing to distinguish
(ve) effects on people who currently own land
and/or businesses from (-ve) effects on those who
don't
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Quick, incomplete survey of CCA policies
? IPCC (2007, 4th Assessment Report, Working Grp
II) Very little on autonomous CCA, nothing on
crowding out ? DCC (current webpage on How to
adapt) "businesses, governments and the
community" are advised (without differentiation)
to "Plan early / Be systematic and strategic /
Use the best information / Be flexible" No
mentions of autonomous CCA, crowding out,
population or immigration policy, or even link
to
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? COAG (2007 Climate Change Adaptation Framework)
No mention of autonomous CCA, crowding out, or
population/ migration other than as a force of
nature ? NSW (webpage on Adapting to climate
change) No mentions of roles and
responsibilities, autonomous CCA, crowding out,
but there is a link to COAG CCAF ? ACT (webpage
on Climate Change Policy - Our Challenge) "We
need...to adapt to the changes that will occur.
This is a challenge the whole ACT community must
embrace." (the entire policy)
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? QLD (2007 ClimateSmart 2050 document)
Focuses more on CCM makes no mention of
autonomous CCA, crowding out, or human migration
/ population other than as a force of nature. ?
VIC (2008, A Climate of Opportunity
document) Substantial discussion of
responsibilities, autonomous CCA "To effectively
address climate change, all levels of government
need to establish shared goals, with a clear
division of responsibility. ... "Where there are
private benefits, individuals and businesses are
generally best placed to manage some risks and
therefore should take reasonable steps to manage
their exposure to climate change risks." - but
many details of responsibilities and benefits TBA