7.4.4.2 The Use of Average Damages
A special case of the income distributional weights approach is to estimate
the money value of impacts for different groups of individuals or countries
and then apply the average damage to all individuals and countries. The best
example of this is the value attached to changes in the risk of death. These
risks are valued in terms of the statistical value of life, which caused much
controversy in SAR (IPCC 1996a, Chapter 6). The “value of a statistical
life” (VSL) converts individual WTP to reduce the risk of death into the
value of a life saved, when it is not known which life that will be. For example,
if each person in a community has a WTP of US$10 to reduce the risk of death
by one in a hundred thousand, then the collective WTP of a group of 100,000
is US$1 million for a measure that would, on average, save one life. Hence,
the figure of US$1 million is referred to as the VSL. This measure is one way
of valuing changes in risks of mortality. Other ways include a “human capital”
approach, which values the loss of income and multiplies it by the change in
risk, or a “life years lost” approach, which takes the WTP for life
years that could be lost as a result of changes in the survival probabilities
an individual faces. Of these, the VSL has been used most commonly in recent
years. The human capital approach is not well founded in terms of welfare and
the life years lost approach is still being developed.
The VSL is generally lower in poor countries than in rich countries, but it
is considered unacceptable by many analysts to impose different values for a
policy that has to be international in scope and decided by the international
community. In these circumstances, analysts use average VSL and apply it to
all countries. Of course, such a value is not what individuals would pay for
the reduction in risk, but it is an “equity adjusted” value, in which
greater weight is given to the WTP of lower income groups. On the basis of EU
and US VSLs and a weighting system that has some broad appeal in terms of government
policies towards income distribution, Eyre et al. (1998) estimate the average
world VSL at around 1 million Euros (approximately US$1 million at 1999 exchange
rates).20
Formally, it can be shown that the use of average values for damages implies
income weights based on an elasticity of one, which, as can be seen from above,
is broadly consistent with government policies towards income redistribution
(Fankhauser et al., 1997; Eyre et al., 1998). The advantage of this approach
is that it addresses equity concerns while retaining a valuation of damages
that is broadly consistent with the efficiency approach. Such an approach may
be a way to reflect the equal value of lives as seen from a global policy perspective.
National perspectives and opportunities should be addressed in another way.
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