IPCC Fourth Assessment Report: Climate Change 2007
Climate Change 2007: Working Group II: Impacts, Adaptation and Vulnerability

7.5 Costs and other socio-economic issues

Costs or benefits of climate change-related impacts on industry, settlements and society are difficult to estimate. Reasons include the facts that effects to date that are clearly attributable to climate change are limited, most of the relatively small number of estimates of macroeconomic costs of climate change refer to total economies rather than to the more specific subject matter of this chapter, and generalising from scattered cases that are not necessarily representative of the global portfolio of situations is risky. Historical experience is of limited value when the potentially impacted systems are themselves changing (e.g., with global economic restructuring and development, and technological change), and many types of costs – especially to society – are poorly captured by monetary metrics. In many cases, the only current guides to projecting possible costs of climate change are costs associated with recent extreme weather events of types projected to increase in intensity and/or frequency, although this is only one kind of possible impact and cannot be assumed to be representative of aggregate costs and benefits of all aspects of climate change, including more gradual change.

Estimates of aggregate macroeconomic costs of climate change at a global scale (e.g., Smith et al., 2001) are not directly useful for this chapter, other than generally illustrating that because many locations, industrial sectors and settlements are not highly vulnerable, total monetary impacts at that scale might not be large in proportion to the global economy. As Section 7.4 indicates, however, vulnerabilities of or opportunities for particular localities and/or sectors and/or societies could be considerable. A possible example is climate-related contributions to changes already being experienced by societies and settlements in the Arctic, which include destabilised buildings, roads, airports and industrial facilities and other effects of permafrost conditions, requiring substantial rebuilding, maintenance and investments (ACIA, 2004). An impact assessment in the UK projected that annual weather-related damages to land uses and properties could increase by 3 to 9 times by the 2080s (Harman et al., 2005). More generally, as one specific aspect of vulnerabilities to climate change, possible economic costs of sea-level rise have been estimated, since exposures of coastal areas to a specified scenario can be analysed for costs of the change v. costs of protecting against the change; and effects of direct costs in coastal areas can be projected for other parts of a regional or national economy (Nicholls and Tol, 2006; Tol et al., 2006). Generally, these studies conclude that the costs of full protection are greater than the costs of losing land to sea-level rise, although they do not estimate non-monetary costs of social and cultural effects.

Recent climate-related extreme weather events have been associated with cost estimates for countries and economic sectors; and trends in these costs have been examined, especially by the reinsurance industry (e.g., Swiss Re, 2004; Munich Re, 2005; also Chapter 1, Section 1.3.8). According to these estimates, an increase in the intensity and/or frequency of weather-based natural disasters, such as hurricanes, floods or droughts, could be associated with very large costs to targeted regions in terms of economic losses and losses of life and disruptions of livelihoods, depending on such variables as the level of social and economic development, the economic value of property and infrastructure affected, capacities of local institutions to cope with the resulting stresses, and the effective use of risk reduction strategies. Estimates of impacts on a relatively small country’s GDP in the year of the event range from 4 to 6% (Mozambique flooding: Cairncross and Alvarinho, 2006) to 3% (El Niño in Central America: www.eclac.cl/mexico/ and follow the link to ’desastres‘) to 7% (Hurricane Mitch in Honduras: Figure 7.3). Even though these macroeconomic impacts appear relatively minor, countries facing an emergency found it necessary to incur increased public spending and obtain significant support from the international donor community in order to meet the needs of affected populations. This increased fiscal imbalances and current account external deficits in many countries.

For specific regions and locales, of course, the impact on a local economy can be considerably greater (see Box 7.4). Estimates suggest that impacts can exceed GDP and gross capital formation in percentages that vary from less than 10% in larger, more developed and diversified impacted regions to more than 50% in less developed, less diversified, more natural resource-dependent regions (Zapata-Marti, 2004).

It seems likely that if extreme weather events become more intense and/or more frequent with climate change, GDP growth over time could be adversely affected unless investments are made in adaptation and resilience.

Figure 7.3

Figure 7.3. Economic impact of Hurricane Mitch and the 1998 to 1999 drought on Honduras ( http://siteresources.worldbank.org/ INTDISMGMT/Resources/eclac_LAC&Asia.pdf).

Box 7.4. Vulnerabilities to extreme weather events in megadeltas in a context of multiple stresses: the case of Hurricane Katrina

It is possible to say with a high level of confidence that sustainable development in some densely populated megadeltas of the world will be challenged by climate change, not only in developing countries but in developed countries also. The experience of the U.S. Gulf Coast with Hurricane Katrina in 2005 is a dramatic example of the impact of a tropical cyclone – of an intensity expected to become more common with climate change – on the demographic, social, and economic processes and stresses of a major city located in a megadelta.

In 2005, the city of New Orleans had a population of about half a million, located on the delta of the Mississippi River along the U.S. Gulf Coast. The city is subject not only to seasonal storms (Emanuel, 2005) but also to land subsidence at an average rate of 6 mm/yr rising to 10-15 mm/year or more (Dixon et al., 2006). Embanking the main river channel has led to a reduction in sedimentation leading to the loss of coastal wetlands that tend to reduce storm surge flood heights, while urban development throughout the 20th century has significantly increased land use and settlement in areas vulnerable to flooding. A number of studies of the protective levee system had indicated growing vulnerabilities to flooding, but actions were not taken to improve protection.

In late August 2005, Hurricane Katrina – which had been a Category 5 storm but weakened to Category 3 before landfall – moved onto the Louisiana and Mississippi coast with a storm surge, supplemented by waves, reaching up to 8.5 m above sea level along the southerly-facing shallow Mississippi Coast (see also Chapter 6, Box 6.4). In New Orleans, the surge reached around 5 m, overtopping and breaching sections of the city’s 4.5 m defences, flooding 70 to 80% of New Orleans, with 55% of the city’s properties inundated by more than 1.2 m of water and maximum flood depths up to 6 m. In Louisiana 1,101 people died, nearly all related to flooding, concentrated among the poor and elderly.

Across the whole region, there were 1.75 million private insurance claims, costing in excess of US$40 billion (Hartwig, 2006), while total economic costs are projected to be significantly in excess of US$100 billion. Katrina also exhausted the federally-backed National Flood Insurance Program (Hunter, 2006), which had to borrow US$20.8 billion from the Government to fund the Katrina residential flood claims. In New Orleans alone, while flooding of residential structures caused US$8 to 10 billion in losses, US$3 to 6 billion was uninsured. Of the flooded homes, 34,000 to 35,000 carried no flood insurance, including many that were not in a designated flood risk zone (Hartwig, 2006).

Beyond the locations directly affected by the storm, areas that hosted tens of thousands of evacuees had to provide shelter and schooling, while storm damage to the oil refineries and production facilities in the Gulf region raised highway vehicle fuel prices nationwide. Reconstruction costs have driven up the costs of building construction across the southern U.S., and federal government funding for many programmes was reduced because of commitments to provide financial support for hurricane damage recovery. Six months after Katrina, it was estimated that the population of New Orleans was 155,000, with this number projected to rise to 272,000 by September 2008; 56% of its pre-Katrina level (McCarthy et al., 2006).

Research has also considered costs of extreme weather-related events on certain sectors of interest, especially water-supply infrastructures. For instance, if reduced precipitation due to climate change were to result in an interruption of urban water supplies, effects could include disruptions of industrial activity as well as hardships for population, especially the poor, who have the fewest options for alternative supplies. The cost of extending pipelines is considerable, especially if it means that water treatment works also have to be relocated. As a rough working rule, the cost of construction of the abstraction and treatment works and the pumping main for an urban settlement’s water supply is about half the cost of the entire system. The cost of flood damage is often even more considerable. For example, the catastrophic flooding of southern Mozambique in 2000 caused damage to water supplies which cost US$13.4 million to repair, or roughly US$50 per person directly affected, of the same order as the cost of providing them with water supplies in the first place (World Bank, 2000). Part of the explanation is that the damaged water supplies also served people whose homes were not directly affected by the flooding; this can be expected to occur in other floods. Nicholls (2004) has estimated that some 10 million people are affected annually by coastal flooding, and that this number is likely to increase until 2020 under all four SRES scenarios, largely because of the increase in the exposed population.

A longer-term concern for industry, settlements and society in developed countries is the prospect of abrupt climate change, which could exceed coping mechanisms in many settlements and societies that would be resilient to gradual climate change (National Research Council, 2002). In such a case, fixed infrastructures are especially vulnerable, although the research literature is very limited.

Reliable estimates of costs associated with more gradual climate change are scarce, for reasons summarised above, although in some cases cost estimates of adaptation strategies are available (Chapter 17). In general, costs that can be addressed strategically over periods of time have different implications for industry, settlements and society than relatively sudden costs (e.g., Hallegatte et al., 2007). For a combination of gradual changes and extreme events, several recent studies indicate that climate change could reduce the rate of GDP growth over time unless vulnerabilities are addressed (Van Kooten, 2004; Stern, 2007).

The existing literature is, in these ways, useful in considering possible costs of climate change for industry, settlement and society; but it is not sufficient to estimate costs globally or regionally associated with any specific scenario of climate change. What can be said at the present time is that economic costs of extreme weather events at a large national or large regional scale, estimated as a percent of gross product in the year of the event, are unlikely to represent more than several percent of the value of the total economy, except for possible abrupt changes (high confidence), while net aggregate economic costs of extreme event impacts in smaller locations, especially in developing countries, could in the short run exceed 25% of the gross product in that year (high confidence). To the degree that these events increase in intensity and/or frequency, they will represent significant costs due to climate change. For industry, settlements and society, economic valuations of other costs and benefits associated with climate change are generally not yet available.