Climate Change 2001:
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7 Costing Methodologies

7.1 Conceptual Basis

Using resources to mitigate greenhouse gases (GHGs) generates opportunity costs that should be considered to help guide reasonable policy decisions. Actions taken to abate GHG emissions or to increase carbon sinks divert resources from other alternative uses. Assessing the costs of these actions should ideally consider the total value that society attaches to the goods and services forgone because of the diversion of resources to climate protection. In some cases, the sum of benefits and costs will be negative, meaning that society gains from undertaking the mitigation action.

This section addresses the methodological issues that arise in the estimation of the monetary costs of climate change. The focus is on the correct assessment of the costs of mitigation measures to reduce the emissions of GHGs. The assessment of costs and benefits should be based on a systematic analytical framework to ensure comparability and transparency of estimates. One well-developed framework assesses costs as changes in social welfare based on individual values. These individual values are reflected by the willingness to pay (WTP) for environmental improvements or the willingness to accept (WTA) compensation. From these value measures can be derived measures such as the social surpluses gained or lost from a policy, the total resource costs, and opportunity costs.

While the underlying measures of welfare have limits and using monetary values remains controversial, the view is taken that the methods to "convert" non-market inputs into monetary terms provide useful information for policymakers. These methods should be pursued when and where appropriate. It is also considered useful to supplement this welfare-based cost methodology with a broader assessment that includes equity and sustainability dimensions of climate change mitigation policies. In practice, the challenge is to develop a consistent and comprehensive definition of the key impacts to be measured.

A frequent criticism of this costing method is that it is inequitable, as it gives greater weight to the "well off". This is because, typically, a well-off person has a greater WTP or WTA than a less well-off person and hence the choices made reflect more the preferences of the better off. This criticism is valid, but there is no coherent and consistent method of valuation that can replace the existing one in its entirety. Concerns about, for example, equity can be addressed along with the basic cost estimation. The estimated costs are one piece of information in the decision-making process for climate change that can be supplemented with other information on other social objectives, for example impacts on key stakeholders and the meeting of poverty objectives.

In this section the costing methodology is overviewed, and issues involved in using these methods addressed.

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