Climate Change 2001:
Working Group III: Mitigation
Other reports in this collection 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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