Economics of Extreme Climatic Events

By

Adil Rasheed

(EPFL-ENAC-ICARE-LESO-PB)

Overview• Introduction to different Climatic Events

and their characterization• Effects of such Events• Estimation of damage cost – sources,

problems, motivations• Presentation of some data• Damage cost estimation in context of a

developing country• Conclusion and Questions

Categorization and definition of High Consequance- Low probability Events and Low Consequance-High probability Events

• HCLPE: Those events which are infrequent and that produce huge damage. Eg. Hurricanes, Flood

• LCHPE: Those events which are frequent and that produce little damage. Eg. Lighting, tornados

Destructions caused by Extreme Climatic Events

• Loss of life

• Loss of private properties

• Destruction of infrastructures

• Epidemics

Possible benefits from Extreme Climatic Events

• Flood may helping in restoring soil fertility– Avoids the need of fertilizers and hence the cost associated with it

• Destroyed infrastructures are restored and replaced by new ones.– Old houses are reconstructed– Replacements of railway tracks etc.

• Installation of monitoring systems – Warning system installed in Tsunami affected areas (India and Sri

Lanka).• Leads to positive changes in government policies

– Case of Wild fire caught immediate attention because of the criticism attracted by Katrina

Motivation for precise estimation of losses

• Concern over Global Warming and its potential effects on extremes

• To avoid large losses of life and property• Need for devising a planning strategy for the

insurance companies• Desire to measure the effectiveness of its

mitigation efforts.

Problems in estimating the Destruction Costs• Lack of Systematic collection of loss data.• Lack of methodologies to account for different types of

losses• Political Reasons• Values of some direct losses are definitive, but many

losses for a given disaster are based on estimates prone to errors.

• Accounting for human life is very vague• Benefits of disasters is mostly ignored in such estimates

Different Sources of Damage Cost

• Government agencies– Politics and corruption

• Agricultural Sources• Insurance Claims

– Not of much use in developing countries– Not all properties are insured

• Private Businesses• Field Studies

– Timelag and loss of destruction data with time.

• Economic Models• Environmental Monitoring System• Scientific Institutions• Historical Data:

– Inflation, inadequacy of data

Data: Flood Data

Rise is due to Better Accounting

No significant increase in the frequency and magnitude of the flood in the last 85 years.

--Lins and Slack

Data: Hurricanes

Annual average losses:• $2.2 Billion (Hebert)• $6.1 Billion (Pielk)

Indiscrepancy due to:1. Impreciseness of damage

cost estimates2. Different approaches used

in cost estimates3. Due to period used for

averaging

Annual hurricane losses normalized to 1995 values from 1925–1995 (Pielke and Landsea, 1998 (adjusted for growth of inflation, wealth and population)

Increase in destruction cost (although the frequency of such events have decreased)

Possible reason: The population near the vulnerable coast has increased

Tornados (LCHPE)

Frequency of occurancesDamage Cost

Close Correlation between frequency of occurrence and damage cost

Difference in loss assessments in a developed and a developing country

• Properties are generally not insured in developing countries.

• Estimates of damage cost sent to the government by the local government dept. are very high but very little reaches the mass.

• In developing countries the loss of life is generally very high.

Same approach can’t be used for damage cost estimates in both developing and developed countries

Conclusion• Human intervention in climate change is evident (not discussed but well

established)• Frequency of occurrences of extreme events are harder to scientifically

document• Some studies show no change in occurrences or characteristics of extreme

events while others indicate otherwise.• There is no crystal clear relation between the occurrences and damage cost of

extreme events.• “The dramatic rise in disaster losses has been caused mainly by large increase

in population in hazard-prone areas, as well as rise in construction cost”.• Inadequate loss data and lack of awareness of the changing risks were the

causes underlying the large insured losses, not increases in storms resulting from global warming.

• Based on a range of models, it is likely that future tropical cyclones (typhoons and hurricanes) will become more intense, with larger peak wind speedsand more heavy precipitation associated with ongoing increases of tropical sea

surface temperatures." • Different planning strategies for developed and developing countries.

At the same time there is no evidence that the number of extreme events are going to decrease.

Risk decision making approaches

Extreme Events

Believe &

Act

Don’t believe &

don’t Act

Believe & Act

Don’t believe &

Act

Avoid serious impacts Have greater impacts

Save ourselves any economic costs of additional investment

Waste the cost of additional investments

WHICH ONE SHOULD I CHOOSE ??And what should be the basis for the estimates of

the damage cost ?

Thank you