Methodologies for the Assessment of Socio-Economic Benefits ofWeather, Climate and Water Services

Jeffrey K. LazoSocietal Impacts Program/Research Applications LabNational Center for Atmospheric Research

Meeting of the WMO Forum: Social and Economic Applications and Benefits of Weather, Climate and Water ServicesGeneva, CH - April 8, 2013

Overview - Assessment of Socio-Economic Benefits

WhoWhatWhereWhen WhyHow

I believe these are necessary conditions for identifying the appropriate “How”

Assessment of Socio-Economic Benefits

Why WhoWhatHow

“… a joint WMO-World Bank authoritative document on methodologies for the assessment of socio-economic benefits of weather, climate and water services.”

1. authoritative document

2. methodologies3. socio-economic

benefits4. weather, climate

and water5. services

Assessment of Socio-Economic Benefits - Why?

Why?•Sound Bites•Program Justification / Budget Justification•Required for Benefit-Cost Analysis•Decision Making for Program Prioritization•Showing Benefits to Actual or Potential End Users•Understanding Human Behavior•Improving Products and Services to Meet NMHS Objectives of Protecting Lives and Property

No economics

needed

Solid economics

needed

Solid social sciences critical

Assessment of Socio-Economic Benefits – Who?

Who? This is directly related to “Why”• National Hydro-Met Services• Private Sector Weather

Information Providers• Academic Analysts –

Consultants• External Funding Agencies

Who needs to pay for this work?• Option 1: National Hydro-Met

Services• Option 2: External Funding

Agencies• Option 3: …

Weather Decision Making

Socio-Economic Outcomes

Assessment of Socio-Economic Benefits – What?

Modeling

and

Forecasting

Dissemination

and

Communication

Monitoring

and

Observation

Socio-EconomicImpacts of Weather

Perceptions

and

Interpretation

Weather Information Value Chain

Assessment of Socio-Economic Benefits – What?

What?1. Economic impacts of weather2. Economic impacts of weather

enterprise3. Socio-economic values of

weather information4. Socio-economic values of

improved weather information

What? Option 1: Economic Impact Analysis “Economic impact” of weather enterprise:•Public Sector Operations and Research$3 B/yr.•Private Sector Weather Industry$3 B/yr.

Weather Enterprise $6 B/yr.

The “Economic Impact” Argument$ 9B economic impacts - direct and indirect multipliers~20,000 Employees$ 1B tax revenues

Tell this to Congressman Skeptical!!! Boulder, CO Norman, OK State College, PA Silver Spring / College Park, MD

We’ve now interested 4 of the 435 Congressmen!!!

http://murphy.house.gov/latest-news/e-news-from-congressman-murphy120/

What? Option 1: Economic Impact Analysis

In Comparison:Wedding Industry (http://weddingindustrystatistics.com/)

•2,500,000 weddings/yr. x ~$25,000/wedding = $62.5B industry

Recreational Fishing Industry (http://asafishing.org/facts-figures/studies-and-surveys/sportfishing-in-

america/)

•$ 48B/yr. retail sales•$115B/yr. economic impacts•828,000 employment impacts

National Park Service (http://home.nps.gov/applications/digest/headline.cfm?type=Announcements&id=13481 )

•FY 2011(request) $3.14 billon•21,501 direct employees•2011 – “National Park Service received 279 million recreation visits and visitors spent $13 billion in local gateway regions. Park visitor spending supported 252,000 mostly local jobs. That spending had a $30 billion benefit to the nation’s economy…”

The Weather Enterprise has:•$ 9B direct and indirect economic impacts •~20,000 employees•$ 1B tax revenues

http://www.crh.noaa.gov/mpx/?n=dualpol

http://www.anenchantedevening.com/dj-services/

http://www.flyfishinsalt.com/news/recreational-fishing-returns-most-nj-waterways

http://county10.com/2013/03/06/yellowstone-national-park-spring-opening-delayed-due-to-sequestration-cuts-to-nps-budgets/

What? Option 2: Economic Impact of Weather• Dutton (2002) - U.S. GDP 1/3rd sensitive to weather • Lazo et al. (2011*) - U.S. GDP ±1.7% owing to

weather variability ($485B/yr.)• Hurricane Sandy (2012) – $62B (http://www.huffingtonpost.com/2012/11/29/sandy-economic-impact-

damage_n_2214060.html)

• US Drought 2012 - $50B? (http://www.bloomberg.com/news/2012-07-16/worst-in-generation-drought-

dims-u-s-farm-economy-hopes.html)

* Lazo, J.K., M. Lawson, P.H. Larsen, and D.M. Waldman. June 2011 “United States Economic Sensitivity to Weather Variability.” Bulletin of the American Meteorological Society. 92.

So what does this tell us about the value of the Weather Enterprise?•Indication of economic importance of weather•Suggestion of potential value of weather forecasts

Does this answer “the question” and get Congressman Skeptical’s attention?

Option 2: Economic Impact of WeatherLazo et al. 2011- U.S. GDP ±1.7% ($485B/yr.)So What? - Suggestion of potential value of weather forecasts

* Lazo, J.K., M. Lawson, P.H. Larsen, and D.M. Waldman. June 2011 “United States Economic Sensitivity to Weather Variability.” Bulletin of the American Meteorological Society. 92.

What? Option 3: “Economic” Analysis – Value of Forecasts

Value of current forecastsNovember 2006 Survey • Sample - 1,465 US

Households• Median value =

$246/HH/yr.• 114,384,000 HH (U.S. Census

Bureau 2008)

Lazo, J.K., R.E. Morss, and J.L. Demuth. 2009. “300 Billion Served: Sources, Perceptions, Uses, and Values of Weather Forecasts.” Bulletin of the American Meteorological Society. 90(6):785-798

Total value of $31.5 billion / year to U.S. HH for all weather forecast services•Net benefit of $26.4B / year•Benefit-cost ratio of 6.2 to 1.0 of all U.S. weather forecast services

Starting to get at societal values created by the weather enterprise

What? Option 4: Economic Analysis – Value of Improved Forecasts

Results•significant marginal values for improved forecast accuracy - landfall, timing, specificity, etc.•total WTP for from baseline to maximum levels on all attributes was $19.52 per household per year•multiplied times 9,857,371 households = $192,421,599 total annual benefit?Compared to total program cost of about $200,000,000 over ten years

Objective•evaluate households’ values for improved hurricane forecasts and warnings•Hurricane Forecast Improvement Project (HFIP)Methods•non-market valuation – conjoint analysis•survey-based valuation•requires qualitative aspects

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Modeling and analysis•theory-based•empirical

Assessment of Socio-Economic Benefits – How?

For Whatever Why and for Whomever … Explanation of methodologies should include “standards”For instance … possible standards for scientific analysis• Validity• Reliability• Peer reviewable• Theory based• Transparent• Replicable• and need to be replicated -

validated

Assessment of Socio-Economic Benefits – How?

1

1. Economic impacts of weather

2

2. Economic impacts of weather enterprise

34

4. Socio-economic values of improved weather information

3. Socio-economic values of weather information

Assessment of Socio-Economic Benefits – How?

Is this all about the Value of Information (VOI)?•Only for value of “services”•Even there … not really “valuing” the information itself …•Valuing the changes in outcomes

State of the art in estimating VOI (how much, how good) -- some combination of:• Price- and cost-based derivation• Probabilistic approaches

– Bayesian belief networks (Cooke and Kousky, forthcoming)

– Expert elicitation• Econometric modeling and estimation

– Productivity (for example, agriculture, utility load management, transportation)

• Simulation modeling and estimation– Enterprise “innovation” and scenario testing

Note – this slide “borrowed” as is from Molly Macauley (RFF)Also - Macauley, M.K. and R. Laxminaryan. 2012. The Value of Information: Methodological Frontiers and New Applications for Realizing Social Benefit (Springer).

Assessment of Socio-Economic Benefits – How?

Valuing the changes in outcomes•Requires identifying and quantifying the “value chain”•As virtually any type of change in outcome is feasible … any type of economic valuation method is potentially relevant!•Therefore is developing a single authoritative “methodology” not judicious?

Assessment of Socio-Economic Benefits – How?

Developing a Taxonomy of MethodsEach method can be characterized by:• Theoretical basis• Strengths and weaknesses• Large body of literature in non-

hydro-met applications

Do we need a “Taxonomy of Values” first?• Certain types of values can only

be measured using certain methods

• This depends on the “signal” those values send

Assessment of Socio-Economic Benefits – How?

Hawkins K (2003) Economic valuation of ecosystem services. University of Minnesota. (online) URL: http://www.frc.state.mn.us/documents/council/landscape/SE%20Landscape/MFRC_Economic_Valuation_EcosystemServices_SE_2003-10-01_Report.pdf

Taxonomy of Values•Not value of information but value of changes in outcomes•How relevant is this in value of weather services?

Assessment of Socio-Economic Benefits – How?

Lazo, J.K. 2002. “Economic Valuation of Ecosystem Services: Discussion and Application.” Drug and Chemical Toxicology 25(4):349–374.

Relating “Taxonomy of Values” to “Taxonomy of Methods”•Market versus Non-Market Valuation Methods•Revealed Preference versus Stated Preference Methods•Direct versus Indirect Valuation Methods

Assessment of Socio-Economic Benefits – How?

Market versus Non-Market•Direct market: the value of the service/good is the market price the value of a particular service/good directly related to the thing in question •Indirect market valuation: when there are no explicit markets for services (de Groot et al. 2002)

Revealed versus Stated Preference•Revealed preference: measurements are based on observations of actual behavior (Freeman, 2003)•Stated preference: based on statements of preferences or choices indicating preferences

Assessment of Socio-Economic Benefits – How?

Market approaches (all are revealed preference):• Production functions - e.g., crop

simulations linked to market data/assumptions• Avoided Cost: services allow society

to avoid costs that would have been incurred in the absence of those services• Averting behavior: observed

voluntary behavior from individuals used e.g., for health protection or as a substitute for another good or service.• Replacement Cost: cost to replace

services with human-made system• Modeling Approaches

− Input-output modeling− Computable General Equilibrium (CGE)

modeling− Econometric Modeling

Lee et al. 2010; Mendelsohn and Olmstead. 2009

Assessment of Socio-Economic Benefits – How?

Non-market approaches (Freeman

2003):• Revealed preference methods

− Travel Cost: value measurable by price consumers WTP to travel there

− Hedonic Pricing: service/good’s price varies with factors associated to that service or good (Pettler, 2008)

• Stated preference methods relying on willingness to pay surveys,

− contingent valuation method (CVM)

− conjoint/stated choice method

Benefits Transfer• Inferring value from studies in other

sectors, countries.• Cheaper – but not necessarily good

science• Requires a foundation of why these

estimates might transfer.• Requires the primary studies for

transferring!!!

Assessment of Socio-Economic Benefits – How?

Expert Elicitation•Eliciting subjective estimates from individuals with expertise in area of interest•Developed from approaches for quantification of parameters under “uncertainty”•What is an expert? What constitutes expertise or knowledge?•Total system perspective•Value of communication / through across participants•Current research

– World Bank – Mozambique– US – Department of Energy Solar

Energy Weather Forecasts

Assessment of Socio-Economic Benefits – How?

Assessment of Socio-Economic Benefits – How?

Benefit-Cost Analysis (BCA)•Policy tool for project assessment•Comparing stream of benefits and costs over project lifetime

•Issues in BCA– Uncertainty in benefits or costs– Sensitivity Analysis

○ Monte Carlo Analysis○ Equity and Distributional Issues

– Inter-period Comparisons / Discounting○ Choice of functional form and

discount rates

Conclusions

• Who• What• Where• When • Why• How

Referencesde Groot, R.S., M.A. Wilson, R.M.J. Boumans. 2002. A Typology for the

Classification, Description and Valuation of Ecosystem Functions, Goods and Services.” Ecological Economics. 41:393–408

Freeman, A.M., 2003. The Measurement of Environmental and Resource Values: Theory and Methods. Resources for the Future. Washington, DC.

Hawkins K (2003) Economic valuation of ecosystem services. University of Minnesota. (online) URL: http://www.frc.state.mn.us/documents/council/landscape/SE%20Landscape/MFRC_Economic_Valuation_EcosystemServices_SE_2003-10-01_Report.pdf

Lazo, J.K. 2002. “Economic Valuation of Ecosystem Services: Discussion and Application.” Drug and Chemical Toxicology 25(4):349–374.

Lazo, J.K., M. Lawson, P.H. Larsen, and D.M. Waldman. June 2011 “United States Economic Sensitivity to Weather Variability.” Bulletin of the American Meteorological Society. 92.

Lazo, J.K., R.E. Morss, and J.L. Demuth. 2009. “300 Billion Served: Sources, Perceptions, Uses, and Values of Weather Forecasts.” Bulletin of the American Meteorological Society. 90(6):785-798.

Lee, J.F.J., M. Springborn, S.L. Handy, J.F. Quinn, and F.M. Shilling. 2010. Approach for Economic Valuation of Environmental Conditions and Impacts. Prepared for Caltrans, Pp. 123.

Mendelsohn, R. and S. Olmstead. 2009. The Economic Valuation of Environmental Amenities and Disamenities: Methods and Applications. Annu. Rev. Environ. Resour. 34:325–47