Select Committee on Economic Affairs Written Evidence

Memorandum by CSERGE, (the Centre for Social and Economic Research on the Global Environment), University of East Anglia, Norwich.

Q.   When are damages likely to occur and how satisfactory is the economic approach to dealing with costs and benefits that are distant in time?

  Cost-Benefit Analysis provides a framework to help maximise the net benefits and efficiency of a scheme to determine whether a policy, project or action is economically efficient. As a rule, a project is efficient if total benefits exceed total costs. Recent government guidance has placed greater emphasis on the valuation of the benefits, especially long-term and non-market benefits; within the appraisal process rather than focusing on just the costs (HM Treasury, 2003). CBA can provide a very useful, transparent and reliable input into the decision-making system, making explicit the costs and benefits of a decision, provided that it is carried out fully and impartially.

  As benefits and costs are incurred across the life time of a project and to enable valid comparisons a `discount rate' is applied. Debate exists over the choice of discount rate, with higher discount rates placing very little weight on the impacts occurring in later years during the decision making process, while low discount rates will encourage investments in all projects, not just non-environmentally beneficial projects; resulting in a rapid depletion of resources. Current government guidance recommends the use of a declining discount rate in appraisals where different discount rates are applied to different time periods over an indefinite time period (HM Treasury, 2003). The use of a declining discount rate is supported by empirical observations of how people actually discount the future, the uncertainty in the future state of the economy in terms of future consumption levels in addition to reducing the unfair burden of social cost placed on future generations through the use of a constant discount rate (OXERA, 2002)

  Any adaptations to climate change will incur costs in the present while the benefits are most likely to occur in the future. A good example of the use of the cost-benefit analysis approach to inform decision/policy makers adapting to climate change is determining the future flood and coastal defences of the Humber catchment. Faced with rising sea-levels and increasing storminess resulting from climate change, the favoured policy option is to realign the existing defences landward, creating intertidal habitat which acts as a natural form of sea defence, absorbing the energy of the waves and water. Thus, managed realignment schemes generally aim to realign defences in a manner that will not only reduce the length of defence required, but will also increase the overall area of intertidal habitat. Furthermore, in addition to contributing to acting as a natural sea defence, amenity benefit is derived from these intertidal habitats; and impacts on local and regional water quality through trapping sediment, nutrients, carbon, and other contaminants.

  In undertaking a cost-benefit analysis of the flood defences in the Humber Estuary, all the costs and benefits involved were assessed, however only the benefits from amenity (taken as a composite value for a range of environmental services) and carbon storage were valued. This conservative valuation approach was undertaken to avoid possible double counting as the nutrient retention function is integral to the maintenance of water quality and biodiversity in the intertidal habitat and therefore to overall amenity, and to combine these values would overestimate the feasible benefits to be derived from the ecosystem. Therefore this assessment probably represents an underestimate of the total economic value of the managed realignment schemes. The cost-benefit equation used in appraising managed realignment of flood defences in the Humber is detailed below.

  As with many adaptation strategies, the initial capital costs involved in these realignment projects are considerable, while the maintenance costs and amenity benefits occur over the life time of the project. Following the government guidance for flood and coastal defences (DEFRA, 2003), the appraisal period is taken to be 100 years, reflecting the physical life of the defences, with the use of a declining discount rate.

  When compared to the present value of the costs of an equivalent `hold-the-line' traditional defence system (CSERGE, 2005), the results showed that even with the partial valuation of only the amenity and carbon storage benefits, managed realignment schemes were more economically efficient than the policy of holding the line. Furthermore, the benefits of managed realignment increased as the appraisal time horizon was increased (25, 50 and 100 year project time-span) and if the managed realignment approach was extended to encompass more related stretches of coast or estuaries.


  CSERGE (2005) Managed Realignment: An economic appraisal in the Humber Catchment. University of East Anglia, Norwich. Forthcoming.

Department for Environment, Food and Rural Affairs (DEFRA), (2003). Flood and Coastal Defence Project Appraisal Guidance: Economic Appraisal: Supplementary Note to Operating Authorities. REVISIONS TO ECONOMIC APPRAISAL PROCEDURES ARISING FROM THE NEW HM TREASURY "GREEN BOOK".

  HM Treasury (2003) "The Green Book" Appraisal and Evaluation in Central Government. London: The Stationery Office.—Book—03.pdf—Book2—03.pdf

  OXERA (2002) A Social Time Preference Rate for Use in Long-Term Discounting. A report for ODPM, DFT and DEFRA.

1 March 2005

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