Sustainability First/Frontier call for new thinking on climate change cost benefit analysis

The intergenerational implications of climate change require new thinking about how to undertake the appraisal (cost-benefit analysis) of spending, regulations or other government actions designed to address climate change – whether by reducing greenhouse gas emissions or putting in place measures to adapt to current and anticipated changes.

That was the key finding of a report from Frontier Economics, undertaken for Sustainability First. Frontier pointed out that efforts to tackle climate change do not fit with many aspects of the existing analysis framework, including because the usual assumption that future generations will be wealthier than current generations does not necessarily hold; some natural environment changes may be irreversible; and there is a global context to costs and benefits.

The report noted the Treasury’s November 2020 Supplementary Green Book Guidance Accounting for the effects of climate change provides a good starting point for such thinking, but said more is needed to develop a comprehensive suitable framework.

Frontier said the framework should include the following elements (see chart):

• The ethical considerations associated with particular policies (such as the degree of consideration for future generations or global context) are apparent for decision makers.

• The right economic inputs are used to populate any analysis: discount rates properly reflect future socio-demographic scenarios and assumptions around financing take climate impacts into account.

• The characterisation of outputs (or results of policies) recognises the shifting sectoral composition of the UK economy under climate scenarios and explicit estimates of their impact on economic growth.

• Impacts on outcomes (or longer term effects of policies as a result of outputs) beyond measured income for future generations are incorporated into the analysis.

• Frontier also identified a few topics that are likely to be pervasive throughout the discussion and warrant further thought. These included the:

• Circular nature of policy impacts: current policies and actions drive outputs that develop the state of the future world, which in turn, act as inputs that contribute to decision-making for the further future.

• Non-linear nature of climate change: beyond a “tipping point” the effects of climate change will no longer be reversible.

• Co-benefits or disbenefits of policy action: many policy actions can have conjoined benefits or disbenefits across sectors. It is important to keep these linkages in mind as policy actions are deliberated.

• Behavioural nudges and consumer action: policy action needs to be accompanied by an impetus on consumer action and behavioural nudges. It also needs to build on external catalysts for change such as crises and other widespread events.

• Explicit recognition of the impact of UK action on the likelihood of wider global action: analysis of UK actions cannot be confined to the impact on UK residents but must consider how they will influence decisions of other countries and institutions (such as international financial institutions, UN and others).