"There is some evidence and much speculation on ways that climate change may affect climate-sensitive sectors of an economy."⁽⁴⁶⁾

The Canadian economy is highly dependent on the health and sustainability of our natural resource industries, such as forestry, fisheries and agriculture, and the reliability of our critical infrastructure, including transportation and health care systems. The availability and quality of our water resources and the sustainability of the coastal zone are also important to Canada's economic well-being. As illustrated throughout this report, climate change will present new opportunities and challenges for each of these sectors. This will lead to a range of economic impacts, both negative and positive, and new investments in adaptation will be required.

At present, it is difficult to derive quantitative estimates of the potential costs of climate change impacts.^{(18, 46, 47)} Limitations are imposed by the lack of agreement on preferred approaches and assumptions, limited data availability, and a variety of uncertainties relating to such things as future changes in climate, social and economic conditions, and the responses that will be made to address those changes. Ongoing research is motivated by the fact that a meaningful assessment of climate change costs, both market and nonmarket, will strongly influence both mitigation and adaptation decisions. Indeed, the concepts and methods of economics have been recognized as a principal means of translating scientific research on climate change into policies.⁽⁴⁸⁾

Economic Impact Assessments

There have been several attempts to estimate the potential costs of climate change on various economic sectors at the national level in both the United States and Canada (see Table 4). Since these studies employ different approaches, make different assumptions and operate on varying scales, direct comparisons between countries or sectors is not possible. These numbers do, however, illustrate the magnitude and ranges of study results.

In general, assessing the economic impacts of climate change involves estimating the value of direct and indirect market and nonmarket impacts, the costs of implementing adaptation options and the benefits gained as a result of the adaptation. In this case, direct impacts refer to those that occur in the region itself, whereas indirect impacts are those that result from the impacts of climate change on systems and sectors in other regions. Market goods and services have well-established ownership and are sold for payment, whereas nonmarket goods and services are not traded and are not subject to well-defined property rights.⁽⁴⁶⁾ Some examples of impacts on market goods include changes in food, forestry and fisheries products, the water supply and insurance costs. Impacts on nonmarket entities include changes in ecosystems, loss of human life, impacts on cultures and changes in political stability.⁽⁴⁶⁾ It should also be noted that impacts on nonmarket services often have consequences for market goods and services.

Table 4: Annual estimates of welfare changes due to climate change

Abbreviatons: UIUC, University of Illinois at Urbana-Champaign; UKMO, United Kingdom Meteorological Office; OSU, Oregon State University; GFDL, Geophysical Fluid Dynamics Laboratory

Considerable research has focused on determining values of market and nonmarket goods. Valuation is often based upon measures of the consumers' willingness to either pay for a positive change or to accept a negative change.⁽⁵⁴⁾ Although it is generally easier to estimate the impacts on market goods than on nonmarket entities, both present challenges. For example, the value of nonmarket goods and services is influenced by personal preferences, which tend to change over time in an unpredictable manner.⁽⁴⁷⁾ The value of market goods depends on changes in supply and demand, which are influenced by many different factors operating at local, regional, national and international levels.

It has also been suggested that the likelihood of undertaking adaptation will depend on whether the impacts are on market or nonmarket goods and services. Since people (as individuals or through companies, households or institutions) have property rights in market goods, climate change would affect the value of their assets. This provides motivation to undertake adaptations that would help to reduce losses and increase the opportunity to capitalize on potential opportunities.⁽⁴⁶⁾ It is in the interest of households and firms to adapt, as they will see the benefits of the adaptation directly.⁽⁵⁵⁾ In contrast, there is a lack of market incentives and mechanisms to adapt to the impacts of climate change on nonmarket goods, as well as more uncertainty concerning who should be responsible for undertaking the adaptation. These factors must be considered when accounting for the role of adaptation in economic impact studies.

The possible costs of climate change have been estimated in many different ways, and studies vary greatly in their complexity and the amount of detail considered. One approach is to examine historical events or trends that are thought to be indicative of future conditions. For example, some researchers have focused on the economic costs of natural disasters, using insurance claims and disaster databases to determine the costs of these events.^{(21, 56)} Others have examined the economic impacts of past anomalous climate conditions, such as warmer-than-average winters or extremely hot summers. To address sea level rise, studies have taken projections of sea level rise (e.g., 0.5 metres by 2100) and calculated the property value that would be lost as a result of inundation, flooding and/or erosion.^{(52, 57)} Limitations with these types of studies include their focus on only one aspect of a changing climate, and generally insufficient inclusion of both the costs and benefits of adaptation.

A more comprehensive approach involves applying a series of models, through integrated assessment, to generate estimates of economic costs. Integrated assessment involves combining "... results and models from the biological, economic and social sciences, and the interactions between these components, in a consistent framework."⁽¹⁴⁾ This heavy reliance on models and assumptions does, however, result in cascading uncertainties.⁽⁵⁸⁾

Specific Issues

Scale of Analysis

At present, most costing studies have focused on modelling the impacts of climate change at the national or international level (references 18, 46; see also Table 4). This means that changes and impacts are aggregated over large regions, so the differential impacts of climate change on smaller areas are often lost. Nor is such analysis consistent with the fact that many adaptation decisions are made at the regional or local level.⁽⁵⁹⁾ Regional analysis of the economic consequences of climate change is limited by the paucity of regional economic data and the difficulties involved in considering economic and biological interactions between regions. Although research frameworks have been developed to help address these concerns (e.g., reference 46), there are few examples of these being used to facilitate economic analyses at the regional level.

Accounting for Adaptation

Many researchers have expressed concern over the way that adaptation has been represented in costing studies.^{(48, 60)} Although it is recognized that adaptation has a pivotal role in reducing the costs of climate change,⁽⁸⁾ many studies pay little attention to adaptation. Other studies incorporate simplified assumptions regarding adaptation, by assuming that adaptation either occurs optimally or not at all, and do not include realistic estimates of the costs of implementing adaptation measures,⁽⁴⁷⁾ despite the fact that research indicates that the costs of adapting to climate change in Canada would be significant (see Table 5).

Another common concern with respect to the inclusion of adaptation in costing studies is that no distinction is drawn between anticipatory adaptation and autonomous adaptation, despite the fact that there are generally economic advantages to anticipatory adaptation. The distribution of adaptation costs and benefits has also received little attention.⁽⁶¹⁾ These factors reduce the reliability of cost estimates.

Table 5: Estimated costs for adapting selected infrastructure to a 5% increase in mean temperature and a 10% increase in mean precipitation over the present century (preliminary estimates from reference 54).

Based on 2001 dollar values and costs

Interactions between Regions and Sectors

There are strong interrelationships between domestic and international economies. As a country that is highly dependent on trade, Canada is sensitive to the impacts of climate change transmitted through international markets. In other words, direct impacts of climate change in other countries that affect the global supply of or demand for goods would affect the Canadian economy. At present, there is little research that specifically examines positive or negative international market spillovers in Canada or elsewhere.

In addition, economic sectors are not isolated, and both impacts and adaptation actions for one sector would have implications for many others. Different sectors share resources, or depend on others for inputs.⁽⁵³⁾ For example, agriculture, recreation, hydroelectric power generation, and municipal and other industrial users all share common water resources. Increased conflict between these sectors would be expected if climate change resulted in reduced water availability (see Water Resources chapter).

Value of Nonmarket Services

Although it is clearly recognized that the costs of climate change are not only economic, it is extremely difficult to assign values to nonmarket services, such as ecosystem functions and cultural uses. For example, the benefits of a wetland, including water filtration, flood control and wildlife habitat, are difficult to quantify. Therefore, most costing studies do not adequately account for nonmarket services.

There is, however, growing awareness of the role of ecosystems in economic health, stemming largely from sustainable development initiatives. For example, a recent report suggests that measures of Canada's wealth should include measures of forest and wetland cover.⁽⁶²⁾ Other initiatives have begun to assess the economic value of wetlands to Canada⁽⁶³⁾ and to address the nontimber (e.g., wildlife, biodiversity, recreation) value of forests.⁽⁶⁴⁾ Such work, although not conducted in the context of climate change, will contribute to improving climate change costing studies.

Future Work

In the Third Assessment Report of the IPCC, experts noted that little progress had been made in costing and valuation methodologies between 1995 and 2001.⁽¹²⁾ Therefore, much work is needed to quantify the costs and benefits of climate change for the economy; this remains a large research gap from both a Canadian⁽⁴⁷⁾ and an international⁽⁶⁵⁾ perspective. Some recommendations for future work include: (46, 66, 67, 68, 69)

• increased consideration of community characteristics (e.g., socio-economic, political, cultural) in costing studies, to provide policy-makers with a better understanding of the regional impacts of climate change;
• improved understanding and quantification of the connections between sectors and regions;
• enhanced estimates for losses involving nonmarket goods;
• incorporation of vulnerability and the process of adaptation in the models;
• evaluation of the importance of extreme events and climate variability; and
• examination of the role of adaptive capacity in influencing the magnitude and nature of climate change costs (of both impacts and adaptation).