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Methodologies for the Assessment of Socio-Economic Benefits of Weather, Climate and Water Services Jeffrey Methodologies for the Assessment of Socio-Economic Benefits of Weather, Climate and Water Services Jeffrey K. Lazo Societal Impacts Program/Research Applications Lab National Center for Atmospheric Research Meeting of the WMO Forum: Social and Economic Applications and Benefits of Weather, Climate and Water Services Geneva, CH - April 8, 2013

Overview - Assessment of Socio. Economic Benefits Who What Where When Why How I Overview - Assessment of Socio. Economic Benefits Who What Where When Why How I believe these are necessary conditions for identifying the appropriate “How”

Assessment of Socio-Economic Benefits Why Who “… a joint WMO-World Bank What authoritative document Assessment of Socio-Economic Benefits Why Who “… a joint WMO-World Bank What authoritative document on How methodologies for the assessment of socio-economic benefits of weather, 1. authoritative services. ” climate and water document 2. methodologies 3. socio-economic benefits 4. weather, climate and water 5. services

Assessment of Socio-Economic Benefits - Why? No economics • Sound Bites needed • Program Assessment of Socio-Economic Benefits - Why? No economics • Sound Bites needed • Program Justification / Budget Justification • Required for Benefit-Cost Solid Analysis economics • Decision Making for Program needed Prioritization • Showing Benefits to Actual or Potential End Users Solid social • Understanding Human sciences Behavior critical • Improving Products and

Assessment of Socio-Economic Benefits – Who? § This is directly related to “Why” • Assessment of Socio-Economic Benefits – 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: …

Assessment of Socio-Economic Benefits – What? Weather Information Value Chain Weather Monitoring and Observation Assessment of Socio-Economic Benefits – What? Weather Information Value Chain Weather Monitoring and Observation Modeling and Forecasting Dissemination and Communication Perceptions and Interpretation Decision Making Socio. Economic Outcomes Socio. Economic Impacts of Weather

Assessment of Socio-Economic Benefits – What? 1. Economic impacts of weather 2. Economic impacts Assessment of Socio-Economic Benefits – What? 1. Economic impacts of weather 2. Economic impacts of weather enterprise 3. Socio-economic values of weather information 4. Socio-economic values of improved weather information

What? Option 1: Economic Impact Analysis “Economic impact” of weather enterprise: • Public Sector 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 § $ 9 B economic impacts - direct and indirect multipliers § ~20, 000 Employees § $ 1 B tax revenues Tell this to Congressman Skeptical!!! Ø Ø Ø Boulder, CO Norman, OK State College, PA http: //murphy. house. gov/latest-news/e-news-from -congressman-murphy 120/

What? Option 1: Economic Impact Analysis The Weather Enterprise has: • $ 9 B What? Option 1: Economic Impact Analysis The Weather Enterprise has: • $ 9 B direct and indirect economic impacts • ~20, 000 employees • $ 1 B tax revenues In Comparison: http: //www. anenchantedevening. com/djservices/ http: //www. flyfishinsalt. com/news/recreationalhttp: //www. crh. noaa. gov/mpx/? http: //county 10. com/2013/03/06/yellowstone-national-park-spring-opening-delayed-duefishing-returns-most-nj-waterways to-sequestration-cuts-to-nps-budgets/ n=dualpol Wedding Industry (http: //weddingindustrystatistics. com/) • 2, 500, 000 weddings/yr. x ~$25, 000/wedding = $62. 5 B industry Recreational Fishing Industry (http: //asafishing. org/facts-figures/studies-and-surveys/sportfishing-in-america/ ) • $ 48 B/yr. retail sales • $115 B/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

What? Option 2: Economic Impact of • Weather - U. S. GDP 1/3 rd What? Option 2: Economic Impact of • Weather - U. S. GDP 1/3 rd sensitive to weather Dutton (2002) • Lazo et al. (2011*) - U. S. GDP ± 1. 7% owing to weather variability ($485 B/yr. ) • Hurricane Sandy (2012) – $62 B • US Drought 2012 - $50 B? (http: //www. huffingtonpost. com/2012/11/29/sandy-economic-impact-damage_n_2214060. html) (http: //www. bloomberg. com/news/2012 -07 -16/worst-in-generation-drought-dims-u-s-farm- economy-hopes. html) 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? * Lazo, J. K. , M. Lawson, P. H. Larsen, and D. M. Waldman. June 2011 “United States Economic Sensitivity to Weather Variability. ” Bulletin of the

Option 2: Economic Impact of Weather Lazo et al. 2011 U. S. GDP ± Option 2: Economic Impact of Weather Lazo et al. 2011 U. S. GDP ± 1. 7% ($485 B/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 Starting to get at societal What? Option 3: “Economic” Analysis – Value of Forecasts Starting to get at societal values created by the weather enterprise Value of current forecasts November 2006 Survey • Sample - 1, 465 US Households • Median value = $246/HH/yr. • 114, 384, 000 HH (U. S. Census Bureau of Total value 2008) $31. 5 billion / year to U. S. HH for all weather forecast services • Net benefit of $26. 4 B / year • Benefit-cost ratio of 6. 2 to 1. 0 of all U. S. weather forecast services 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

What? Option 4: Economic Analysis – Value of Improved Forecasts Objective • evaluate households’ What? Option 4: Economic Analysis – Value of Improved Forecasts Objective • evaluate households’ values for improved hurricane forecasts and warnings • Hurricane Forecast Improvement Project Methods (HFIP) • non-market valuation – conjoint analysis • survey-based valuation • requires qualitative aspects Modeling and analysis • theory-based • empirical 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

Assessment of Socio-Economic Benefits – How? For Whatever Why and for Whomever … § 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? 2 3 4 1 1. Economic impacts of Assessment of Socio-Economic Benefits – How? 2 3 4 1 1. Economic impacts of weather 2. Economic impacts of weather enterprise 3. Socio-economic values of weather information 4. Socio-economic values of improved weather information

Assessment of Socio-Economic Benefits – How? Is this all about the Value of 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 …

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

Assessment of Socio-Economic Benefits – How? Valuing the changes in outcomes • Requires identifying 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!

Assessment of Socio-Economic Benefits – How? Developing a Taxonomy of Methods § Each method Assessment of Socio-Economic Benefits – How? Developing a Taxonomy of Methods § Each method can be characterized by: • Theoretical basis • Strengths and weaknesses • Large body of literature in non-hydromet 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? Taxonomy of Values • Not value of information Assessment of Socio-Economic Benefits – How? Taxonomy of Values • Not value of information but value of changes • How relevant is this in value of weather servic Hawkins K (2003) Economic valuation of ecosystem services. University of Minnesota. (online) URL: http: //www. frc. state. mn. us/documents/council/landscape/SE%20 Landscape/MFRC_Economic_Valuation_Ecosystem. Services_ SE_2003 -10 -01_Report. pdf

Assessment of Socio-Economic Benefits – How? Relating “Taxonomy of Values” to “Taxonomy of • Assessment of Socio-Economic Benefits – How? Relating “Taxonomy of Values” to “Taxonomy of • • • Market versus Non-Market Valuation Methods Revealed Preference versus Stated Preference Metho Direct versus Indirect Valuation Methods Lazo, J. K. 2002. “Economic Valuation of Ecosystem Services: Discussion and Application. ” Drug and

Assessment of Socio-Economic Benefits – How? Market versus Non-Market • Direct market: the value 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

Assessment of Socio-Economic Benefits – How? Market approaches (all are revealed preference): • Production 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 Lee et al. 2010; Mendelsohn and Olmstead.

Assessment of Socio-Economic Benefits – How? Non-market approaches (Freeman 2003): • Revealed preference methods 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

Assessment of Socio-Economic Benefits – How? Benefits Transfer • Inferring value from studies in Assessment of Socio-Economic Benefits – How? 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 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? Benefit-Cost Analysis (BCA) • • Policy tool for 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 Conclusions • • • Who What Where When Why How

References de Groot, R. S. , M. A. Wilson, R. M. J. Boumans. 2002. References de 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%20 Landscape/MFR C_Economic_Valuation_Ecosystem. Services_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