Societal Impacts and Economic Benefits of Improving Shortrange

Societal Impacts and Economic Benefits of Improving Short-range Weather Forecasts Jeffrey K. Lazo Societal Impacts Program NCAR - Boulder, CO lazo@ucar. edu www. sip. ucar. edu International Symposium on Nowcasting and Very Short Range Forecasting (WSN 05) September 5, 2005

Outline of My Talk n n n Why value forecasts? What should be valued? What is value? How are values measured? Example Conclusion

Why Value Forecasts? 1. program justification n 2. 3. program evaluation guidance for research investment n 4. 5. benefit-cost analysis any cases of true comparative analysis? inform users of forecast benefits developing end-to-end forecast and warning system

What Should Be Valued? n n Economic impacts of weather Dutton - $3 T US Forecasts Research to improve forecasts How forecasts are used short-term forecasts warning systems predict – communicate – use

What Should Be Valued? Forecasts Value Integrate forecasting and valuation - Meteorology - Economics

What Should Be Valued? Weather Observation Forecast Communication Perception Valuation Meteorology Psychology Risk communication Anthropology Marketing Sociology Geography Risk perceptions Economics

What Should Be Valued? Mental Modeling “A mental model is an explanation in someone's thought process for how something works in the real world. “It is a kind of internal symbol or representation of external reality, hypothesised to play a major part in cognition. ” en. wikipedia. org/wiki/Mental_model

What Should Be Valued? Expert Diagram

What Should Be Valued? Expert Diagram: Uncertainty

What is Value? Forecast Frost No Frost -C (lost cost) Action Protect Don’t Protect -L (lost crop) 0 Nelson and Winter QJE Why ask “What is Value? ” • • Ensure that “economic value” is valid economics Look at broader approach to economic valuation

What is Value? “US” versus non-”US” approaches? Economic values and societal impacts e. g. , lives saved environmental values time saved reduced impact on vulnerable populations

What is Value? n n n Economic agents n Consumers n Producers n Government Assumptions 1. People have rational preferences 2. Individuals maximize utility 3. Firms maximize profits 4. Agents act independently using full information Neoclassical theory includes or extends to n Competitive equilibrium n Non-market and intrinsic values n Social welfare theory (incl. benefit-cost analysis) n Value of information (VOI)

What is Value? S P$ P* Producers maximizing profits by offering quantities for sale at different prices. Consumers maximizing utility by buying quantities at different prices. Equilibrium price (P*) and quantity (Q*) D determined by interaction of Supply and Demand Q Q*

What is Value? S P$ Producer Surplus = Total Revenues minus Total Marginal Costs P* PS D Q* Q

What is Value? S P$ Consumer Surplus = Total Benefits minus Total Expenditures CS P* D Q* Q

What is Value? S P$ CS P* PS D Q* Q

What is Value? S 0 P$ S CS 1 DCS P* PS D D Q* Q 1 0 Q 1

What is Value? n n Neo-classical economics – utility theory Willingness to pay - WTP

What is Value? S CS 0 DCS S 1 P* PS D 1 D Q* Q 1 0 Q WTP: How much income could be taken away from the individual who receives improved weather forecasts while keeping him at the same level of utility

What is Value? S 0 CS S 1 P* PS D 1 D Q* Q 1 0 Q

What is Value? Market Failures § Public goods § Market power § Externalities § Information

What is Value? Topics: Public Goods What is the price (i. e. , value) of weather forecasts? Weather forecast characteristics • Non-rival • Non-exclusive Problems of public goods • No observable price information • No provision by private markets Weather forecasts as “quasi-public goods”?

What is Value? Topics: Time 1. Value of time 2. Discounting 5% Rate of Time Preference Discounted Benefits Costs Period Benefits Costs 0 0. 00 100. 00 5 60. 00 47. 02 0. 00 10 60. 00 36. 83 0. 00 120. 00 100. 00 Net Benefit 83. 85 20. 00 Net Benefit 100. 00 -16. 15

What is Value? Topics: VSL Value of Statistical Life (VSL) • 1, 000 people each willing to pay $50 a year for a program to reduce the chance of death by 1 in 100, 000 per year (say from 20 in 100, 000 to 19 in 100, 000 each year) • Means that the group is WTP $50, 000 to prevent 10 deaths • VSL = $50, 000/10 deaths = $5, 000

What is Value? Topics: Benefits Transfer Application of results from one study for a different analysis context. Same commodity being valued? same baseline? same outcome? No Forecast Climatology Current Improved Perfect Adjusting for: date of study – changes in prices (inflation) changes in preference other significant determinants of value

How Are Values Measured? Murphy, A. H. , 1994: Assessing The Economic Value Of Weather Forecasts: An Overview Of Methods, Results And Issues. Meteorological Applications, 1(2), 69 -73. Anaman, K. A. , D. J. Thampapillai, A. Henderson. Sellers, P. F. Noar, And P. J. Sullivan, 1995: Methods For Assessing The Benefits Of Meteorological Services In Australia. Meteorological Applications, 2(1), 17 -29 Macauley, M. K. , 1997: Some Dimensions Of The Value Of Weather Information: General Principles And A Taxonomy Of Empirical Approaches. Report Of Workshop On The Social And Economic Impacts Of Weather, Boulder, Co.

How Are Values Measured? n Prescriptive Studies Descriptive Studies n Revealed preference n market prices n hedonic methods n n Stated preference stated value (contingent valuation) n stated choice n

Example: “Super. Comp” BENEFITS OF INVESTING IN WEATHER FORECASTING RESEARCH: AN APPLICATION TO SUPERCOMPUTING Jeff Lazo, Jennie Rice, Marca Hagenstad n Purpose: Assess benefits of buying a new supercomputer for weather forecast research n value of research to improve forecasts n assess value chain n benefits transfer n non-market valuation n value of statistical life n discounting

Example: “Super. Comp” 1. 2. 3. 4. 5. 6. Determine potential impact of supercomputer on forecast quality Identify potential sectors/users and of improved forecast Identify existing benefit studies for sectors/users Quantify probabilities and timing of impacts Develop benefits model for aggregating over time Conduct sensitivity analysis

Example: “Super. Comp” Marine Resource Mgt. Benefits Private Sector Benefits (e. g. , highways) New Supercomputer Improved Environmental Modeling International Benefits Agriculture Benefits Marine Transportation Benefits Total Improved Operational Forecasts (NWS Benefits) DOE Benefits (wind) Air Force Benefits Army Benefits Household Benefits Retail Benefits Aviation Benefits Energy Benefits (temps, wind) Benefits

Example: “Super. Comp” Household Benefits of Short Term Weather Forecasts Stratus Consulting (2002) – stated preference study

Example: “Super. Comp” Agriculture: Annual value of improvement to perfect information (PI) Apples, peaches, and pears Value of improvement to PI per acre of farmland Alfalfa Winter wheat Total - these crops $1, 403 $75 $35 $65. 19 Acres of farmland 828, 460 23, 541, 000 44, 349, 000 68, 718, 460 Value of PI - 100% of land $1. 16 B $1. 77 B $1. 55 B $4. 48 B Value of PI - 5% of land $58 M $89 M $77 M $224 M

Example: “Super. Comp” Weather-related fatalities and VSL estimates (we assume 10% of weather-related fatalities preventable with perfect information) Year Fatalities — value (millions) 1996 1997 540 600 $3, 240 $3, 600 1998 1999 2000 2001 2002 687 908 476 464 540 $4, 122 $5, 448 $2, 856 $2, 784 $3, 240 Average annual 602 $3, 613 a. Calculated as $6 million per fatality. Source: NWS (1996 -2002).

Example: “Super. Comp” HPCS – double current computing capabilities - enable doubling of the spatial and temporal resolutions of environmental models currently run by NOAA, including finite-difference models of the atmosphere and ocean Observation Understanding NCEP Supercomputing NHRA GFDL Supercomputing Computing Improvements in Weather Forecasts

Example: “Super. Comp” 1. 2. 3. Contribution from NHRA – 20% Contribution from computing – 33% Contribution to forecast improvements over 5 year life of NHRA – 75% 20% x 33% x 75% = 5%

Example: “Super. Comp” Financial assumptions for base case present value calculations Real social discount rate 3% Decision to purchase supercomputer 2004 First year of operation 2005 Number of years until benefits begin 2 Number of years in which benefits accrue 5 Time horizon for accrued benefits Infinite

Example: “Super. Comp” Summary of present value of benefits in 2003 (millions, 2002$) Household sector Orchards, winter wheat, alfalfa Avoided weather- 69 26 21

Conclusion n Valuation (and communication and perception and decision making research) needs to become an integral part of the weather forecasting system Don’t need to put a dollar value on everything n comes back to the question one wants to answer Valuation should not be done by meteorologists n you don’t want economists forecasting the weather

Fin Merci Beaucoup © Harald Edens, reproduced with permission