3. Assessing natural catastrophe risk 3.1. Expert modelling of natural disaster risk Assessments of future risk are inherently difficult because of the uncertainties associated with the impacts of climate change and socio economic development on future
The CCC did not make an ethical choicebetween those methods. Instead it argued prag-matically that it is difficult to imagine a globaldeal that would not ask developed countriesto reduce their per capita emissions to globalaverage levels. Allowing some large emitters toremain above the global average would requireother emitters to remain below it, and agreementon such an outcome is unlikely.This argumentation, first put forward by Stern(2008), implies a roughly 80 per cent reduction inUK emissions from currently just over 10 tCO2eper capita to around 2–2.5 tCO2epercapita.Inabsolute terms, the UK would have to reduce emis-sions from 695 MtCO2e in 2006 to 159 MtCO2ein2050 (see Figure 1). The 80 per cent target is in linewith a growing international consensus on, andcommitment to, long-term emission cuts by devel-oped countries. The target is formulated as aminimum requirement, leaving open the optionof further cuts if required (for example in the lightof new scientific evidence).Despite framing climate change as a risk issue,the CCC did not ignore the issue of mitigationcosts, which is central to economic assessments.Considerable effort went into ascertaining thatthe proposed targets are technically feasible andcan be achieved at reasonable cost. They can.The CCC’s modelling results, based on MARKAL,concur with the IPCC fourth assessment (Barkeret al., 2007) that cutting emissions by four-fifthswould cost no more than 1–2 per cent of GDP in2050 (see AEA, 2008).A key plank of the long-term abatement strategywould have to be the decarbonization of the elec-tricity sector, through a combination of renewableenergy, nuclear power and carbon capture andsequestration (CCS). On the back of a decarbo-nized electricity sector, large-scale emissionreductions would also become feasible in twoother important sectors, heating and transport.In the short term, significant contributionswould have to come from increased energy effi-ciency in buildings, transport and industry.Although it endorsed the free trade in carbon emis-sions, the CCC also noted that the majority of the80 per cent cut would in the long term have to beachieved via domestic action.3. The first three carbon budgets (2008 –2022)Theintroductionoffive-yearcarbonbudgetsisargu-ably the key institutional innovation of the ClimateChange Act. From a political economy point ofview, the budgets allay concerns that without inter-mediate milestones action toward the mid-centurytarget would be delayed and they allow for theobjective and transparent monitoring of perform-ance. The budgets also increase policy certaintyand send a strong signal to industry, encouragingbusiness to undertake the large-scale investmentsneeded to create a low-carbon economy.Each carbon budget constitutes a distinct five-year target. However, the CCC used the year2020, the mid-point of the third budget period,to take a ‘sighting shot’ at appropriate budgetsfor periods one to three. The CCC recommendeda two-track approach with two state-contingenttargets (see Figure 2):BAn interim target of –34 per cent, relative to1990, to which the UK should commit unilat-erally; andFIGURE 1 Current UK emissions and the 2050 targetSource: CCC (2008).Note: UK emissions in 2006 (including transport) were 16% lowerthan in 1990. Hence an 80% emissions cut relative to 1990translates into a (120.20/0.84) ¼ 77% reduction from today.204 Fankhauser, Kennedy and SkeaENVIRONMENTAL HAZARDS BAn intended target of –42 per cent, relative to1990, which the UK should adopt if a mean-ingful successor to the Kyoto Protocol can beagreed.Consistent with the long-term target, the carbonbudgets cover all Kyoto gases, despite uncertaintyin the measurement of non-CO2emissions, par-ticularly in agriculture. However, the CCC rec-ommended the exclusion of emissions frominternational aviation and shipping until a trans-parent and sensible way could be found to allo-cate international emissions to the nationallevel. The CCC recognized the importance ofinternational transport emissions, however, andwill monitor them in its annual progressreports. It also argued that the level of ambitionin the budgets should reflect likely progress inreducing emissions in these sectors.In recommending the three carbon budgetsthe CCC was guided by three main concerns:(1) the need for consistency with EU-wide energyand climate change policy, (2) the need to be con-sistent with the 2050 objective and make an ade-quate early contribution to the 2050 target; and(3) the need for budgets that are ambitious buttechnically and economically feasible.The distinction between an interim andintended budget was a direct result of EU policyapproach, which also distinguishes a ‘unilateral’target (a 20 per cent EU-wide emissions cut) anda ‘global cooperation’ target (a 30 per cent emis-sions cut). The CCC felt this was an appropriateway to approach the international negotiationsfor a post-2012 agreement. The targets proposedfor the UK are roughly consistent with the obli-gations that the EU-internal burden sharingmethodology imposes on the UK.Similarly, the budgets set the UK on courseto reach its 2050 target. Meeting the intendedbudget target would require a decrease in UKgreenhouse gas emissions of 2.8 per cent perannum between 2007 and 2020. This would haveto increase to 3.5 per cent per annum between2020 and 2050. Although the initial reductionrate is lower than the long-term average, theCCC felt it was adequate. In an environment ofhigh uncertainty, the proposed targets alsoprovide the flexibility required to make cost-effective mid-term corrections should new infor-mation become available (Watkiss et al., 2008).Although consistency with EU policies and thelong-term target is crucial, by far the most effortwent into the third consideration – ascertainingthat the proposed targets are technically andeconomically feasible. The CCC systematicallyassessed the emission reduction potential in themain sectors – electric power, transport, build-ings and industry, and the non-CO2sectors.Detailed marginal abatement cost curves werederived for all relevant sectors to identifyemission reduction opportunities through abottom-up process. About half of the UK’s emis-sions are covered by the EU Emissions TradingScheme (ETS). The CCC estimated that EU-widecompliance with the EU ETS could be achievedfor a carbon price of £40 per tonne by 2020. In afirst instance, the same cut-off price of £40 pertonne was then used for emission reductionoptions outside the EU ETS (in the non-tradedsector). However, in many cases more expensivemeasures were ultimately also included basedon their ‘dynamic efficiency’ – that is, their long-term potential for deep emission cuts later on – orto start driving down the costs of promisingtechnologies.A distinction was made between the theoreti-cally feasible potential and the realisticallyFIGURE 2 CCC recommendation for the 2008–2022 carbonbudgetsSource: CCC (2008).Building a low-carbon economy 205ENVIRONMENTAL HAZARDS achievable potential, which takes into accountbarriers in the uptake of measures. The realisticpotential reflects a judgement on the prevailingpolicy framework, how it might be strengthenedand the incentives it gives to take up theoreticallyfeasible abatement options. In this respect, theCCC distinguished between three policy scen-arios (CCC, 2008):BThe current ambition scenario includesmeasures which cost less than the £40 pertonne cut-off, or which are covered byexisting policies, but is cautious about theirrealistically achievable potential. The scen-ario includes significant progress towardslow-carbon electricity generation, and someprogress on improving fuel efficiency innew cars.BThe extended ambition scenario includes ‘moreambitious but still reasonable assumptions’about the realistic reduction potential ofexisting policies, plus a number of measureswhich would cost more than £40 per tonne,but which are ‘important stepping stones onthe path to 2050’. The scenario is ‘broadly inline’ with policies to which the governmentor the EU are committed in principle, butwhich have yet to be implemented.BThe stretchambitionscenarioadds further abate-ment options for which there is no policy com-mitment at the moment, for example ‘moreradical new technology deployment andmore significant lifestyle adjustments’.The conclusion of this analysis is that the‘extended ambition’ scenario would be sufficientfor the UK to meet the interim budget target.For the intended target, ‘extended ambition’would have to be combined with an increasedreliance on carbon offsets or additional measuresenvisaged under the ‘stretch ambition scenario’.However, the existing policy framework willhave to be strengthened to reach ‘extendedambition’ level or more.The CCC looked in detail at the wider socialand economic implications of the proposedbudgets – on competitiveness, energy security,fuel poverty, the fiscal balance and for thedevolved administrations. It found that theywere on the whole manageable, although comp-lementary measures may be needed to mitigatesome of them, for example in the case of fuelpoverty and the competitiveness of selectedsectors. Overall, the CCC concluded that the UKcould meet the proposed carbon budgets at acost of less than 1 per cent of GDP.4. The road aheadThe initial work of the CCC was about settingtargets, both over the long term (2050) andmore immediately for the first three carbonbudgets (2008 –2022). The CCC’s recommen-dations on the long term were adopted straightaway and are part of the Climate Change Act.In spring 2009 the government also adoptedthe CCC’s 34 per cent interim target for 2008–2022. The government did not endorse theintended target of 42 per cent, but acknowl-edged the interim target will have to be revisedonce there is a new international agreement.The CCC will be asked for an updated rec-ommendation once the details of the new agree-ment are known.With advice on the fourth budget not dueuntil 2010, the focus of the CCC is shifting tomonitoring. Checking adherence to the carbonbudgets is an important part of the remit ofthe CCC, which will assess progress in thisrespect in its annual reports to government.The immediate challenge for the 2009 annualreport, due in October, will be to devise a frame-work of indicators that reveal, with sufficientlead time, whether the UK is on track inmeeting its carbon budget obligations. Suchlead indicators are likely to cover policy develop-ments (e.g. changes to the renewable energy fra-mework), implementation issues (e.g. uptake ofnew incentive schemes), investment (e.g. cleangeneration capacity under development), inno-vation (e.g. progress on CCS pilots) and techno-logical change (e.g. the carbon efficiency of newcars). Particularly salient in the current206 Fankhauser, Kennedy and SkeaENVIRONMENTAL HAZARDS economic environment will be the need to dis-tinguish between structural, policy-inducedchange and temporary effects due, for example,to fluctuations in the business cycle.The CCC will also seek to deepen its under-standing of sectors and mitigation optionsthat have not been fully covered in the firstreport. This includes, for example, the issue ofagricultural emissions, technology options inthe heating sector, demand-side measures inthe transport sector and the impact of alarge-scale shift to low-carbon technologies onthe functioning of the electricity market.There is also the question of how to tackleairline emissions and bring international avia-tion and shipping into the carbon budgetingsystem. The role of aviation will be the subjectof an aviation review carried out in 2009.Finally, the CCC will also start looking at adap-tation with the creation of an adaptationsub-committee.These questions are not new, and many ofthem will occupy analysts and policy makers foryears to come as we seek to mitigate the risks ofclimate change. The work of the CCC, like thechallenge of building a low-carbon economy,has only just started. But with the ClimateChange Act the UK has put in place an insti-tutional framework through which it can beginto tackle climate change.Notes1. However, concern about country allocation andaccounting issues led the CCC not to recommendthe inclusion of international aviation and shippingin the 2008–2022 budgets.2. See www.cgd.ucar.edu/cas/wigley/magicc.ReferencesAEA, 2008. MARKAL-MED Model Runs for Long-termCarbon Reduction Targets in the UK, Phase I and II.Final Report to the Committee on Climate Change.www.theccc.org.uk/reports/building-a-low-carbon-economy/supporting-research.Barker, T., Bashmakov, I., Alharthi, A., Amann, M.,Cifuentes, L., Drexhage, J., Duan, M., Edenhofer,O., Flannery, B., Grubb, M., Hoogwijk, M., Ibitoye,F. I., Jepma, C. J., Pizer, W. A. and Yamaji, K., 2007.Mitigation from a cross-sectoral perspective.Climate Change 2007: Mitigation of Climate Change.Contribution of Working Group III to the FourthAssessment Report of the Intergovernmental Panelon Climate Change (IPPC). Cambridge UniversityPress, Cambridge, UK.CCC (Committee on Climate Change), 2008. Building aLow Carbon Economy: The UK’s Contribution to Tack-ling Climate Change. The First Report of the Commit-tee on Climate Change, December. TSO, London.www.theccc.org.uk/reports/building-a-low-carbon-economy.Dietz, S., 2008. A Long-Run Target for Climate Policy: TheStern Review and its Critics. Background Report for theCommittee on Climate Change. Grantham ResearchInstitute, London School of Economics, London.www.theccc.org.uk/reports/building-a-low-carbon-economy/supporting-research.DTI, 2003. Our Energy Future: Creating a Low CarbonEconomy. Energy White Paper, Department of Tradeand Industry, February. TSO, London.Meinshausen, M., Hare, B., Wigley, T. M. M., VanVuuren, D., Den Elzen, M. G. J. and Swart, R., 2006.Multi-gas emissions pathways to meet climatetargets. Climatic Change, 75(1). 151–194.RCEP, 2000. Energy – the Changing Climate. Royal Com-mission on Environmental Pollution 22nd Report,June. www.rcep.org.uk/energy.htm.Smith, J. B., Schellnhuber, H. J., Qader Mirza, M., Fan-khauser, S., Leemans, R., Lin, E., Ogallo, L., Pittock,B., Richels, R., Rosenzweig, C., Safriel, U., Tol,R. S. J., Weyant, J. and Yohe, G., 2001. Lines ofevidence for vulnerability of climate change: a syn-thesis. Climate Change: Impacts, Adaptation and Vul-nerability. Contribution of Working Group II to theThird Assessment Report of the IPCC. CambridgeUniversity Press, Cambridge, UK.Smith, J. B., Schneider, S. H., Oppenheimer, M., Yohe,G. W., Hare, W., Mastrandrea, M. D., Patwardhan,A., Burton, I., Corfee-Morlot, J., Magadza, C. H. D.,Fu¨ssel, H. M., Pittock, A. B., Rahman, A., Suarez, A.and van Ypersele, J. P., 2009. Assessingdangerous climate change through an update of theIntergovernmental Panel on Climate Change (IPCC)‘reasons for concern’. Proceedings of the NationalAcademy of Science USA, 106(11). 4133–4137.Solomon, S., Qin, D., Manning, M., Chen, Z., Marquis,M., Averyt, K. B., Tignor, M. and Miller, H. L. (eds),2007. Climate Change 2007: The Physical ScienceBasis. Contribution of Working Group I to theFourth Assessment Report of the IntergovernmentalBuilding a low-carbon economy 207ENVIRONMENTAL HAZARDS Panel on Climate Change (IPCC). Cambridge Uni-versity Press, Cambridge, UK.Stern, N., 2008. Key Elements of a Global Deal on ClimateChange. Grantham Research Institute, London Schoolof Economics, London. www.lse.ac.uk/grantham.Sura, K. and Golborne, N., 2008. Integrated assessmentmodelling. Technical appendix for Chapter 2.Building a Low Carbon Economy: The UK’s Contributionto Tackling Climate Change: The First Report ofthe Committee on Climate Change, December.TSO, London. www.theccc.org.uk/reports/building-a-low-carbon-economy/supporting-research.Watkiss, P., Blyth, W., Dietz, S., Downing, T., Hunt, A.and Fletcher, K., 2008. Review of the MethodologicalApproaches Available to Set UK Carbon Budgets.Report to the Shadow Committee on ClimateChange, April. www.theccc.org.uk/reports/building-a-low-carbon-economy/supporting-research.208 Fankhauser, Kennedy and SkeaENVIRONMENTAL HAZARDS Managing natural disaster risks in a changing climateW. J. W. BOTZEN1,* AND J. C. J. M. VAN DEN BERGH21Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands2ICREA, Barcelona, Spain; Institute of Environmental Science and Technology & Department of Economics and Economic History,Universitat Auto`noma de Barcelona, Spain; Faculty of Economics and Business Administration & Institute for EnvironmentalStudies, Vrije Universiteit, Amsterdam, The NetherlandsNatural disasters have increased in frequency and severity during the last few decades, causing considerable economic damageand loss of life. A combination of climate and socio-economic change is likely to augment disaster loss trends in the future,creating the need for more sophisticated disaster risk management. A resilient risk management strategy for uncertain low-probability, high-impact risks comprises a package of measures focused on disaster risk prevention, damage mitigation andarrangements for efficient risk sharing. Possible implications of climate change on future risks and risk management policies areoutlined. It is argued that financial arrangements such as insurance can play an important role in an adaptation strategy aimed atlimiting and ameliorating socio-economic impacts of natural disasters.Keywords: adaptation; bounded rationality; catastrophe modelling; climate change; insurance; natural disasters;risk perception1. IntroductionRecent extreme weather events have demon-strated the vulnerability of various countries tonatural disasters (Munich Re, 2009). Economiclosses caused by such disasters can be of suchmagnitude that individuals and businesses maybe unable to carry them and could risk bank-ruptcy unless they are financially compensated.In the face of a projected rise in the frequencyand severity of natural disasters due to socio-economic developments and climate change thequestion arises of how to design policies thatlimit exposure to and ameliorate impacts ofnatural disasters. The role of financial arrange-ments for natural disaster risk is important inthis respect, since an often-raised question iswho should pay for the elevated risks faced (Kun-reuther et al., 2008). Apart from simply compen-sating for damage, financial arrangements suchas insurance may contribute to the adaptationof societies to increasing risk and enhance econ-omic resilience to disasters (Mills and Lecompte,2006; Botzen and van den Bergh, 2008). This isnot an easy task for the insurance sector, giventhe problems with insuring low-probability, high-consequence (correlated) disaster risk. As anexample, in the USA several major insurancecompanies retreated from some hazard-proneareas, such as State Farm in Florida, where hurri-cane risks are very high, as they were incapableof limiting exposure to rising risk (von Ungern-Sternberg, 2009).1During the last few decades a considerableincrease in the frequency and economic damageof natural disasters occurred worldwide (Kun-reuther and Michel-Kerjan, 2007). Figure 1shows an upward trend in overall and insuredlosses caused by great natural disasters since1950. Natural disasters, such as major storms,floods and earthquakes, have devastating conse-quences for societies around the globe withresearch articleB *Corresponding author. E-mail: wouter.botzen@ivm.vu.nlENVIRONMENTAL HAZARDS 8 (2009) 209–225doi:10.3763/ehaz.2009.0023 # 2009 Earthscan ISSN: 1747-7891 (print), 1878-0059 (online) www.earthscanjournals.com especially large impacts on developing countries,while effects on insurers are concentrated indeveloped countries (Freeman et al., 2003). Inparticular, natural disasters may cause manydeaths with a single event, resulting in thespread of diseases in affected areas, and havemajor adverse economic consequences causedby damage to property, both direct and indirect,such as business interruption and productivitylosses. Some examples of major events in thelast decade indicate the diversity of threatsposed by nature and their global character.Major events in Europe were the 2002 floods inCentral Europe, the 2003 heatwave that caused35,000 deaths, and river floods in the UK in2007. The tsunami in Asia in 2004 was a large cat-astrophe causing more than 283,000 deaths whilea major earthquake in China caused at least70,000 deaths in 2008 (Lay et al., 2005; MunichRe, 2009). The USA was hit by a series of destruc-tive hurricanes in 2005 – hurricanes Katrina,Rita and Wilma killed over 1,500 people andresulted in USD180 billion of compensation pay-ments – followed by hurricane Ike in 2008 (Kun-reuther et al., 2008). Damaging wildfires occurredin Greece in 2008; major forest fires in Australia in2009 killed over 200 people and damaged largepieces of land with devastating effects on wildlife.The sharp increase in tempo and severity of therecent disasters made some leading academicssuggest that we have entered a new era ofnatural catastrophes (Kunreuther et al., 2008).Because of their disruptive impacts2natural cata-strophes are often well publicized in the mediaand are an important issue for governments,international organizations, such as the WorldBank and the United Nations, and the broaderresearch community. A question that oftenarises is how to design effective policies thatlimit the rise in natural disaster losses andreduce their impact on human societies. Thispaper provides some insights into this subjectfrom an economics perspective and indicatesthe role financial arrangements can play in limit-ing exposure to natural disasters. The insurancesector, which is the world’s largest industry interms of revenues, could be a major partner inpromoting climate change adaptation (Mills,2007). In this respect climate change does notonly pose a threat to insurers but also entails thedevelopment of new business opportunities(Mills, 2007; Botzen et al., 2009a).FIGURE 1 Overall and insured losses caused by great natural disasters between 1950 and 2008(2008 values)Source: Munich Re (2009).210 Botzen and van den BerghENVIRONMENTAL HAZARDS The remainder of this paper is structured asfollows: Section 2 outlines the influence of socio-economic developments and climate change onnatural disaster risk; Section 3 discusses expertassessment of risk and households’ perceptionsand behavioural responses to risk; Section 4 pro-vides some strategies of managing extremeweather risk; and Section 5 examines the rolefinancial arrangements can play in natural disas-ter risk management.2. Future natural disaster risk under climateand socio-economic change2.1. Impact of socio-economic developmentson natural catastrophe damageHuman-induced developments are a major deter-minant of the occurrence and consequences ofnatural disasters. Natural hazards such asstorms, flash floods, heat waves and stormsurges are natural phenomena. However, thedamage caused by them is to a great extent influ-enced by human activities. A natural disaster isusually defined as the impact of a natural eventon human societies, for example, in terms ofloss of lives or economic costs (Bocˇkarjova,2007). A certain threshold of economic damageor loss of life generally needs to be exceededbefore an extreme weather event is defined as anatural disaster. Important in this respect arealso the abilities of societies to prepare for andmanage the economic disruption caused by thedisaster, which depend on the countries’ level ofeconomic development (Rose, 2003). A majorpart of the increased damage due to natural disas-ters around the globe can be explained by socio-economic developments such as an increasedpopulation and concentration of wealth in areasthat are vulnerable to natural hazards (Chang-non, 2003; Muir-Wood et al., 2006; Cromptonand McAneney, 2008; Miller et al., 2008). Forexample, the large rise in hurricane damage inthe USA that has been observed in the lastdecades is mainly due to increased human settle-ments at coastal locations where hurricanes oftenmake landfall, such as Florida (Pielke et al., 2008;Schmidt et al., 2009). In the future, urbanizationin hazard-prone areas such as coastal agglomera-tions is projected to continue, which enhancesvulnerability to weather extremes, posing chal-lenges for the management of natural disasterrisk (Bouwer et al., 2007).2.2. Climate change and the frequency andseverity of natural disastersIn addition to socio-economic developments,climate change may increase the intensity andseverity of weather extremes and contribute toan increasing loss burden of natural disasters inthe future (Mills, 2005; IPCC, 2007; Botzen et al.,2009a). Anthropogenic climate change is causedby the emissions of carbon dioxide and othergreenhouse gases such as methane which haveaccumulated in the earth’s atmosphere since theindustrial revolution (mainly since the late 19thcentury), predominantly due to the burning offossil fuels, deforestation and other land usechanges. These rising levels of greenhouse gasesresult in increases in surface air temperature,because the greenhouse gases in the atmospheretrap heat (e.g. Pierrehumbert, 2004). The Intergo-vernmental Panel on Climate Change (IPCC) pro-jects a rise in global average surface temperaturesbetween 1.1 and 2.98C in 2100 for a low-emissionscenario and between 2.4 and 6.48Cin2100undera high-emission scenario (IPCC, 2007). Severalpositive feedback mechanisms of climate changemay increase greenhouse gas concentrations inaddition to human-induced emissions and, there-fore, result in more warming than anticipated byclimate models (Stern, 2007). Examples arereleases of methane due to melting of permafrostand a reduced uptake of carbon as a result of theweakening of natural carbons sinks, such as theAmazon forest3(Heimann and Reichstein, 2008;Kennedy et al., 2008).Climate change is likely to result in an intensi-fied water cycle, which implies that existingregional patterns of scarcity and abundance ofwater are amplified, increasing the risk ofManaging natural disaster risks 211ENVIRONMENTAL HAZARDS . wouter.botzen@ivm.vu.nlENVIRONMENTAL HAZARDS 8 (20 09) 20 9 22 5doi :10 .3763/ehaz .20 09.0 023 # 20 09 Earthscan ISSN: 17 4 7-7 8 91 (print), 18 7 8-0 059 (online) www.earthscanjournals.com especially. management .2. Future natural disaster risk under climateand socio -economic change2 .1. Impact of socio -economic developmentson natural catastrophe damageHuman-induced