Assessing the Economic Impacts of Weather and Value of ...web.sca.uqam.ca/.../5291_p2.2_lazo_jeffrey.pdf · Jeffrey K. Lazo Director – Societal Impacts Program National Center for

Assessing the Economic Impacts of Weather and Value of Weather Forecasts Jeffrey K. Lazo Director – Societal Impacts Program National Center for Atmospheric Research Boulder, CO. USA 80307 [email protected] 46th congress of the Canadian Meteorological and Oceanographic Society (CMOS) Montreal, CA - May 30, 2012

For yourself • Is there an aspect of something that matters to you as a

meteorologist / hydrologist / climatologist / …. that it would be useful or important to have some “economic analysis”?

• What is the question? • How would this be analyzed?

o What theories o What methods o What data o What analysis

• What would you do with the information from the economic analysis?

Met Éireann - Irish National Meteorological Service • Mission statement implies that the National Meteorological Service

will … contribute effectively to national prosperity and to Government objectives by supplying relevant meteorological services to all sectors of the economy.”

(http://www.met.ie/about/default.asp)

Australian Bureau of Meteorology • Vision: To provide Australians with environmental intelligence for

safety, sustainability, well-being and prosperity. • The Bureau provides governments and businesses with

environmental intelligence that underpins vital economic decisions. • Action: Measure the social and economic benefits that Australians

gain from environmental intelligence services. (http://www.bom.gov.au/info/leaflets/strategic-plan-2010-15.pdf)

Lesotho Meteorological Services • Mission Statement: To improve the livelihood of Basotho through

effective application of the science of Meteorology and harmonization of their socio-economic activities with weather and climate

(http://www.lesmet.org.ls/about-us.htm)

Fiji Meteorological Service • Mission: To observe and understand regional weather and Fiji's

climate and provide meteorological services in support of well being of communities, economic growth, environmental sustainability and international obligations

(http://www.met.gov.fj/about_us.html)

World Meteorological Organization • The vision of WMO is to provide world leadership in expertise and

international cooperation in weather, climate, hydrology and water resources and related environmental issues and thereby contribute to the safety and well-being of people throughout the world and to the economic benefit of all nations

(http://www.wmo.int/pages/about/mission_en.html)

US National Weather Service • Mission: Provide weather, water, and climate data, forecasts and

warnings for the protection of life and property and enhancement of the national economy

• Goals that focus on critical weather-dependent issues: • Improve sector-relevant information in support of economic

productivity; (http://www.nws.noaa.gov/com/weatherreadynation/files/strategic_plan.pdf)

To provide examples of what the “economics of weather” means to:

• help policy makers in the hydrometeorological communities understand what economics has to offer

• illustrate economic approaches on the value of weather impacts and forecasts

• illustrate economic value of the weather enterprise • encourage investment in economic analysis

Objective

Economics is …

… a science … a social science … a study of human behavior … a theory of value … useful for understanding choices between options … a critical policy analysis tool

First - what is economics?

Measure and analyze …

• Impact of weather on the economy (direct impacts)

• “Indirect” impacts of weather information

– lives saved

– time saved

– reductions in risk

• Decision making under uncertainty

• Tradeoffs over time

• Economic value of a forecast that is not bought or sold

What can we do with economics?

• What is the economic impact of weather on the economy of the United States (or Canada or …)?

• What is the value to the general public of current weather forecasts?

• What is the value of improving the accuracy of weather forecasts?

• What is the net benefit of a major investment in research to improve forecasts?

What sorts of questions can econ answer about weather and weather forecasts?

Four examples of the “economics of weather” • Theoretical / conceptual basis

• What is evaluated and why (study objectives)

• How it is evaluated (methods and results)

• Use of this information (use in policy)

Studies address questions on the: 1. Economic impact of weather

2. Value of current weather forecasts

3. Value of improved forecasts

4. Value of investments in research to improve forecasts

Case Studies

1. ECONOMIC IMPACT OF WEATHER

• Objective Question to answer: – What is the effect of weather variability on US

economic output? (please ask yourself if this could be replicated in Canada)

Framework – Use empirical analysis to detect a “signal” – Using valid economic theory and methods


Conceptual Approach – Demand

• How much consumers are willing to buy as a function of price

• How does demand change with a change in weather

– Supply • How much producers are willing to sell as a function of

price • How does supply change with a change in weather

– Interaction of supply and demand

• How do demand and supply interact to determine a “market outcome” (i.e., prices and quantity)

• How outcome will change with a change in weather


Demand – How much of the output of a sector consumers

are willing to buy as a function of price


Supply – How much output a sector is willing to sell as a

function of price


Interaction of D & S to determine “market” outcome – P* & Q*



• Phase I: Estimation – Methods

• develop quantitative models of the relationship between economic output and weather variability

• 11 nongovernmental U.S. economic sectors • state-level – 48 states • 24 years • economic data

– gross state product (GSP), labor, capital (K), energy

• weather data – temperature and precipitation variability

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.


Translog “Production” Function ij WL K Er t

ijt ijt ijt ijt ijt itQ A e L K E W bb b b=

ln( ) ln( ) ln( ) ln( ) ln( )

1 1ln( ) ln( ) ln( ) ln( ) ln( )2 2

ln( )ln( ) ln( ) ln( ) ln( ) ln( )

1 ln( )ln( ) ln( ) ln2

ijt ijt L ijt K ijt E ijt

it it it LL ijt ijtW WW

LK ijt ijt LE ijt ijt ijt itLW

KK ijt ijt KE ijt

Q A t L K E

W W W L L

L K L E L W

K K K

d b b b

b b b

b b b

b b

= + + + + +

+ + +

+ + +

+ ( )

1ln( )ln( ) ln( ) ln( ) ln( ) ln( )2

ijt

ijt it EE ijt ijt ijt it ijtKW EW

E

K W E E E Wb b b e

+

+ + +

i = state j = sector t = year


• Phase I: Results: All 11 sectors are found to have statistically significant sensitivity to weather variability

Sector HDD CDD Ptot Pstd

Agriculture - + - Communications + + +

Construction + + FIRE (finance, insur., & real estate) + + + -

Manufacturing + + - Mining + - +

Retail trade + + + Services + + -

Transportation + Utilities + -

Wholesale trade + + - +


• Phase 2: Impact Analysis – Method:

• 11 estimated sector models • set economic inputs to recent historical

averages • estimated economic output, varying only

weather inputs using 70 years of historical weather observations

• aggregate by 1. sector 2. state 3. all US (all sectors all states)

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., M. Lawson, P.H. Larsen, and D.M. Waldman. June 2011 “United States Economic Sensitivity to Weather Variability.” Bulletin of the American Meteorological Society.


• Phase 2: Results – U.S. GDP varies by up to $485 billion a year of 2008

gross domestic product—about 3.4%—owing to weather variability

– Plus or minus $243B – some good years / some bad …

• Policy Analysis / Decision Making – not designed for specific policy analysis or decision

making – results provide reliable information on the magnitude

and importance of weather impacts on the US economy

• Future work … – Canada - 3.4% GDP equals ~CA$56.4B - 2008 Q4

seasonally adjusted annual GDP

2. VALUE OF CURRENT FORECASTS

Objective – What is the economic value of current weather forecasts? – Back-of-the-envelope” estimate

Methods

– Nationwide survey >1,500 respondents to assess • where, when, and how often they obtain weather forecasts • how they perceive forecasts • how they use forecasts • the value they place on current forecast information

– Implemented online with restricted access to only invited

participants

– Simplified valuation approach

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

The National Weather Service (NWS) is the primary source of weather forecasts, watches, and warnings for the United States. In addition to normal weather forecasts of precipitation, temperature, cloudiness, and winds, the NWS also provides:

• Severe weather (such as thunderstorms and tornadoes) forecasts, watches, and warnings • Hurricane forecasts, watches, and warnings • Fire weather forecasts, watches, and warnings • Forecasts used for aviation and marine commerce

All this information is also provided to media (including television, radio, and newspapers) and private weather services (such as The Weather Channel). How important to you is the information provided by the NWS that is listed above? All of the activities of the National Weather Service (NWS) are paid for through taxes as a part of the federal government. This money pays for all of the observation equipment (such as satellites and radar), data analysis, and products of the NWS (including all the forecasts, watches, and warnings). Suppose you were told that every year about $2 of your household's taxes goes toward paying for all of the weather forecasting and information services provided by the NWS. Do you feel that the services you receive from the activities of the NWS are worth more than, exactly, or less than $2 a year to your household?

a) Worth more than $2 a year to my household b) Worth exactly $2 a year to my household c) Worth less than $2 a year to my household

Not at all important

A little important

Somewhat important

Very important

Extremely important


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

2. VALUE OF CURRENT FORECASTS Results

– value of current wx information ~$286 / household / year – ~114,384,000 households in US (2006) – $31.5 billion total per year value to U.S. households

– compares to U.S. public and private sector meteorology costs

of $5.1 billion/ yr – benefit-cost ratio of 6.2 to 1.0

Policy Analysis / Decision Making

– justify current investments in weather observation, modeling, and forecasting system

– Note: “back-of-the-envelope” approach used suggests need for better methods to derive current value estimates

Future work … – Application in other countries …


Ekos Research Associates, 2007. National WES Products and Services Survey 2007. Final report submitted to Business Policy Directorate, Meteorological Service of Canada. 62 pp.

Median $90/hh * 13.6M HH ~$1.2 billion per year

or $160.82 median?

3. VALUE OF IMPROVED FORECASTS

• Objective – evaluate households’ values for improved hurricane forecasts

and warnings

• Methods – non-market valuation – conjoint analysis – survey development

• expert input • focus groups • cognitive interviews • pre-tests • small sample pre-test (80 subjects) - Miami, FL. • full implementation

– Online implementation – Knowledge Networks panel (1,218 responses) – Gulf and Atlantic coast hurricane vulnerable areas up to North

Carolina

Lazo, J.K. and D.M. Waldman. 2011. “Valuing Improved Hurricane Forecasts.” Economics Letters. 111(1): 43-46. Lazo, J.K., D.M. Waldman, B.H. Morrow, and J.A. Thacher. 2010. “Assessment of Household Evacuation Decision

Making and the Benefits of Improved Hurricane Forecasting.” Weather and Forecasting. 25(1):207-219



Lazo, J.K. and D.M. Waldman. 2011. “Valuing Improved Hurricane Forecasts.” Economics Letters. 111(1): 43-46. Lazo, J.K., D.M. Waldman, B.H. Morrow, and J.A. Thacher. 2010. “Assessment of Household Evacuation Decision

Making and the Benefits of Improved Hurricane Forecasting.” Weather and Forecasting. 25(1):207-219

Conditional Probit (AB and SQ choices) N= 1201 (out of 1218) respondents who answered all 8 choice questions. 9605 responses (out of 8*1201 = 9608) responses (3 refusals of St. Quo question)

Beta t-stat WTP Unit Range WTP Max

Improvement

Landfall Time -0.052 -9.41 $1.27 hours 2 - 5 $3.81

Landfall Location -0.009 -13.92 $0.21 miles 25 - 50 $5.26

Wind Speed -0.005 -2.51 $0.11 mph 7-15 $0.90

Change in Wind Speed 0.007 13.70 $0.16 % 20 - 60 $6.49

Surge Depth -0.007 -1.30 $0.17 feet 2 - 5 $0.50

Surge Information 0.035 1.83 $0.85 yes/no 0 - 1 $0.85

Extended Forecast 0.035 3.68 $0.86 days 5 - 7 $1.72

Cost -0.041 -48.39 $19.52


• Results – significant marginal values for improved accuracy of landfall,

timing, specificity, extended forecast, etc. – total WTP for overall superior forecast (maximum levels on all

attributes) is $19.52 per household per year – 9,857,371 households … $192,421,599 total annual benefit?

• Policy Analysis / Decision Making – demonstrated the feasibility of valuing improvements in

hurricane forecasts using non-market valuation methods – Hurricane Forecast Improvement Project (HFIP) – potentially

$200M+ program – NSF Project: integrate individual’s mental models of the

hurricane forecast and warning system, with the values for improvements using latent class modeling approaches – to account for respondent heterogeneity

4. VALUE OF RESEARCH TO IMPROVE FORECASTS

• Objective – perform benefit-cost analysis for a new supercomputer for

research to improve weather forecasting

• Methods

– several economic methods applicable to benefit-cost analysis (1) benefits transfer (2) survey-based nonmarket valuation (3) discounting (4) value of statistical life (5) expert elicitation (6) influence diagramming, and (7) sensitivity analysis

Lazo, J.K., J. S. Rice, M. L. Hagenstad. 2010. “Benefits of Investing in Weather Forecasting Research: An Application to Supercomputing.” Yuejiang Academic Journal. 2(1):18-39.



• Results – benefits to households, agriculture, aviation evaluated – average total benefits from these three sectors were estimated at

$116 million in present value (2002 US dollars) – Net Present Value (present value of benefits minus costs)

• 3% real rate of discount = $104.60 million (2003 US dollars) • 5% real rate of discount = $ 53.17 million (2003 US dollars)

– internal rate of return = 21.82%

• Policy Analysis / Decision Making

– meet OMB regulatory requirements for a benefit-cost analysis study of a significant investment in research infrastructure

Lazo, J.K., J. S. Rice, M. L. Hagenstad. 2010. “Benefits of Investing in Weather Forecasting Research: An Application to Supercomputing.” Yuejiang Academic Journal. 2(1):18-39.

SOME QUESTIONS TO ASK … • Why talk about economics of weather enterprise?

• What to value? (i.e., objective of an economic study) – Economic impact of weather – Value of current forecasts – Value of improved forecasts – Value of research to improve forecasts – Value of …

• How to value? (i.e., methods) – Primary studies versus using existing data / research – Market valuation or non-market valuation – Survey research, econometric models, expert elicitation, …

• What level of detail / sophistication? (i.e., resources) – $25k benefit-cost assessment to $1M benefit analysis

• What is information from the study going to be used for? – will the study provide the right information for decision making?

Time to move beyond anecdotes – need studies that “hold water at OMB” – need multiple studies for validation – need studies to meet real world needs – need studies to further methods specific to weather – build knowledge and expertise

• on the economics side • on the weather side

Weather community needs long-term scientifically valid socio-economic analysis

to support the needs of the weather enterprise

For yourself • Is there an aspect of something that matters to you as a

meteorologist / hydrologist / climatologist / …. that it would be useful or important to have some “economic analysis”?

• What is the question? • How would this be analyzed?

o What theories o What methods o What data o What analysis

• What would you do with the information from the economic analysis?

THANKS! QUESTIONS?

Jeff Lazo

[email protected] www.sip.ucar.edu

References (available on http://www.sip.ucar.edu/publications.php) • Lazo, J.K. and D.M. Waldman. 2011. “Valuing Improved Hurricane Forecasts.” Economics Letters. 111(1): 43-46. • Lazo, J.K., D.M. Waldman, B.H. Morrow, and J.A. Thacher. 2010. “Assessment of Household Evacuation

Decision Making and the Benefits of Improved Hurricane Forecasting.” Weather and Forecasting. 25(1):207-219. • Lazo, J.K., J. S. Rice, M. L. Hagenstad. 2010. “Benefits of Investing in Weather Forecasting Research: An

Application to Supercomputing.” Yuejiang Academic Journal. 2(1):18-39. • 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: 709-720. • 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.

Documents

Assessing the Economic Impacts of Weather and Value of ...web.sca.uqam.ca/.../5291_p2.2_lazo_jeffrey.pdf · Jeffrey K. Lazo Director – Societal Impacts Program National Center for