1. Societal Impacts and Economic Benefits of Improving Short-range Weather Forecasts International Symposium on Nowcasting and Very Short Range Forecasting (WSN05) September 5, 2005 Jeffrey K. Lazo Societal Impacts Program NCAR - Boulder, CO lazo@ucar.edu www.sip.ucar.edu

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

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

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

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

6. What Should Be Valued? Weather  Observation  Forecast  Communication  Perception  Valuation MeteorologyRisk communicationMarketing PsychologyAnthropologySociology GeographyRisk perceptionsEconomics

7. 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_mode l

8. What Should Be Valued? Expert Diagram

9. What Should Be Valued? Expert Diagram: Uncertainty

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

11. 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

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

13. What is Value? P$ Q S D P* Q* 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*) determined by interaction of Supply and Demand

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

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

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

17. What is Value? P$ Q S0S0 D0D0 P* Q* CS PS D1D1 S1S1 Q1Q1  CS  PS

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

19. Q S0S0 D0D0 P* Q* CS PS D1D1 S1S1 Q1Q1  CS 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?

20. Q S0S0 D0D0 P* Q* CS PS D1D1 S1S1 Q1Q1  PS What is Value?

21. What is Value? Market Failures  Public goods  Market power  Externalities  Information

22. 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”?

23. What is Value? Topics: Time PeriodBenefitsCosts 00.00100.00 560.000.00 1060.000.00 120.00100.00 1.Value of time 2.Discounting Discounted Benefits Discounted Costs 0.00100.00 47.020.00 36.830.00 83.85100.00 Net Benefit 20.00Net Benefit -16.15 5% Rate of Time Preference

24. What is Value? Topics: VSL Value of Statistical Life (VSL) 1,000,000 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 $50,000,000 to prevent 10 deaths VSL = $50,000,000/10 deaths = $5,000,000

25. 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 ClimatologyCurrentImprovedPerfect Adjusting for: date of study – changes in prices (inflation) changes in preference other significant determinants of value

26. 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.

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

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

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

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

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

32. Example: “SuperComp” Agriculture: Annual value of improvement to perfect information (PI) Apples, peaches, and pearsAlfalfa Winter wheat Total - these crops Value of improvement to PI per acre of farmland $1,403$75$35$65.19 Acres of farmland828,46023,541,00044,349,00068,718,460 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

33. Example: “SuperComp” Weather-related fatalities and VSL estimates (we assume 10% of weather-related fatalities preventable with perfect information) YearFatalities Fatalities — value (millions) 1996540$3,240 1997600$3,600 1998687$4,122 1999908$5,448 2000476$2,856 2001464$2,784 2002540$3,240 Average annual602$3,613 a. Calculated as $6 million per fatality. Source: NWS (1996-2002).

34. Example: “SuperComp” Observation Understanding Computing Improvements in Weather Forecasts NCEP Supercomputing NHRA GFDL Supercomputing 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

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

36. Example: “SuperComp” Financial assumptions for base case present value calculations Real social discount rate3% Decision to purchase supercomputer 2004 First year of operation2005 Number of years until benefits begin2 Number of years in which benefits accrue5 Time horizon for accrued benefitsInfinite

37. Example: “SuperComp” Summary of present value of benefits in 2003 (millions, 2002$) Household sector69 Orchards, winter wheat, alfalfa26 Avoided weather-related fatalities21

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

39. Fin Merci Beaucoup © Harald Edens, reproduced with permission