Poor and vulnerable people insufficiently protected against floods

Published: 9 December 2016

The current practice of cost-benefit analyses for investments in flood risk management are mostly based on too narrow definitions of risk and social welfare that fail to do justice to the broader concept of social welfare as is used in welfare economics. These analyses disadvantage poor and vulnerable groups especially in developing countries, who as a result remain inadequately protected. This is the conclusion of Jarl Kind of Deltares in a study conducted with VU-IVM that was published in WIREs Climate Change.

Reducing flood risks

On average 19,000 people die each year as a result of flooding, most of them in developing countries. The direct damage amounts to an average of 15 billion dollars per year. Reducing flood risks in the future poses a major challenge. The global investment required is estimated at tens of billions of dollars annually. To maximise risk reduction within the limited financial resources available, costs and benefits of investments in flood risk management are balanced against each other. The largest benefits are achieved by investing where the risks are highest.

Every dollar has a different value in different circumstances

In the standard approach to risk assessment, risk is defined as probability multiplied by consequence. The benefits of investments in flood risk management are then calculated as the reduction of the risk. The result is that wealthier areas are better protected. However, this approach is consistent with welfare economics only under specific conditions. In welfare economics, the social welfare obtained from an additional dollar declines as income rises. This means that an additional dollar will have different values in different situations (with or without flooding) and for different households (rich or poor). Cost-benefit analyses (CBA) must therefore include risk aversion of households (people will value risk reduction higher than the reduction of the expected damage) and differences in income (damage for poor households is given a higher value). The standard approach to risk assessments does not take these factors into account and it is appropriate only when damages for individual households remain limited and the differences in income are relatively small, or when the government provides almost complete compensation for the damage caused by flooding. The latter is assumed to be the case in Dutch CBAs for flood risk management but it is not the case in many other countries.

Hypothetical case study

The renewed interest in social welfare in cost-benefit analyses results from discussions about those analyses for climate-change-mitigation measures in which damage resulting from climate change is weighted differently for rich and poor countries. However, differences in income within countries should also be taken into account. At this moment, there is a lack of international consensus about how cost-benefit analyses should be conducted for investments in flood risk management and other adaptation measures. Different countries apply different guidelines and only a number of them, such as the United Kingdom, take social welfare into account. A hypothetical flood risk management case was elaborated in the Deltares study. It used both the standard approach and the social-welfare approach that includes risk aversion and income distribution. This led to completely different policy conclusions about the desired policy for flood risk management, with more measures for poor and socially-vulnerable groups.

Jarl Kind (senior economist at Deltares): In the interests of the poorest and most vulnerable population groups, it is the highest time to bring the current practice of cost-benefit analysis for flood risk management in line with welfare economics. This is also consistent with the approaches currently being developed at the IPCC and the World Bank.

In the standard approach to risk assessment, measures for the hypothetical Beach and Central districts would be given highest priority. These are the districts that suffer most damage. Adopting an approach based on social welfare that also accounts for risk aversion and differences in income leads to greater priority for measures targeting the Canal district, where total damage is lower but the average damage per capita is relatively high and incomes are relatively low.

In the standard approach to risk assessment, measures for the hypothetical Beach and Central districts would be given highest priority. These are the districts that suffer most damage. Adopting an approach based on social welfare that also accounts for risk aversion and differences in income leads to greater priority for measures targeting the Canal district, where total damage is lower but the average damage per capita is relatively high and incomes are relatively low.

Next steps

Cost-benefit analyses that take social welfare into account require additional data and analyses of the socio-economic context of measures for flood risk management. Practical examples are needed to demonstrate how this should be taken forward, also for situations in which limited data is available. Arguing that a change is needed is not the same thing as actually implementing change.

Click here for the full article:

WIREs Climate Change: “Accounting for risk aversion, income distribution and social welfare in cost-benefit analysis for flood risk management”, by Jarl Kind, Wouter Botzen and Jeroen Aerts.