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Berkeley Economic Review: The Cost-Benefit Analysis of Climate Change

By Vanessa Thompson, Editor

1.4 million students have skipped school and joined Greeta Thunberg’s Fridays for Future school strike to advocate for climate action. For them, Greta Thunberg, a notable climate leader, was their tipping point to walk out and fight for our climate. In contrast to student advocates, policymakers do not pursue climate reform on the basis of a social movement but rather by first performing a cost-benefit analysis in order to determine their “tipping point.” The cost-benefit analysis performed by policymakers, however, is not without its problems, as it must balance today’s economic prosperity with future quality of life.

The value of a statistical life (VSL) is a key component of this cost-benefit analysis utilized by economists to determine the cost of death and compare it to the benefit of risky industrial practices. As the EPA states, “valuing the reduced risks of mortality, in particular, poses a special set of conceptual, analytical, ethical and empirical challenges for economists and policy analysts.” However, the VSL is still widely used and valued by policy makers as a means of determining whether to allow or ban certain risky activities. The way in which people evaluate the monetary cost of their lives will determine how much they are willing to spend on climate-centered policy reform and, thus, our odds for survival.

VSL does not measure the price of a human life. Instead, VSL is the amount society is willing to pay by means of foregone monetary gains in order to reduce risky behavior and protect life. If a government agency sets the VSL at $10 million and the specific risk of an activity would kill five people, then they are willing to invest $50 million (5 x $10 million) into saving those lives. The lack of adequate resources and funding means that governments have to decide how many resources they will allocate to saving life versus investing in other beneficial activities such as economic growth.

Origin of VSL:

Cost-benefit analysis models are vital to determining the benefits and costs associated with certain regulations. As such, the VSL was devised to assist governments and global agencies in determining the balance between development and sustainability. VSL was invented during the Cold War to determine the costs of different military strategies. In 1946, the government initiated the Research And Development (RAND) Corporation with the goal of “designing a strategy for the first aerial invasion of the Soviet Union.” The initial strategy used cheap and risky military equipment. The plan did not consider the number of fatalities as a factor in the total cost of the operation. The military generals denied the plan until the strategists factored in the cost of human life. VSL became a tool to estimate the cost of different military operations while also considering potential casualties. After it proved useful in the military, industry and government utilized VSL as a policy tool that could weigh the dangers of civilian actions. It continues to be used today to analyze numerous issues.

The VSL is a particularly useful statistic because it enables economists to compare the risk of death to the marginal benefit of an activity. More precisely, VSL measures the marginal benefit of each life based on the risk level of the activity and society’s willingness to pay to save that life. For example, the marginal benefit of driving a car outweighs the cost associated with the risk of a car accident; thus, a total ban on cars would not be a sound policy. VSL is not a price on life; it is a marginal price on saving a life compared to the marginal benefit of the risky activity. From eating poorly to driving, there are too many possibilities to prevent every risky action. Thus, the VSL as a tool is an abstraction that shows which choice is more costly.

How VSL is Calculated:

The calculation determining VSL is based on an individual’s wage and income. The more money that an individual can earn, the greater their VSL. The ethical controversy of VSL is highly contentious, especially when the worth of someone’s life is based on their earning power. For example, in the United States, someone with a high school diploma will accumulate an average total earnings over their lifetime of $900,000. Obtaining a bachelor’s degree doubles that figure to $1.8 million. Although in the United States, agencies set a constant VSL for all citizens, this practice does not hold across national borders. The estimates of VSL vary depending on the country, average citizen’s income, and GDP per capita.

Although inequalities within countries are not recognized since each state sets a standard for all citizens, inequalities between countries are apparent. On a state level, many VSL estimates are directly based on GDP per capita. According to an analysis conducted by the Journal of Transportation Economics, a survey of thirteen countries with accessible information showed that most VSL estimates were approximately 120 times the GDP per capita of that nation. GDP per capita of the ten poorest countries in the world is $1,140, compared to $102,420 of the top ten wealthiest. Among the ten countries with the lowest GDP per capita are Madagascar, Malawi and Mozambique, each country has tremendous biodiversity and crucial rainforests that protect numerous species. The differences in resources of each location drastically differ GDP per capita, but should that change the value of a human life?

How VSL Impacts the People and the Environment:

As the VSL increases, there is a greater cost to pollution and to environmental degradation. This is due to the fact that the health of the environment, air and natural resources impacts human health. If losing a human life has a higher cost, then we will pay more to preserve the environment. The incentive to limit pollution rather than continue burning fossil fuels increases when health is more valuable.

The VSL of wealthier nations is higher than for nations with fewer resources. Thus, protecting life is more economically advantageous than maximizing production in wealthier nations. Wealthier nations can still purchase goods from poorer nations where the VSL is lower. What’s tragic about these power dynamics is that the lives of individuals in the Global North are not, and will not be, as severely harmed. The consequence is that affluent nations can continue to pollute, impacting the lives of people in the Global South.

The paradigm of who is valued and who is not has two main effects: (1) impoverished nations cannot invest in their human capital to raise their VSL because of their limited resources and (2) their low VSL forces governments to liquidate natural resources instead of investing in human capital. Since VSL is not as high as wealthier nations, destroying natural resources becomes a means of survival to promote economic growth. This liquidation of natural resources further degrades human health and VSL. This is a self-reinforcing cycle. Poorer nations also have limited health care and educational infrastructure compared to wealthier ones. Thus, these countries produce fewer patents per capita and have lower human capital. With limited human capital, national governments and domestic corporations must utilize the natural resources. The extraction of natural resources, exporting of these raw materials, and mining efforts all harm the environment and local communities. The pollution and harmful effects of carbon emissions from these processes continue to degrade the environment these communities survive in. The externalities lower the VSL and the cycle continues. I title this cycle: “The Value Trap.” Natural resource extraction is a short term benefit for a long term problem of environmental destruction. Thus, VSL is an invaluable metric for determining who has the greatest risk.

In addition to “The Value Trap” in resource-constrained nations, wealthier nations have the resources and high VSL to invest in climate adaptation. However, they also have the fewest predicted casualties from climate change, meaning their risks are different. If their risks are different, then climate change is not as great of a threat to human life in wealthier nations. Thus, the effect is two-fold: they can protect themselves more because their VSL is higher, and their risks are lower so their costs are lower. According to an analysis from the University of Chicago, “the full mortality risk of climate change, the sum of both deaths and adaptation costs measured in death equivalents, is still borne disproportionately by regions that are poor today.” The World Health Organization’s map depicts global deaths from climate change by nation.

Although the VSL of wealthier nations is higher and they can and should invest in climate adaptation, they are projected to face the fewest climate-related deaths. Under the Kyoto Protocols, the Paris Agreement and the UN’s Green Climate Fund, wealthy nations agreed to bear the burden of much of the climate adaptation costs; however, funding has been slow to materialize. According to the New York Times, “Only $3.5 billion actually committed out of $10.3 billion pledged to a prominent United Nations program called the Green Climate Fund.” The risks for wealthy nations are inherently different. Thus, the incentives to reduce carbon emissions are also different.

The carbon footprint of individuals living in the Global North are significantly higher than those in the Global South. However, the people who are most dependent on agriculture and natural resources are also the poorest and most at risk of climate-related deaths. The VSL of people is a key representation of these reinforcing inequalities within a context of climate change. When determining how much industry pollution and carbon emissions are regulated, we also need to ask: whose lives are we risking?

The Problem with Using VSL for Climate Change:

The origin of VSL was for military strategists to determine the cost of battle casualties. However, when determining the cost of life of a soldier, a mine worker or a driver behind the wheel, these people are also active participants in this risky activity. When the VSL is applied to children and their risk of living on a polluted planet, does this measurement still hold? We, as humanity, have no other planet on which to survive. This removes any element of choice and consent to the “risky activity” of industrial pollution, unlike the driver behind the wheel of a car.

A growing body of economic research over the past few decades has measured the cost of carbon using the VSL. The U.S. EPA has used VSL to determine how much regulation to impose on coal plants since Massachusetts v. EPA, when the EPA was given jurisdiction to oversee climate mitigation. However, under executive order 13783, under the Trump administration, there are little to no regulations on coal plants currently and his new Affordable Clean Energy Rule will barely reduce carbon emissions.

The risk of living on this planet is ever increasing. Even if living on Earth was a choice, VSL climate change analyses cannot factor the full scope of climate change. The Climate Vulnerability monitor estimates climate change will take an ever-increasing number of lives. Although 2020 and other years may see only a few thousand climate-related deaths, in the year 2030, 400,000 will lose their lives due to the direct effects of climate change. Another estimate from the World Health Organization estimates 150,000 lives will be lost in the year 2030. This does not account for the pot-2030 effects. VSL analysis on climate change is not only morally wrong, but does not consider the long term consequences. The choice is not: to pollute today, or to save 400,000 lives. The choice is: stop polluting, or set society on a path of environmental destruction with unknown consequences for many generations. If our risk is determined yearly by a ten year estimate or based on historical data, like some studies, this does not account for the catastrophic damages that will follow if we continue with the “business as usual” plan. Since predictions to 2100 are nearly impossible to account for given economic, techiniological and society changes, can we truly measure the total risk of human life if carbon emissions continue to increase?

Of course, dedicating all of our natural resources to carbon mitigation is not responsible. There is an optimization pointof spending on climate change. We must balance the maintenance of a strong economy today and investing in sustainability for tomorrow. However, if we don’t understand the risks and cost to human life, it is difficult to scientifically justify excessive production of carbon emission. Continuing to pollute without understanding the long-term implications could lead to more lives lost than previously assumed, or the degreation in the quality of life.

On average, a child born today will live until 2090 not accounting for greenhouse gas emissions which could increase by 4 degrees celsius by then, described Dr. Nick Watts. Dr. Watts is executive director of the recent air quality report by The New England Journal of Medicine said, “We roughly know what that [a 4 degrees celsius increase] looks like from a climate perspective,” he said. “We have no idea what that looks like from a public health perspective. But we know it is catastrophic.”

With children marching all over the world in the Fridays for Future marches, yelling that they are fighting for their survival, can we really balance the profits and daily luxuries today with their lives?


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