STUDIES

The Economic Impacts of Climate Change in Montenegro: A First Look
In its effort to provide appropriate reaction to climate change Ministry for Spatial Planning and Environment together with United Nations Development Programme in Montenegro has prepared a study with main purpose to economically quantify losses induced by adverse effect of changing climate in Montenegro.
This report has five objectives, as follows:

To identify the data and state-of-the-art models and methods needed to estimate the economic impacts of climate change and the benefits and costs of adaptation in agriculture and forests, tourism, water resources and human health in Montenegro,
To assess the extent of the capacity in-country to develop and apply these data, models and methods to Montenegro’s situation,
To use existing data, models and methods available in Montenegro to make some highly preliminary estimates of the economic value of the physical impacts that were identified in the First National Communication, and finally
To suggest ways in which the existing analytical and institutional capacity to estimate the economic impacts of climate change and the benefits and costs of adaptation in Montenegro can be improved.

The Introduction to this study (Chapter 2) describes the underlying theory for estimating the economic impacts of climate change.  Climate change, in one way or another, affects the quantity and quality of environmental services that humans use both to produce goods and services, for lack of a better term, to “enjoy life”.  That is how these physical impacts make their way into markets for goods and services and everyday life.  In markets, climate change influences the production and market prices of goods and services in the sectors affected directly by climate change.  In modern economies markets are linked together by inter-industry flows of both goods and services and the money exchanged for these goods and services.  These inter-industry flows act as a conveyor belt for climate change impacts, spreading them potentially throughout the whole economy.

Accordingly, this study identifies two types of impacts of climate change.  The first are welfare impacts and the second are impacts on indicators of national economic activity. Welfare impacts measure the economic gains and losses that consumers, producers and investors experience directly as a result of climate-induced shifts in market supply and demand curves.  These welfare effects for these three groups have a similar economic meaning and the theoretical basis for measuring them and adding them up (and not adding them up) is well established.  These economic impacts are known as “climate change damages”.  Adaptation can reduce some of these damages at some cost.  The net reduction in climate change damages due to adaptation is called the “net benefits of adaptation”.  Finally, the climate change damages that are left over are called the “imposed damages of climate change”.

The economic impacts of climate change on indicators of national economic activity are different.  They measure changes in such things as gross national product, consumption spending, investment and government investment.  These impacts also include measures of labor force activity, like employment and unemployment, and income transfers between countries.  In some cases, national income accounting systems provide the rules for adding up some, but not all, of these impacts.  Apart from that, these impacts – even if they are measured in monetary terms – should not be added to the value of welfare impacts, although both represent important information for decision makers in the public and private sectors to help them cope with climate change.

The four chapters after the Introduction focus on the following economic sectors or impact categories in Montenegro:

Chapter 3: Agriculture and forests, which are joined, because they share a common land base,
Chapter 4: Tourism,
Chapter 5: Water resources, which cuts across many different market sectors in the economy, and
Chapter 6: Human health, which is limited in its coverage.

Each chapter outlines the main methodological approaches, types of models and data bases that are needed to make comprehensive estimates of climate change damages, which is different in every sector and impact category.  It also attempts to outline the current status of the existing capacity to develop these models and use them to estimate climate change damages in Montenegro.  In most cases, this capacity is extremely limited or non-existent.   It is also possible that some of the capacity to do this does exist, but is hard to locate.  Each chapter also contains short- and long term- recommendations for developing this capacity in the future in the different economic sectors and impact categories.

The study uses what we call a “no regrets” approach to capacity building. This means that the models, methods and data needed to estimate the physical and economic impacts of climate change and to make decisions in the public and private sectors about how to “best” avoid these impacts through adaptation can, in many cases, be used to making planning and management decisions related to economic development and environmental protection.  In other words, the rationale for building these models and developing new data bases is to help Montenegro develop its economy in a wise way that benefits both Montenegrins and their natural environment and ecosystems.  The valuable role they can perform to help cope with climate change is an added benefit.

The results of the capacity building assessments in each chapter will be addressed in the last part of this chapter, under the heading of “conclusions and recommendations”.  The rest of this summary is devoted to the quantitative analyses in each sector to make selected estimates of climate change damages due to specific impacts on specific sub-sectors or locations in Montenegro.

Simply because Montenegro lacks state-of-the-art models to estimate the economic impacts of climate change does not mean that is impossible to make some preliminary estimates of these impacts.  In fact, these types of preliminary estimates, which rely on existing data and methods as well as a number of key assumptions to replace what is missing, can be very useful in the early stages of formulating climate and development policy.  In particular, this “limited information” approach can sometimes identify the range and scope of economic impacts; it can identify impacts of importance that might not be obvious at first; and it can tell you something what assumptions and data may be important and what are not. All of this information – while not perfect – is probably better than nothing.

In all, this study made a preliminary estimate of climate change damages in the following areas:

1. Agriculture and forests: the climatic impacts of reductions in maize yields, nationally, on gross farm revenues using information from a crop yield simulation study in Croatia.
2. Agriculture and forests: the climatic impacts of increased crop water demand on the cost of pumping and distributing additional irrigation water to crops on existing and new irrigated land.
3. Tourism and recreation: the climatic impacts of increased temperatures on the visitation by and expenditures of international and domestic tourist in Montenegro using partial information from the Hamburg Tourist Model (HTM).
4. Tourism and recreation:  the climatic impacts of increased temperatures on the visitation by, and expenditures of, international and domestic tourist in Montenegro using partial information from the PESETA project methodology for estimating tourism impacts.
5. Water Resources: the climatic impacts of reduced runoff on the gross revenues from the sale of electricity from the Mratinje Dam hydroelectric plant on the Piva River.
6. Health: the climatic impacts of higher temperatures on the economic value of additional lives lost due heat-related mortality in Montenegro.

A summary of the results for all six case studies are shown below in Table 1.  The results are the undiscounted average annual value of climate change damages for each case study under the Climate Change Scenarios A1B Near Future (2001-2030) A1B Far Future (2071-2100) and A2 Far Future (2071-2100).  In some cases not enough information was available to estimate the results for all three scenarios and in the case of the health assessment only information from the B2 NF and FF scenarios was available.  In these cases, information from the climate scenarios and physical economic impact estimates were used to interpolate and fill “missing values”. 

Since these are the first such estimates of climate change damages in Montenegro and because there are so few similar estimates for other Balkan countries, it is a bit difficult to put them in perspective without much more information about the individual sectors. Nevertheless, these results do raise a number of important research and policy issues. The average annual climate change damages due to reduced maize yields are small because little maize is produced.  However, these damages would increase if the livestock sector is expanded significantly based on future development plans and locally grown maize is used to fatten cattle in feed lots. This would involve a large structural change in the agricultural sector.  The average annual damages due to increases in irrigated crop water use were higher than expected for relatively small amounts of land.  This could be a cause for future concern, if the actual development of newly irrigated lands is more aggressive than expected.  This would also depend on the effects of climate change on the competitiveness of domestic vs. imported fruit, grapes and wine in local markets and international markets.  So, in both agricultural case studies better models – agricultural sector models, to be specific – are needed to take into account those factors.

The estimated climate change damages due to reductions in tourists are reasonably large compared to existing expenditures by tourists.  The differences between the two sets of estimates in this sector illustrate a common phenomenon in economics, namely that different models have different sensitivities to input assumptions and data.  The estimate obtained by the PESETA-based approach for the A1B NF scenario is actually believable: short-term climate change may be a good thing for tourism, but eventually – if these models are right – average and peak temperatures will become so high that tourists, in the summer time at least, will shift their beach visits northward.

The climate change damages associated with reductions in runoff on the Piva River are also relatively large, but the methodology was fairly crude.  This also points to the fact that better models and data are needed to confirm and improve upon these estimates in this, as well as other, sectors.  The future of Montenegro’s hydroelectric power ambitions could be dramatically affected by climate change and planners need to look at including the impacts of climate change on runoff and electricity demand into current and future development plans.

The last estimate of climate change damages in the health sector probably looks like a big number to people who are not familiar with value of life assessments.  However, compared to other EU and some Balkan countries included in the PESETA health care analysis for the EU, the estimated climate change damages presented in Table 1 are fairly small and based on relatively small numbers of additional deaths due to higher temperatures.  Montenegrins apparently are already acclimatized to cope with large variations in peak summer-time temperatures. 

The estimates of average annual climate change damages summarized in Table 1 have a number of limitations:

The methodologies are preliminary and not very sophisticated, in most cases based on very limited data and strong assumptions that were required to conduct the analysis, but may not be true,
The results are not comprehensive.  They are case studies,
The measures used in each case study require somewhat strong assumptions to qualify as valid damage estimates, based on welfare losses and gains, in the field of economics.  As such, the temptation to add them up should be resisted,
These estimates of climate change damages do not include welfare losses by consumers due to price changes, caused indirectly by climate change,
The estimates in these cases should not be misinterpreted as impacts on national economic activity, such as GDP.  These types of economic impacts were not estimated because no macroeconomic model of the Montenegrin economy could be located.

Konačno, ograničenja ovih rezultata snažno naglašavaju potrebu za unapređenjem kapaciteta za razvijanje boljih podataka i modela. Na to je fokusiran posljednji dio ovog poglavlja koji obuhvata zaključke i preporuke.