Equity and the aggregation of the damage costs of climate change

The economic value of environmental goods is commonly determined using the concepts of willingness to pay (WTP) or willingness to accept (WTA). However, the WTP/WTA observed in different countries (or between individuals) will differ according to socio-economic characteristics, in particular income. This paper analyses the issue of equity and valuation in the context of climate change using the basic tools of welfare economics. It shows how WTP/WTA estimates can be corrected if the underlying income distribution is considered unfair. It proposes that in the aggregation process individual estimates be weighted with an equity factor derived from the social welfare and utility functions. Equity weighting can significantly increase aggregated (global) damage figures, although some specifications of weighting functions also imply reduced estimates. The paper also shows that while the postulate of uniform per-unit values is compatible with a wide range of 'reasonable' utility and welfare specifications, there are also cases when the common-value notion is not compatible with defensible welfare concepts.