196
A part of this framework involves understanding the potential future impacts of different climate change
scenarios on the region’s assets, which need to be expressed in today’s dollar value.
To do this, it is necessary to complete 5 sequential steps:
a) understand the current value of the relevant private assets and infrastructure in the region;
b) estimate the life span and replacement costs of these assets. A proxy for this is the insured
value of the asset.
c) understand the future impacts of climate change under each climate change scenario upon the
said assets;
d) estimate the cost of damage that each asset will be likely to sustain from those impacts; and
lastly
e) determine and apply a discount rate
31
in order to represent future costs of damage to those
assets in today’s terms.
These steps are consistent with multiple bodies of work in regard to asset damage pricing, including the
Australian Department of Climate Change and Energy Efficiency (2012) and Larsen and Goldsmith
(2007).
Prior to finalising the model, several issues need to be resolved to ensure the results may serve as a
credible evidence base. These issues include:
x
Ascertaining what information is available from the owners of the assets. Information around asset
values, amortisation schedules, planned upgrades, insurance values, and asset life span is normally
commercial-in-confidence and difficult to access.
x
Definition of the climate change impacts (e.g. rainfall, flooding, sea level rise) that may directly relate
to the asset.
x
Knowledge about the damage to the asset from the climate change impact and the frequency and
likely costs that will be incurred. In some instances, historical records may be used for to determine
projected costs.
x
Determination of whether operational costs such as temporary production closure and revenue losses
are included in the model.
x
How to address co-related weather events and their impacts on the asset.
x
Accounting for future levels of inflation and inclusion of benefits (e.g rising property values in the short
term).
x
Ascertaining what discount rate to use. Selecting a low discount rate results in greater costs being
incurred by present stakeholders (shareholders, community). Discount rates of 7% have been used
in interstate asset valuations.
31
Discount rates are used to convert future economic impacts into their present day value. Discounting allows long term returns on
investment in climate change mitigation to be determined in today’s dollars. Discount rates vary depending on the opportunity cost
of capital, ranging from 4-12 percent.
