The Economics of Adaptation ECONADAPT

Climate change adaptation: progress and challenges

Paul Watkiss

Expert Workshop on Adaptation Financing and Implementation

Adaptation Policy and Economics: Review and Analysis

Overview

• Introduction to the ECONADAPT Project

• Policy appraisal

• Review findings: evolving literature and translation to practice

• Project appraisal

• Costs and benefits of adaptation

• Decision making under uncertainty

The Economics of Adaptation ECONADAPT

The Economics of Adaptation ECONADAPT

ECONADAPT

• Research funded by European Union’s Seventh Framework Programme

• Objectives to build the knowledge base on the economics of adaptation, and to convert this into practical information for decision makers

• Project commenced in October 2013 and runs for 36 months

• Co-ordinated by University of Bath, UK and involves 14 teams

• Strong focus on science-practice (research co-production)

The Economics of Adaptation ECONADAPT

Two Major Research Themes

The project frames the research by asking two questions

• First, what are the key methodological advances needed to improve the economic assessment of adaptation?

• Second, how can improved economic methods / tools be applied in the context of big adaptation decisions facing Europe in the next decade?

ECONADAPT

Dissemination & toolbox

Policy use domains

Methods & estimates

Scaling & transfer

Uncertainty analysis

Disaster Risk Management

Project appraisal

Policy appraisal

Macro-economics of

adaptation

International adaptation assistance

Impr

oved

Met

hods

Policy context/

Stakeholder engagement

Linkages

Policy Review

• Analysis of recent adaptation literature and science-practice interface

• Three shifts identified

• From science–based impacts to adaptation-assessment based policy

• Iterative climate risk management

• Decision making under uncertainty

The Economics of Adaptation ECONADAPT

Previously……..

Adaptation considered as the last step in a science-led analysis

- climate model

- impact model

- then adaptation

• Focuses on longer-term when signal emerges (post 2040) – rather than short term policy (what to do now), noting discounted future benefits

• Does not consider broader policy and other factors

• If-then framework ignores uncertainty and assumes perfect foresight

b) With climate change

a)

c) With adaptation

Time Time

b)

ΔCC

ΔA

Future scenario uncertainty

Source: Watkiss et al, 2013

2080s, A1B (Driest)

2080s, A1B (Wettest)

Future model uncertainty - precipitation

Source: Christensen et al, 2012

• Flood Damage Cost in Europe

• 12 regional climate models

• Which do you want to believe?

• Potential mis-allocation

Adaptation

Source: Rojas, Feyen and Watkiss, 2013

Adaptation assessment

• The practice of identifying options to adapt to climate change and evaluating them in terms of criteria such as availability, benefits, costs, effectiveness, efficiency, and feasibility.

• In practice…….

• Focus on adaptation objectives first (rather than impacts)

• Policy first approach (including non-climate policy)

• What do I need to do now (not what need to do in 2040)?

-Current, short-term & future climate risks -Climate sensitivity & vulnerability -Cross-sectoral linkages -Non-climate drivers

- Problem type - Objectives including cross-sectoral Define risk / problem type

and consider objectives

CCRA vulnerability/impacts

Adaptation assessment context

Identification and classification of options

Appraisal of options

Continuous and ex post evaluation

- Baseline/ autonomous adaptation. - Governance & responsibilities - Adaptive capacity - Existing plans & preparedness - Policy, appraisal & investment -Timing & urgency of decisions - Level of priority / Justification for intervention

- Identify adaptation options - Classification of options

- Appraisal (multi-attribute) - Detailed appraisal.

- Prioritisation for risks. - Analysis of possible

sector prioritisation

Prioritisation (risks and sectors)

Source: Watkiss and Hunt 2011

What’s different?

Noting time and resource !

Iterative Climate Change Risk Management

• Climate change is now considered as a dynamic and evolving risk

• Starts with current climate – to future uncertain impacts

• Adaptation also evolved – set of different actions to cover different problems

What does this mean in practice

• Policy comprise of complementary adaptation decisions (portfolios)

• 1. Focus on decisions now for current risks (adaptation deficit), e.g. early low- and no-regret options, building adaptive capacity

• 2. Focus on decisions now that exposed to climate in the future – mainstreaming and climate risk screening of infrastructure, etc.

• 3. Focus on future decisions for future risk under high uncertainty – iterative risk plans, learning and review

• These differ because of the consideration of type of action, timing, discounting, uncertainty, economic methods, etc.

• But can combine in adaptation pathways….

Source: Haasnoot et al, 2013

Source: ECA, 2012

Policy Appraisal

Policy Appraisal - Ethiopia Climate Resilience Strategy

0

50

100

150

200

250

Addi

tiona

l Ada

ptat

ion

Nee

ds, b

y Th

eme,

$m

USD

(200

8)

Social protection for high priority groups

Disaster Risk Reduction

Forestry, conservation and biodiversity

Sustainable agriculture & land management

General animal & value chain improvements

Value chain and market development

Crop and water management on-farm

Information and awareness

Capacity and Institutions

Source: Watkiss et al 2014

Economic project appraisal

• This has some implications for policy and project appraisal

• Costs and benefits of capacity building, soft-options

• Economic analysis of flexibility and robustness (versus optimality) important along with low-cost mainstreaming

• Value of information, option values, and learning for long-term major risks

• Issue of incremental versus transformational adaptation

Costs and benefits of adaptation

• ECONADAPT inventory of studies (analysed ~300, identified ~500+)

• Existing options that used for adaptation

• 1) for no/low regrets, ‘it depends’ 2) Resource, opportunity and policy costs

45

92

48

106

70

44

97

50

26

60

28

33

12

39

35

34

9

0 20 40 60 80 100 120

General

Human Health

Buildings & Construction

Water management

Coastal protection

Biodiversity

Agriculture

Forestry

Fisheries

Energy

Finance & Insurance

Transport

Industry

Tourism

Regional & urban planning

Civil protection/Disaster manag.

Other

145

26

10

18

4

15

4

8

61

0 50 100 150 200

Europe

North-America

Central & South America

Africa

Middle-East

Asia

Australia

Pacific

Global

Source: Econadapt, 2014

Decision support

Cost-Effectiveness Analysis

Cost-Benefit Analysis

Portfolio Analysis

Robust Decision Making

Real Options Analysis

Iterative Risk Management

Values all costs and benefits to society of all options, and estimates the net benefits/costs in monetary terms.

Compares costs against effectiveness (monetary/non-monetary) to rank, then cost-curves for targets/resources.

Allows economic analysis of future option value and economic benefit of waiting / information / flexibility.

Identifies robust (rather than optimal) decisions under deep uncertainty, by testing large numbers of scenarios.

Economic analysis of optimal portfolio of options by trade-off between return (NPV) and uncertainty (variance).

Uses iterative framework of monitoring, research, evaluation and learning to improve future strategies.

Traditional decision support

Decision making under

uncertainty

Multi-Criteria Analysis

Allows consideration of quantitative and qualitative data together for ranking alternative options.

0 5 10 15

Review

Portfolio Theory

Iterative riskmanagement

Robust decisionmaking

Real options

Source: Watkiss et al 2014

Decision Support Findings

• Different approaches more/less suited for different applications

• Issue of complexity, time and resources for all of these

• Priority is for ‘light-touch’ approaches

Source: Watkiss et al 2014

Tool Applicability Cost-Benefit Analysis Short-term assessment, particularly for market sectors. Cost-Effectiveness Analysis

Short-term assessment, for market and non-market sectors, where clear headline indicator and dominant impact (less applicable cross sectoral and complex risks).

Real Options Analysis Project based analysis. Large irreversible capital investment, particularly where existing

adaptation deficit. Comparing flexible vs. non flexible options.

Robust Decision Making Project and strategy analysis. Conditions of high uncertainty. Near-term investment with long life times (e.g. infrastructure).

Portfolio Analysis Analysing combinations of options, including potential for project and strategy formulation. Iterative Risk Assessment Project level. Strategy level for framework for planning.

International adaptation finance

• Adaptation finance to developing countries important

• Focus on short-term low-regret addresses problem of effective resource allocation for future climate change versus development

• However, leads to strong overlap with development (attribution)

• E.g. in Ethiopia, over 60% of priority adaptation options identified were already in Government programmes/budget

• And caution against omitting the longer-term

Conclusions

• Changing focus for policy and project appraisal for adaptation

• Centres on real adaptation implementation

• Shift from theory to practice

• Complementary set of actions

• Iterative risk management

• Realistic costs and benefits

• Consideration of uncertainty

ECONADAPT Key questions

Science – practice interaction and co-production

• What are the key methodological gaps or areas of research?

• What methods or guidance would be useful?

• What tools would be useful?