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Economic Evaluation of Climate Change Adaptation Measures in the Caribbean: A Methodology Change

Ms.Sophia Terrelonge

Economic Evaluation of Climate Change Adaptation Measures in the Caribbean: A

Methodological Challenge

Abdullahi AbdulkadriSophia Terrelonge

Department of EconomicsThe University of the West Indies, Mona Campus

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Outline of Presentation

IntroductionBackground to issue of Adaptation in the

CaribbeanTowards a simple Economic Evaluation

ToolThe Cost-Benefit AnalysisConcluding Remarks

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Introduction CCCCC and UWI (through Dept. of Economics) entered

into an agreement in January 2007 to develop a simple economic assessment tool for adaptation measures

A comprehensive review of the literature revealed that: Significantly more economic studies have been done on

mitigation than adaptation Majority of economic studies have been based on

developed countries, especially Europe No economic study on climate change adaptation exists in

the Caribbean to our knowledge Based on our experience during the project, we highlight

challenges in conducting economic evaluation of CC adaptation measures in the Caribbean and offer a framework for conducting such analysis

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Background

The issue of climate change is gaining more attention and the adaptive capacity of the Caribbean needs to be enhanced

Process of enhancement involves Identification of risks of and threats from CC Itemization of CC adaptation options in

response to risks/threat Evaluation of options to determine cost-

effectiveness Choice and implementation of option(s)

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Background

Identification of risks and threats Climate change is characterized by uncertainty, as there

is a wide range of impact scenarios which vary in their significance

Downscaling of impact scenarios to regional conditions is very crucial for precision of economic predictions

Considerations for intergenerational trade-offs play a major role in the sustainable use of natural resource endowments for the benefit of the present and future generations

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Background

Itemization of CC adaptation options Focus is on building adaptive capacity within the

Caribbean in response to climatic impacts Areas of particular importance in the region include land

use management (especially in the coastal areas), management of water resources, protection of biodiversity and strengthening of infrastructure

Vulnerable sectors of the economy include tourism, agriculture, fishery, transportation and health

CC adaptation measures must address these and other priorities

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Background

Evaluation of adaptation options An appropriate evaluation tool must be employed Data limitations highlight conflict between ideal and feasible framework

A simple model is better than no model

Choice and implementation of option(s) Recommendations of an economic evaluation assist in

the choice of best option and its implementation

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Towards a simple Economic Evaluation Tool

Major economic studies on climate change are from the Stern Review, UKCIP, IPCC and few academic literature

Established models include Utility/Welfare Maximization framework Cost-Effectiveness Analysis (CEA) Cost-Benefit Analysis (CBA)

Each of the three identified major models have different variations

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Towards a simple Economic Evaluation Tool Utility/Welfare Maximization framework

Arguably the most sophisticated model for economic evaluation of CC adaptation

Requires extensive data of high precision Attempts to capture all or most impact measures in a utility or

social welfare function Intergenerational considerations are easily incorporated

Challenges posed The type of probabilistic data required is lacking Most people have problem understanding the concept of utility Results of model may reflect the modeller’s views instead of

those of the affected population

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Towards a simple Economic Evaluation Tool Cost-Effectiveness Analysis (CEA)

Particularly useful when options being considered generate the same type of impact

Requires primary data mainly Provides unit cost of achieving the desired impact

Challenges posed Can’t be used to compare options with different types of

impact The choice of discount factor may be controversial Provides a single measure that may be too restrictive for

policy makers

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Towards a simple Economic Evaluation Tool Cost-Benefit Analysis (CBA)

Particularly useful when options being considered generate different types of impact

Requires primary data mainly Provides the dollar value of benefits to be derived from a $1

investment/expenditure on an adaptation option

Challenges posed Usually criticized on ethical grounds –everything is in dollars,

even human lives The choice of discount factor may still be controversial Also provides a single measure that may be too restrictive for

policy makers

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Towards a simple Economic Evaluation Tool We based our economic evaluation tool on the

Cost-Benefit Analysis (CBA) because: Multi-sectoral nature of climate change impacts Available data in the region vis-à-vis data needs of

different models Requirement to keep the model simple Ease of implementation of CBA

Evaluation Tool is in two parts A heuristic assessment to prune dominated options A formalized CBA for non-dominated options

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Heuristic Assessment

Adaptation Cost

Risk of Climate Change

Low High

Low Low risk of adaptation

Implement Adaptation

High Ignore adaptation High risk of adaptation

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Cost-Benefit Analysis

The Cost/Benefit Analysis (CBA) examines the costs associated with different adaptation strategies in tandem with their projected benefits

It is important that values be assigned to all the resources utilized

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Cost-Benefit Analysis

The costing methodology involves five steps:

(1) Itemization of the physical, engineering and/or biological components of each adaptation option

(2) Calculation of the resource costs of adaptation

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Cost-Benefit Analysis

(3) Identification and measurement of outcomes of adaptation options in physical units

(4) The conversion of the identified physical outcomes into monetary values

(5) The comparison of the costs and benefits of various adaptation options

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Cost-Benefit Analysis

The CBA is carried out by forming a ratio of the total discounted benefits to the total discounted costs

An adaptation option with a benefit-cost (B-C) ratio greater than one is seen as an effective option

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Cost-Benefit Analysis

A benefit-cost ratio less than one implies an ineffective option

If the B-C ratio is one, then the option is just breaking-even

The discount rate that is selected depends on the time horizon for the completion of the project

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Cost-Benefit Analysis

Discounting serves the purpose of representing future costs and benefits in today’s monetary value, hence providing a common basis for valuation

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Cost-Benefit Analysis: Limitations

Future costs and benefits may not be estimated precisely, as they are uncertain

Macroeconomic parameters such as the inflation and interest rates have a significant impact on the projected costs and benefits

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Cost-Benefit Analysis: Limitations

The use of a standard discount rate may not be appropriate for all economies and every adaptation measure

Therefore, the implication is that the economic analysis based on a single B-C ratio in an uncertain environment may not be adequate

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CBA: Sensitivity Analysis

In response to the inadequacy of a single B-C ratio, there is the need to conduct sensitivity analysis

Sensitivity analysis provides a means of varying

the estimates of costs, benefits and the discount factor within a credible range of values, so as to obtain corresponding range of values for the B-C ratio

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CBA: Sensitivity Analysis

This range should provide a more robust means of economic assessment than a single ratio

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Concluding Remarks

CC adaptation is necessary for all countries in the Caribbean region

In every case, early incorporation of an economic assessment is beneficial for project management and policy purposes

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Concluding Remarks

This early incorporation will ensure the collection of the necessary data and the performance of CBA during the process of adaptation, rather than at a later date when essential data may not have been collected

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Thank you ladies and gentlemen.