Adaptation measures  are available to make cities more resilient to  the impacts of climate change. But decision-makers need the facts to identify the most cost-effective investments.

Economics of Climate Adaptation (ECA) – Shaping climate-resilient developmentA framework for decision-making

Climate adaptation is an urgent priority for the custodians of national and local economies, such as finance ministers and mayors. Such decision-makers ask: What is the potential climate-related loss to our economies and societies over the coming decades? How much of that loss can we avert, with what measures? What investment will be required to fund those measures – and will the benefits of that investment outweigh the costs?

The ECA methodology 1 provides decision-makers with a fact base to answer these questions in a systematic way. It enables them to understand the impact of climate  change on their economies – and identify actions to minimize that impact at the lowest cost to society. It therefore allows decision-makers to integrate adaptation with  economic development and sustainable growth. In essence, we provide a methodology  to pro-actively manage total climate risk, which means: ̤ Assess today’s climate risk ̤ Chart out the economic development paths that put greater population and  

assets at risk ̤ Consider the additional risks presented by climate change

1  The methodology is based on the findings of a study by the Economics of Climate Adaptation Working Group, a partnership between the Global Environment Facility, McKinsey & Company, Swiss Re, the Rockefeller Foundation, ClimateWorks Foundation, the European Commission, and Standard Chartered Bank.  See reference6 below. 

Background

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2 

In a first step, for a given location, economic sector and affected population, we identify the most relevant hazards and analyze historic events (e.g., from disaster data sets).

Using state-of-the-art probabilistic modeling, we estimate the expected economic loss today, the incremental increase from economic growth and any further incremental increase due to climate change.

Among the various factors, future change in climate risk is the most difficult to predict. We therefore use scenario analysis 2 as the main tool to help decision-makers deal  with uncertainty, constructing three potential climate risk scenarios: today‘s climate, moderate climate change and high (or extreme) climate change for the year 2030 3.

2  To arrive at these scenarios, we use global and regional circulation models to assess changes in precipitation and temperature, mainly based on the A2 IPCC 4th AR emission scenario. We leverage public academic  research to flesh out the complex interactions between climate change and potential impact (for example, between increases in sea surface temperature and hurricane intensity).

3  We chose 2030, as this is far enough in the future to result in a climate change impact but close enough to be relevant for decision-making. Any other timeframe could be assessed with the same methodology.

4  Note that insurance does not come with a cost/benefit ratio below one. This is due to the fact insurance transfers and diversifies risk, but does not reduce it. The price of insurance includes the reserves for the  expected loss (that would result in cost/benefit=1), plus the capital and operational costs. Insurance is therefore especially suited to manage low frequency/high severity events, which would exceed the (budget) capacity of the owners of the insured risks.

5 Since the probabilistic loss modeling is carried out at high resolution (postal code or higher) and taking into account the specific vulnerabilities of all assets involved, the effect of adaptation measures is reflected in a highly detailed fashion, too (eg exact position of flood defenses…)

6 Method description and first eight case studies across the globe:  http://media.swissre.com/documents/rethinking_shaping_climate_resilent_development_en.pdf Latest report assessing adaptation needs in the Caribbean region: http://media.swissre.com/documents/ECA+Brochure-Final.pdf

Where and from what are we at risk?

What is the magnitude of the expected loss?

Potential impact fromeconomic growth

2008, today’s expected loss

Source: Report of the Economics of Climate Adaptation Working Group 2009

Expected loss from exposure to climate High climate change scenario, USD millions

Incremental increase from economic growth; no climate change

Incremental increase from climate change

2030, total expected loss

Potential impactfrom change in climate

56

23

71%

17 96

Example city of Hull, UK: The expected loss under the high climate change scenario for the city of Hull, UK. In this case, by 2030 the risk increases by up to 71%.

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   3

Example city of Hull, UK:  The adaptation cost curve for the city of Hull,  UK (see referenced report6 for details). For each adaptation measure (rectangle), the loss aversion potential (horizontal axis) and its cost/benefit ratio (vertical axis) is shown. Note that for this case, 65% of the loss under  a high climate change scenario can be cost-effectively averted by prevention and inter- vention measures. Insurance4 covers another ~15% of the expected loss. Further measures (to the right, such as elevating existing buildings to prevent flooding) are not cost-effective.

We then build a balanced portfolio of adaptation measures, assessing the loss aversion potential and cost-benefit ratio for each adaptation measure5. The loss aversion potential (the benefit of the measure) is assessed by modeling the effect of each specific measure and its cost by calculating capital and operating expenditures.

The adaptation cost curve shows that a balanced portfolio of prevention, intervention and insurance measures are available to pro-actively manage total climate risk. Insurance - or risk transfer - incentivizes prevention initiatives by putting a price tag on the risk with a premium. 

So far, economics of climate adaptation studies have been carried out for6: Hull, UK: focus on risk from multiple hazards (wind, inland flood, storm surge); Miami and South Florida, USA: focus on risk from hurricanes; North and North East China and Maharashtra, India: focus on drought risk to agriculture; Mopti region, Mali: focus on risk to agriculture from climate zone shift; Georgetown, Guyana: focus on  risk from flash floods; Samoa: focus on risks caused by sea level rise (storm surge and groundwater salination); Tanzania: focus on health and power risks caused by drought; Caribbean: Multihazard and sector studies in Anguilla, Antigua and Barbuda, Cayman Islands, Bermuda, Barbados, Jamaica, St. Lucia and in Dominica; and a sector study along the US Gulf Coast (Alabama, Louisiana, Mississippi, Texas).

In the 17 studies carried out so far6, we learn that (at least until 2030): ̤ The key drivers in many cases are today’s climate risk and economic development. ̤ The prioritization of the adaptation measures is not strongly dependent on the 

chosen climate change scenario. Cost-effectiveness is still valid even without climate change for a substantial subset of proposed measures

How could we respond?

Economics of Climate Adaptation case studies

Averted loss (USD m)

Cost/benefit

Source: Report of the Economics of Climate Adaptation Working Group 2009

0.0

2.0

3.0

1.0

4.0

5.0

6.0

Insu

ranc

e

Floo

d aw

aren

ess

cam

paig

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0.0

1

Sea

defe

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east

0

.03

Sea

defe

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wes

t 0

.08

Riv

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ull d

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0.1

3

Mob

ile p

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r con

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0

.25

Trai

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0

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Hyd

raul

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arrie

r upg

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0

.39

Floo

d pr

oofin

g of

floo

rs –

new

bui

ldin

g

0.4

9

Sand

bag

build

ings

– s

trat

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loca

tion

0

.65

Incr

ease

dra

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s

0.7

7

Bui

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1.6

8C

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uild

ings

1

.90

Sand

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build

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ener

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2.1

5

Floo

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exi

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3.3

0

Clo

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exi

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4.8

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Foof

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build

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5

.60

Stro

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5

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– e

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6

.20

Measures below this line have net economic benefits

~65% of total expected losscan be averted cost-effectively

0 50 750700 850 900 1000 1100300 550

This presents a strong case for immediate action –  it is cheaper to start adapting now than to sit and wait.

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© 2013 Swiss Re. All rights reserved.

Title: Economics of Climate Adaptation (ECA) –  Shaping climate-resilient development

A factsheet on urban resilience

Authors: Dr. David Bresch, Andreas Spiegel

Editing and realisation: Patrick Reichenmiller

Graphic design and production: Media Production, Zurich

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