Watkiss econadapt economics of adaptation

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Published on July 23, 2014

Author: OECD_ENV

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Expert Workshop on Adaptation Financing and Implementation, Putting Priorities into Practice in OECD Countries, Paris, 18-19 June, 2014

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 AdaptationECONADAPT

The Economics of AdaptationECONADAPT 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 AdaptationECONADAPT 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 ImprovedMethods 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 AdaptationECONADAPT

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-sectoralDefine 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 AdditionalAdaptationNeeds,byTheme,$mUSD(2008) 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 risk management Robust decision making 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?

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