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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.