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The Economics of Adaptation Concepts, Methods and Examples The Economics of Adaptation Concepts, Methods and Examples The Economics of Adaptation Concepts, Methods and Examples A guide for practitioners to assess economic benefits and costs of avoiding climate change damages through adaptation by developing these estimates using existing tools and data. Authors: John MacIntosh Callaway, Jr., Prakriti Naswa, Sara Lærke Meltofte Trærup and Riyong Kim Bakkegaard 2016 UNEP DTU Partnership Department of Management Engineering Technical University of Denmark UN City Marmorvej 51, 2100 Copenhagen Ø Denmark www.unepdtu.org November 2016 ISBN: 978-87-93458-11-6 Reviewers: Todd Ngara, Anne Olhoff, Daniel Puig, and Sudhir Sharma Editors: John MacIntosh Callaway, Jr. and Prakriti Naswa Design and production: Magnum Custom Publishing New Delhi, India [email protected] Photo acknowledgement: Front cover photo – Young coffee plants in a nursery in Cauca, southwestern Colombia. Copyright: Neil Palmer (CIAT). Retrieved from flickr.com Back cover photo – A low-lying sandy island off Belize with lots of mangrove forest surrounding it. Copyright: Ethan Daniels. Retrieved from shutterstock.com This guidebook can be downloaded from: http://www.unepdtu.org Please use the following reference when quoting the guidebook: Callaway, J. M., Naswa, P., Trærup, S. L., & Bakkegaard, R. K. (2016). The Economics of Adaptation: Concepts, Methods and Examples. (J. M. Callaway, & P. Naswa, Eds.) Copenhagen: UNEP DTU Partnership. Disclaimer: This publication is intended to be a starting point for developing country governments, practitioners, planners, and stakeholders. The findings, suggestions, and conclusions presented in this publication are those of the authors and do not necessarily represent the views of the institutions involved in the research project or imply endorsement of any approach described in the publication. Contents Abbreviations v Foreword vii 1. Introduction 1 References 6 2. Adaptation to Climate Change: Definitions, Concepts and Relevant Economic Metrics 9 Definitions of Adaptation 9 Money Metrics for Adaptation 15 Private or Social Benefits and Costs 16 A Theory of Economic Adjustment Applied to Adaptation 17 Chapter Summary 34 References 35 3. Bottom-up Economic Analysis: Simplified Methods 41 Outlines of Top-down and Bottom-up Approaches 41 An Example to Generalize From: Conservation Tillage in the Central Rift Valley of Ethiopia 44 A Second Example to Generalize From: Rainwater Harvesting (RWH) by Small Freehold Farmers 52 Chapter Summary 69 References 69 4. Case Study Examples of Bottom-up Adaptation Benefit-Cost Analyses 73 Introduction 73 References 75 Case Study 1. Rainwater Harvesting in Tanzania 76 Introduction 76 Analysis 77 Base Case 77 Damage Case 77 Technology for Adaptation 80 Adaptation Case 80 Estimates of Climate Change Damages, Net Benefits of Adaptation and Residual Damages 82 Conclusion and Discussion 82 References 82 iii Case Study 2. Ecosystem-based Adaptation in the Brazilian Amazon 84 Background and Objectives 84 Methods and Data 85 Results 87 Conclusion and Discussion 90 References 91 Case Study 3: Reduction of Cyclonic Damage in India 93 Introduction 93 Climate risks and existing adaptation measures 94 Understanding the costs and benefits of adaptation 94 Exposure level, return period and future damage 95 The Damage Case: Option 0 (Do Nothing) 97 Avoided Damages with Adaptation Options 98 Conclusion and Discussion 100 Technical Annexes 102 References 106 Case Study 4. Adaptation Benefit-Cost Analysis of Beach Nourishment in a Hypothetical Developing Country Setting 107 Methods 107 References 116 5. Decision-making under Uncertainty 119 Introduction 119 Decision-making under uncertainty 121 Traditional approaches for dealing with uncertainty 122 Making Mistakes in Ex-ante, Ex-post Planning: Damages, Benefits and Regrets 135 Chapter Summary 145 Appendix to Chapter 5 146 References 147 6. Summary and Conclusions 153 Summary 153 Conclusions 154 iv Abbreviations ANPV Annualized Net Present Value AS Arabian Sea BCA Benefit Cost Analysis BoB Bay of Bengal CGE Computable General Equilibrium Models CS Consumer surplus CS Cyclonic Storm CT Conventional Tillage DD Deep Depression EC The European Commission EC Commission of the European Communities EV Expected Value EVI Expected Value of Information EVPI Expected Value of Perfect Information EVUPI Expected Value Under Perfect Information FC Fixed Costs GCM General Circulation Models IAM Integrated Assessment Model IPA Indian Ports Association IPCC Intergovernmental Panel on Climate Change IRR Internal Rate of Return IWGSCC-USGOV Interagency Working Group on Social Cost of Carbon, United States Government LDC Least Developed Countries LRMC Long-Run Marginal Cost LRTC Long-Run Total Cost LRVC Long-Run Variable Cost MT Minimum Tillage MVP Marginal Value Products v NAP National Adaptation Program NPV Net Present Value OECD The Organisation for Economic Co-operation and Development PE Partial Equilibrium PS Producer Surplus RCM Regional Climate Models RCP Representative Concertation Pathways RDM Robust Decision Making RWH Rain Water Harvesting SCAP Storage Capacity SCS Severe Cyclonic Storm SDR Sustainable Development Reserves SDS Secretaria de Estado do Meio Ambiente e Desenvolvimento Sustentável SOA State-of-the-Art SRES The Special Report on Emission Scenarios SRMC Short-Run Marginal Cost SRTC Short-Run Total Cost SRVC Short-Run Variable Cost STCAP Storage Capacity - Optimal SuCS Super Cyclone UDP UNEP-DTU Partnership UKCIP UK Climate Impact Programme UNDP United Nations Development Program UNEP United Nations Environment Programme UNFCCC United Nations Framework Convention on Climate Change URC UNEP-Risø Center USD United States Dollar VC Variable Costs WTP Willingness to Pay ZT Zero Tillage vi Foreword Adaptation is increasingly at the forefront of climate change discussions and action. We see this reflected in the Paris Agreement adopted at the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change. We see it in the high prominence of adaptation in national and sectoral level strategies, plans and policies. Furthermore, we see it at the local level, where people are already adapting to the early impacts of climate change that affect livelihoods through, for example, changing rainfall patterns, drought, and frequency and intensity of extreme events. Analyses of the costs and benefits of climate change impacts and adaptation measures are important to inform future action. Despite the growth in the volume of research and studies on the economics of climate change adaptation over the past 10 years, there are still important gaps and weaknesses in the existing knowledge that limit effective and efficient decision-making and implementation of adaptation measures. Much of the literature to date has focussed on aggregate (national, regional and global) estimates of the economic costs of climate change impacts. There has been much less attention to the economics of climate change impacts and the costs and benefits of adaptation measures at local level, where the impacts of climate change will manifest themselves, and where many adaptation actions need to be taken. In our engagement with partners in developing countries, the need for a better understanding of the fundamentals of the economics of climate change adaptation and, in more practical terms, the need to understand the simplified methods used in assessing the costs and benefits of adaptation actions, have been stressed repeatedly. This publication is an attempt to address this need. The publication deals with ways of elaborating the fundamentals of economics of climate change adaptation. It then goes on to the current bottom-up approaches that aid decision-makers in assessing the costs and benefits of adaptation actions. The technical report has three prominent components, dealing respectively with theoretical concepts, practical examples and decision-making under uncertainty. In addition, it provides a rich list of references for further research. Our members of staff from different areas of specialization have contributed to this technical report. Our hope is that its comprehensive approach will be useful for those who are trying to bridge theory with practice and the decision-makers who design and implement adaptation policies. Anne Olhoff vii Drip irrigation system in raised garden bed Copyright: Floki. Retrieved from shutterstock.com 1. Introduction John MacIntosh Callaway, Jr. This introduction is a combination of an executive summary and an introduction to this report. However, it is organized more around ideas and concepts than it is around the chapters themselves. It attempts to weave together several aspects of the economics of adaptation to climate change into a cohesive whole. These aspects include, in very broad terms: • A strictly economic definition of adaptation, • The role of capital investment in adaptation, and • The need to further build the technical capacity of local experts in many developing countries to assess the various economic costs and benefits associated with adaptation to climate change. Over the years, researchers in many fields and policy-makers in a number of multi- and bi-lateral donor organizations have adopted various definitions of adaptation to climate change, as well as different classifications, in an effort to qualitatively distinguish among different forms of adaptation. A number of these are presented in the first part of Chapter 2. Among these classifications, perhaps the most widely used is
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