17 Economics of Adaptation Coordinating Lead Authors: Muyeye Chambwera (Zimbabwe), Geoffrey Heal (USA) Lead Authors: Carolina Dubeux (Brazil), Stéphane Hallegatte (France), Liza Leclerc (Canada), Anil Markandya (Spain), Bruce A. McCarl (USA), Reinhard Mechler (Germany/Austria), James E. Neumann (USA) Contributing Authors: Patrice Dumas (France), Samuel Fankhauser (UK), Hans-Martin Füssel (Germany), Alistair Hunt (UK), Howard Kunreuther (USA), Richard S.J. Tol (UK), Paul Watkiss (UK), Richard Woodward (USA), David Zilberman (USA) Review Editors: Eduardo Calvo (Peru), Ana Iglesias (Spain), Stale Navrud (Norway) Volunteer Chapter Scientist: Terrence Kairiza (Zimbabwe) This chapter should be cited as: Chambwera , M., G. Heal, C. Dubeux, S. Hallegatte, L. Leclerc, A. Markandya, B.A. McCarl, R. Mechler, and J.E. Neumann, 2014: Economics of adaptation. In: Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part A: Global and Sectoral Aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Field, C.B., V.R. Barros, D.J. Dokken, K.J. Mach, M.D. Mastrandrea, T.E. Bilir, M. Chatterjee, K.L. Ebi, Y.O. Estrada, R.C. Genova, B. Girma, E.S. Kissel, A.N. Levy, S. MacCracken, P.R. Mastrandrea, and L.L. White (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp. 945-977. 945 Table of Contents Executive Summary ............................................................................................................................................................ 948 17.1. Background ............................................................................................................................................................. 950 17.2. Economic Aspects of Adaptation ............................................................................................................................ 950 17.2.1. Public and Private Actors in Adaptation Implementation .................................................................................................................. 950 17.2.2. Broad Categorization of Adaptation Strategies ................................................................................................................................ 950 17.2.3. Broad Definition of Benefits and Costs ............................................................................................................................................. 951 17.2.3.1. Ancillary Economic Effects of Adaptation Measures and Policies ...................................................................................... 951 17.2.3.2. Economic Consideration of Ancillary Effects ...................................................................................................................... 951 17.2.4. Adaptation as a Dynamic Issue ......................................................................................................................................................... 951 17.2.5. Practical Adaptation Strategy Attractiveness and Feasibility ............................................................................................................. 951 17.2.6. Adaptation Benefits and Costs, Residual Damage, and Projects ....................................................................................................... 952 17.2.7. A Broader Setting for Adaptation ..................................................................................................................................................... 953 17 17.2.7.1. Adaptation and Mitigation as Competitive or Complementary Investments ..................................................................... 954 17.2.7.2. Adaptation and Development ........................................................................................................................................... 954 17.3. Decision Making and Economic Context for Adaptation ........................................................................................ 954 17.3.1. Economic Barriers to Adaptation Decision Making ........................................................................................................................... 955 17.3.1.1. Transaction Costs, Information, and Adjustment Costs ...................................................................................................... 955 17.3.1.2. Market Failures and Missing Markets ................................................................................................................................ 955 17.3.1.3. Behavioral Obstacles to Adaptation .................................................................................................................................. 955 17.3.1.4. Ethics and Distributional Issues ......................................................................................................................................... 955 17.3.1.5 Coordination, Government Failures, and Political Economy ............................................................................................... 956 17.3.1.6. Uncertainty ........................................................................................................................................................................ 956 17.3.2. Economic Decision Making with Uncertainty .................................................................................................................................... 956 17.3.2.1. Cost-Benefit Analysis and Related Methods ...................................................................................................................... 956 17.3.2.2. Multi-Metric Decision Making for Adaptation ................................................................................................................... 957 17.3.2.3. Non-Probabilistic Methodologies ...................................................................................................................................... 957 17.4. Costing Adaptation ................................................................................................................................................. 958 17.4.1. Methodological Considerations ........................................................................................................................................................ 958 17.4.1.1. Data Quality and Quantity ................................................................................................................................................. 958 17.4.1.2. Costs and Benefits Are Location-Specific ........................................................................................................................... 958 17.4.1.3. Costs and Benefits Depend on Socioeconomics ................................................................................................................. 959 17.4.1.4. Discount Rates Matter ....................................................................................................................................................... 959 17.4.2. Review of Existing Global Estimates: Gaps and Limitations ............................................................................................................. 959 17.4.3. Consistency between Localized and Global Analyses ....................................................................................................................... 960 17.4.4. Selected Studies on Sectors or Regions ............................................................................................................................................ 960 946 Economics of Adaptation Chapter 17 17.5. Economic and Related Instruments to Provide Incentives ..................................................................................... 963 17.5.1. Risk Sharing and Risk Transfer, Including Insurance .......................................................................................................................... 964 17.5.2. Payments for Environmental Services ............................................................................................................................................... 964 17.5.3. Improved Resource Pricing and Water Markets ................................................................................................................................ 964 17.5.4. Charges, Subsidies, and Taxes ........................................................................................................................................................... 965 17.5.5. Intellectual Property Rights .............................................................................................................................................................. 966 17.5.6. Innovation and Research & Development Subsidies ......................................................................................................................... 966 17.5.7. The Role of Behavior ......................................................................................................................................................................... 966 References ......................................................................................................................................................................... 966 Frequently Asked Questions 17.1: Given the significant uncertainty about the effects of adaptation measures, can economics contribute much to decision making in this area? ...........................................................................................................................