Download Cost Benefit Analysis Tool and Guidance

Cost Benefit Analysis tool is not a new tool but is in demand by adaptation planners. The World
Resources Institute provides step-by-step guidance on how to use the tool. This document can be
used with the Power Point presentation on this tool.
Cost Benefit Analysis
Background on Cost Benefit Analysis
The Pacific is highly vulnerable to extreme weather events. According to Brown et al. (2014a), climate
oriented disasters cause average annual direct losses of USFJ$284 million in the region, which are
amongst the highest per capita losses in the world. In Fiji, for example, solely in 2012, three natural
disasters – one 50-year flood, one 25-year flood, and one Category 4 cyclone – ravaged Viti Levu, Fiji's
largest island. Early estimates of damage equaled 4.3% of national GDP (Brown et al., 2014a).
Economic valuation (estimations of benefits and costs) of adaptation is relevant to address different
objectives, such as decisions on national sectoral policies or programs, or the appraisal and prioritization
of projects at subnational or local level (Watkiss et al., 2015). A common economic decision support tool
used in project appraisal is Cost Benefit Analysis (CBA). This method compares the monetized costs and
benefits of a proposal or range of options. For periodization purposes, a policy analyst using CBA would
select the best option amongst them – i.e. the one with the greatest benefits compared to costs. As long
as benefits exceed the costs, the policy change or option is justified and allows resources to be allocated
efficiently against other priorities (Watkiss et al., 2015).
The CBA eliminates risks associated with changing conditions on the elements affecting adaptation
projects such as future socioeconomic scenarios, climate conditions and its impacts. Under risk
conditions we can quantify random future outcomes – for instance through probabilities – and then risk
should be explicitly taken into account as much as possible. A way of including risk is through a
sensitivity analysis. Sensitivity analysis is a systematic method for examining how the outcome of a CBA
changes with variations in assumptions about project components that might change unexpectedly in
the future – such as a consequence of climate change.
This section explains to government officials, and representatives from the private sector and nongovernmental organizations with a technical or planning background the concept of cost benefit analysis
and how it can be used to prioritize adaptation projects.
5.4.2 Methodology
Cost-benefit analysis (CBA) is frequently used in government economic appraisal. It aims to value all
relevant costs and benefits of a proposed project/program to society, allowing comparison of costs and
benefits in a common metric – money (Watkiss et al., 2015). CBA compares options using net present
values (NPV), calculated as total discounted benefits minus total discounted costs, or benefit-cost ratios.
As it identifies whether benefits exceed the costs, it can justify intervention, and allows resources to be
allocated efficiently against other priorities, facilitating NPV ranking of options (Watkiss et al, 2015).
CBA differs from the traditional financial analysis in many ways (see Figure 1), which causes sometimes
confusion amongst analyst and decision makers. Probably the more noticeable between these two types
of analysis is that whereas financial analysis focus on profits or financial gains for a specific economic
agent (such as a firm) CBA focus on the overall societal impact – both in the environment and the
population.
Figure 1: Difference between financial and CBA
Source: P-CBA (2015).
CBA analysis is useful in different instances of decision making as it allow us to answer the following
questions (P-CBA, 2015):
– Is a project or activity worthwhile (to invest or not)?
– Which of these projects/activities should we choose?
– Which project will give us the best pay off per dollar invested?
– Which project will generate the highest value to society once we have paid for it?
Furthermore, in the context of project assessment it can help us to answer whether or not investing in a
project has been worthwhile; whereas the information generated can also inform how to
proceed/adjust project implementation (P-CBA-2015).
CBA can be used in different parts of a project cycle (see Figure 2). It can be used to assess project
feasibility at the first stages (Ex ante CBA), just after the adaption actions have been identified to see if
the project is worth to invest. It can be done more at the middle of the project cycle (Mid-term CBA),
either on the project implantation or project monitoring phases, to know how the project is performing
and if the planned benefits and costs have been occurred at the levels envisioned. Finally, at the end of
the project (Ex post CBA), to know the final tally or evaluation of the project and observe whether or not
the actual benefits along the project’s life were bigger than the costs.
Figure 2: Role of CBA along the project cycle
Source: P-CBA (2015).
5.4.3 CBA AND ADAPTATION
In the application of CBA to climate adaptation, benefits are defined as the avoided damage costs of
climate change, whereas costs are related to the actual investments on implementing the adaptation
action. If benefits outweigh the costs of a given adaptation measure, there are net benefits and the
adaptation measure is economically efficient, meeting the principal criterion of CBA (Watkiss et al.,
2015). Applications exist for adaptation, see for instance AIACC (2006), that primarily use scenario-based
impact assessment to appraise measures, estimating baseline damage costs then applying CBA to
appraise responses under alternative climatic and socio-economic futures.
Although CBA is widely used, it has some limitations. For instance, it requires that all benefits and costs
are expressed in monetary terms, which is difficult to do particularly in non-market sectors (Watkiss et
al. 2015). As for its application to value adaptation actions, CBA faces important challenges as elements
such as capacity building and non-technical options are given lower priority or omitted because its
difficulty to quantify and value.
In the following subsections, we present the main steps to follow to perform a CBA focused in
adaptation options and how it can help to rank them.1 The steps are presented following an example of
Fiji’s single worst natural disaster since 1931, when a hurricane led to the highest recorded flood in the
Ba River catchment. History nearly repeated itself in 2009, when a severe monsoonal trough caused
significant damage, loss of life, and widespread flooding, particularly in Ba town. In January and March
2012, a flood of similar magnitude followed a tropical rain depression and severe rains with catastrophic
results.
Located in the north-western part of Viti Levu, Ba is the second largest province in Fiji by area and the
largest by population, with 231,762 residents. Sugar production, timber harvesting, and fishing are
important commercial activities, although the population is largely rural and generally poor (around 34%
poverty rate in Ba Province). 45,879 people are estimated to live within the boundaries of the
catchment, most of them in Ba Town and downstream, where flooding is a particular risk.
5.4.4 STEP 1: IDENTIFYING THE APPROPRIATE ADAPTATION OPTIONS
A cost benefit (CBA) study was conducted on disaster risk reduction (adaptation) measures for flooding
in the Ba River catchment in Viti Levu, Fiji. It identified the most economically effective adaptation
options for communities and households against flooding – we present only three as an illustrative
example. The analysis accounted for the biophysical and socioeconomic impacts of flooding, the costs,
benefits, and feasibility of management, and the potential impacts of climate change.
The study considered the costs and benefits of the adaptation options identified under three climate
change scenarios – current, moderate, and severe. For the purposes of the CBA it assumed a project life
of 100 years and net present values (NPV) are calculated using a standard discount rate of 8%. For this
particular exercise we consider only three options from the original study:
Plant riparian buffers: Plant 30m buffer of native vegetation along all stream-banks (1,291 ha).
Plant floodplain vegetation: Plant native vegetation on 10% of cropland in catchment flood plain
(total 1,631 ha).
River dredging: Dredge lower portion of the Ba River (3,845,000 m3).
Once the adaptation options have bed identified, the analyst have to consider what elements associated
to their costs and benefits can be monetized or note. CBA will then only focus on those that can be
monetized. The following table provides an idea on this process.
Table 1: Identifying costs and benefits
Category
Labour
Capital
1
Plant
Plant floodplain
riparian buffers
vegetation
Monetised Costs
x
x
x
x
River dredging
e river
x
x
This case study used as example is adapted from Brown, P., et al. (2014). ‘Evaluating Ecosystem-Based Adaptation for Disaster
Risk Reduction in Fiji’. Landcare Research-USP, Fiji. The figures are representative and does not reflect the original results of the
study.
Materials
Operating & maintenance
Monitoring
x
x
x
Monetised Benefits
x
x
x
x
Avoided damages - agriculture
Avoided damages - livestock
Avoided damages – housing
Avoided damages – durable
assets
Avoided damages – indirect costs
x
Avoided damages – businesses
x
Provision of Non-timber forest
x
products
Carbon sequestration
x
Non-monetised Benefits
Soil erosion control
x
Maintenance of soil fertility
x
Biodiversity & habitat
x
Potential recreation values
x
Spiritual values
x
Source: Adapted from Brown et al. (2014)
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
5.4.5 STEP 2: IDENTIFYING THE COST AND BENEFITS ASSOCIATED TO THOSE OPTIONS
The study identified the monetized costs can be categorized in capital, labor, materials, operating and
maintenance and monitoring. Furthermore, the study identified the following four categories of benefits
(avoided damages):
Avoided damages – households: Difference between estimated damages accrued under
adaptation options relative to a ‘doing nothing’ option. Includes avoided damages for crops,
livestock, housing, durable assets, and indirect costs.
Avoided damages – businesses: Difference between estimated damages accrued under
adaptation options relative to a ‘doing nothing’ option for the average business in each
catchment
Non-Timber forest products: Average household income obtained from the value of collecting,
using and/or selling non-timber forest products in one hectare of new forests, riparian buffers,
and floodplain vegetation
Carbon sequestration: Value of carbon sequestered in native vegetation planted. Valued at
FJ$20 per ton carbon dioxide equivalent (FJ$ /tCO2e) based on average global market carbon
price
5.4.6 STEP 3: Valuing and discounting such costs and benefits
In the table 2, the estimated total discounted benefits (over 100 years) under three different severity of
damages from climate change are presented. The options produce different levels of benefits
corresponding to the severity of climate change. For instance, floodplain vegetation is more prone to be
affected by extreme weather events, whereas the river dredging tend to be less and thus can produce
higher benefits during such contingency.
Table 2: Valuing costs and benefits
Benefit Category
Avoided damages
– households
Avoided damages
- businesses
Non-timber
forest products
Carbon
sequestration
Severity of
climate change
Current
Moderate
Severe
Current
Moderate
Severe
Current
Moderate
Severe
Current
Moderate
Severe
Benefits from adaptation options
(million of FJ$)
Plant riparian
Plant floodplain
Dredge River
buffers
vegetation
443.3
370.7
889.4
447.5
373.5
906.4
455.6
379.2
938.9
221.6
222.4
593.0
223.8
224.1
604.3
227.8
227.5
626.0
295.5
444.8
0
298.4
448.2
0
303.8
455.0
0
517.2
444.8
0
522.1
448.2
0
531.6
455.0
0
Current
Moderate
Severe
Source: Adapted from Brown et al. (2014)
Total
1477.6
1491.8
1518.8
1482.6
1494.0
1516.6
1482.4
1510.7
1564.8
3.2.5 STEP 4: Comparing cost and benefits
Once the information of the monetized benefits and costs over the life of the project has been can
calculated, these can be compared to calculate the Net present value (NPV). This NPV is the difference
between total benefits and total costs of each adaptation option under current climate change
conditions discounted to the present day’s value. As presented in the third column of Table 3.
Table 3: Comparing cost and benefits
Current Climate
Change
Riparian buffers
Total present
value of benefits
(FJ$ million)
Total present
value of costs (FJ$
million)
Total NPV (FJ$
million)
1477.6
1465.0
12.6
Floodplain
1482.6
vegetation
Dredging the river
1482.4
Source: Adapted from Brown et al. (2014)
1487.4
- 4.8
1504.7
- 22.3
As we can observe both options 2 and 3 present a negative NPV, which means that their costs outweigh
the benefits. Therefore, it is not advisable to invest in these options. The only option worth investment
in this example is planting riparian buffers.
5.4.7 STEP 5: Ranking the adaptation options according to its Net Present Value (NPV)
The next step will be to rank the adaptation options according to their NPV, where the highest ranked
option (number 1) will be the one with the highest NPV. The rest of the options will follow the ranking in
descending order. For the particular example presented, there is only one option that can formally be
ranked (option 1 plant riparian buffers) because it is the only one that presented a positive NPV – see
Table 4.
Table 4: Ranking adaptation options
Total present
Total present
value of benefits
value of costs (FJ$
(FJ$ million)
million)
Current Climate
Change
Riparian buffers
1477.6
1465.0
Floodplain
1482.6
1487.4
vegetation
Dredging the river
1482.4
1504.7
Source: Adapted from Brown et al. (2014)
Total NPV (FJ$
million)
Rank
12.6
- 4.8
1
-
- 22.3
-
5.4.8 STEP 6: Sensitivity analysis
Sensitivity analysis examines how changes in the assumptions of an economic study affect its results.
These assumptions are made to best approximate the problem being studied. At the same time,
assumptions are typically subject to uncertainty and error. For example, climate change future
conditions may change. A properly designed sensitivity analysis can be powerful as it contributes to an
understanding of the relationships between the assumptions and the CBA results. An incorrectly
designed sensitivity analysis, however, can be used to support a flawed estimation and can lead to
wrong conclusions.
For the example, it is considered that the assumption of the future conditions of climate will change in
intensity. Changes are the assumed to be moderate and severe. The implication for our adaptation
options is that it effectiveness to protect against the impact of climate change will be different. For
instance we assume that as the effectiveness of the option changes so the benefits do see first column
of table 4. For sake of simplicity, it is assumed that costs are invariant to changes in climate conditions.
The new results for benefits are presented in table 4.
Table 5: Sensitivity analysis and re-ranking adaptation options
Total present
Total present
value of benefits
value of costs (FJ$
(FJ$ million)
million)
Current Climate
Change
Riparian buffers
1477.6
1465.0
Floodplain
1482.6
1487.4
vegetation
Dredging the river
1482.4
1504.7
Moderate Climate
Change
Riparian buffers
1491.8
1465.0
Floodplain
1494.0
1487.4
vegetation
Dredging the river
1510.7
1504.7
Severe Climate
Change
Riparian buffers
1518.8
1465.0
Floodplain
1516.6
1487.4
vegetation
Dredging the river
1564.8
1504.7
Source: Adapted from Brown et al. (2014)
Total NPV (FJ$
million)
Rank
12.6
- 4.8
1
-
- 22.3
-
26.8
6.6
1
2
6.0
3
53.8
28.2
2
3
60.1
1
From Table 4 it can be observed that under moderate and severe climate change conditions, all three
adaptation options present positive NPV. Hence, now they are susceptible to be ranked. Under
moderate climate change conditions planting riparian buffers is still the highest ranked option, followed
by planting floodplain vegetation and dredging the river. However, under severe climate conditions,
dredging the river becomes the highest ranked option, whereas riparian buffers and floodplain
vegetation are the second and third options respectively.
5.4.9 REFERENCES
AIACC (2006) Estimating and Comparing Costs and Benefits of Adaptation Projects: Case Studies in South
Africa and Gambia. Report on Assessments of Impacts and Adaptations to Climate Change, International
START Secretariat, Washington, D.C.
Brown, P., Daigneault, A., Gawith, D., Aalbersberg, W., Comley, J., Fong, P., and F. Morgan (2014).
‘Evaluating Ecosystem-Based Adaptation for Disaster Risk Reduction in Fiji’. Landcare Research-USP, Fiji.
P-CBA (2015). ‘The ABC of CBA’. Training Series Presentations, 08-10 April 2015, Fiji.
Watkiss, P., Hunt. A., Blyth, W., and J. Dyszynski (2015). ‘The use of new economic decision support tools
for adaptation assessment: A review of methods and applications, towards guidance on applicability’.
Climatic Change, 132: 401–416.
BREAK OUT GROUPS EXERCISE
Break out groups’ work (Day 3 CBA)2
Introduction
Fiji’s single worst natural disaster occurred in 1931, when a hurricane led to the highest recorded flood
in the Ba River catchment. History nearly repeated itself in 2009, when a severe monsoonal trough
caused significant damage, loss of life, and widespread flooding, particularly in Ba town. In January and
March 2012, a flood of similar magnitude followed a tropical rain depression and severe rains with
catastrophic results.
Located in the north-western part of Viti Levu, Ba is the second largest province in Fiji by area and the
largest by population, with 231,762 residents. Sugar production, timber harvesting, and fishing are
important commercial activities, although the population is largely rural and generally poor (around 34%
poverty rate in Ba Province). 45,879 people are estimated to live within the boundaries of the
catchment, most of them in Ba Town and downstream, where flooding is a particular risk.
A cost benefit (CBA) study was conducted on disaster risk reduction (adaptation) measures for flooding
in the Ba River catchment in Viti Levu, Fiji. It identified the most economically effective adaptation
options for communities and households against flooding. The analysis accounted for the biophysical
and socioeconomic impacts of flooding, the costs, benefits, and feasibility of management, and the
potential impacts of climate change.
Adaptation options
The study considered the costs and benefits of the adaptation options identified under three climate
change scenarios – current, moderate, and severe. For the purposes of the CBA it assumed a project life
of 100 years and net present values (NPV) are calculated using a standard discount rate of 8%. For this
particular exercise we consider only three options from the original study:
Plant riparian buffers: Plant 30m buffer of native vegetation along all stream-banks (1,291 ha).
Plant floodplain vegetation: Plant native vegetation on 10% of cropland in catchment flood plain
(total 1,631 ha).
River dredging: Dredge lower portion of the Ba River (3,845,000 m3).
Identify costs and benefits
In the following table, identify (tick with a x) which category of monetised cost and benefits as well as
non-monetised benefits are applicable to each of the three adaptation options described above.
Category
2
Plant
riparian buffers
Plant floodplain
vegetation
River dredging
e river
This case study is adapted from Brown, P., et al. (2014). ‘Evaluating Ecosystem-Based Adaptation for Disaster Risk Reduction in
Fiji’. Landcare Research-USP, Fiji. The figures are representative and does not reflect the original results of the study.
Monetised Costs
Labour
Capital
Materials
Operating & maintenance
Monitoring
Monetised Benefits
Avoided damages - agriculture
Avoided damages - livestock
Avoided damages – housing
Avoided damages – durable
assets
Avoided damages – indirect costs
Avoided damages – businesses
Provision of Non-timber forest
products
Carbon sequestration
Non-monetised Benefits
Soil erosion control
Maintenance of soil fertility
Biodiversity & habitat
Potential recreation values
Spiritual values
The study estimated the following discounted costs (over 100 years) for the three adaptation actions.
Cost
Riparian Planting
Floodplain Planting
Dredge River
(Million FJ$)
(Million FJ$)
(Million FJ$)
Capital
586.0
595.0
601.9
Labour
219.8
223.1
225.7
Materials
366.3
371.9
376.2
Operating and maintenance
146.5
148.7
150.5
Monitoring
146.5
148.7
150.5
Total
The study identified the following four categories of benefits (avoided damages):
Avoided damages – households: Difference between estimated damages accrued under
adaptation options relative to a ‘doing nothing’ option. Includes avoided damages for crops,
livestock, housing, durable assets, and indirect costs.
Avoided damages – businesses: Difference between estimated damages accrued under
adaptation options relative to a ‘doing nothing’ option for the average business in each
catchment
Non-Timber forest products: Average household income obtained from the value of collecting,
using and/or selling non-timber forest products in one hectare of new forests, riparian buffers,
and floodplain vegetation
Carbon sequestration: Value of carbon sequestered in native vegetation planted. Valued at
FJ$20 per tonne carbon dioxide equivalent (FJ$ /tCO2e) based on average global market carbon
price
In the following table, we present the estimated total discounted benefits (over 100 years) under three
different severity of damages from climate change. The options produce different levels of benefits
corresponding to the severity of climate change. For instance, floodplain vegetation is more prone to be
affected by extreme weather events, whereas the river dredging tend to be less and thus can produce
higher benefits during such contingency.
Benefit Category
Avoided damages
– households
Avoided damages
- businesses
Non-timber
forest products
Carbon
sequestration
Total
Severity of
climate change
Current
Moderate
Severe
Current
Moderate
Severe
Current
Moderate
Severe
Current
Moderate
Severe
Benefits from adaptation options
(million of FJ$)
Plant riparian
Plant floodplain
Dredge River
buffers
vegetation
443.3
370.7
889.4
447.5
373.5
906.4
455.6
379.2
938.9
221.6
222.4
593.0
223.8
224.1
604.3
227.8
227.5
626.0
295.5
444.8
0
298.4
448.2
0
303.8
455.0
0
517.2
444.8
0
522.1
448.2
0
531.6
455.0
0
Current
Moderate
Severe
Results and sensitivity analysis
Considering the information that you have read, calculate the following (and fill the table below)
NPV (Total benefits – Total costs) of each adaptation option under current climate change
conditions.
Rank from 1 to 3 the options according to their NPV, which one will be chosen?
Sensitivity analysis: calculate the NPV for each option now considering that climate change
impacts will be moderate and severe (fill the table with the results). Note: We assume that costs
are insensitive to climate change. Is it always the same option ranked as first? If not, discuss
why.
Assume that you are a decision maker in charge of prioritizing and deciding in what adaptation
option the Government of Fiji will invest, how will you rank the options considering the severity
of climate change? Explain why.
Total present
value of benefits
(FJ$ million)
Current Climate
Change
Riparian buffers
Floodplain
vegetation
Dredging the river
Moderate Climate
Change
Riparian buffers
Floodplain
vegetation
Dredging the river
Severe Climate
Change
Riparian buffers
Floodplain
vegetation
Dredging the river
Total present
value of costs (FJ$
million)
Total NPV (FJ$
million)
Rank
General References
Dinshaw, A and H McGray (2014) A Tailored View of Successful Adaptation to Climate Change. African
and Latin American Resilience to Climate Change Project. USAID.
Erin Gray and Arjuna Srinidhi. 2013. “Watershed Development in India: Economic valuation and
adaptation considerations” Working Paper. Washington, DC: World Resources Institute.
Available online at http://www. wri.org/publication/watershed-development-indiaeconomicvaluation-adaptation-considerations
Hammill A, and TM Tanner (2011) Harmonising climate risk management? Adaptation screening and
assessment tools for development co-operation. Working paper for the OECD Task Team on
Climate Change and Development Co-operation, May 2011.
McGray, H, A Hamill, and R. Bradley (2007) Weathering the Storm: Options for Framing Adaptation and
Development. Washington, D.C.: World Resources Institute.
Nilsson, M, A Jordan, J Turnpenny, J Hertin, B Nykvist and D Russel (2008), ‘The use and non-use of
policy appraisal tools in public policy making’ in Policy Sciences, 41 (4), 335‒355.
Turnpenny JR, AJ Jordan, D Benson and T Rayner (2016) The Tools of Policy Formulation: An Introduction
in The Tools for Policy Formulation: Actors, Capacities, Venues, and Effects. AJ Jordan and JR
Turnpenny (eds). Elgar Online. Available from:
http://www.elgaronline.com/view/9781783477036.00011.xml
ECONOMIC METHODS TO
PRIORITIZE OPTIONS:
Cost-Benefit Analysis
Juan-Carlos Altamirano
World Resources Institute
January 2016
PICTURE: ASIAN DEVELOPMENT BANK
WHAT IS COST-BENEFIT ANALYSIS?
CBA: Framework to assess the merits (gains
and losses) of a project from the perspective
of society (not a single individual or firm)
Picture: Kelvin Smith
CBA AND FINANCIAL ANALYSIS
Source: USAID (2012)
COST BENEFIT ANALYSIS USEFUL WHEN
• Decision making:
– Is a project or activity worthwhile (invest or not)?
– Which of these projects/activities should we choose?
– Which project will give us the best pay off per dollar
invested?
– Which project will generate the highest value to
society once we have paid for it?
• Project assessment:
– Has investing in this project been worthwhile?
• Information generated can also inform how to
proceed/adjust project implementation
Picture: Kay Adams
CBA AND ADAPTATION TO CLIMATE CHANGE
• Application of CBA to adaptation
– benefits are defined as the avoided damage
costs of climate change; costs of
implementing project
– If benefits outweigh the costs of a given
adaptation measure, the measure is
economically efficient
• These primarily use scenario-based
impact assessment to appraise measures
Source: Watkiss et al. (2014) ; Picture: Kay Adams
WHEN CAN THIS METHOD BE USED?
• When you have climate scenarios at
different resolutions and estimations of
damages.
• Requirements (expertise, data,
computational, financial): low-medium.
• Effectiveness: options face small-medium
climate sensitivity
Source: USAID (2012) ; Picture: Kay Adams
STRENGTHS AND WEAKNESSES
• Strengths:
– Direct analysis of economic benefits and
costs
– Widely applied and well-studied.
• Weaknesses
– requires all elements to be expressed in
monetary terms
– Non-market sectors are difficult to valuate
(adaptation, capacity building and nontechnical options)
Source: USAID (2012) ; Picture: Kay Adams
USES ON PROJECTS CYCLE
Start
Situation
analysis
End
Project
evaluation
Ex post CBA
Project
monitoring
Mid term
CBA
Problem
analysis
Identification of
possible solutions/
options
What
purpose
would your
CBA serve?
Project
implementation
Source: USAID (2012) and adapted from Gamper and Turcanu (2007 )
Project
design
Project
feasibility
Ex ante CBA
BENEFIT AND COSTS OF ADAPTATION (FLOODS)
Adaptation action
Costs
Benefits
Coastal revegetation
•
•
•
Space requirements
Plants
Maintenance •
•
•
Compensation
New
housing/buildings
Conflicts Coastal relocation
•
Build sea walls
•
•
•
Materials and equipment
Labour
Maintenance and operation
•
•
•
•
•
Lost income from businesses closures
Losses to households
Infrastructure repairmen
Provision of flood relief subsidies and services
Health costs
Education costs
BENEFIT AND COSTS OF ADAPTATION (FLOODS)
Adaptation action
Costs
Benefits
Coastal revegetation
•
•
•
Space requirements
Plants
Maintenance •
•
•
Compensation
New
housing/buildings
Conflicts Coastal relocation
•
Build sea walls
•
•
•
Materials and equipment
Labour
Maintenance and operation
•
•
•
•
•
Lost income from businesses closures
Losses to households
Infrastructure repairmen
Provision of flood relief subsidies and services
Health costs
Education costs
BENEFIT AND COSTS OF ADAPTATION (FLOODS)
Adaptation action
Costs
Benefits
Coastal revegetation
•
•
•
Space requirements
Plants
Maintenance •
•
•
Compensation
New
housing/buildings
Conflicts Coastal relocation
•
Build sea walls
•
•
•
Materials and equipment
Labour
Maintenance and operation
•
•
•
•
•
Lost income from businesses closures
Losses to households
Infrastructure repairmen
Provision of flood relief subsidies and services
Health costs
Education costs
BENEFIT AND COSTS OF ADAPTATION (FLOODS)
Adaptation action
Costs
Coastal revegetation
$ 4.5 million Coastal relocation
$ 10 million
Build sea walls
$ 8 million Note: Figures per year
Benefits
$ 23 million
BENEFIT AND COSTS OF ADAPTATION (FLOODS)
Future value = Present Value x Compound
factor
[future value of my money]
Present value = future value/discount factor
[present value of my future money]
NET PRESENT VALUE
Adaptation action
Costs
Benefits
Coastal revegetation
(3x $ 4.5 million)/ 3.3
Coastal relocation
(3 x $ 10 million)/3.3
Build sea walls
(3 x $ 8 million)/3.3
Adaptation action
(3 x $ 23 million)/3.3
Net Benefits (present value)
Coastal revegetation
$ 28.3 million
Coastal relocation
$ 18.4 million
Build sea walls
$ 21.2 million
RISK AND CBA (UNCERTAINTY ANALYSIS)
• Uncertainties arise from:
– Predictions about the future
– Data limitations
– Limited understanding of the causal relationships
between natural environment, technology, and human
behaviour
– Some costs and benefits are hard to value accurately
• If we use wrong parameters or assumptions, this
may lead to erroneous or misleading results and
conclusions.
• So, how can we account for uncertainty in CBA?
Picture: Kay Adams
NET PRESENT VALUE (SENSITIVITY ANALYSIS)
Adaptation action
Costs
Benefits
Coastal revegetation
(3x $ 9 million)/ 3.2
Coastal relocation
(3 x $ 12 million)/3.2
Build sea walls
(3 x $ 9 million)/3.2
Adaptation action
(3 x $ 23 million)/3.2
Net Benefits (present value)
Coastal revegetation
$ 13.2 million
Coastal relocation
$ 10.4 million
Build sea walls
$ 13.2 million
QUESTIONS?
PICTURE: ASIAN DEVELOPMENT BANK