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ECONOMIC ANALYSIS OF ADAPTATION STRATEGIES TO CLIMATE CHANGE: A
COST BENEFIT ANALYSIS
Relebohile Letele
Bureau of Statistics (BOS), BOX 455 Maseru 100
Ministry of Development Planning
Mpilo road
Maseru, Lesotho
[email protected]
ABSTRACT
Climate change poses threats to the agricultural sector and negatively affects subsistence farmers
who have a low adaptive capacity. Therefore adaptation capacity is needed to counteract the
impacts of climate change. However, while adaptation is considered crucial for addressing
potential challenges of current variability and future climate change, there are many knowledge
gaps in the assessment of the cost and benefits of adaptation to climate change in the agricultural
sector. There is thus a need to build capacity, particularly on fine-tuning methodologies to
understand a range of estimates and trade-offs related to local level adaptation to climate change.
This thesis presents an economic analysis of adaptation to climate change. This study draws on
the existing literature on best strategies and tailors its use on testing local level economic
methods for analysis of adaptation projects. The thesis focuses on the exploration of CostBenefit Analysis of adaptation options to climate change in order to provide comprehensive
evidence for policy makers. Three main methods of economic analysis namely; Net present value
(NPV), Benefit-Cost ratio (BCR) and internal rate of return (IRR), were used for each of the
adaptation strategies. The results of this thesis show that farmers who practice late planting and
recommended fertilizer amount in the context of climate change are the ones who will get the
highest crop production more than farmers who practice early planting and common fertilizer.
Therefore this study recommends that farmers in Maphutseng should adapt late planting and
recommended fertilizer amount in order to protect themselves from the negative impacts of
climate change.
Keywords: Climate change, climate change adaptation, Lesotho, Maphutseng, cost-benefit
analysis.
1. Impacts of climate change
According to Cline et.al agricultural production remains the main source of livelihood for rural
communities in Africa, providing employment to more than 60 percent of the population and
contributing about 30 percent of gross domestic product. According to Scoones and Thompson
(2009), agriculture is an important source of livelihoods in developing countries, providing ways
of life for billions of people, many of them poor. In Lesotho, climate conditions and variations
influence agricultural output and export potential because agricultural production is primarily
rainfed and is vulnerable to extreme weather events. Extreme events are themselves catalysts of
environmental change, (Hutchinson, et.al 2009). Many studies such Kurukulasuriya and
Mendelsohn (2007); Lecocq and Shalizi (2007); Maddison (2007) have indicated that as climate
change is likely to further reduce agricultural productivity. With likely long-term changes in
rainfall patterns and shifting temperature zones, climate change is expected to significantly affect
agricultural production in the Southern African region and this could be detrimental to the
region’s food security and economic growth. The fourth Intergovernmental Panel on Climate
Change (IPCC) states that yields from rain fed agriculture could be reduced by up to fifty percent
by 2020 (IPCC 2007,p.13)
. Climate change is also likely to have a negative implication for gross domestic product (GDP).
Developing countries like Lesotho are particularly vulnerable to global warming. Mendelsohn
(2011) argues that these countries tend to have a disproportionate share of their GDP in climate
sensitive sector, especially agriculture. They will consequently have higher impacts as a fraction
of their GDP. They are also more vulnerable because they have weak governments. It is not clear
that many of the governments of developing countries are capable of mounting effective public
programs to counteract climate impacts. Governments of many developing countries may be
particularly ineffective in adapting to climate change. Many developing countries also have weak
markets. The absence of property rights will discourage many private actors (firms and
households) from adapting efficiently as well.
2. Climate change adaptation
In terms of climate change, adaptation can be taken to be any change in behaviour that an actor
such as household, firms, or government makes to reduce the harm or increase the gains from
climate change. In this vein, efficient adaptations are the set of adaptations that maximise net
benefits. However not every adaptation is worthwhile. The only adaptations that are desirable are
worthwhile and are those whose benefit of a change exceeds the costs. Such adaptations should
be encouraged. Whether any specific change is worthwhile will depend on where it is done and
when it is done. Getting both the local conditions right and the timing is crucial.
Chambwera and Stage (2010) relates adaptation to climate change as an economic problem
because it addresses the bigger problem of allocating scarce resources to attain sustainable
development. Ignoring climate change by not building adaptive measures could eventually
damage economic growth and other aspects of human and natural wellbeing, and threaten to
reverse the gains made in these areas in the past. The risks posed by climate change to
development will be managed more efficiently by putting them in the mainstream of
development. An economic analysis is necessary to determine whether or not it is worthwhile
doing any adaptation at all. An Economic analysis of adaptation to climate change can also be
used to prioritise or choose the most appropriate adaptation option.
THE STUDY AREA
The study was conducted in Maphutseng, in the Mohales Hoek district. The reason for choosing
this area is because the study was sponsored by FANRPAN, and FANRPAN had already
collaborated with World Vision. This collaborated of a community livelihood database was
collected by Lesotho World Vision using the Household Vulnerability Index (HVI) tool. The
HIV tool is able to quantity the different households in terms of their vulnerability by various
factors. The district consists of smallholder farmers who rely on rainfed crop production for
food, therefore likely to be some of those most likely to suffer from climate change. The district
is located in summer rainfall area with annual mean rainfall of 714mm, average annual
temperature of 15.60C, annual mean maximum temperatures of 22.70C and annual mean
minimum temperature of 8.40C.
DATA COLLECTION
This study is based on data collected via a fresh household survey in Maphutseng. The survey
provided information on inputs used by these farmers and their outputs. The questionnaire also
captured socio economic characteristics of the households such as household vulnerability,
adaptation strategies to climate variability if any, their perception and attitudes to climate change
and how it is affecting them in their existing agricultural practices. Households were asked
questions on their knowledge of national adaptation strategies to climate change, in addition to
assets and credits, and risks they faced and discount rates charged on loans. The questionnaire
was pre-tested in an area that will not be covered in the research. The main indicators of
adaptation used in the questionnaire include: the choice of adaptation method, capital used in
adaptation process, the cost stream over the period they have been using the chosen adaptation
measure.
This study is both dealing with autonomous adaptation and planned adaptation. Since the main
focus of the paper is autonomous adaptation, the analysis was mainly at plot level where these
adaptation strategies are implemented.
A population list comprising of the households was drawn out. The population list was obtained
from the District Agriculture Development Office and World Vision. Systematic sampling
technique was used to select a sample of 350 farmers. These farmers were interviewed through a
semi-structured questionnaire. The primary data was analyzed through STATA and SPSS
(Statistical Package for Social Scientists).
Secondary data was collected from literature and crop scenarios were obtained from University
of Cape Town (UCT). Climate data that was used to drive the crop model assessments were
generated by UCT for the period 2046 -2065.
Crop yield simulation
This study mostly included the modeling of various scenarios using the DSSAT crop model
driven by projections of climate downscaled from 9 Global Circulation Models to assess the
impact of climate change on crops in Maphutseng. DSSAT was used for this study as it has a
flexible management interface which allows for the assessment of various farm management
strategies.
DSSAT was run for the control period with currently practiced management strategies. It also
simulated future conditions with a “no change” scenario in terms of management driven by
projected downscaled climate for the future period (2046 – 2065). Different management
strategies were altered to assess how adjustments in management practices can help reduce the
impact of climate change or exploit opportunities which may arise as a result of climate change.
Management strategies were analyzed separately and possibly in combinations for all adaptation
benefits. The model output were statistically analyzed and represented graphically through e.g.
Coefficients of Variation (CV), dispersion statistics, Cumulative distribution functions (CDFs)
etc.
3. Results of Cost-Benefit Analysis
An evaluation result for the CBA results help to determine which adaptation strategy is the
optimal one and should be highly encouraged to be adapted.
CBA results from table 3.1 confirm that EP with RF is viable. This is mainly because the NPV of
8929.57 was found. That is, the NPV should be greater than zero for an option to be acceptable.
This indicates that EP with RF constitutes a good investment opportunity. The BCR of 5.26 for
this adaptation strategy indicates that benefits exceed economic costs of this adaptation option
under consideration and therefore EP with RF is a viable adaptation option.
Table 3.1 Summary of discounted cash flows for farmer who are adopting
EP with RF
LP with RF
NPV
8929.57
11913
BCR
5.26
6
IRR
9000
12000
The comparison of expected cost and benefits can help inform policy makers about the likely
efficiency of an adaptation investment. The results in table 3.1 shows that the NPV of LP with
RF, which is 9647.83, it’s higher than the NPV in the practice of EP with RF. LP with RF has
been supported by literature to be the most efficient strategy to be used by farmers in
Maphutseng under the change in future climate. The BCR is 5.26, this indicate that the
adaptation strategy is viable. BCR shows the overall value of money of this adaptation strategy.
Since this adaptation strategy is greater than one, and then it shows that the adaptation strategy is
viable.
The results of table 3.1 indicate that farmers who practice LP with RF have the highest NPV than
farmers who practice EP with RF. NPVs are used to prioritize allocation of funds. Therefore
according to this results LP with RF is the adaptation strategy which can be given the first
priority in terms of allocation of funds. It has also been found that farmers who practice LP with
RF had the same BCR to farmers who practice EP with RF. Moreover, farmers who practice LP
with RF had the highest IRR than farmers who practice EP with RF. This has lead to a
conclusion LP with RF is the best adaptation strategy that farmers can use in order to reduce
climate change resilience to crop production. This is consistent with expert recommendation and
the fact that Lesotho is going to benefit from a warmer climate, since Lesotho is experiencing a
cold climate, therefore planting late is therefore beneficial as there is low risk of early frost and
crop failures. It is also considered as the optimal option since summer rains comes late in
December, which is beneficial for maize germination. Farmers should therefore be encouraged to
practice LP with RF. Therefore extension officers should be trained on issues related to climate
change and conservation agricultural issues and informs smallholder farmers on adjusting their
cropping systems. Smallholder farmers should therefore be encouraged to adapt to LP with RF in
order to maximize their yield.
Results of non-adaptors
Decreases in projections in mean maize yield have been experienced under CF which is common
among subsistence farmers in Maphutseng. Projections have also shown that CF practices will
not be suitable for use under a changed climate; therefore farmers are not encouraged to use
these common practices under a changed future climate. This supports the literature which states
that low fertilizer application results in low yields.
Table 3.2 below shows that non-adopters have an NPV of zero and BCR of one when there are
11.94 percent of the farmers practicing EP with CF and 13.29 percent of the farmers practicing
LP with CF. When more than 11.94 percent of the farmers practice EP with CF then the NPV
becomes less than zero and the BCR becomes less than one, which would therefore be
undesirable. Likewise, when there are 13.29 percent of the farmers practice LP with CF, the
NPV becomes less than zero and the BCR becomes less than one, which shows that this practice
undesirable. The discounted cash flows will be found in annex 2. However, according to these
results, late planting has been projected to give slightly higher yields than farmers who practice
early planting. This means that LP is still projected to give good yields with climate change; this
practice could have performed better if CF was not combined with this strategy, but rather LP
with RF could have been the optimal option.
Table 3.2: Discounted cash flows for Farmers who are not adapting
EP with CF
LP with CF
NPV
0
0
BCR
1
1
2862
3226
IRR
Table 3.2 above shows that non-adopters have an NPV of zero and BCR of one when there are
11.94 percent of the farmers practicing EP with CF and 13.29 percent of the farmers practicing
LP with CF. When more than 11.94 percent of the farmers practice EP with CF then the NPV
becomes less than zero and the BCR becomes less than one, which would therefore be
undesirable. Likewise, when there are 13.29 percent of the farmers who practice LP with CF, the
NPV becomes less than zero and the BCR becomes less than one, which shows that this is
undesirable.
REFERENCES
Chambwera M. and Stage J. (2010), Climate change adaptation in developing countries: issues
and perspectives for economic analysis, Journal of Environmental Economics.
Mendelsohn R. (2011), The Economics of adaptation to Climate Change in Developing
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Kurukulasuriya P. and Mendelsohn R. (2007). Endogenous Irrigation: The Impact of Climate
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Lecocq F. and Shalizi Z. (2007), Balancing expenditures on mitigation of an adaptation to
climate change: An exploration of Issues Relevant to Developing Countries, Journal of World
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Maddison D. (2007), The Perception of an Adaptation to climate Change in Africa, World Bank
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IPCC (Intergovernmental Panel on Climate change) (2007), Summary for policy makers, In:
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and Vulnerability, Contribution of Working Group II to the Fourth Assessment Report of the
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agenda for social science research, Journal of Environmental Science and Policy 12 (2009) 386397.