There is a growing focus on the economics of adaptation as policy moves from theory to practice. However, the techniques commonly used in economic appraisal have limitations in coping with climate change uncertainty. While decision making under uncertainty has gained prominence, economic appraisal of adaptation still uses approaches such as deterministic cost-benefit analysis. Against this background, this paper provides a critical review and assessment of existing economic decision support tools (cost-benefit analysis and cost-effectiveness analysis) an uncertainty framework (iterative risk management) and alternative tools that more fully incorporate uncertainty (real options analysis, robust decision making and portfolio analysis). The paper summarises each method, provides examples, and assesses their strengths and weaknesses for adaptation. The tools are then compared to identify key differences, and to identify when these approaches might be appropriate for specific applications in adaptation decision making.
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There are many different definitions of uncertainty. We use the definition from UK Government economic appraisal (HMT, 2007), where uncertainty involves a large number of possible outcomes and it is impossible to attach probabilities, as differentiated from risk, defined as the likelihood, measured by the probability, that a particular event will occur.
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The funding for this work was provided by the EC FWP7 funded MEDIATION and IMPACT2C projects.
This article is part of a Special Issue on “Uncertainty and Climate Change Adaptation” with Guest Editors Tiago Capela Lourenço, Ana Rovisco, Suraje Dessai, Richard Moss and Arthur Petersen
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Watkiss, P., Hunt, A., Blyth, W. et al. 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 (2015). https://doi.org/10.1007/s10584-014-1250-9
- Climate Policy
- Risk Preference
- Efficiency Frontier
- Robust Decision Make
- Flood Risk Management