Skip to main content

The use of new economic decision support tools for adaptation assessment: A review of methods and applications, towards guidance on applicability

Abstract

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.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig 2

Notes

  1. 1.

    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.

References

  1. Aerts, J.C.J.H., Botzen, W., van der Veen, A., Krywkow, J. & Werners, S. (2008) Dealing with uncertainty in flood management through diversification. Ecology and Society, 13, 41

  2. Agrawala S, Bosello F, Carraro C, deCian E, Lanzi E (2011) Adapting to Climate Change: Costs, Benefits, and Modelling Approaches. Int Rev Environ and ResEcon 5:245–284

    Article  Google Scholar 

  3. 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

  4. Anda J, Golub A, Strukova E (2009) Economics of climate change under uncertainty: Benefits of flexibility. Energy Policy 37(4):1345–1355

    Article  Google Scholar 

  5. Boyd, R Wade, S. and Walton, H (2006) Climate Change Impacts and Adaptation: Cross-Regional Research Project(E). Report to the Department for Environment, Food and Rural Affairs, London, UK

  6. Blyth W, Bradley R, Bunn D, Clarke C, Wilson T, Yang M (2007) Investment risks under uncertain climate change policy. Energy Policy 35(11):5766–5773

    Article  Google Scholar 

  7. CCC (2008) Building a low-carbon economy–the UK’s contribution to tackling climate change. Committee on Climate Change, Published by the Stationary Office, London, UK

  8. Christensen, O.B, et al. (2011) European and Global Climate Change Projections: Outputs, Scenarios and Uncertainty. In. ClimateCost. ISBN 978-91-86125-35-6

  9. Crowe KA, Parker WH (2008) Using portfolio theory to guide reforestation and restoration under climate change scenarios. Clim Chang 89:355–370

    Article  Google Scholar 

  10. Dessai S, Hulme M (2007) Assessing the robustness of adaptation decisions to climate change uncertainties: A case study on water resources management in the East of England. Glob Environ Chang 17:59–72

    Article  Google Scholar 

  11. Downing T (2012) Views of the frontiers in climate change adaptation economics. WIREs ClimChange 3:161–170

    Article  Google Scholar 

  12. Dixit, A.K., Pindyck, R.S., (1994) Investment under Uncertainty. Princeton University Press, Princeton,NJ

  13. Dyszynski, J. and Takama, T. (2010) “Robust decision making for sustainable and scalable drought index based micro-insurance in Ethiopia Reducnig weather related disaster risk with rural agro-insurance: In. Micro-insurance: An innovative tool. Published by the Global Risk Forum, GRF, Davos

  14. EA (2011) TE2100 Strategic Outline Programme. Published by Environment Agency, Bristol, UK

  15. Eckhause, J. and J.Herold (2013) Using real options to determine optimal funding strategies for CO2 capture, transport and storage projects in the EU. Energy Policy

  16. Feyen L, Watkiss P (2011) The impacts and economic costs of river floods in Europe. In. ClimateCost. ISBN 978-91-86125-35-6

  17. Fuss S, Johansson DJA, Szolgayova J, Obersteiner M (2009) Impact of climate policy uncertainty on the adoption of electricity generating technologies. Energy Policy 37(2):733–743

    Article  Google Scholar 

  18. Gersonius B, Ashley R, Pathirana A, Zevenbergen C (2013) Climate change uncertainty: building flexibility into water and flood risk infrastructure. Clim Chang 116(2):411–423

    Article  Google Scholar 

  19. Groves DG, Lempert RJ (2007) A new analytic method for finding policy-relevant scenarios. Glob Environ Chang 17:73–85

    Article  Google Scholar 

  20. Groves, D.G. Fischbach, J.R. Bloom, E., Knopman, D. Keefe, R. (2013) Adapting to a Changing Colorado River. Making Future Water Deliveries More Reliable Through Robust Management Strategies. Published by the RAND Corporation: ISBN/EAN:9780833081797

  21. Groves DG, Sharon C (2013) Planning tool to support planning the future of Coastal Louisiana. Journal of Coastal Research: Special Issue 67 - Louisiana′s 2012 Coastal Master Plan Technical Analysis:147–161.2013

  22. Hallegatte S (2009) Strategies to adapt to an uncertain climate change. Glob Environ Chang 19(2):240–247

    Article  Google Scholar 

  23. Hallegatte, S., Shah, A., Lempert, R., Brown, C. and Gill, S. (2012). Investment Decision Making Under Deep Uncertainty: Application to Climate Change. Policy Research Working Paper 6193. Published by the World Bank Washington DC

  24. Haasnoot M, Kwakkel JH, Walker WE, Maat JT (2013) Dynamic Adaptive Policy Pathways: A Method for Crafting Robust Decisions for a Deeply Uncertain World. Glob Environ Chang 23(2):485–498

    Article  Google Scholar 

  25. HMT (2007) Green Book. Appraisal and Evaluation in Central Government Treasury Guidance. Her Majesty’s Treasury.  Published by the Stationary Office, London, UK

  26. HMT (2009) Accounting for the Effects of Climate Change. Supplementary Guidance. Her Majesty’s Treasury.  Published by the Stationary Office, London, UK

  27. Hunt, A. (2009) Economic Aspects of Climate Change Impacts and Adaptation in the UK. PhD Thesis. University of Bath

  28. IPCC (2012): Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation. A Special Report of the Intergovernmental Panel on Climate Change [Field, CB et al (eds)] Cambridge University Press, Cambridge, UK and New York, NY USA, 582 pp

  29. IPCC (2013) Summary for Policymakers In: Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Stock, TF et al (eds).]. Cambridge University Press, Cambridge, UK and New York, NY, USA

  30. Jeuland, M and Whittington, D (2013). Water Resources Planning under Climate Change: A “Real Options” Application to Investment Planning in the Blue Nile. Environment-for-Development. Discussion Paper Series, EfD DP 13–05

  31. Kontogianni, A., C.H. Tourkolias, D. Damigos and M. Skourtos (2013). Assessing sea-level-rise costs and adaptation benefits under uncertainty in Greece. Environmental Science & Policy 27:61–78

  32. Lempert RJ, Groves DG (2010) Identifying and evaluating robust adaptive policy responses to climate change for water management agencies in the American west. Technological Forecasting & Social Change 77:960–974

    Article  Google Scholar 

  33. Lempert, R.J. Kalra, N.Peyraud, S. Mao, Z. Sinh-Bach-Tan, S. Cira, D. and Lotsch, A. (2013) Ensuring Robust Flood Risk Management in Ho Chi Minh City. Policy Research Working Paper WPS6465. Published by the World Bank, Washington DC, USA

  34. Linquiti, P. and N. Vonortas (2012). The value of flexibility in adapting to climate change: a real options analysis of investments in coastal defense. Climate Change Economics 03(02):1250008

  35. Markowitz HM (1952) Portfolio selection. J Financ 7:77–91

    Google Scholar 

  36. McDonald R, Siegel D (1986) The value of waiting to invest. Q J Econ 101:707–723

    Article  Google Scholar 

  37. Matalas, N.C. and Fiering, M.B. (1977) Water Resource Systems Planning. In: Climate, climatic change and the water supply. National Academy of Sciences, Washington

  38. Martínez Ceseña EA, Mutale J, Rivas-Dávalos F (2013) Real options theory applied to electricity generation projects: A review. Renew Sust Energ Rev 19:573–581

    Article  Google Scholar 

  39. Merton, R., (1973) The theory of rational option pricing. Journal of Economic Management Science 4,141–183

  40. Mishan, E.1988 Cost-Benefit Analysis: An Informal Introduction (4th edition), London: Unwin-Hyman

  41. Murphy, J.M. et al. (2009), UK Climate Projections Science Report: Climate change projections. Met Office Hadley Centre, Exeter

  42. Pearce, D.W. and C.A. Nash, (1981) The Social Appraisal of Projects: A Text in Cost-Benefit Analysis, Macmillan, London

  43. Reeder, T and Ranger, N (2011) “How do you adapt in an uncertain world? Lessons from the Thames Estuary 2100 project.” World Resources Report, Washington

  44. Rosenzweig, C., et al. (2013) Assessing agricultural risks of climate change in the 21st century in a global gridded crop model intercomparison. PNAS (ISI-MIP Special Feature). doi:10.1073/pnas/1222463110

  45. Reuter, W.H., J. Szolgayová, S. Fuss and M. Obersteiner (2012) Renewable energy investment: Policy and market impacts. Applied Energy 97

  46. Scandizzo P.L. (2011) Climate Change Adaptation and Real Option Evaluation. CEIS Working Paper 232

  47. Tompkins EL; Adger WN (2004) Does Adaptive Management of Natural Resources Enhance Resilience to Climate Change? Ecology and Society, 9

  48. UNFCCC (2009) Potential costs and benefits of adaptation options: A review of existing literature. UNFCCC Technical Paper F CDCeCce/mTPb/e2r0 20090/29

  49. Watkiss, P. et al. (2013) Climate Resilience Strategy: Agriculture. Report to the Global Green Growth Institute/Federal Republic of Ethiopia

  50. World Bank (2009) Evaluating Adaptation via Economic Analysis. Guidance Note 7, Annex 12.

  51. Zhu L, Fan Y (2011) A real options-based CCS investment evaluation model: Case study of China's power generation sector. Appl Energy 88(12):4320–4333

    Article  Google Scholar 

Download references

Acknowledgments

The funding for this work was provided by the EC FWP7 funded MEDIATION and IMPACT2C projects.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Paul Watkiss.

Additional information

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

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

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

Download citation

Keywords

  • Climate Policy
  • Risk Preference
  • Efficiency Frontier
  • Robust Decision Make
  • Flood Risk Management