Expert Workshop on Adaptation Financing and Implementation, Putting Priorities into Practice in OECD Countries, Paris, 18-19 June, 2014

1. The Economics of Adaptation
ECONADAPT
Climate change adaptation: progress and challenges
Paul Watkiss
Expert Workshop on Adaptation Financing and Implementation
Adaptation Policy and Economics:
Review and Analysis

2. Overview
• Introduction to the ECONADAPT Project
• Policy appraisal
• Review findings: evolving literature and translation to practice
• Project appraisal
• Costs and benefits of adaptation
• Decision making under uncertainty
The Economics of AdaptationECONADAPT

3. The Economics of AdaptationECONADAPT
ECONADAPT
• Research funded by European Union’s Seventh Framework Programme
• Objectives to build the knowledge base on the economics of adaptation,
and to convert this into practical information for decision makers
• Project commenced in October 2013 and runs for 36 months
• Co-ordinated by University of Bath, UK and involves 14 teams
• Strong focus on science-practice (research co-production)

4. The Economics of AdaptationECONADAPT
Two Major Research Themes
The project frames the research by asking two questions
• First, what are the key methodological advances needed to improve the
economic assessment of adaptation?
• Second, how can improved economic methods / tools be applied in the
context of big adaptation decisions facing Europe in the next decade?

5. ECONADAPT
Dissemination
& toolbox
Policy use domains
Methods &
estimates
Scaling
& transfer
Uncertainty
analysis
Disaster Risk
Management
Project
appraisal
Policy
appraisal
Macro-
economics of
adaptation
International
adaptation
assistance
ImprovedMethods
Policy
context/
Stakeholder
engagement
Linkages

6. Policy Review
• Analysis of recent adaptation literature and science-practice interface
• Three shifts identified
• From science–based impacts to adaptation-assessment based policy
• Iterative climate risk management
• Decision making under uncertainty
The Economics of AdaptationECONADAPT

7. Previously……..
Adaptation considered as the last step in a science-led analysis
- climate model
- impact model
- then adaptation
• Focuses on longer-term when signal emerges (post 2040) – rather than
short term policy (what to do now), noting discounted future benefits
• Does not consider broader policy and other factors
• If-then framework ignores uncertainty and assumes perfect foresight
b) With
climate change
a)
c) With
adaptation
Time Time
b)
ΔCC
ΔA

8. Future scenario uncertainty
Source: Watkiss et al, 2013

9. 2080s, A1B
(Driest)
2080s, A1B
(Wettest)
Future model uncertainty - precipitation
Source: Christensen et al, 2012

10. • Flood Damage Cost in Europe
• 12 regional climate models
• Which do you want to believe?
• Potential mis-allocation
Adaptation
Source: Rojas, Feyen and Watkiss, 2013

11. Adaptation assessment
• The practice of identifying options to adapt to climate change
and evaluating them in terms of criteria such as availability,
benefits, costs, effectiveness, efficiency, and feasibility.
• In practice…….
• Focus on adaptation objectives first (rather than impacts)
• Policy first approach (including non-climate policy)
• What do I need to do now (not what need to do in 2040)?

12. -Current, short-term & future climate risks
-Climate sensitivity & vulnerability
-Cross-sectoral linkages
-Non-climate drivers
- Problem type
- Objectives including
cross-sectoralDefine risk / problem type
and consider objectives
CCRA
vulnerability/impacts
Adaptation
assessment context
Identification and
classification of options
Appraisal of options
Continuous and ex post
evaluation
- Baseline/ autonomous adaptation.
- Governance & responsibilities
- Adaptive capacity
- Existing plans & preparedness
- Policy, appraisal & investment
-Timing & urgency of decisions
- Level of priority /
Justification for intervention
- Identify adaptation options
- Classification of options
- Appraisal (multi-attribute)
- Detailed appraisal.
- Prioritisation for risks.
- Analysis of possible
sector prioritisation
Prioritisation
(risks and sectors)
Source: Watkiss and Hunt 2011
What’s different?
Noting time and resource !

13. Iterative Climate Change Risk Management
• Climate change is now considered as a dynamic and evolving risk
• Starts with current climate – to future uncertain impacts
• Adaptation also evolved – set of different actions to cover different problems

15. What does this mean in practice
• Policy comprise of complementary adaptation decisions (portfolios)
• 1. Focus on decisions now for current risks (adaptation deficit), e.g. early low-
and no-regret options, building adaptive capacity
• 2. Focus on decisions now that exposed to climate in the future –
mainstreaming and climate risk screening of infrastructure, etc.
• 3. Focus on future decisions for future risk under high uncertainty – iterative risk
plans, learning and review
• These differ because of the consideration of type of action, timing, discounting,
uncertainty, economic methods, etc.
• But can combine in adaptation pathways….

16. Source: Haasnoot et al, 2013
Source: ECA, 2012
Policy Appraisal

17. Policy Appraisal - Ethiopia Climate Resilience Strategy
0
50
100
150
200
250
AdditionalAdaptationNeeds,byTheme,$mUSD(2008)
Social protection for high priority groups
Disaster Risk Reduction
Forestry, conservation and biodiversity
Sustainable agriculture & land management
General animal & value chain improvements
Value chain and market development
Crop and water management on-farm
Information and awareness
Capacity and Institutions
Source: Watkiss et al 2014

18. Economic project appraisal
• This has some implications for policy and project appraisal
• Costs and benefits of capacity building, soft-options
• Economic analysis of flexibility and robustness (versus optimality)
important along with low-cost mainstreaming
• Value of information, option values, and learning for long-term major risks
• Issue of incremental versus transformational adaptation

19. Costs and benefits of adaptation
• ECONADAPT inventory of studies (analysed ~300, identified ~500+)
• Existing options that used for adaptation
• 1) for no/low regrets, ‘it depends’ 2) Resource, opportunity and policy costs
45
92
48
106
70
44
97
50
26
60
28
33
12
39
35
34
9
0 20 40 60 80 100 120
General
Human Health
Buildings & Construction
Water management
Coastal protection
Biodiversity
Agriculture
Forestry
Fisheries
Energy
Finance & Insurance
Transport
Industry
Tourism
Regional & urban planning
Civil protection/Disaster manag.
Other
145
26
10
18
4
15
4
8
61
0 50 100 150 200
Europe
North-America
Central & South America
Africa
Middle-East
Asia
Australia
Pacific
Global
Source: Econadapt, 2014

20. Decision support
Cost-Effectiveness
Analysis
Cost-Benefit
Analysis
Portfolio Analysis
Robust Decision
Making
Real Options
Analysis
Iterative Risk
Management
Values all costs and benefits to society
of all options, and estimates the net
benefits/costs in monetary terms.
Compares costs against effectiveness
(monetary/non-monetary) to rank,
then cost-curves for targets/resources.
Allows economic analysis of future
option value and economic benefit of
waiting / information / flexibility.
Identifies robust (rather than optimal)
decisions under deep uncertainty, by
testing large numbers of scenarios.
Economic analysis of optimal portfolio
of options by trade-off between return
(NPV) and uncertainty (variance).
Uses iterative framework of
monitoring, research, evaluation and
learning to improve future strategies.
Traditional
decision
support
Decision
making under
uncertainty
Multi-Criteria
Analysis
Allows consideration of quantitative
and qualitative data together for
ranking alternative options.
0 5 10 15
Review
Portfolio Theory
Iterative risk
management
Robust decision
making
Real options
Source: Watkiss et al 2014

21. Decision Support Findings
• Different approaches more/less suited for different applications
• Issue of complexity, time and resources for all of these
• Priority is for ‘light-touch’ approaches
Source: Watkiss et al 2014
Tool Applicability
Cost-Benefit Analysis Short-term assessment, particularly for market sectors.
Cost-Effectiveness
Analysis
Short-term assessment, for market and non-market sectors, where clear headline indicator
and dominant impact (less applicable cross sectoral and complex risks).
Real Options Analysis Project based analysis. Large irreversible capital investment, particularly where existing
adaptation deficit. Comparing flexible vs. non flexible options.
Robust Decision Making Project and strategy analysis. Conditions of high uncertainty.
Near-term investment with long life times (e.g. infrastructure).
Portfolio Analysis Analysing combinations of options, including potential for project and strategy formulation.
Iterative Risk Assessment Project level. Strategy level for framework for planning.

22. International adaptation finance
• Adaptation finance to developing countries important
• Focus on short-term low-regret addresses problem of effective resource
allocation for future climate change versus development
• However, leads to strong overlap with development (attribution)
• E.g. in Ethiopia, over 60% of priority adaptation options identified were
already in Government programmes/budget
• And caution against omitting the longer-term

23. Conclusions
• Changing focus for policy and project appraisal for adaptation
• Centres on real adaptation implementation
• Shift from theory to practice
• Complementary set of actions
• Iterative risk management
• Realistic costs and benefits
• Consideration of uncertainty

24. ECONADAPT Key questions
Science – practice interaction and co-production
• What are the key methodological gaps or areas of research?
• What methods or guidance would be useful?
• What tools would be useful?