1 Economic Evaluation of Climate Change Adaptation Measures in the Caribbean: A Methodology Change Ms.Sophia Terrelonge

Economic Evaluation of Climate Change Adaptation Measures in the Caribbean: A Methodological Challenge Abdullahi Abdulkadri Sophia Terrelonge Department of Economics The University of the West Indies, Mona Campus

3 Outline of Presentation Introduction Background to issue of Adaptation in the Caribbean Towards a simple Economic Evaluation Tool The Cost-Benefit Analysis Concluding Remarks

4 Introduction CCCCC and UWI (through Dept. of Economics) entered into an agreement in January 2007 to develop a simple economic assessment tool for adaptation measures A comprehensive review of the literature revealed that:  Significantly more economic studies have been done on mitigation than adaptation  Majority of economic studies have been based on developed countries, especially Europe  No economic study on climate change adaptation exists in the Caribbean to our knowledge Based on our experience during the project, we highlight challenges in conducting economic evaluation of CC adaptation measures in the Caribbean and offer a framework for conducting such analysis

5 Background The issue of climate change is gaining more attention and the adaptive capacity of the Caribbean needs to be enhanced Process of enhancement involves  Identification of risks of and threats from CC  Itemization of CC adaptation options in response to risks/threat  Evaluation of options to determine cost- effectiveness  Choice and implementation of option(s)

6 Background Identification of risks and threats  Climate change is characterized by uncertainty, as there is a wide range of impact scenarios which vary in their significance  Downscaling of impact scenarios to regional conditions is very crucial for precision of economic predictions  Considerations for intergenerational trade-offs play a major role in the sustainable use of natural resource endowments for the benefit of the present and future generations

7 Background Itemization of CC adaptation options  Focus is on building adaptive capacity within the Caribbean in response to climatic impacts  Areas of particular importance in the region include land use management (especially in the coastal areas), management of water resources, protection of biodiversity and strengthening of infrastructure  Vulnerable sectors of the economy include tourism, agriculture, fishery, transportation and health  CC adaptation measures must address these and other priorities

8 Background Evaluation of adaptation options  An appropriate evaluation tool must be employed  Data limitations highlight conflict between ideal and feasible framework  A simple model is better than no model Choice and implementation of option(s)  Recommendations of an economic evaluation assist in the choice of best option and its implementation

9 Towards a simple Economic Evaluation Tool Major economic studies on climate change are from the Stern Review, UKCIP, IPCC and few academic literature Established models include  Utility/Welfare Maximization framework  Cost-Effectiveness Analysis (CEA)  Cost-Benefit Analysis (CBA) Each of the three identified major models have different variations

10 Towards a simple Economic Evaluation Tool Utility/Welfare Maximization framework  Arguably the most sophisticated model for economic evaluation of CC adaptation  Requires extensive data of high precision  Attempts to capture all or most impact measures in a utility or social welfare function  Intergenerational considerations are easily incorporated Challenges posed  The type of probabilistic data required is lacking  Most people have problem understanding the concept of utility  Results of model may reflect the modeller’s views instead of those of the affected population

11 Towards a simple Economic Evaluation Tool Cost-Effectiveness Analysis (CEA)  Particularly useful when options being considered generate the same type of impact  Requires primary data mainly  Provides unit cost of achieving the desired impact Challenges posed  Can’t be used to compare options with different types of impact  The choice of discount factor may be controversial  Provides a single measure that may be too restrictive for policy makers

12 Towards a simple Economic Evaluation Tool Cost-Benefit Analysis (CBA)  Particularly useful when options being considered generate different types of impact  Requires primary data mainly  Provides the dollar value of benefits to be derived from a $1 investment/expenditure on an adaptation option Challenges posed  Usually criticized on ethical grounds –everything is in dollars, even human lives  The choice of discount factor may still be controversial  Also provides a single measure that may be too restrictive for policy makers

13 Towards a simple Economic Evaluation Tool We based our economic evaluation tool on the Cost-Benefit Analysis (CBA) because:  Multi-sectoral nature of climate change impacts  Available data in the region vis-à-vis data needs of different models  Requirement to keep the model simple  Ease of implementation of CBA Evaluation Tool is in two parts  A heuristic assessment to prune dominated options  A formalized CBA for non-dominated options

14 Heuristic Assessment Adaptation Cost Risk of Climate Change LowHigh Low Low risk of adaptation Implement Adaptation High Ignore adaptationHigh risk of adaptation

15 Cost-Benefit Analysis The Cost/Benefit Analysis (CBA) examines the costs associated with different adaptation strategies in tandem with their projected benefits It is important that values be assigned to all the resources utilized

16 Cost-Benefit Analysis The costing methodology involves five steps: (1)Itemization of the physical, engineering and/or biological components of each adaptation option (2)Calculation of the resource costs of adaptation

17 Cost-Benefit Analysis (3) Identification and measurement of outcomes of adaptation options in physical units (4) The conversion of the identified physical outcomes into monetary values (5) The comparison of the costs and benefits of various adaptation options

18 Cost-Benefit Analysis The CBA is carried out by forming a ratio of the total discounted benefits to the total discounted costs An adaptation option with a benefit-cost (B-C) ratio greater than one is seen as an effective option

19 Cost-Benefit Analysis A benefit-cost ratio less than one implies an ineffective option If the B-C ratio is one, then the option is just breaking-even The discount rate that is selected depends on the time horizon for the completion of the project

20 Cost-Benefit Analysis Discounting serves the purpose of representing future costs and benefits in today’s monetary value, hence providing a common basis for valuation

21 Cost-Benefit Analysis: Limitations Future costs and benefits may not be estimated precisely, as they are uncertain Macroeconomic parameters such as the inflation and interest rates have a significant impact on the projected costs and benefits

22 Cost-Benefit Analysis: Limitations The use of a standard discount rate may not be appropriate for all economies and every adaptation measure Therefore, the implication is that the economic analysis based on a single B-C ratio in an uncertain environment may not be adequate

23 CBA: Sensitivity Analysis In response to the inadequacy of a single B-C ratio, there is the need to conduct sensitivity analysis Sensitivity analysis provides a means of varying the estimates of costs, benefits and the discount factor within a credible range of values, so as to obtain corresponding range of values for the B-C ratio

24 CBA: Sensitivity Analysis This range should provide a more robust means of economic assessment than a single ratio

25 Concluding Remarks CC adaptation is necessary for all countries in the Caribbean region In every case, early incorporation of an economic assessment is beneficial for project management and policy purposes

26 Concluding Remarks This early incorporation will ensure the collection of the necessary data and the performance of CBA during the process of adaptation, rather than at a later date when essential data may not have been collected

27 Thank you ladies and gentlemen.