A review of the economics of adaptation and climate-resilient development
This working paper aims to inform the development community about the current state-of-knowledge and emerging thinking on the economics of adaptation and the application to development.
1. The framing of adaptation has changed significantly in recent years, consistent with a more practical and early implementation-based focus. In turn, this is changing the economic analysis of adaptation. Three key shifts have been identified: There is a move towards more policy-orientated studies, in which the objectives are framed around adaptation (‘adaptation assessment’), with an aim to inform early interventions; There is a greater emphasis on integrating (mainstreaming) adaptation into current policy and development, rather than as a stand-alone activity; There has been a move to consider the phasing and timing of adaptation, due to an increasing recognition of uncertainty. This has translated into the separation of current climate variability and future climate change, and respectively current, short and longer-term adaptation interventions, accompanied by the use of iterative climate risk management and decision making under uncertainty.
2. There is a shift in the types of adaptation options that are being recommended for early implementation. There is now more emphasis on early options that address current climate variability in the short-term (and build resilience for the future), with low-regret options, including capacity building and non-technical adaptation. There is also a focus on early options to address future risks in the long-term, taking account of uncertainty, either for early decisions which have a long life time (e.g. infrastructure) or for future long-term risks, where early action is warranted. This new focus has implications for the types of economic appraisal needed, to allow analysis of the costs and benefits of capacity building, and for addressing the phasing and timing of adaptation using decision making under uncertainty. There is also more awareness of the process of adaptation and the need to address socio-institutional issues and barriers.
3. The knowledge base on the costs and benefits of adaptation has evolved significantly in recent years. There are now many more studies at national, regional and local scale, with coverage in both developed and developing countries. In terms of the coverage by sector and risk, estimates have moved beyond the previous focus on coastal zones and now extend to water management, floods, agriculture and the built environment. However, major gaps remain for ecosystems and business/services/industry. More recent implementation-based and policy-orientated studies indicate higher costs of adaptation than the earlier literature. This is because these later studies address existing policy objectives and standards, they consider multiple risks and recognise and plan for uncertainty, and they include the additional opportunity and transaction costs associated with policy implementation.
4. There are a number of methodological challenges with the economic assessment of adaptation. This includes issues around adaptation objectives, baselines, discounting, equity, transferability and additionality. While the academic theory in many of these areas has advanced, this has not yet transferred into common (appraisal) practice: this is due to time, resource and capacity constraints, but also because in many areas, there remains no agreed consensus. The increasing use of mainstreaming in adaptation (indirectly) is, however, removing many of these challenges, because it leads to a greater use of existing development and sector practice, and thus the use of methods, approaches and assumptions already in place for appraisal.
5. One of the key challenges for adaptation appraisal is the high uncertainty involved. The most common techniques used in economic appraisal have limitations in coping with this, and a suite of new decision support tools have emerged that advance decision-making under uncertainty. These approaches include real option analysis, robust decision making, portfolio analysis, rule based criteria and iterative risk management. However, all of the new methods – at least when applied formally – are complex to use and require high capacity and resources. Whilst they have potential application for major development investment, the capacity and resource needs are a barrier to their application in more routine project appraisal. A key priority is thus to develop more pragmatic (light-touch) versions of these methods, which can capture their core concepts while maintaining a degree of economic rigour.