Technical Policy Briefing Notes - 2
Cost-Effectiveness Analysis
Discussion and Applicability
Policy Briefs
Cost-Effectiveness Analysis
Discussion and Applicability
The review and case studies provide a number
of practical lessons on the application of costeffectiveness analysis
to adaptation. They provide useful information on the types of
adaptation problem types where CEA might be appropriate, as well as
data needs, resource requirements and good practice.
CEA is considered most useful for near-term adaptation assessment, particularly for identifying low and no regret options. The approach can be applied to both market and non-market sectors, but it particularly relevant for areas that are difficult to value in monetary terms, e.g. biodiversity, health. The use for long-term assessment is considered most appropriate when used as part of an iterative adaptive management analysis, rather than as a tool on its own. It is most applicable (and relevant) where there is a clear headline indicator and a dominant impact – and less applicable for cross sectoral and complex risks, because it works with a single metric. It is thus more applicable when there is already agreement on sectoral objectives and effectiveness criteria. It is more appropriate where climate uncertainty is low, and good data exists for cost/benefit components.
The key data inputs vary on the use of the tool, i.e. whether a cost-effectiveness ranking (cost per unit benefit) or a full policy analysis. An initial ranking of options can often work with generic data on burdens to identify promising options. However, a full policy analysis usually requires some form of scenario-based impact outputs, to assess unit effectiveness accurately, and total effectiveness against a baseline. Full cost data is needed (capital and operating costs, expressed in equivalent economic terms) as well as data on unit effectiveness. For policy applications, additional information is needed in the form of baseline risks and the total potential for each option.
In considering the application of CEA to adaptation, a number of good practice lessons are highlighted:
CEA is considered most useful for near-term adaptation assessment, particularly for identifying low and no regret options. The approach can be applied to both market and non-market sectors, but it particularly relevant for areas that are difficult to value in monetary terms, e.g. biodiversity, health. The use for long-term assessment is considered most appropriate when used as part of an iterative adaptive management analysis, rather than as a tool on its own. It is most applicable (and relevant) where there is a clear headline indicator and a dominant impact – and less applicable for cross sectoral and complex risks, because it works with a single metric. It is thus more applicable when there is already agreement on sectoral objectives and effectiveness criteria. It is more appropriate where climate uncertainty is low, and good data exists for cost/benefit components.
The key data inputs vary on the use of the tool, i.e. whether a cost-effectiveness ranking (cost per unit benefit) or a full policy analysis. An initial ranking of options can often work with generic data on burdens to identify promising options. However, a full policy analysis usually requires some form of scenario-based impact outputs, to assess unit effectiveness accurately, and total effectiveness against a baseline. Full cost data is needed (capital and operating costs, expressed in equivalent economic terms) as well as data on unit effectiveness. For policy applications, additional information is needed in the form of baseline risks and the total potential for each option.
In considering the application of CEA to adaptation, a number of good practice lessons are highlighted:
- • A good starting point for an adaptation CEA is to consider the cost-effectiveness of options to current climate variability, and then to assess cost-effectiveness in a number of defined future periods.
- • The application of CEA to adaptation will ideally be context and location specific. It is important to identify appropriate sector and risk specific metrics, and stakeholder consultation can help this step.
- • The application of CEA to adaptation should consider non-technical options and capacity building as well as technical options, noting these are more difficult to quantify.
- • The application of CEA to adaptation needs to consider uncertainty. This should involve a sampling (multiple cost curves) across a range of socio-economic and climate model projections (even if low/high ranges). The use of single central estimates and single cost curves should be avoided. To capture the issues of timing and dependencies, analysis is likely to require a minimum of two future time periods.
- • The CEA baseline should take account of current conditions and existing and planned policy. Future baseline projections should consider socio-economic as well as climate change, and ideally autonomous adaptation and existing/planned adaptation measures.
- • The analysis of inter-dependencies between options is important, i.e. how one option might affect another. It is also preferable to undertake CEA within an iterative plan, to capture enabling steps and portfolios of options, rather than using outputs as a simple technical prioritisation.
- • Due to the focus on a single metric, there is a need to assess wider attributes of options, i.e. their wider environmental, social and economic characteristics, as well practicality, acceptability, etc. These should alter the ranking of options.
- • Recent applications of CEA have tried to apply the cost curve concept to adaptation using full cost-benefit analysis. The MEDIATION review does not recommend such an approach. More details are provided in the box.
Box 3. More Advanced Lessons from
Mitigation Cost-Effectiveness Analysis
A number of lessons of relevance for adaptation have emerged from the widespread use of CEA in mitigation.
Building Adaptation Cost Curves Using Economic Valuation
A number of lessons of relevance for adaptation have emerged from the widespread use of CEA in mitigation.
- CEA tends to work with technical costs, omitting important policy and/or transaction costs, which need to be factored in when moving to policy implementation. For this reason, they underestimate the costs of options (and overestimate the relative cost-effectiveness). These policy costs should be factored into analysis.
- Cost curves can be divided into expert-based and model-derived curves. Expert-based curves assess the cost and reduction potential of each single abatement measure, while model-derived curves are based on a range of partial- or general-equilibrium models. For adaptation, most initial assessments are likely to be expert based, but there may be potential for modelling in some future areas.
- Cost-effectiveness usually optimises to one attribute, but in practice, policy options need to consider many elements, whether expressed in monetary or non-monetary terms. There have been some applications of CEA which seek to build in ancillary effects, either through the use of cost-effectiveness adjustments or through multi-optimisation analysis. These involve a step change in complexity and resources, but do provide much more robust results.
- A key area of discussion has centred on discount rates, and whether to use a social or private sector discount rate. Recent examples have undertaken sensitivity analysis with both to examine whether this alters the ranking and overall costs of compliance.
- Baseline assumptions, including the technology and reference costs (e.g. future energy prices), have a significant impact on the cost-effectiveness analysis. Such socio-economic drivers are known to be as important as climate drivers for adaptation, and need to be taken into account in analysis.
- Most MACC assessments have limited feedback between sectors or even time periods. Furthermore, they are defined with respect to a certain year. These issues are more important for adaptation.
- There has also been a debate around learning curves and innovation, which are important in determining the balance of current versus future options. This is something which requires consideration in the adaptation domain, albeit in more complex assessments.
Building Adaptation Cost Curves Using Economic Valuation
- A number of recent assessments of adaptation have taken the marginal abatement cost curve concept used for mitigation, but used monetary values to define effectiveness. In essence, this just undertakes cost-benefit analysis, but presents results so that they look like a mitigation cost curve.
- The MEDIATION project has reviewed this approach and does not recommend it for adaptation.
- This is because the approach tries to force adaptation to fit a decision framework targeted for mitigation. It does not solve any of the issues raised above on cost-effectiveness analysis, i.e. it treats adaptation as a simple linear process, focused on technical options, and most importantly, it has little consideration of uncertainty.
- Furthermore, it introduces a new problem with respect to the challenge in estimating monetary values for many sectors of interest to adaptation (health, ecosystem services), as well as capacity building and non-technical options, which are a priority for early adaptation.
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