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Cost-benefit analysis is described in Table 3.7.2. In general, the option with the highest net benefits or the highest cost-benefit ration is selected from a set of options. One issue is that cost-benefit analysis in its conventional form does not address distributional issues associated with a given option. Costs and benefits accruing to different actors are generally aggregated additively and the issue of winners and losers is addressed separately.

CBA requires the setting of a baseline against which to measure future benefits of an option. This is more difficult for adaptation than for mitigation because adaptation is locally and sector specific. Thus, adaptation baselines should be comprised of impacts without the adaptation measure. Benefits can then be calculated with respect to this baseline. This is more complex than for mitigation, where impact models are not necessary. In that case, only projected emissions may be required to calculate the effectiveness of a given option.

Table 3.7.2: Formal decision making methods.

Method type	Formal decision making
Sub-types	Cost-benefit analysis	Cost-effectiveness analysis	Multi-criteria analysis
Task	Choose which action should be taken.
Characteristics of AS	An actor making a single decision. A set of options (also called alternatives, strategies, actions) from which the actor chooses a baseline, which is a “do nothing” alternative against which to measure the values of the metrics.
	One metric by which the alternatives can be characterised in terms of their costs and outcomes	One metric by which the alternatives can be characterised in terms of their costs and a different metric by which alternative can be characterised in terms of their benefits (i.e., outcomes).	Several metrics by which the alternatives can be characterised in terms of their costs and benefits.
Steps taken	identify a set of options. choose a baseline against which the benefits and costs will be measured. calculate present value of cost (PVC) and present value of benefits (PVB) for each. decision rule: chose alternative with the highest netbenefits or benefit cost ratio	choose a metric for effectiveness E (e.g. cost, low impacts). choose a baseline against which the effects will be measured. choose a set of alternatives that may be applied to reach the target. for each alternative I, calculate cost effectiveness ratio (CER): CERi = Ei/Ci. decision rule: choose alternative i* with the highest CER*.	identify a set of options. identify multiple criteria and a weights for each criteria. associate a value for each criteria to each alternative. This steps yields a matrix.  compute the weighted sum (called score) for each alternative.  decision rule: choose the alternative with the highest score.
Results	A ranking of options.
Example cases	Sea-level rise as reported in Agrawala and Fankhauser (2008). For fresh water systems Callaway et al. (2007) and for the agricultural sector in Rosenzweig and Tubiello (2007).	Kouwenhoven and Cheatham (2006) address the cost-effectiveness of options for increasing freshwater supply in Pacific Island nations that are being negatively affected by climate change. Based on financial records and interviews with project teams, they calculate the cost of options are then evaluated on the basis of how much additional water harvesting potential they provide. They find that for three different communities rain-water harvesting is the most cost-effective option for providing greater access to freshwater. Other options such as improving water main infrastructure are more expensive per unit delivered. Mendes Luz et al. (2011) address the costeffectiveness of options to reduce the transmission/incidence of dengue fever. They develop a dynamic model of dengue transmission that includes the effects of the development of human immunity and insecticide immunity to test the effectiveness in terms of DALYs (disabilityadjusted life years) of 43 different strategies to reduce dengue incidence, including both larval targeted and adult targeted strategies. They find that all interventions caused emergence of insecticide resistance which will increase the magnitude of future dengue epidemics when combined with the loss of community immunity. The model showed that adult targeted strategies were more cost-effective than larvae targeted strategies.	National Adaptation Plan of Action for Lesotho (LMS 2007) identified and ranked 9 adaptation projects on the basis of criteria developed with a group of stakeholders made up of national level ministries, NGOs, and local governance representative. The options were ranked on the criteria of: i) impact on the economic growth rate of vulnerable communities; ii) impact on poverty reduction; iii) multi-lateral environmental agreement synergies; iv) employment creation; vi) prospects for sustainability. Miller and Belton (2011) evaluate policy options to improve water management faced with climate impacts in Yemen. The options were ranking according to multiple criteria of: public financing needs, implementation barriers, environment, social, economic, and political-institutional. A sensitivity analysis was also conducted in order to investigate how changes in weighting of criteria affected the ranking of options. They find that combining several options to provide incentives for water use efficiency, and to promote technology uptake into a portfolio is the preferred option.
Issues involved	A standard CBA cannot deal with the indirect benefits. A GE approach would be needed. Does not consider distributional effects of options. Outcomes are highly dependent on discount rates.	A metric for outcomes is necessary for CEA. This is difficult to identify for adaptation.

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CBA