Notes on Applying Real Options to Climate Change Adaptation Measures, with examples from Vietnam

A factor common to all adaptation measures is the uncertainty that is the hallmark of climate change. The timing, intensity and location of climate change impacts is not known to any degree of precision. Because most deterministic analyses and policy prescriptions ignore this uncertainty, their recommendations are likely to waste community resources. Except by chance, adaptation measures will either be over-engineered, or they will be inadequate and result in harm. Applying real options thinking allows an incremental and flexible approach. Adaptation measures are implemented only as better knowledge becomes available over time. Several examples are given of real options in the Mekong Delta, with a comparison of net present values of two housing alternatives. It is essential to undertake net present value calculations when comparing different projects to ensure that the value of any options is weighed against other costs and benefits.Environmental Economics and Policy,

Getting real about adapting to climate change: using 'real options' to address the uncertainties

Scientists predict that some climate change is already inevitable, even if greenhouse emissions are stabilised. Adaptation strategies will be of comparable importance to reducing emissions. However, the specific effects of climate change are currently unknowable, especially at the local level. Given this uncertainty, deterministic adaptation strategies are inappropriate. Rather than building ‘worst-case scenario’ sea walls, for example, strong foundations can be laid — so that walls can be built (or not built) in future to match actual climatic conditions without incurring unnecessary upfront expense. Other examples of such ‘real options’ are provided to illustrate the feasibility of the approach

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Adaptor of last resort? An economic perspective on the government’s role in adaptation to climate change

Abstract Individuals and societies have always adapted to change, whether catastrophic or slow onset. Over the last two centuries, however, governments have significantly extended their role as ultimate social manager of risk.  It is as yet unclear whether, how, or to what extent governments will add adaptation to climate change to their portfolio of responsibilities.  This report investigates this question on the basis of review and analysis of economic and policy thinking on the issues, and by using a new dataset on the 2011 Brisbane flood. Uncertainties about the future impacts of climate change obviate definitive conclusions about future adaptation actions and insights for specific situations cannot be generalised.  Economic precepts suggest that governments should limit intervention to cases of genuine market failure, such as the provision of information on likely impacts of climate change including at the local level, or to support for people affected by uninsurable events.  But any role as ‘insurer of last resort’ needs to be circumscribed by rigorous social cost-benefit analysis to ensure that government intervention is beneficial, in the context of the need to adapt to climatic changes.  Although the phenomenon of ‘government failure’ is generally ignored in the adaptation literature (and often by policy makers), it too can stymie efficient adaptation.  A standard justification for government intervention is market failure, including misperception of risk by individuals and businesses.  We use Brisbane property prices before and after the January 2011 flood, as well as property-level flood risk information to test the hypothesis that buyers do not accurately perceive the risk of riverine flooding.  The results indicate that buyers do take risk into account, and even discriminate between zones of differing flood risk.  The concepts of ‘government as insurer of last resort’ and ‘government as insurer of first resort’ as alternative forms of intervention in markets are examined with a view to disambiguation.  In contrast to much current thinking in academic and government circles, we conclude that the government should not act as an ‘adaptor of first or last resort’.  Rather, government can best contribute to efficient adaptation by reducing the economic costs and institutional barriers to adaptation faced by individuals and organisations.Comprehensive micro-economic reform, and the promotion of institutional flexibility are potential ‘no regrets’ strategies because they will also promote economic growth and welfare.Please cite as: Dobes, L, Jotzo, F, Doupé, P 2013 Adaptor of last resort? An economic perspective on the Government’s role in adaptation to climate change, National Climate Change Adaptation Research Facility, Gold Coast, pp. 81.Individuals and societies have always adapted to change, whether catastrophic or slow onset. Over the last two centuries, however, governments have significantly extended their role as ultimate social manager of risk.  It is as yet unclear whether, how, or to what extent governments will add adaptation to climate change to their portfolio of responsibilities.  This report investigates this question on the basis of review and analysis of economic and policy thinking on the issues, and by using a new dataset on the 2011 Brisbane flood. Uncertainties about the future impacts of climate change obviate definitive conclusions about future adaptation actions and insights for specific situations cannot be generalised.  Economic precepts suggest that governments should limit intervention to cases of genuine market failure, such as the provision of information on likely impacts of climate change including at the local level, or to support for people affected by uninsurable events.  But any role as ‘insurer of last resort’ needs to be circumscribed by rigorous social cost-benefit analysis to ensure that government intervention is beneficial, in the context of the need to adapt to climatic changes.  Although the phenomenon of ‘government failure’ is generally ignored in the adaptation literature (and often by policy makers), it too can stymie efficient adaptation.  A standard justification for government intervention is market failure, including misperception of risk by individuals and businesses.  We use Brisbane property prices before and after the January 2011 flood, as well as property-level flood risk information to test the hypothesis that buyers do not accurately perceive the risk of riverine flooding.  The results indicate that buyers do take risk into account, and even discriminate between zones of differing flood risk.  The concepts of ‘government as insurer of last resort’ and ‘government as insurer of first resort’ as alternative forms of intervention in markets are examined with a view to disambiguation.  In contrast to much current thinking in academic and government circles, we conclude that the government should not act as an ‘adaptor of first or last resort’. Rather, government can best contribute to efficient adaptation by reducing the economic costs and institutional barriers to adaptation faced by individuals and organisations.Comprehensive micro-economic reform, and the promotion of institutional flexibility are potential ‘no regrets’ strategies because they will also promote economic growth and welfare.Please cite as: Dobes, L, Jotzo, F, Doupé, P 2013 Adaptor of last resort? An economic perspective on the Government’s role in adaptation to climate change, National Climate Change Adaptation Research Facility, Gold Coast, pp. 81.&nbsp

Multi-criteria analysis: “Good Enough” for government work?

Multi-criteria analysis (including Triple Bottom Line approaches) is fundamentally flawed in principle, and is open to abuse by special-interest groups. Its increased use poses a significant risk to the quality of policy formulation by Australian governments

Social cost-benefit analysis in Australia and New Zealand. The state of current practice and what needs to be done

All is not well with the evaluation of government programs and projects. Resources available to any society are limited. If governments are to increase the well-being of their citizens, they must be able to select and implement the socially most beneficial projects and policies. But many government agencies lack the expertise to carry out a cost-benefit analysis, or even to commission one. Commercial consultants, on the other hand, often have some analytical expertise, but are not immune from adopting approaches that accommodate the proclivities of their client agencies. In order to increase analytical rigour and methodological consistency, this publication urges the adoption of a ‘belts and braces’ set of protocols for use in project evaluation

Defining Regional "Standing" for Cost–Benefit Analysis in Federated Countries

Specification of “standing” – whose benefits and costs should be counted – is a crucial step in a Cost–Benefit Analysis. If it is omitted, some relevant costs and benefits may be excluded, or, conversely, wrongly included. The textbook formulation for standing is “the whole of society” for a country, but the literature is virtually silent on the issue at a sub‐national or regional level. A strictly state or regional standing can be a problem within federated countries such as Australia or the USA due to conceptual inconsistencies and resulting inefficiencies. On balance, a national perspective is to be preferred, at least as a default option

A Cross-Border Perspective on 'Standing' in Cost-Benefit Analysis

The concept of ‘standing’ – whose benefits and costs should be counted – is wellestablished, and its specification is a crucial step in conducting a Cost-Benefit Analysis. But it is often ignored by analysts. From a national perspective, the orthodox formulation of ‘standing’ is ‘the whole of society’, or at least the legal citizens of the country concerned. The underlying rationale appears to be that benefits should be counted only for those who pay for a project through their taxes. Little or no academic attention has been given to ‘standing’ at the sub-national level in federations such as Australia or the USA. However, the general lack of concordance between taxation areas and benefit regions suggests that ‘standing’ in the border regions of contiguous states should be deemed to possess a national perspective, at least as a default position.This report was commisioned by Australian National Universit

The Post-Truth Era in Government Evaluation of Major Projects and Policies

Australian experience reveals an increasingly post-truth approach to economic evaluation, with governments ignoring or avoiding professional expertise when promoting their favoured projects and policies. Lack of formal guidelines for economic evaluation, such as those promulgated by Congress and successive American presidents, are a partial explanation. A concomitant hollowing-out of public service expertise in economic analysis has also occurred. More importantly, public sector agencies have even lost much of their capability to understand and assess evaluations carried out on their behalf by commercial consultants. An effective antidote to this deskilling would be the production and publication of analyses of major government policy and project proposals, as well as the development of a standardised analytical framework, reinforced with training for public servants.This report was commisioned by Australian National Universit

Social cost-benefit analysis in Australia and New Zealand. The state of current practice and what needs to be done

All is not well with the evaluation of government programs and projects. Resources available to any society are limited. If governments are to increase the well-being of their citizens, they must be able to select and implement the socially most beneficial projects and policies. But many government agencies lack the expertise to carry out a cost-benefit analysis, or even to commission one. Commercial consultants, on the other hand, often have some analytical expertise, but are not immune from adopting approaches that accommodate the proclivities of their client agencies. In order to increase analytical rigour and methodological consistency, this publication urges the adoption of a ‘belts and braces’ set of protocols for use in project evaluation