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Assessing and selecting adaptation options

4.2 How do I carry out cost-benefit analysis?

Cost–benefit analysis is often used by governments and other organizations, such as private sector businesses, to appraise the desirability of a given action or measure. CBA can help to predict whether the benefits of a measure outweigh its costs and in relation to other alternatives (i.e. it allows to rank alternative measures in terms of the cost–benefit ratio). CBA are also required when implementing several EU laws.

 

To assess feasible adaptation options, the analysis of costs and benefits is crucial. Estimates of costs and benefits are emerging but vary substantially with the objectives, the aggregation level and sector.

In general a CBA contains the following steps:

  1. Identify all costs and benefits.
  2. Assign a monetary value to the costs: costs include the costs for physical resources needed, as well as the cost of the human effort involved in all phases of a project. Costs are often relatively easy to estimate. The costs that might occur in the future are discounted to today's value using a discount rate.
  3. Assign a monetary value to the benefits: quantifying benefits is not as straight forward as quantifying costs. It's often very difficult to predict benefits accurately, especially for new measures. Secondly, along with the financial benefits, there are often intangible, or soft, benefits related to a measure. There are several methodologies, however, that allow quantification. The quantified benefits also need to be discounted to today's values.
  4. Compare costs and benefits: finally, compare the value of costs to the value of benefits, and use this analysis to decide the course of action. To do this, calculate total costs and total benefits, and compare the two values to determine whether the benefits outweigh the costs. At this stage it's important to consider the payback time, to find out how long it will take to reach the breakeven point – the point in time at which the benefits have just repaid the costs.

Carrying out a cost-benefit analysis is an established technique. It has an explicit normative basis and is performed for the purpose of informing policy makers about what they ought to do. However, some people find the very idea of assigning a monetary value to saving lives or to the quality of life, which is an essential element of cost-benefit analysis, meaningless and ethically wrong. Furthermore, as CBAs in the area of adaptation normally do not allow quantifying all benefits, the results are often misleading and should therefore be considered with care.

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