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Assessing and selecting adaptation options

4.2 Conducting a cost-benefit analysis of adaptation measures

The analysis of costs and benefits can significantly assist decision-makers in working out the best strategy for using scarce economic resources for the most effective adaptation approach and help prioritize and time resilience investments. Cost–benefit assessments are often used by governments and private sector organizations to appraise the desirability of a given action or investment. The analysis 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).

Adaptation costs are understood to be the "costs of planning, preparing for, facilitating, and implementing adaptation measures, including transition costs" (IPCC) and the benefits are "the avoided damage costs or the accrued benefits following the adoption and implementation of adaptation measures" (IPCC). Because almost no adaptation action can fully eliminate a climate change impact and the associated risk, the costs of the residual risk (the remaining impacts after the implementation of the adaptation action) also need to be accounted for.

Assessing the costs and benefits of adaptation options can be undertaken more narrowly considering financial budgetary costs and benefits only or more comprehensively considering the wider costs and benefits to the local economy. In addition, social and environmental costs and benefits may also be included in cost-benefit assessments. It is especially important to include non-market costs and benefits, in the assessments of adaptation options to realistically account for the full range of benefits and costs,  even though they are more difficult to express in monetary terms.

A set of approaches for valuing the costs and benefits of adaptation options exists. Three commonly used methods are:

  • Cost-Benefit Analysis (CBA)
  • Cost-Effectiveness Analysis (CEA)
  • Multi-Criteria Analysis (MCA)

In general a CBA contains the following steps:

  1. Define the adaptation objective and identify corresponding adaptation options to be assessed
  2. Define the baseline to enable assessments comparing scenarios "with" and "without" the specific adaptation action
  3. Identify all costs and benefits over a set timeline, generally the lifetime of an adaptation measure or the time horizon of climate impact scenarios
  4. Assign a monetary value to the costs: costs include the costs for physical resources needed, cost of the human effort involved in all phases of a project as well as any quantifiable social, environmental or economic disbenefits. The costs occurring in the future are discounted to today’s value ("present value") using a discount rate
  5. Assign a monetary value to the benefits: quantifying benefits can be less straightforward. It is often more difficult to predict benefits accurately, especially for new innovative options. 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 - please refer to further guidance in the resources linked below. The quantified benefits also need to be discounted to today’s values.
  6. 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 ( establishing the "net present value" - NPV). It is also important to consider the payback time - how long it will take to reach the break-even point at which the benefits have repaid the costs.

A limitation of CBA is that it requires all benefits to be measured and expressed in monetary terms, which is often either difficult to achieve or is seen as morally questionable ( e.g. assigning monetary value to human lives or "discounting" future benefits). The other two methods, CEA and MCA, can be used to overcome some of these issues.

Cost-effectiveness analysis (CEA) is used to determine the least costly way to achieve specific adaptation objective. While the costs of the measures need to be calculated in monetary terms, the benefits can be expressed in any other quantified measure, which can be compared with the target value. For example, e.g. if the target is to reduce the number of heat-related deaths, each option will be assessed on their potential to reduce the heat-related mortality (number of deaths avoided and percentage decrease as compared to baseline), which is then compared its cost. CEA commonly omits the consideration of social aspects, implementation feasibility or co-benefits, which need to be assessed in parallel.

Resources and information on further methods and tools are provided below.

Multi-Criteria analysis (MCA) integrates various assessment criteria (financial and non-financial, monetised or expressed in other quantitative terms) and priorities with respect to different criteria (as different stakeholders can have diverse preferences with respect to project outcomes, benefits and impacts in one common framework to arrive at scoring and relative ranking of the adaptation options, commonly integrating the results of CBA or CEA. See Step 4.3 for further details on MCA.