Key Messages 
  • Decisions about adaptation strategies necessarily involve assumptions about the future – both assumptions about factors that cannot be influenced by decisions makers (such as future climate change impacts), and factors that are under control of decision makers (such as spatial planning, which influences the value at risk from climate change).
  • This short, fictitious example illustrates a real-life choice, in which a municipality has to chose a) whether to promote investment into urban redevelopment, even though this would increase the value at risk from coastal flooding, and b) which level of climate change to anticipate in defining its adaptation strategy.
  • By comparing the economic welfare pay-offs of different scenarios, it provides a structured framework in which the risks of under- and over-adaptation can be compared, and possible no-regret options identified. It also provides an estimate of the cost of being wrong, i.e. making assumptions about climate change and the appropriate level of adaptation that turn out to be incorrect.

Context

Decisions about adaptation strategies necessarily involve assumptions about the future – both assumptions about factors that cannot be influenced by decisions makers (such as future climate change impacts), and factors that are under control of decision makers (such as spatial planning, which influences the value at risk from climate change). These assumptions are necessarily fraught with uncertainty, which makes it necessary to incorporate uncertainties into the decision making process in a transparent way.

This short, fictitious example illustrates a real-life choice, in which different uncertainties have to be weighed against each other. For the fictitious example of an English coastal city, it presents the choice of the municipality a) whether to promote investment into urban redevelopment, even though this would increase the value at risk from coastal flooding, and b) which level of climate change to anticipate in defining the adaptation strategy. While the example itself is merely a schematic one, this comparison provides a conceptual framework in which the benefits of development can be weighed off against increased climate risks, and in which the role of uncertainty in the decision process is made transparent.

Policy and methodological developments 

The example illustrates how the tabular approach of Callaway and Hellmuth (2006) can be adopted to provide a decomposition of costs and benefits. A fictitious example is used to illustrate these benefits. The example highlights the trade-off between the benefits of urban redevelopment in a coastal municipality, and the increased exposure to climate risks because of the new development. The trade-off is illustrated by providing the payoffs (in terms of overall economic welfare generated) for a range of different possible outcomes. These outcomes are grouped into 12 cases, depending on a) whether development takes place or not, b) what level of climate change materialises, and c) which level of adaptation the municipality provided for. As a complication, the decision on the adaptation strategy is taken before the decision on development is made, and before the extent of climate change impacts is known.

As a result, there are cases of under-adaptation (in which the municipality wrongly assumed a lower level of climate change impacts, or a lower level of development, or both); cases of over-adaptation (in which the municipality wrongly assumed a higher level of climate change impacts, or a higher level of development, or both), and cases in which the level of adaptation is appropriate to the evolution of climate change impacts and urban re-development. A comparison of the payoffs under the different cases allows estimating the “cost of being wrong”, and thus provides a (rough) measure of the cost of uncertainty.

Main implications and recommendations 

The comparison of different outcomes highlights the fact that there are often different objectives to account for when planning responses, and that the welfare effects of achieving these objectives are uncertain. The comparison of the outcomes may serve to demonstrate the extent to which uncertainty may lead to the maladaptation, i.e. choosing the “wrong” response to climate change impacts, and the cost (in the form of foregone welfare) of such maladaptation.

Since the payoffs in the fictitious example are equally fictitious, the case study does not permit drawing any general conclusions: its usefulness is rather to provide a clear and consistent framework for comparing different outcomes under different assumptions. In the fictitious example, the economic benefits of development are net positive in all cases (even in the case with climate change and without adaptation), but are of course significantly higher if the appropriate adaptation strategy is chosen. In this sense, re-development is a no-regret option: the payoff always remains positive, even if the assumptions about climate change and resulting adaptation choices turn out to be incorrect. By contrast, the example presents a negative payoff for the cases of overadaptation, where the adaptation strategy is based on an assumed level of climate change – or of development – that does not materialise. Yet, as mentioned, these numeric results depend entirely on the assumptions made by the author, and therefore are not suitable to be generalised.

Two insights emerge regarding the usefulness of the framework for comparison:

1. Representation of uncertainties. The two-by-two matrix form clearly simplifies and reduces the range of development and climate scenarios considered in the table. It is straightforward and provides an understandable form to illustrate the types of choices to be made. In principle, the dimensions of the matrix could be enlarged to include a wider range of development/climate scenarios, and thus a more nuanced representation of the breadth of possible assumptions, albeit at the expense of making the matrix more complex and more difficult to grasp intuitively.

2. Treatment of uncertainties. The matrix itself is merely a way of presenting data, but does not provide the means to gather the data for subsequent adaptation investment decisions. However, in so far as the cases selected are representative of the range of plausible scenarios, the matrix provides the intermediate output necessary to inform decisions that involve economic criteria. In doing so, it highlights the potential extent of mal-adaptation, i.e. when the level of adaptation is not well aligned to the level of development or climate change that actually materialises.

Bibliography 

Callaway, J.M. and M.E. Hellmuth (2006), Climate  risk  management  for  development:  economic  considerations. presented at Stern Review Workshop on “Economics  of  Adaptation”, 15 May 2006, http://www.sternreview.org.uk