What are the main steps involved in economic analysis of climate change adaptation? The framework can be applied to help in the identification, timing and sequencing of adaptation and the short-listing of options.

If you are interested in more information on the general framework click on the headings below the table.

If you are interested in concrete examples on the application of the framework for different policy challenges, read on.
Example from the ECONADAPT Project
What is it relevant for?

The appraisal of infrastructure and projects considering long term climate risks

The justification of the use of large funds for climate resilience

The adaptation to extreme weather events with high short term impacts

The analysis of climate change risks and adaptation strategies at Member State and EU level

General Framework for economic analysis of climate adaptation

Defining the adaptation problem

The policy led approach recommends starting the assessment by framing the overall aims and objectives towards adaptation. This orientates the analysis to provide information to inform early decisions for policy makers.  Critically, this is usually focused around the question of ‘what do I need to do in the next five years’, noting this may include immediate actions but also early interventions to start adapting to future climate change.  This framing is particularly important in aligning to the adaptation planning process and the prioritisation of early actions for early climate finance.

Identify entry points and stakeholders

There is an increasing emphasis on integrating (mainstreaming) adaptation into current policy and development, rather than implementing measures as a stand-alone activity. This requires the integration of adaptation into existing policies and processes, taking account of broader policy objectives and wider costs and benefits, not only for climate change risks.  Importantly, this aligns the process of adaptation to development, which is a key issue in the developing country context.  A component of this mainstreaming process is to find relevant entry points, that is, to identify opportunities in the national, sector or local planning process where adaptation can best be integrated.

It is necessary to engage with stakeholders at different stages in the project, in bilateral and multilateral meetings, and to ensure good communication and exchange of information.

Dealing with uncertainties through social learning

One of the ways to cope with multiple perspectives and interpretations of governments, organizations, private enterprises and individuals lies in social learning. We can consider two types of uncertainties which are connected with social learning: informational uncertainty (due to the lack of knowledge) and normative uncertainty, which is linked to perception of acceptable risk. Planning processes can take a dynamic learning approach to climate modelling based on the availability of more robust information; estimates are regularly updated with advances in knowledge and understanding of the risks posed to society by any given climate disaster. In order to address the issue of uncertainty over time in climate policy paths, the dynamic learning approach can be employed by creating decision points along policy paths to incorporate improved information and models.


Assessing the context and materiality

Gathering a preliminary level of knowledge in a context analysis is essential to correctly aim the following steps of the appraisal. This includes:

  • Characterising the physical context, synthesising knowledge on the environmental features, the climate, and the hazard;
  • Characterising the socio-economic context in order to define the boundaries of the adaptation target, identifying which people and activities are relevant;
  • Characterising the policy, institutional and stakeholder context, by preparing e.g. an extensive list of the people, companies and institutions involved, and of their normative and executive responsibilities.

Climate and risk information

The next step is to develop the climate information and risk information.  In line with the iterative approach, this should start with current climate variability and then look towards future climate change projections, with a strong emphasis on capturing uncertainty.

This analysis of risks also should be undertaken with the context of the adaptation decision, i.e. who and what decision it aims to inform on. In the case of a specific infrastructure project, for example, the focus may be on investigating the economic costs and benefits of enhancing resilience in the design.  In a more complex policy or programme mainstreaming setting, it will include a broader focus on the risks to various activities, noting the life-times of different areas and decisions.

Hazard analysis

More specifically on hazard assessment, it is essential that a selection is made of a range of possible future outcomes, both in terms of the physical-climatic world and of the socio-economic world.

Future climatic developments that have been adopted by the latest IPCC report in 2013 are the so-called Representative Concentration Pathways, which correspond to a range or four different narratives that bring about different intensities and timing of greenhouse gas emissions. For each of these emission scenarios, General Circulation Models are employed to calculate the evolution of climate variables, such as temperature, humidity and precipitation, for the rest of the century and beyond. Future socio-economy is accounted for by the so-called Shared Socioeconomic Pathways (SSPs).

Studies on regional to local scale are generally based either on statistical downscaling of GCM results, or on Regional Climate Models (RCMs). The latter incorporate boundary and forcing conditions from GCMs to which they are interfaced (“embedded”), and are run at higher resolution, which enables more accurate the representation of specific climate mechanisms, such as those due to irregular local topography. When the expertise available to the practitioners allows, it is worth applying RCM or statistical downscaling.

Regarding time horizons, the practitioner should consider that climate change is a gradual process. Generally, impacts will be proportional to the time horizon selected. But while the for the most moderate climate change scenario the situation is expected to stabilize after a few decades, for the highest one, impacts will increase for a longer time. To sample the evolution of climate change-driven processes, often the approach is taken of selecting at least two time horizon of focus: the short term (e.g. 2030 and 2050) and the long term (e.g. 2070 to 2100).

Selecting Representative Concentration Pathways (RCPs) and Shared Socioeconomic Pathways (SSPs)

Even though RCPs and SSPs are decoupled, and many combinations between them are possible, it is important this step is to make sure that the chosen combination of climate/emission and socio-economic scenarios is coherent. The following combinations can be applied, which in a way cover the extremes of the future spectrum of possibilities:

  • RCP2.6 and SSP1: Successful sustainable technologies are implemented, strongly reducing emissions and leading to the mildest climate change scenario. Further, diffused development enables even capacity for adaptation.
  • RCP8.5 and SSP3: No implementation of policies to address climate change results in high use of fossil fuels to meet growing energy demand, and the intense climate change unfolds. Further, development equality is low, and capacity for adaptation is locally highly limited.


Selecting time horizons

Two notions matter particularly when deciding whether to focus on short- or on long-term future in the assessment.

  • Short term: On the one hand, focusing on the shorter term often seems more appealing to meet the horizon of interest of many stakeholders (e.g., investors, local and national governments). But on the other hand for many impacts, like sea level rise, short time horizons entail small differences between climate change scenarios, hampering the comparison of impacts and therefore of adaptation between high- and low-emission scenarios.
  • Long term: While reasoning in terms of the end of the century (or beyond) may seem to make little sense to many stakeholders, in the long term drastic differences in impacts between scenarios become evident and can be quantified. Also, this ultimately forms the basis for studies of primary importance in the climate change discourse, such as the comparison of the costs of adaptation versus the investments needed to mitigate emissions.


Impact analysis

An efficient way to deal with the quantification of climate change impacts is to express them as changes in the risk faced. Risk assessment provides important information for decision-making, including on the hazard faced, as well as the exposure and vulnerability of the population.

While likely impacts can be assessed based exclusively on historic datasets, it is very beneficial, to the ends of the adaptation appraisal to, to have access to a model that is able to simulate impacts. A model enables altering one or more of the risk components (hazard, exposure, vulnerability) to incorporate and to understand the effect (i.e., the risk reduction) of adaptation.


Using up-to-date information

Old, outdated, or inaccurate exposure maps drastically reduce the accuracy and therefore the value of any assessment. Liaising with the local authorities, the most updated maps should be retrieved, reporting land uses or, if the case scale is small, even buildings. The availability of local vulnerability curves / information should be checked. Alternatively, if the case scale is small, a survey could be conducted. If resources do not allow, apply the most representative curves available from literature.


Obtaining reliable data on the climate change-induced hazard is the most essential aspect of any assessment. A characterization of the hazard intensity on a map allows for the spatial analysis of the impacts. Accounting for the people and assets that are located in the reach of the hazard is the second most important phase of the impact analysis.

Information about the vulnerability links the exposed people and assets to the hazard they may experience, and enables quantifing the damage suffered. Most often, vulnerability is represented in the so-called ”stage-damage” (or ”vulnerability”) functions, which report the proportion of damage for a given amount of hazard.


Taking into account future socio-economic change in impact assessments

Because we are dealing with evolving impacts, exposure maps are needed to represent both the present configuration of people and assets, and future projections of it. To obtain exposure data for the future, an approach that is often taken is to apply multplicative factors from large scale projections of socioeconomic developments to data about current exposure.


Considering uncertainties in decision-making

Adequate consideration of uncertainties - and their interaction - is necessary when designing an adaptation project. However, reducing all uncertainties is an impossible task. While reducing epistemic uncertainty by acquiring knowledge or reducing normative uncertainties through participatory processes is possible, translational uncertainty cannot be reduced.

A risk framework can represent a good strategy to deal with uncertainties. Risk can also be defined as the potential, when the outcome is uncertain, for adverse consequences on lives, livelihoods, health, ecosystems, economic, social and cultural assets, services, and infrastructure.

In general, three broad risk categories are usually used: acceptable risks, tolerable risks, and intolerable risks (which exceed a socially negotiated norm). In climate change, major risks lie in the failure to adapt to changes in the environment, leading to instability and insecurity of economic system(s) threatening adequate level of societal welfare.

Assessing and managing risks involve a number of steps: describing and modelling the systems to be managed; identifying hazards related to the system functioning; select the events that may initiate accident(s); analyse quantitatively the accident(s) (including exposure and vulnerabilities); evaluate risk and carrying out the decision making (or deliberative) process. Several economic methods are available to analyse quantitatively of qualitatively the economic risk of alternative investment options (see below).

It is important to highlight that, to reduce uncertainties from different subjective opinions, a clear way of communication and the use of a well-founded vocabulary can help in order to avoid linguistic ambiguity. Transparency generally helps; however, particular care should be given to the way information on scientific methods, statistics and the like are communicated, including ranges and so on. Communication on uncertainty should be different for different types of audiences.

Acceptable, tolerable and intolerable risks (after Klinke and Renn, 2002; Renn and Klinke, 2013)


Option identification, sequencing and prioritisation

The modeling framework for the impact assessment can be used to calculate impacts of climate-driven hazards both without and with the selected adaptation measure(s). Contrasting future outcomes under the two assumptions will then allow to evaluate the effectiveness of the measures. Still, oftentimes it may be unclear how the existing assessment model(s) can take into account, as in the case of adaptation by means of implementing early-warning systems, or of increasing the copying capacity of residents. It is important to account for what the modeling framework is able to consider, and what it cannot.


Within ECONADAPT a tool has been set-up that enables the expedite screening of possible adaptation options, and filtering them according to their characteristics. For more information see here.


Adaptation measures are effective under some circumstances, while they loose part or all of their effectiveness past certain system treshholds. For example, a dam that is meant to protect the city downstream from river flooding will stop serving its purpose once precipitation and discharge in the basin, and thus water levels at the dam, will have increased pass some critical threshold, also called adaptation ”tipping point”. The moment when the tipping point is reached typically depends on the climate change scenario, and can be determined by modeling the system in multiple future time horizons. Because of large uncertainties related to future climate and to modeling limitations, the timing of tipping points is generally difficult to pinpoint.

At the tipping point the decision-maker will be faced with a constrained set of alternative adaptation options: e.g., raising the dam further, or alter the course of the river downstream. However, some options may at this point be precluded, such as, in the example of the dam, the possibility of managing the course of the river upstream of the dam. If no other option but the current can be adopted anymore, the current option is often called a ”lock-in” option. The decsion-maker needs to be very aware that decisions may lead to possible lock-in situations, when the choices of future generations are strongly limited. The economic assessment involves quantifying the value of the proposed adaptation measures. A number methods are available, be it through a cost-benefit, cost-effectiveness or multi-criteria framework or using methods that better account for uncertainties.


Reviews on the costs and benefits of adaptation in different sector is available. For more information see here.


The following table summarises the main groups of economic tools and their potential use.


Regarding their application to different adaptation contexts, it is worth highlighting:

  • For analysis that is focused on current climate variability (the adaptation deficit), existing decision support tools can be used, including cost-benefit analysis;
  • However, as adaptation interventions are often in areas that are difficult for valuation, and usually involve a lack of quantitative information, multi-criteria analysis is often used;
  • For the analysis of short-term decisions with long life-times and longer-term challenges, a greater focus on new decision support tools is warranted. Robust-decision making has broad application for current and future time periods;
  • When investments are nearer term (especially high upfront capital irreversible investments), and where there is an existing adaptation deficit, Real-Option Analysis is a potentially useful tool;
  • For long-term applications in conditions of a low current adaptation deficit, Iterative Risk Management may be more applicable.

The table below compares their strength and weaknesses. There are no hard-or-fast rules on which tool to use in which application, though, certain techniques do align to various elements of the policy led framework. There is no “one-size-fits-all” approach to economic appraisal; each method presents a unique set of strengths and challenges. It is important to carefully select the most appropriate approach for each individual adaptation scenario.



A light touch approach to the application of economic instruments

Importantly while the tools are presented individually, they are not mutually exclusive. Many of these methods are resource intensive and technically complex, and this is likely to constrain their formal application to large investment decisions or major risks. Given this, a critical question is whether their concepts can be used in ‘light-touch’ approaches that capture their conceptual aspects, while maintaining a degree of economic rigour. This would allow a wider application in qualitative or semi-quantitative analysis. This could include the broad use of decision tree structures from Real Option Analysis, the concepts of robustness testing from Robust Decision Making, the shift towards portfolios of options from PA, and the focus on evaluation and learning from Iterative Risk Management for long-term strategies.


There are number of issues to into consideration, especially if cost-benefit analysis is to be used:

  • Multiple categories of damages should be considered, where possible, including indirect and intangible damages;
  • The monetization of non-money damages needs the application of dedicated approaches. Alternatively, separate accounting for non-monetary benefits/impacts should yield a fair representation in the decision-making stage;
  • Often adaptation may bring co-benefits that should not be overlooked. An efficient way in which these can be made evident is via meetings with local stakeholders and experts;

As this step is crucial to the outcome of the economic appraisal, a serious investigation (i.e., sensitivity analysis) of the effects of different discounting approaches and rates should be carried out.


The choice of the discount rates in adaptation!

One long-standing issue in the adaptation field is the choice of the discount rate. Discount rates are factors used to increase the weight of costs and benefits occurring the shorter term, hence they are a representation of how society values the future. Many governments and businesses tend to use high discount rates and hence largely undervalue the future, and profits to technical-type measures with clearer, short-term benefits. In addition, discount rates are stationary, and do not account for changing preferences of future generations.

For more information into the use of discount rates in adaptation, please follow this link.


Financing, programming and implementation


Adaptation costs are higher when working with practical adaptation, because of these additional capacity building costs, as well as the additional opportunity, transaction or policy costs associated with implementation (noting such costs are usually omitted in ‘unit cost’ estimates).  These need to be included in the overall design and economic appraisal of adaptation. 

One issue is that these capacity building and soft options are more challenging to appraise in economic appraisal.  Many of these options can be quantified using value of information measures, for both early direct responses, as well as for informing future orientated decisions. There are also approaches that exist for assessing socio-institutional and organisational options, including the use of alternative approaches such as switching values.

Private involvement in adaptation

Stakeholders that will substantially benefit from the adaptation (e.g., farmers, industries), may be considered to share the public investment burden, applying specific policy instruments proposed in ECONADAPT. Adaptation in both case studies creates benefits to private parties, which should motivate private investment into the measures. In Bilbao, property owners financed the elevation of plots of land.


Continuous / ex post evaluation