Fiscal consequences of extreme weather risks in Europe

Context

Given the ongoing societal debate over what might be the most favourable course of action in terms of adaption and risk management, cost-benefits, acceptability, viability and any other implications of adaptation policies should be evaluated within the context of other pressing longer-term structural issues, such as the ‘greening’ of tax and investment, population ageing and longer-term sustainable growth at the regional and global level.

Integrating distributional objectives in the cost:benefit analysis of adaptation options

Context

In adopting measures to adapt to climate change, adaptation options need to be based on robust assessment approaches which allow for the allocation of scarce resources. An important part of this process involves determining the costs and benefits of adaptation options in order to reduce vulnerability, enhance adaptive capacity and build resilience.

Applying alternative discounting rules: The equivalency principle

Context

Discounting is especially relevant in the context of climate change as it requires addressing long term and intertemporal decision-making. From an economic perspective, intertemporal choices have been assessed during the last 80 years using the discounted utility model, formulated by Samuelson (1937). The discounted utility model is based on the assumption that people make decisions by assessing its (positive or negative) consequences in a similar way to how the market evaluates gains and losses.

Uncertainties and causes of uncertainties in climate change adaptation

Context  

Uncertainty is a state of having limited knowledge where it is impossible to exactly describe existing state or future outcome (Hubbard, 2014). It applies to predictions of future events, to physical measurements already made, or to the unknown. The IPCC glossary of Working Group II defines uncertainty as a state of incomplete knowledge that can result from a lack of information or from disagreement about what is known or even knowable.

Real Options Analysis

What does Real Options Analysis do?

Traditionally used on the financial markets to mitigate investment risks, Real Options Analysis (ROA) can be used in adaptation to gain insight into the risks associated with investing in physical (real) assets. It is particularly useful when considering when to invest into an adaptation intervention or the value of adjusting adaptation interventions over time in response to changing events. ROA provides an economic analysis of the value of flexibility and future learning.  

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