1. Module III.3 Appraising adaptation options Trainer: [Name]

2. Overview of this module
The module will:
Inform stakeholders on the role of cost benefit analysis (CBA) in the appraisal of adaptation options (or projects)
Introduce policy makers to the usefulness of cost benefit analysis
Highlight the limitations of CBA in the appraisal of adaptation options
Provide resources and references that can serve as a reference point
Provide an overview of the content of the presentation, starting with “Objectives of the module” (see next slide).
1. The module will not focus on sector wide cost-benefit analytical techniques although the underlying principles do remain valid for that.

3. What can you expect to learn from this session? - I
Reflect on the need for ranking and prioritizing adaptation options that emerge as equally plausible form in the NAP process
Understand the steps involved in carrying out a Cost Benefit Analysis (CBA) of options (at the project level)
List two to four learning objectives of the module.
What would you like each participant to know and be able to do when he/she has completed the module? Make the participants clearly understand the intended learning outcome and the relevance of the topic.

4. What can you expect to learn from this session? - II
Reflect on the potentials and limits of CBA for appraising adaptation options
Learn how you can use CBA practically in the context of the core elements of the NAP process
Understand that the choice of the discount rate and the expected climate damage significantly influence the result of a CBA 
List two to four learning objectives of the module.
What would you like each participant to know and be able to do when he/she has completed the module? Make the participants clearly understand the intended learning outcome and the relevance of the topic.

5. The NAP process typically involves four elements:
The role of CBA in the NAP process and linkages with previous module - I
The NAP process typically involves four elements:
(A) Laying the groundwork and addressing gaps
(B) Preparatory elements
(C) Implementation strategy
(D) Reporting, Monitoring and Review.
CBA is an important tool in helping countries at (B) and (C) stages and helps to narrow down gaps in (A), especially the stocktaking
Key questions under B.2 and B.3 of NAP technical guidelines:
What are viable cost-effective adaptation options to reduce the impacts of climate change or to exploit opportunities?
What are the costs and benefits of each adaptation option?
Appraise individual adaptation options, including economic, ecosystem and social costs and benefits, and possibilities for unintended (positive and negative) impacts of adaptation measures
Also important for implementation, Step C.2, key questions:
What are the potential costs of implementing the NAPs and how can these costs be met?

6. Some of the areas where CBA becomes valuable in the process include:
The role of CBA in the NAP process and linkages with previous module - II
Some of the areas where CBA becomes valuable in the process include:
Assessing climate vulnerabilities and identifying adaptation options at different levels
Prioritizing ACC in national planning
M&E – theories of change and impact evaluation
Key questions under B.2 and B.3 of NAP technical guidelines:
What are viable cost-effective adaptation options to reduce the impacts of climate change or to exploit opportunities?
What are the costs and benefits of each adaptation option?
Appraise individual adaptation options, including economic, ecosystem and social costs and benefits, and possibilities for unintended (positive and negative) impacts of adaptation measures
Also important for implementation, Step C.2, key questions:
What are the potential costs of implementing the NAPs and how can these costs be met?

7. Economic tools for ranking and prioritization of adaptation options
CBA – Cost Benefit Analysis
CEA – Cost Effectiveness Analysis
MCA – Multi criteria Analysis
In module 3.2 a simplified multi criteria analysis has been conducted. Multi criteria analyses have often been conducted to elaborate NAPAs.
The relevance of CBA in NAP process in 3-4 sentences in the notes section and include a reference to NAP Technical Guidelines pages 74-78:
As part of the NAP process, it is likely that vulnerable sectors that are making a conscious attempt to identify ways to reduce likely damages from climate change, will identify more than one way of doing so. Faced with alternative choices that are equally plausible, policy makers will be interested to select those options that maximize overall economic welfare. This would entail understanding the marginal costs and marginal benefits of different interventions. With this information, policy makers will then be able to  make a more complete decision on adaptation priorities than without key economic information.
Source GIZ (2013)

8. Objective ways to know we are maximizing benefits
Evaluating distinct but equally plausible adaptation options (or measures) requires a CBA of each alternative option
This will allow an objective comparison to be made between the options. This module will focus on comparisons on a project basis.
For adaptation options that have implications on entire sectors, a market analysis is required to see how entire economic systems are affected. This can be done at two levels – a sector by sector or an inter-sectoral approach
Bullet 2 note: Adaptation options that have implications for not only the sector/options that the adaptation is intended but have potentially large impacts on other sectors/options will have what economists call general equilibrium effects. Suppose adaptation involves farmers shifting from maize to fruit (more heat loving). At current prices, many farmers would switch as climate warms
However, as supply of maize falls, maize price rises and as supply of fruit increases, fruit price falls. Economic wide adjustment suggests that less farmers should make switch given price changes.
References: Black, Fischer (1995). Exploring General Equilibrium. Cambridge, MA: MIT Press. ISBN 

9. Objective ways to know we are maximizing benefits
Example of project analysis under uncertainty:
Suppose a low dam costs $1 billion, a high dam costs $1.5 billion and with current climate, a low dam has benefits of $1.2 billion and high dam of $1.6 billion
low dam is better with $200 million net gain
With future wetter climate, suppose benefit of low dam rises to $1.3 billion and benefit of high dam rises to $2 billion
high dam now better option with $500 million net gain

10. Cost benefit analysis: intro - I
When making a decision, esp. in the public sector, trade-off analysis is inevitable. Costs and benefits of an action and / or inaction need to be understood for policy decisions.
Add up costs and add up benefits; if net benefits are positive: do the project!
Simple, right?
Not quite! Issue of measurement of costs and benefits.

11. Cost benefit analysis: intro - II
Often times, costs simpler – tend to be one-off and are market transactions e.g. one time cost of constructing an irrigation system
Benefits can be trickier e.g.: How do we calculate the market (e.g. wealth) and non-market (e.g. health) benefits over time?

12. CBA: 8 suggested steps Define the scope of analysis
Identify all potential impacts of the project
Quantify the predicted impacts
Monetize impacts
Discount rate to find present values of costs and benefits
Calculate the net present value (NPV)
Perform expected value and/or sensitivity analysis
Make recommendations

13. Time preference and discounting – I
When determining the optimal allocation of resources over time, one must deal with time preferences.
CBA requires consideration of stream of benefits over time against costs which incur largely today (e.g. install irrigation system that is expected to be useful over x years).
The problem is that the value of money does not stay constant over time.
Also, most individuals prefer to receive benefits now as opposed to receiving the same level of benefits in future (i.e. they have positive time preferences).
In general, value depreciates over time so $1 today is not the same value as $1 in 5 years from now
Time preferences reflects the idea that individuals will rather have benefits today than in the future – an impatience to consume now rather than later. This phenomena is called time discounting.
How much weight we put on this preference however depends on the goods discount rate. The goods discount rate reflects the elasticity of marginal utility of consumption. If consumption per person is growing, the marginal utility of an additional unit will be lower for the future (and richer) generations. Both rates combined are the general social discount rate.
How do we think about activities that have value but occur at times other than the present?
Solution: normalize all future values to a present value (value today).
An individual with a positive time preference will discount the value of a contract that promises to pay a fixed amount of money at some future date.
You can change 0 and 1 to 0 and 100% for the discount rate.

14. Time preference and discounting – II
So, we need a system:
The discount rate (value between 0 and 1) is a product of society’s time value of money (composed of the pure rate of time preference and the goods discount rate) [closer to 0: future is more important; closer to 1: today is more important].
In general, value depreciates over time so $1 today is not the same value as $1 in 5 years from now
Time preferences reflects the idea that individuals will rather have benefits today than the future. How much weight we put on this preference however depends on the goods discount rate.
How do we think about activities that have value but occur at times other than the present?
Solution: normalize all future values to a present value (value today).
An individual with a positive time preference will discount the value of a contract that promises to pay a fixed amount of money at some future date.
You can change 0 and 1 to 0 and 100% for the discount rate.

15. Discounting: How do we do it?
Use this formula to convert all future values to present values:
PV = FV(t) / (1+r)t
Where
FV is expected future value
r is the discount rate (value between 0 and 1)
t is time.
Example: How much is $ in 30 years worth today? Try it using different values for r!
Use the Figure to explain. The is worth today. This will be worth less in the future. How much less depends on the discount rate – For example; 100,000 in 16 years is worth about 10,000 today at the discount rate of 15% but worth about today at the discount rate of 3%.
Source GIZ (2013)

16. Potentials and limits of CBA within the NAP process – I
CBA works best when it is possible to estimate both the market and non-market values of all benefits that accrue.
It is a systematically estimated analysis that provides a key piece of information to facilitate a decision. It is not meant to be used as the sole decision-criteria.
If properly executed, CBA enables comparison, in equal terms, the investments that have to be made today with benefits that accrue over time.
Sensitivity Analysis is a process where the analysts makes different assumptions in the CBA (such as different percentage of climate change damage) to show robustness of the criteria to those different assumptions.

17. Potentials and limits of CBA within the NAP process - II
The major limitations of a CBA is that not all costs and benefits can be quantified in monetary terms.
The discount-factor can matter in the final analysis.
Need to also account for uncertainty over time. Can use sensitivity analysis to capture some uncertainty.
Within the NAP process, results from CBA can be used as one of the ways of evaluating and ranking adaptation options after they have been identified. Political, social and other considerations will also matter along with economic considerations.
Sensitivity Analysis is a process where the analysts makes different assumptions in the CBA (such as different percentage of climate change damage) to show robustness of the criteria to those different assumptions.

18. Exercise: CBA – I
The case developed for the exercise is the construction of a new irrigation scheme including a dam construction for agricultural production. This is considered a measure for adapting to increasing water scarcity from climate change.
The CBA accounts cost and benefits of the project over a period of 30 years. Essential results are visualized in a scheme as shown in Figure III.3.1 compiling the Discounted Total Benefit and the Discounted Total Cost.
The CBA is conducted under certain assumptions. You are invited to reflect in a calculation exercise the influence of the following parameters:
Discount rate (value between 0 and 1): A product of society’s time value of money (composed of the pure rate of time preference and the goods discount rate) [closer to 0: future is more important; closer to 1: today is more important].
Climate damage: The reduction of benefits through damages from CC. In the case construction of the exercise it is assumed that the total agricultural benefits are reduced through negative impacts on the yields despite the irrigation measures.

19. Exercise: CBA – II
You are invited to vary these two parameters in a mini-group on a computer within the Excel file for the CBA in the following ways:
Modify the Discount rate between 0.03 and 0.1.
Modify the damage through climate change between 0 and 0.3.
Analyze the Cumulative Net Benefits and visualize the results for different variations of the parameters.
How will the break-even point be influenced by the Discount rate and the damage through climate change? The break-even will be reached where the Cumulative Net Benefit curve cuts the 0-axis.
Identify a case, where the break-even point will never be achieved.

20. Imprint
Published by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
Climate Policy Support Project
Dag-Hammarskjöld-Weg Eschborn, Germany T F
Contact E I
Responsible Nele Bünner, GIZ
Author Babatunde Abidoye
This presentation is part of a NAP country-level training that has been developed by GIZ on behalf of BMZ and in cooperation with the NAP Global Support Programme (NAP-GSP), in particular UNDP and UNITAR.
The training is designed to support countries in setting up a National Adaptation Plan (NAP) process. It builds on the NAP Technical Guidelines developed by the Least- Developed Countries Expert Group (LEG).
You are welcome to use the slides, as long as you do not alter its content or design (including the logos), nor this imprint. If you have any questions regarding the training, please contact Till Below or Nele Bünner at GIZ. For questions related to the Technical Guidelines, please refer to the UNFCCC’s NAP Support Portal.
As a federally owned enterprise, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH supports the German Government in achieving its objectives in the field of international cooperation for sustainable development. GIZ also engages in human resource development, advanced training and dialogue.